Lesson 2 covers the accounting equation, defining key terms like property, assets, liabilities, and owner's equity. It explains the significance of these concepts in accounting, particularly how they relate to financial claims and the sources of a company's assets. The lesson concludes with the accounting equation for both sole proprietorships and corporations: assets = liabilities + owner's equity or stockholders' equity.

1. Welcome, dear students !

2. Lesson 2
Accounting
Equation

3. Lesson 2. Learning objectives
1 Property and Financial Claims
2 Assets , Liabilities and Owner’s Equity
3 Accounting Equation

4. Lesson 2: What You’ll Learn
WHY IT IS IMPORTANT UNDERSTAND EQUATION
Describe the relationship List and define each part of
between property and the accounting equation.
financial claims.
Explain the meaning of the Assets – Liabilities – Owners Equity
term equities as it is used in
accounting.

5. Lesson 2: Accounting Equation
Key Terms
property assets
financial claim equity
credit owner’s equity
creditor liabilities

6. 1. Property
What is Property ?
.
In accounting,
Property is anything of
property and
value that a person or
financial claims are
business owns and
measured in dollar
therefore controls.
amounts.
A financial
claim is a legal
When you own an
right to an item
item of property, you
have a legal right to
that item.

7. Buying on credit from Creditor
The business or person
selling you the item on credit is When you buy property on credit,
called a creditor . you do not have the only financial
claim to the property.
A creditor can be any person
or business to which you You share the financial claim to that
owe money. property with
your creditor..

8. 2. Assets
Property or items of value owned by a business
are referred to as assets
Businesses can have various types of assets, such as:
• cash
• office equipment
• manufacturing equipment
• buildings
• land

9. Definition of an asset:
Assets are things that the
company owns.
* Assets also include costs paid in advance
that have not yet expired, such as prepaid
advertising, prepaid insurance, prepaid
legal fees, and prepaid rent.

10. Types of Equities
"Owner's Equity" are the words used on the balance
sheet when the company is a sole proprietorship.
An example of an owner's equity account is Mary Smith,
Capital (where Mary Smith is the owner of the sole
proprietorship).
If the company is a corporation, the words Stockholders'
Equity are used instead of Owner's Equity.

11. Definition of an Liabilities:
Liabilities are obligations of the company.
They are amounts owed to creditors for a
past transaction and they usually have the
word "payable" in their account title.
Along with owner's equity, liabilities can be
thought of as a source of the company's
assets.
They can also be thought of as a claim
against a company's assets.

12. Another example of Liabilities
Liabilities also include amounts received in advance for
future services.
Since the amount received (recorded as the asset Cash)
has not yet been earned, the company defers the
reporting of revenues and instead reports a liability such as
Unearned Revenues or Customer Deposits.

13. What Are the Two Types of Equities?
The accounting term for the financial claims to these assets is equities.
Owner’s Equity Liabilities
Definition of Owner’s Definition of Liabilities:
Equity:
Liabilities are the debts
Owner's Equity along of a business. They are
with liabilities can be measured by the
thought of as a amount of money
source of the owed by a business to
company's assets. its creditors.

14. 3. The accounting equation for a sole
proprietorship
ASSETS = LIABILITIES +OWNER’S EQUITY
The accounting equation for a corporation is:
Assets = Liabilities + Stockholders’ Equity

15. Summary
The resources owned by a business are its assets.
Examples of assets include cash, land, buildings, and
equipment.

16. Summary: Liabilities
The rights of creditors are the debts of the business and are
called liabilities.

17. Summary: Property
Financial information about property
The purpose of accounting is to
provide:
Financial claim to property
property financial claim
Anything of value that A legal right to property.
a person or business
owns

18. Summary : Property
A creditor lends you money.
The financial claim is
shared.
You buy something on credit.
credit creditor
When you buy something Any person or business to
and agree to pay for it which you owe money.
later.

19. Summary: Accounting Equation
The following equation shows the relationship among assets,
liabilities, and owner’s equity:
Assets = Liabilities + Owner’s Equity

20. Follow next lesson
Lesson 3:
Business transactions
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