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Unit 1 The Accounting Equation
The document discusses key concepts in accounting including the accounting equation of Assets = Liabilities + Equity, double-entry bookkeeping, and how various transactions affect the accounting equation. It provides examples of how an owner's investment, borrowing money, purchases, and expenses impact asset, liability, and equity accounts to maintain the balance of the accounting equation.
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Unit 1 The Accounting Equation
- 3. » Accounting asa whole is based on a single equation: ASSETS = EQUITY + LIABILITIES
- 4. » The wordequation comes from the word equal. For any equation, one side always equals another.
- 5. » The accountingequation should remain in balance at all times because of double-entry accounting or bookkeeping. » Double-entry means that every transaction will affect at least two accounts in the general ledger.
- 6. » Examples ˃An owner's investment into the company will increase the company's assets and will also increase owner's equity. ˃ When the company borrows money from its bank, the company's assets increase and the company's liabilities increase.
- 7. » Well, inorder to answer that question we need to look at what each of the terms in the equation mean… 1. Assets 2. Liabilities 3. Owner’s Equity
- 9. » Official Definition:A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
- 10. » An assetis ˃ A possession of a business that will bring the business benefits in the future. ˃ Anything that will add future value to your business.
- 11. » Land »Computer » Vehicle » Cash
- 12. » Debtors arepeople that owe your business money and the value of these debts as a whole. » Another name for debtors is accounts receivable. The word receivable simply means capable of being received, or will be received.
- 13. » Would debtorsor accounts receivable be an asset for your business? ˃ Answer: Even though you cannot own a debtor, you will get benefits in the future from having money owed to your business. ˃ The benefits are simple – you will get paid! So if you have $3,000 owed to you by Mr. Smith, you have a debtor, an asset, worth $3,000.
- 14. » An additionalrequirement for an asset is that you have to be able to accurately measure its value. » This is usually quite simple, as the value is equal to how much you paid for it. » Are employees considered an asset? ˃ Can you put an accurate, reliable figure on how much an employee is worth to you, bearing in mind that he or she can resign at any point by giving notice? Tricky, right? As you can imagine, it's nearly impossible to place a value on people – consequently employees are actually never included as assets in accounting - but only because we can't value them.
- 15. 1. DOES YOURBUSINESS OWN/CONTROL IT? 2. WILL IT BRING YOUR BUSINESS BENEFITS IN THE FUTURE? 3. CAN YOU VALUE IT ACCURATELY?
- 16. » The costof an asset includes all costs necessary to get it to the business premises and into a condition in which it can be sold. So the cost of an asset can include the following: ˃ Purchase price ˃ Import duties, - Transport costs to get it to your premises, - Installation or set-up costs.
- 17. Increase Assets DecreaseAssets Purchasing Equipment (The asset account Equipment increases) Purchasing Equipment (The asset account Cash decreases) Owner Contributions Owner Draws Receiving bank loans Repaying bank loans
- 19. » A presentobligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
- 20. » a liabilityis simply... a debt of the business. » The debt will result in assets (usually cash) leaving the business in the future.
- 21. » The mostcommon liability is a loan. » Another common liability is called creditors. ˃ A creditor, also known as a payable, is any business or person (apart from the bank) that you owe. ˃ Suppliers (who you owe for products purchased on credit) would fall under creditors.
- 22. Increase Liabilities DecreaseLiabilities Receiving a bank loan Repaying a bank loan Credit purchases Credit Payments Notes payable to creditors Paying Creditors
- 24. » The residualinterest in the assets of the enterprise after deducting all its liabilities.
- 25. » The owner’sequity is simply the owner’s share of the assets of a business.
- 26. » Represents thevalue of the assets that the owner can lay claim to. » The value of all the assets after deducting the value of assets needed to pay liabilities. » It is the value of the assets that the owner really owns. OWNER’S EQUITY = ASSETS - LIABILITIES
- 27. ASSETS = EQUITY+ LIABILITIES » Assets can only ‘belong’ to two types of people: ˃ people outside the business who are owed money (liabilities) ˃ the owner himself (owner’s equity).
- 28. » In thecase of a corporation, which is publicly owned, equity is labeled shareholder’s equity
- 29. Increase Owner’s EquityDecrease Owner’s Equity Revenues Expenses Gains Losses Owner contributions Owner withdraws Beginning Capital
- 30. » The coststhe company incurs in carrying on operations in its effort to make money » Decrease owner’s equity » Can be paid for with cash (decreases assets) » Or charged (increase liabilities)
- 31. » The differencebetween expenses and equipment is equipment can be liquidated or converted to cash. » Equipment is an asset (future benefits) » Expenses are used up FAST. » EXAMPLE: ˃ A company car is equipment: No effect on owner’s equity. ˃ A telephone bill is an expense: Decreases owner’s equity.
- 32. » Income »Example: a service company earns revenue when it provides services to its clients » Recorded as an increase in owner’s equity and an increase in assets ˃ Increases Cash OR ˃ Increase sDebtors » Investopedia Explains Revenues`
- 33. » Net Income:The company is bringing in more money than it is spending to continue operations. Revenues > Expenses » Net Loss: The company is bringing in less money than it is spending to continue operations Revenues < Expenses » Break Even: When a company’s revenues are equal to their expenses ˃ Revenues = Expenses
- 34. Beginning Capital PLUS Additional Investment Net Income* Withdraws + - Revenues -- Expenses If expenses are greater than revenues, then a net loss would result. This loss would be subtracted from capital because it would be a negative number.
- 35. » Every transactionaffects TWO or more accounts! » This is how the accounting equation stays in balance
- 36. For each ofthe transactions, indicate the two (or more) effects on the accounting equation of the business or company. The owner invests personal cash in the business. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 37. The owner withdrawsbusiness assets for personal use. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 38. The company receivescash from a bank loan. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 39. The company repaysthe bank that had lent money to the company. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 40. The company purchasesequipment with its cash. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 41. The owner contributesher personal truck to the business Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 42. The company purchasesa significant amount of equipment on credit. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 43. The company purchasesland by paying half in cash and signing a note payable for the other half. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 44. The company paysa bill for telephone services using cash. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 45. The company paysa bill for telephone services using cash. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 46. The company payscash for a warehouse. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 47. The company receivesa bill for electric services to be paid next month. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 48. The company pays$200 cash for an ad in a local newspaper. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 49. The company purchasestechnology equipment on credit. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Increase Decrease No Effect Equity:
- 50. Which of thefollowing will cause owner’s equity to increase? a) Expenses b) Owner draws c) Revenues
- 51. Which of thefollowing will cause owner’s equity to decrease? a) Net income b) Net loss c) revenues
- 52. The accounting equationshould remain in balance because every transaction affects how many accounts? a) Only one b) Only two c) Two or more