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Accounting equation
- 3. An asset is a resource controlled by the entity (as a result of past events) from which future economic benefits are expected. Or in other word, assets are ‘what the business owns’.
- 4. ASSETS are the RESOURCES OWNED BY A BUSINESS . Here are some types of assets that might be owned by a business company: Accounts Receivable Vehicles Store Supplies Cash ASSETS Notes Receivable Land Buildings Equipment 4
- 5. * Land * Computer * Vehicle * Cash *
- 6. Decrease Assets Increase Assets Purchasing Supplies (The asset account Purchasing Supplies (The asset account Cash decreases) Supplies increases) Owner Draws Owner Contributions Repaying bank loans Receiving bank loans Credit purchases
- 8. Liabilities are present obligations of the entity (arising from past events), the settlement of which is expected to result in an outflow of economic benefits. Or in other word, liabilities are ‘what the business owes’.
- 9. LIABILITIES are the CREDITOR’S CLAIMS ON ASSETS. • Creditors are the people or companies to whom a business owes something (like money). • Here are some types of liabilities that a company might owe: Accounts Payable Notes Payable LIABILITIES Taxes Payable Wages Payable 9
- 10. *The most common 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.
- 11. *The residual interest in the assets of the enterprise after deducting all its liabilities.
- 12. Owner’s Equity is defined as the residual interest in the assets of the entity after the deduction of its liabilities.
- 13. *
- 14. *Represents the value 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
- 15. EQUITY is the OWNER’S CLAIM ON ASSETS In a business EQUITY is composed of four parts that either increase or decrease equity: EQUITY CAPITAL: What the owner puts into the business INCREASE − WITHDRAWALS: What the owner takes out of the business DECREASE + REVENUES: What the company receives for sales INCREASE − EXPENSES: What the company pays to operate the business. DECREASE 15
- 16. *In the case of a corporation, which is publicly owned, equity is labeled shareholder’s equity
- 17. Decrease Owner’s Equity Increase Owner’s Equity Expenses Revenues Losses Gains Owner withdraws Owner investments Beginning Capital
- 18. *Income *Example: a service company earns revenue when it provides services to its clients *Recorded as an increases in owner’s equity and an increase in assets
- 19. *The costs the company incurs in carrying on operations in its effort to create revenue *Decrease owner’s equity *Can be paid for with cash (decreases assets) *Or charged (increase liabilities)
- 20. *The difference between expenses and equipment is equipment can be liquidated or converted to cash. EXAMPLE: *A company car is equipment: No affect on owner’s equity. *A telephone bill is an expense Decreases owner’s equity.
- 21. *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
- 22. Beginning Capital PLUS Additional Investment Net Income* + Revenues -- Expenses - Withdraws 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.
- 24. The word equation comes from the word equal. It is a state of being essentially equal or equivalent; equally balanced. For any equation, one side always equals another.
- 25. Assets = Liabilities + Owner’s Equity
- 29. ASSETS = EQUITY + LIABILITIES *The accounting equation indicates how much of the assets of a business belong to, or are owned, by whom. *Assets can only ‘belong’ to two types of people: *people outside the business who are owed money (liabilities) *the owner himself (owner’s equity).
- 30. *The accounting equation 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.
- 31. *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.
- 32. 1. The basic accounting equation is assets = liabilities + ______________ ______________.
- 33. For each of the transactions in items 2 through 9, indicate the two (or more) effects on the accounting equation of the business or company. #2 The owner invests personal cash in the business. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect *
- 34. #3 The owner withdraws business assets for personal use. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 35. #4 The company receives cash from a bank loan. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 36. #5 The company repays the bank that had lent money to the company. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 37. #6 The company purchases equipment with its cash. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 38. #7 The owner contributes her personal truck to the business Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 39. #8 The company purchases a significant amount of equipment on credit. Assets: Increase Decrease No Effect Liabilities: Increase Decrease No Effect Owner's (or Stockholders') Equity: Increase Decrease No Effect
- 40. #9 The company purchases land 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') Equity: Increase Decrease No Effect
- 41. SALE
- 42. Every transaction has two sides PURCHASE