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    CHAPTER 3 - Accounting Equation

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    yow jing pei
    The document discusses the accounting equation and its elements. The accounting equation is an equality that must be prepared at any point in time and shows the resources owned by a business and the claims against those resources. It states that assets equal equities, where assets equal liabilities plus owner's equity. Assets are resources owned, liabilities are amounts owed, and owner's equity is the total funds provided by the owner. The accounting equation can be expanded to show owner's equity equals capital minus drawings plus net profit. Transactions that increase or decrease owner's equity are also discussed.

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    CHAPTER 3 - Accounting Equation

    Uploaded by

    yow jing pei
    650 views16 pages
    The document discusses the accounting equation and its elements. The accounting equation is an equality that must be prepared at any point in time and shows the resources owned by a business and the claims against those resources. It states that assets equal equities, where assets equal liabilities plus owner's equity. Assets are resources owned, liabilities are amounts owed, and owner's equity is the total funds provided by the owner. The accounting equation can be expanded to show owner's equity equals capital minus drawings plus net profit. Transactions that increase or decrease owner's equity are also discussed.

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    accounting

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    The document discusses the accounting equation and its elements. The accounting equation is an equality that must be prepared at any point in time and shows the resources owned by a business and the claims against those resources. It states that assets equal equities, where assets equal liabilities plus owner's equity. Assets are resources owned, liabilities are amounts owed, and owner's equity is the total funds provided by the owner. The accounting equation can be expanded to show owner's equity equals capital minus drawings plus net profit. Transactions that increase or decrease owner's equity are also discussed.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    650 views16 pages

    CHAPTER 3 - Accounting Equation

    Uploaded by

    yow jing pei
    The document discusses the accounting equation and its elements. The accounting equation is an equality that must be prepared at any point in time and shows the resources owned by a business and the claims against those resources. It states that assets equal equities, where assets equal liabilities plus owner's equity. Assets are resources owned, liabilities are amounts owed, and owner's equity is the total funds provided by the owner. The accounting equation can be expanded to show owner's equity equals capital minus drawings plus net profit. Transactions that increase or decrease owner's equity are also discussed.

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    You are on page 1of 16

    ACCOUNTING EQUATION

    THE ENTITY CONCEPT


    Each business is a separate entity from its

    owner
    For accounting purposes, the business is

    regarded as an entity or a unit by itself. It


    exists separately from its owners. Thus
    means that all financial information relating to
    the business is recorded and reported
    separately from the owners personal financial
    information.

    EXAMPLE
    DIYANA
    (individual)

    DIYANA
    (sole trader of book store)

    Separate accounting entity


    (record of personal
    transaction)

    Separate accounting entity


    (record of transaction relating
    business transaction)

    ACCOUNTING
    EQUATION
    Accounting equation is an equality that must be

    prepared at any point of time in accounting


    period.
    Basic accounting equation:
    ASSET = EQUITIES
    ASSET = CAPITAL+ LIABILITIES

    The equation shows the resources owned by the business


    and the claims against these resources

    ELEMENTS IN THE ACCOUNTING


    EQUATION
    Assets : resources owned by the business
    Assets
    Fixed
    Assets
    Assets that have a useful life > 1 year
    Used in business operations
    to generate profit
    Example : Land and building,
    Plant and Machinery, Vehicles

    Current
    Assets
    Assets that can be converted into
    Cash within 1 year
    Example : stock, debtor, cash in hand

    ELEMENTS IN THE ACCOUNTING


    EQUATION
    Liabilities : Amount owed by the business

    to external parties (creditors, bank)


    Liabilities
    Long term
    liabilities

    Debts which are not expected to


    be paid within a year
    Example : Bank loans

    Current
    liabilities

    Debts which are expected to be


    Paid within a year
    Example : Creditors, accrued
    expenses

    ELEMENTS IN THE ACCOUNTING


    EQUATION
    Owner equity : the total of resources or

    funds provided for by its owner


    Owners equity

    Capital

    The amount of money


    Invested by the owner
    In the business

    Drawing

    Withdrawals of
    Assets by the owner

    Revenue

    Inflow of cash or
    Assets from the sales
    Of goods or services

    Expenses
    Cost of assets
    consumed or services
    rendered to earn
    revenue

    THUS..

    ACCOUNTING
    EQUATION
    Owners equity = capital drawing + revenue - expenses

    EXPANDED ACCOUNTING
    EQUATION
    ASSETS = EQUITIES

    ASSETS = LIABILITY + OWNERS EQUITY

    ASSETS = LIABILITY + CAPITAL DRAWING + REVENUE - EXPENSES

    ASSETS = LIABILITY + CAPITAL DRAWING + NET PROFIT

    OR
    ASSETS + EXPENSES + DRAWING = LIABILITY + CAPITAL + REVENUE

    LCR (Credit balance in nature)


    AED (Debit balance in nature)
    (DOUBLE ENTRY SYSTEM)

    TRANSACTIONS THAT INCREASE OR


    DECREASE OWNERS EQUITY

    INCREASES (+)

    DECREASES (-)

    Owners withdrawal
    from the business

    Owners investment
    in the business

    OWNERS EQUITY

    Revenue received

    Expenses incurred

    DOUBLE ENTRY SYSTEM


    Increases in Assets, Drawings and Expenses :
    the entry will be debited
    Decreases in Assets, Drawings and Expenses :
    the entry will be credited

    THE DOUBLE ENTRY SYSTEM


    Increases in Liabilities, capital and Revenue :
    the entry will be credited
    Decreases in Liabilities, capital and Revenue :
    the entry will be debited

    EXAMPLE
    Diyana starts business with RM 30,000 cash from personal

    savings and RM 20,000 cash from a bank loan


    The business OWNS the following:
    Asset
    CASH
    RM 50,000
    =========
    The business OWES the following:
    Owners equity
    CAPITAL
    RM 30,000
    Liabilities
    LOAN FROM BANK
    RM 20,000
    TOTAL

    RM 50,000
    =========

    EXAMPLE
    ( From previous information)
    Derive the fundamental accounting equation
    ASSET
    Cash RM 50,000

    OWNERS EQUITY
    Capital RM 30,000

    OR
    ASSETS
    RM 50,000

    LIABILITIES
    RM 20,000
    OWNERS
    EQUITY
    RM 30,000

    LIABILITIES
    Loan RM 20,000

    TRANSACTIONS ON CREDIT
    TERMS
    Owner of the business
    Sales goods or services to
    Buyer

    Becomes our DEBTOR

    Purchase goods or services from


    Seller

    Becomes our CREDITOR

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