the accounting equation - introduction
TRANSCRIPT
THE ACCOUNTING EQUATION
THE ACCOUNTING EQUATION
•The whole of financial accounting is based on this simple idea
• It is the foundation of accounting
THE ACCOUNTING EQUATION
ASSETS CAPITAL LIABILITIES
ASSETS = CAPITAL + LIABILITIES
Assets can be thought of as the resources or the “stuff” required in order to set up and run the business
Assets can consist of:
ASSETS
BUILDINGS MACHINERY STOCK AMOUNTS OWING FROM CUSTOMERS
ASSETS = CAPITAL + LIABILITIES
• Capital can be thought of as the amount of those resources or assets supplied by the owner of the business
• Capital may also be referred to as OWNERS EQUITY
CAPITAL
• If the owner of the business has supplied all the resources initially to start up the business then the equation will be;
CAPITAL
ASSETS LIABILITIES
ASSETS = CAPITAL + LIABILITIES
• IF RESOURCES OF THE BUSINESS HAVE BEEN SUPPLIED BY SOMEONE OTHER THAN THE OWNER, THEN AMOUNTS OWING TO THESE OTHER PEOPLE IN
RESPECT OF THOSE RESOURCES SUPPLIED ARE REFERRED TO AS LIABILITIES• Liabilities can include:
LIABILITIES
LOANSAMOUNTS OWING TO
SUPLIERS
AMOUNTS OWING FOR
EXPENSES
ASSETS CAPITAL LIABILITIES
ACTUAL RESOURCES/STUFF IN THE
BUSINESS
WHO HAS CLAIMS TO THOSE ASSETS OR RESOURCES IN THE BUSINESS
– WHO SUPPLIED THEM? THIS WILL INCLUDE BOTH THE OWNERS CLAIMS AND OTHER PEOPLES CLAIMS
ASSETS = CAPITAL + LIABILITIES
• The accounting equation should always balance.
• This is because we are looking at the same thing but from two different places or points of view.
• Therefore, no matter how many transactions occur, both sides of the equation should always balance.
ACCOUNTING EQUATION EXAMPLE
• If on the 1/1/2012 Adam started a business. He deposited $10,000 into a bank account he opened specifically for his business.
ASSETS$10,000
CAPITAL$10,000
LIABILITIES$0
CASH IN BANK+ $10,000
MONEY INVESTED BY OWNER+ $10,000
ACCOUNTING EQUATION EXAMPLE
• If on the 5/1/2012 Adam bought a computer for $3,000 and he paid for this by cheque.
ASSETS$10,000
CAPITAL$10,000
LIABILITIES$0
COMPUTER = $3,000BANK = ($10,000-$3,000)
=$7,000
TOTAL=$3,000+$7,000=$10,000
UNCHANGED
BALANCE SHEET(STATEMENT OF FINANCIAL POSITION)
• ASSETS• COMPUTER $3,000• CASH AT BANK ($10,000 - $3,000) $7,000• TOTAL ASSETS $10,000
• CAPITAL $10,000
ACCOUNTING EQUATION EXAMPLE
• If Adam purchased some stock for $500 from a supplier on credit
ASSETS$10,500
CAPITAL$10,000
LIABILITIES$500
COMPUTER $3,000BANK $7,000STOCK $500TOTAL $10,500
UNCHANGEDTRADE PAYABLES $500
ADAM OWES HIS SUPPLIER $500
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