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Tutorial 1a The Accounting Equation
J. E. Cairnes School of Business and Economics NUI Galway
J. E. Cairnes School of Business & Economics
ASSETS
Definition:
‘an asset is owned by its owner and is worth something to its owner’
‘any right which is of economic value to its owner’
(Gillespie & Lewis, Principles of Financial Accounting)
J. E. Cairnes School of Business & Economics
ASSETS
Fixed Assets (>12mths): • Acquired by the business with the intention of
retaining them within the business to help generate profit
• Tangible assets (Land and Buildings, Equipment etc.)
• Investment property (For rental income or for sale at profit)
• Intangible assets (Goodwill, R&D Investment etc.)
• Financial assets (Shares in other companies etc.)
J. E. Cairnes School of Business & Economics
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ASSETS
Current Assets (<12mths): • Assets which arise from day to day trading activities
e.g. cash or assets that the business intends to turn into cash
• Stock
• Debtors
• Cash/Bank
• Prepaid expenses
J. E. Cairnes School of Business & Economics
LIABILITIES
Defintions:
‘the source of funds from outsiders’
‘amounts owed to people or firms outside the business’
(Gillespie & Lewis, Principles of Financial Accounting)
J. E. Cairnes School of Business & Economics
LIABILITIES
Creditors falling due after more than one year: • Long term loans
• Debentures
Creditors falling due within one year: • Creditors
• Short Term Borrowings
• Taxation (<12 months)
• Accrued Expenses J. E. Cairnes School of Business & Economics
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Ownership Interest
The liability of the entity to the owners of the entity
Often referred to as ‘Capital’, ‘Capital Employed’, ‘Equity’ or ‘Shareholders Funds’
J. E. Cairnes School of Business & Economics
Ownership Interest
Definitions:
‘the owners claim on the business’
‘the assets less liabilities of the business’
(Gillespie & Lewis; Principles of Financial Accounting)
J. E. Cairnes School of Business & Economics
THE ACCOUNTING EQUATION
ASSETS = LIABILITES
ASSETS LIABILITES = OWNERSHIP INTEREST
+
ASSETS = LIABILITES - OWNERSHIP INTEREST
J. E. Cairnes School of Business & Economics
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The Accounting Equation
• John decides to set up a taxi business • He uses €10,000 savings and borrows €15,000 from the
bank to buy a car for €25,000
• Assets: Car - €25,000 • Liabilities: Loan from bank - €15,000 • Capital: John’s investment - €10,000 • 25000 = 15000 + 10000
J. E. Cairnes School of Business & Economics
Profits/Gains & Losses
Profits/Gains are increases in ownership interest not resulting from contributions from owners
Losses are decreases in ownership interest not resulting from distributions to owners
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
Allison
1. Invests €10,000 in cash in a new business.
2. Purchases a stock of 100 pairs of shoes for €8,000.
3. Sells 50 pairs of shoes for €7,000 in cash.
J. E. Cairnes School of Business & Economics
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Accounting Equation Examples
1. Bank Capital
€10,000 €10,000
Initial
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
2. Bank 100 Shoes Capital
€2,000 €8,000 €10,000
Initial
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
3. Capital Bank 50 Shoes
€9,000
€4,000
€10,000
Initial
J. E. Cairnes School of Business & Economics
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Accounting Equation Examples
4. Bank 50 Shoes Profit Capital
€9,000 €4,000 €10,000 €3,000
Initial
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
5. The Entity Ownership Interest Bank 50 Shoes Profit Capital
€9,000 €4,000 €10,000 €3,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
1. Brian inherits a boat worth €20,000 and decides to start a boat hire business.
2. In the first month €2,000 of hire fees are received in cash.
3. At the end of the first month Brian owes €500 in berthing fees currently unpaid.
4. Brian takes €750 from the business as a capital withdrawal.
J. E. Cairnes School of Business & Economics
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Accounting Equation Examples
1. Boat Capital
€20,000 €20,000
Initial
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
2. Boat Bank (Profit) Capital
€20,000 €2,000 €20,000 €2,000
Initial
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
3. Boat Bank Fees Due (Profit) Capital
€20,000 €2,000 €20,000 €1,500 (€500)
Initial
J. E. Cairnes School of Business & Economics
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Accounting Equation Examples
4. Boat Bank Fees Due Profit Capital
€20,000 €1,250 €19,250 €1,500 (€500)
Residual
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
5. The Entity Ownership Interest
Boat Bank Fees Due Profit Capital
€20,000 €1,250 €19,250
€1,500 (€500)
J. E. Cairnes School of Business & Economics
The Accounting Equation
• Assets – Liabilities = Capital + Revenue - Expenses - Drawings
J. E. Cairnes School of Business & Economics
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The Accounting Equation
Assets – Liabilities = Capital +Revenue - Expenses - Drawings
or Debit (Dr) Credit (Cr) Assets = Capital + Expenses +Revenue + Drawings +Liabilities
J. E. Cairnes School of Business & Economics
Accounting Equation Debits & Credits
THE SUM OF ALL DEBITS (Dr’s)
= THE SUM OF ALL
CREDITS (Cr’s) J. E. Cairnes School of Business & Economics
Steps in preparing set of accounts
• 1. Record all transactions • 2. Extract a list of balances at the end of the period
(called a trial balance) • 3. Prepare a Profit and Loss account and Balance Sheet
from list of balances
J. E. Cairnes School of Business & Economics
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How do we record all transactions?
By using T Accounts with Dr. and Cr. entries for individual accounts.
J. E. Cairnes School of Business & Economics
Accounting Equation T – Accounts
ASSET Dr. Cr.
INCREASE ASSET
REDUCE ASSET
J. E. Cairnes School of Business & Economics
Accounting Equation T - Accounts
LIABILITY Dr. Cr.
INCREASE LIABILITY
REDUCE LIABILITY
J. E. Cairnes School of Business & Economics
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Accounting Equation T - Accounts
REVENUE Dr. Cr.
INCREASE REVENUE
REDUCE REVENUE
J. E. Cairnes School of Business & Economics
Accounting Equation T - Accounts
EXPENSE Dr. Cr.
INCREASE EXPENSE
REDUCE EXPENSE
J. E. Cairnes School of Business & Economics
Rules for Recording Transactions through Double Entry
J. E. Cairnes School of Business & Economics
1. Dr Assets Cr Liabilities 2. Dr Expenses Cr Gains • With Increases • The opposite applies for decreases
3. Dr Bank/Cash In Cr Bank/Cash Out
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Let’s look at some examples of Recording Transactions through Double Entry
J. E. Cairnes School of Business & Economics
• In Tutorial 1b we will look at Michael Green • In Tutorial 1c we will look at Kate Convey
• See: http://www.nuigalway.ie/cairnes/leavingcert/ for tutorials on other topics
Interested in pursuing an accounting career? Study at NUI Galway
J. E. Cairnes School of Business & Economics
• CAO Course Codes • GY201 B Comm • GY202 B Comm (International) with French • GY203 B Comm (International) with German • GY204 B Comm (International) with Spanish • GY207 B Comm (Accounting) • GY208 B Comm (Gaeilge) • For further information,
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