ACCOUNTING EQUATION
& RECORDING PROCESS
STUDENT WILL BE ABLE TO STATE
THE ACCOUNTING EQUATION AND
EXPLAIN EACH OF THE ELEMENT
IN THE ACCOUNTING EQUATION.
HOW MUCH PROFIT EARN?
WHAT ARE THE ELEMENT IN THE ACCOUNTING?
BOOK OF ACCOUNT NEED
YOU TO PREPARE
ACCOUNTING
INFORMATION WHICH
SHOWS THE FINANCIAL
POSITION OF THE BUSINESS
AND ITS PROFITABILITY.
STATEMENT OF
FINANCIAL POSITION
ASSETS = LIABILITIES + OWNER’S EQUITY
This is basic elements of accounting that can be identify in the
business. This equation explain that all the balance in
accounts should in the agreement of total assets with the
total liabilities and owner’s equity.
ASSETS ARE THE RESOURCES THAT A
BUSINESS ENTITY OWNS OR CONTROL
TO PROVIDE FUTURE SERVICES OR
BENEFIT IN ORDER TO EARN PROFIT
TYPES OF ASSETS CHARACTERISTICS
i. Non-current Assets Assets acquired not for resale.
Useful life of more than a year.
Tangible non-current assets – land and building,
machinery, equipment, motor vehicle, office furniture
Intangible non-current assets – franchise, goodwill,
patent, trademark, copyright
Investment – fixed deposit
Example of non-current asset
ASSETS ARE THE RESOURCES THAT A
BUSINESS ENTITY OWNS OR CONTROL TO
PROVIDE FUTURE SERVICES OR BENEFIT
IN ORDER TO EARN PROFIT
TYPES OF ASSETS CHARACTERISTICS
ii. Current Assets Cash or assets that are expected to be converted
into cash within a year.
Stock/Inventory/Merchandise, Account
Receivable/Debtors, Cash at bank(Bank), Cash in
hand (Cash), Prepaid expense, Accrued revenue
Example of current asset
LIABILITIES ARE DEFINED AS WHAT
THE BUSINESS ENTITY OWES TO ITS
NON-OWNER.
TYPES OF
LIABILITIES CHARACTERISTICS
i. Non-Current Amount owing by the business that is
Liabilities not expected to be repaid within a
year.
Example: Mortgage, Long-term loan
(Loan from bank), Debenture,
LIABILITIES ARE DEFINED AS WHAT
THE BUSINESS ENTITY OWES TO ITS
NON-OWNER.
TYPES OF
LIABILITIES CHARACTERISTICS
ii. Current Amount owing by the business that
Liabilities expected to be repaid within a year
Example: Short-term loan, bank
overdraft, creditors/accounts payable,
Prepaid revenue, Accrued expense.
OWNER’S EQUITY IS THE BALANCE
OF TOTAL ASSET AFTER ALL THE
CLAIM OR LIABILTIES HAVE BEEN
PAID.
TYPE OF EQUITY CHARACTERISTICS
i. Capital Capital is the total investment by owners
in the business plus the profit/ loss that
have accumulated in the company and
after the owner withdrawals.
OWNER’S
OWNER’S EQUITY
EQUITY FOR SOLE
PROPRIETORSHIP CAN BE EXPANDED
= CAPITAL - DRAWINGS + REVENUE
INTO 4 DIVISIONS
- EXPENSES
ASSETS = LIABILITIES + OWNER’S + REVENUES - EXPENSES - DRAWINGS
EQUITY
EXTENDED ACCOUNTING EQUATION
REVENUE
Revenues are the gross increase in owner’s equity
resulting from business activities entered into for the
purpose earning income. It will increase the business
profit.
(Profit = revenues – expenses).
Example: sales, fees, services, commissions,
interest received, dividends, rent received.
EXPENSES
Expenses are the cost of assets consumed or services
used in the process of earning revenue. It will decrease
the business profit.
(Profit = revenues – expenses).
Example: Salary, Wages, Telephone bill,
Insurance, Rent expense, Interest, Utility ….
DRAWINGS
Drawings are the withdrawals of assets by the owners
which reduce the owner’s claim in the business.
Example: Cash or goods taken out from a business for
personal use.
Classify the item below into:
Current Asset/Non-current Asset, Current Liability/Non-current Liability,
Owner’s Equity, Revenue, Expenses or Drawing.
Mortgage Non-current liability
Motor Vehicle Non-Current Asset
Salary Expense
Commission Revenue
Classify the item below into:
Current Asset/Non-current Asset, Current Liability/Non-current Liability,
Owner’s Equity, Revenue, Expenses or Drawing.
Account Receivable Current Asset
Land and Building Non-Current Asset
Account Payable Current Liability
Capital Owner’s Equity