1. ACCOUNTING EQUATION
AND ACCOUNT
CLASSIFICATION
05 June 2013

2. Basic Accounting Equation
A = L + C
ASSETS = LIABILITIES + OWNER’S EQUITY

3. Assets
 Assets are resources controlled by an entity.
 Two major classifications:
 Current assets – are cash and other resources
that are reasonably expected to be realised in
cash or sold or consumed in the business within 1
year of the reporting date or the business’s
operating cycle, whichever is longer.
 Non-current assets – long-term assets

4. Assets
 Current Assets
 Cash
 Short-term investments (i.e., government bonds)
 Receivables
 Notes receivable
 Accounts receivable
 Interest receivable
 Prepaid expenses

5. Assets
 Non-current Assets
 Investment property – investments of the
company in non-current assets other than
financial assets
 Property, plant and equipment – tangible
resources of a relatively permanent nature that
are used in the business and not intended for
sale.
 Intangible assets – non-current resources that do
not have physical substance
(i.e., patents, copyrights, trademarks)

6. Liabilities
 Liabilities are claims against assets.
 Two major classifications:
 Current liabilities - are liabilities expected to be
settled in the normal operating cycle of the
business or are due to be settled within 12
months after the end of the reporting period.
 Accounts Payable
 Salaries Payable
 Utilities Payable

7. Liabilities
 Two major classifications:
 Non-current liabilities – obligations expected to
be paid after 1 year or after an operating cycle
 Bonds payable
 Mortgages payable
 Long-term notes payable

8. Owner’s Equity
 The ownership claim on total assets.
 The content of the owner’s equity section
varies with the form of business entity.
Type of business Equity account
Sole-proprietorship One capital account
Partnership One capital account for each partner
Corporation
Share capital, Reserves, Retained earnings
(Shareholder's equity)

9. Increases in Owner’s Equity
 Investments by owner are the assets the
owner puts into the business.
 Income is the gross increase in owner’s equity
resulting from business activities entered into
for the purpose of earning profit.
 Revenue arises in the course of ordinary activities
of the business.
 Gain arises from events that are not part of a
businesses ordinary course of activities.

10. Decreases in Owner’s Equity
 Drawings are withdrawals by the owner of
cash or other assets for personal use.
 Expenses are the costs of assets consumed or
services used un the process of earning
income.
 Salaries expense
 Utilities expense
 Rent expense
 Depreciation expense
 Interest expense

11. Owner’s Equity
 Profit results when revenue exceeds
expenses.
 Loss occurs when expenses exceed revenue.

12. Basic Accounting Equation
A = L + C
ASSETS = LIABILITIES + OWNER’S EQUITY

13. Accounting Equation
 Basic Accounting Equation
ASSETS = LIABILITIES +
OWNER’S EQUITY
 Expanded Basis Accounting Equation
ASSETS = LIABILITIES + OWNER’S CAPITAL –
OWNER’S DRAWINGS + REVENUE –
EXPENSES

14.  A transaction is an exchange of values
(stated in terms of money) between two
parties.
 In every transaction there is value received
and value parted with. This is the dual effect
of a business transaction which gave rise to
double-entry bookkeeping.
Double-entry System
 Each transaction affects at least two accounts
(one debited, one credited)
Transaction Analysis

15.  Source of Assets – An asset account
increases and a corresponding claims
(liabilities or owner’s equity) account
increases.
 Examples:
 Investment of cash by the owner
 Purchase of supplies on account
Increase in Assets = Increase in Owner’s Equity
Increase in Assets = Increase in Liabilities
Types and Effects of
Transactions

16.  Exchange of Assets – One asset account
increases and another asset account
decreases.
 Examples:
 Equipment purchased on cash
 Collection of Accounts Receivable
Increase in One asset = Decrease in another Asset
Types and Effects of
Transactions

17.  Use of Assets – An asset account decreases
and a corresponding claims (liabilities or
equity) account decreases.
 Examples:
 Withdrawal of cash by the owner
 Payment of Accounts Payable
Decrease in Assets = Decrease in Owner’s Equity
Decrease in Assets = Decrease in Liabilities
Types and Effects of
Transactions

18.  Exchange of claims – One claims (liabilities
or owner’s equity) account increases and
another claims (liabilities or owner’s equity)
account decreases.
 Examples:
 Received bill for utilities but the owner did not pay
yet
Increase in Liabilities = Decrease in Owner’s Equity
Increase in Owner’s Equity = Decrease in liabilities
Increase in one Liability = Decrease in another Liability
Increase in one Owner’s Equity = Decrease in another Owner’s Equity
Types and Effects of
Transactions

19. Analyzing Business
Transactions
 Account – is an individual accounting record
of increases and decreases in a specific
asset, liability or owner’s equity item.
 Consists of three parts:
 The title of the account
 Left or debit side
 Right or credit side

20. Analyzing Business
Transactions
 T account – a simplified format of account that
resembles the letter T.
Left or debit side Right or credit side
Debit balance Credit balance
Title of account

21. Debits and Credits
 Debit
 Indicates left
 Abbreviated as Dr
 Came from the Latin word debere which originally
meant ‘debtor’
 Credit
 Indicates right
 Abbreviated as Cr
 Came from the Latin word credere which
originally meant ‘creditor’

22. Debits and Credits
ASSETS = LIABILITIES +
OWNER’S EQUITY
Left or debit side
ASSETS
Right or credit side
LIABILITIES AND OWNER'S EQUITY
(REVENUE - EXPENSE)
Debit balance Credit balance
Title of account