An asset is a resource controlled
by the entity (as a result of past
events) from which future
economic benefits are expected.
Or in other word, assets are ‘what
the business owns’.
ASSETS are the
RESOURCES OWNED BY A BUSINESS .
Here are some types of assets that might
be owned by a business company:
Accounts
Receivable
Vehicles
Store
Supplies
Cash
ASSETS
Notes
Receivable
Land
Buildings
Equipment
4
* Land
* Computer
* Vehicle
* Cash
*
Decrease Assets
Increase Assets
Purchasing Supplies (The asset account Purchasing Supplies (The asset account
Cash decreases)
Supplies increases)
Owner Draws
Owner Contributions
Repaying bank loans
Receiving bank loans
Credit purchases
Liabilities are present obligations
of the entity (arising from past
events), the settlement of which
is expected to result in an
outflow of economic benefits. Or
in other word, liabilities are
‘what the business owes’.
LIABILITIES are the
CREDITOR’S CLAIMS ON ASSETS.
• Creditors are the people or companies to whom a business
owes something (like money).
• Here are some types of liabilities that a company might owe:
Accounts
Payable
Notes
Payable
LIABILITIES
Taxes
Payable
Wages
Payable
9
*The most common liability is a loan.
*Another common liability is called creditors.
*A creditor, also known as a payable, is any
business or person (apart from the bank)
that you owe.
*Suppliers (who you owe for products
purchased on credit) would fall under
creditors.
*The residual interest in the assets of
the enterprise after deducting all its
liabilities.
Owner’s Equity is defined as
the residual interest in the
assets of the entity after the
deduction of its liabilities.
*
*Represents the value of the assets that the
owner can lay claim to.
*The value of all the assets after deducting
the value of assets needed to pay
liabilities.
*It is the value of the assets that the
owner really owns.
OWNER’S EQUITY = ASSETS - LIABILITIES
EQUITY is the OWNER’S CLAIM ON ASSETS
In a business EQUITY is composed of four
parts that either increase or decrease equity:
EQUITY
CAPITAL:
What the owner
puts into the
business
INCREASE
−
WITHDRAWALS:
What the owner
takes out of the
business
DECREASE
+
REVENUES:
What the
company
receives for
sales
INCREASE
−
EXPENSES:
What the
company pays
to operate the
business.
DECREASE
15
*In the case of a corporation, which is
publicly owned, equity is labeled
shareholder’s equity
Decrease Owner’s Equity
Increase Owner’s Equity
Expenses
Revenues
Losses
Gains
Owner withdraws
Owner investments
Beginning Capital
*Income
*Example: a service company earns
revenue when it provides services to
its clients
*Recorded as an increases in owner’s
equity and an increase in assets
*The costs the company incurs in
carrying on operations in its effort to
create revenue
*Decrease owner’s equity
*Can be paid for with cash (decreases
assets)
*Or charged (increase liabilities)
*The difference between expenses and
equipment is equipment can be liquidated
or converted to cash.
EXAMPLE:
*A company car is equipment: No affect
on owner’s equity.
*A telephone bill is an expense Decreases
owner’s equity.
*Net Income: The company is bringing in more money
than it is spending to continue operations.
*Revenues > Expenses
*Net Loss: The company is bringing in less money than
it is spending to continue operations
*Revenues < Expenses
*Break Even: When a company’s revenues are equal to
their expenses
Beginning Capital
PLUS
Additional
Investment
Net Income*
+
Revenues
-- Expenses
-
Withdraws
If expenses are greater than revenues, then a
net loss would result. This loss would be
subtracted from capital because it would be a
negative number.
The word equation comes from the word
equal.
It is a state of being essentially equal or
equivalent; equally balanced.
For any equation, one side always equals
another.
Assets = Liabilities + Owner’s Equity
ASSETS = EQUITY + LIABILITIES
*The accounting equation indicates how
much of the assets of a business belong
to, or are owned, by whom.
*Assets can only ‘belong’ to two types of
people:
*people outside the business who are
owed money (liabilities)
*the owner himself (owner’s equity).
*The accounting equation should
remain in balance at all times because
of double-entry accounting or
bookkeeping.
*Double-entry means that every
transaction will affect at least two
accounts in the general ledger.
*An owner's investment into the
company will increase the company's
assets and will also increase owner's
equity.
*When the company borrows money
from its bank, the company's assets
increase and the company's liabilities
increase.
1. The basic accounting equation is assets =
liabilities + ______________
______________.
For each of the transactions in items 2 through 9,
indicate the two (or more) effects on the
accounting equation of the business or company.
#2
The owner invests personal cash in the business.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
*
#3
The owner withdraws business assets for personal use.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#4
The company receives cash from a bank loan.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#5
The company repays the bank that had lent money to the company.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#6
The company purchases equipment with its cash.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#7
The owner contributes her personal truck to the business
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#8
The company purchases a significant amount of equipment on credit.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
#9
The company purchases land by paying half in cash and signing a note payable
for the other half.
Assets:
Increase
Decrease
No Effect
Liabilities:
Increase
Decrease
No Effect
Owner's (or
Stockholders')
Equity:
Increase
Decrease
No Effect
SALE
Every transaction has two sides
PURCHASE
*
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