Introduction to Accounting
Prepared by: Dr. Nguyen Huu Cuong
Senior Lecturer of Accounting Faculty,
Danang University of Economics,
The University of Danang.
Email:
nguyenhuucuong@due.udn.vn
© 2023 by Nguyen Huu Cuong
1
Chapter 2
Accounting Equation
Prepared by: Nguyen Huu Cuong,
PhD (Queensland University of Technology)
Senior Lecturer of Accounting Faculty,
Danang University of Economics.
© 2023 by Nguyen Huu Cuong
2
Learning Objectives
Careful study of this chapter
should enable you:
1. Understand and differentiate between basic
and expanded accounting balances.
2. Define, explain, and give examples of the
elements of the accounting equation (assets,
liabilities, equity, revenue, expenses).
3. Analyse business transactions.
© 2023 by Nguyen Huu Cuong
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Accounting Equation
− Accounting Equation
+
+
Accounting Equation captures vital elements studied by
accountants, providing user-friendly financial information
These elements are also known as accounting objects
including Assets, Liabilities, Owners’ Equity, Income
(Revenue), and Expenses
− Accounting objects  Accounting Equation
+
+
Assets of the entity
Sources of assets (what are sources financing/funded assets
 Sources of funds/finances) Liabilities and Owner’s Equity
 Significance of accounting equation
o Evaluates financial position
o Identifies sources of assets
o Reveals origins of entity's assets
LO1: Accounting Equation
© 2023 by Nguyen Huu Cuong
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Accounting Equation
− Assets, Liabilities, and Owner’s Equity:
+
Elements of Balance Sheet, assist the evaluation of the
entity’s financial position
Basic Accounting Equation
Assets = Liabilities + Owner’s Equity
− Revenue, Expense and Net Income (Loss)
+
Elements of Balance Sheet, assist the evaluation of the
entity’s financial performance.
Expanded Accounting Equation
Assets = Liabilities + Owner’s Equity + Revenue - Expenses
LO1: Accounting Equation
© 2023 by Nguyen Huu Cuong
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Accounting Equation
LO1: Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets
Definition
− An asset is a resource controlled by the
entity as a result of past events and from
which future economic benefits are
expected to flow to the entity (VAS 01, para. 18a)
 CONTROL ☺ OWN # RENT
 Future economic benefits: a capability
to convert into cash or cash
equivalents or to reduce cash outflows.
 Assets: cash, merchandise, equipment,
furniture, buildings
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets – Control (Own/Rent)
− Resources controlled by the entity
+ The right to exploit and use such resources in activities
to achieve certain objectives of the entity.
+ Right of disposition: The right to control/restrict the
use of economic benefits from that resource to another
entity.
The entity's rights to these resources are the result of
events that have occurred.
− Is a public goods or know-hows assest of an
entity?
+ Public goods,
for eg. public rights of way over land
+ Know-hows
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets – Future Economic Benefit
− Future economic benefits
+ The potential to increase an entity's cash and
cash equivalents or reduce its expenses.
− An asset may be:
+ used singly/in combination with other assets
in the production of goods/services to be sold
by the entity
+ exchanged for other assets;
+ used to settle a liability; or
+ distributed to the owners of the entity
Future economic benefits = the value brought to the
unit.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets - Example
− Office Space for a Tech Company
+ CONTROL (OWN/RENT)
o Ownership Example: Imagine the tech company owns
its office building.
▪ It has complete control over the building, how it's
used, and even if it's sold in the future. This
ownership provides the company with autonomy
to make decisions regarding the property.
o Rental Example: Alternatively, if the company rents
office space in a building, it still exercises control over
that space. While the company doesn't own the
building, it has control over the rented space, allowing
it to conduct its operations effectively.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets - Example
− Office Space for a Tech Company
+ FUTURE ECONOMIC BENEFITS
o Ownership Example:
▪ If the tech company owns the office building, it
not only controls the space but also holds an asset
that can bring future economic benefits. The
company can use the building for its operations
and, if necessary, sell it in the future to gain cash
that can be used for other investments.
o Rental Example: In the case of renting office space,
while the company doesn't own the space, it still has
control over it for a certain period. The economic
benefit lies in the effective use of the office space to
carry out business activities, which can lead to
increased productivity and revenues.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets
Recognition of Assets
− An item that meets the definition of an
asset should be recognised if:
 It is probable that any future economic
benefit associated with the item will flow to
the entity; and
 The item has a cost or value that can be
measured with reliability.
(VAS 01, para. 40)
Only items that meets the definition and recognition
criteria are recognised.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Assets
Recognition of Assets
 Assets versus expenses (Conceptual Framework,
para. 4.45)
 An expense (an asset): If economic
benefits of an incurred expenditure will
flow to the entity within (beyond) the
current accounting period.
 Example: Office (Space) Rent
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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ASSETS
ASSETS recognized and presented in
the entity's financial statements are
 Must be a resource controlled by the entity
 Probably bring future economic benefits to
the entity
 The value must be reliably determined
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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ASSETS
Analysis of the following resources are
recognized and presented in the financial
statements as ASSETS of the entity?
 Research and Development Expenditure
 Internally generated goodwill
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of ASSETS
Based on liquidity
−
−
Liquidity refers to how easily (i.e. the ease) and quicly (i.e.
the speed) an asset can be turned into cash without
significantly impacting its market value.
Current (Short Term) Assets: These are assets expected to be
converted into cash or consumed WITHIN either one
normal business cycle or one year (12 months)
o The longer time criterion serves as the basis for classifying
assets into short-term or long-term categories.
−
Business Cycle and Assets Conversion: The business cycle
marks the span from a company’s investment in inventory
for operations to the moment of selling products, goods, or
providing services, resulting the collection of revenue from
customers.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of ASSETS
Based on liquidity
−
Non-Current (Long Term) Assets: These are assets expected
to be converted into cash or consumed AFTER either one
normal business cycle or one year (12 months)
o The longer time criterion serves as the basis for classifying
assets into short-term or long-term categories.
−
Time criterion for asset classification. In practice, it’s
common to use the one-year criterion, i.e. 12 months, to
classify assets into short-term and long-term. Why?
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Liquidity
DESCENDING
Excerpt from the Balance Sheet as at
June 30, 2023 of Vietnam Joint Stock
Company (VNM)
CURRENT (Short-term) ASSETS
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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CURRENT (Short-term) ASSETS
 Cash and Cash Equivalents
− Cash: Physical currency on hand (cash on
hand), in bank accounts (cash in bank), or in
transit (cash in transit);
− Cash Equivalents: Highly liquid assets, like
short-term securities with maturity within
three months from the date of investment.
 Short-term Financial Investment
− Trading Securities: Bought and sold for
short-term gains
− Held-to-maturity investments: Investments
expected to mature within 12 months
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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CURRENT (Short-term) ASSETS
 Short-term Accounts Receivable:
− Represents the entiy's right to receive (something)
from organisations and individuals
− Includes receivables from customers (Accounts
Receivable), advances to suppliers/sellers,
advances to employees, etc.
 Inventories
− Short-term assets reserved for the production
process, such as raw materials, work-in-process
− Short-term assets reserved for sales, such as
finished goods, merchandise, etc.
 Short-term prepaid expenses
− Expenses paid in advance for short-term benefits,
such as insuarance premiums, rent, etc.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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LO2: Elements of Accounting Equation
Stable Nature (holding for long-term use
DESCENDING
Excerpt from the Balance Sheet as at
June 30, 2023 of Vietnam Joint Stock
Company (VNM)
NON-CURRENT (Long-term) ASSETS
© 2023 by Nguyen Huu Cuong
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NON-CURRENT (Long-term) ASSETS
 Fixed Assets:
− Assets held by the entity for the normal operation of the entity.
− Tangible fixed assets: Physical assets like land, buildings, and
machinery (Value criteria ≥ 30,000,000 VND according to
Circular 45/2013/TT-BTC)
− Intangible fixed assets: Non-physical assets like patents,
trademarks, and goodwill (Value criteria ≥ 30,000,000 VND
according to Circular 45/2013/TT-BTC)
 Investment Properties: Properties held to earn rental income
or for capital appreciation.
 Long-Term Investments
− Invest in subsidiaries
− Invest in affiliated companies, joint ventures, etc.
 Other long-term assets
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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SOURCES OF CAPITAL
− Source of capital: This refers to where the
entity's assets or capital comes from
− Two main sources:
 Owner’s equity: Assets are financed by
contributions from owners or retained earnings.
This represents the portion of assets owned by the
shareholders.
 Liabilities: Assets can also be financed through
borrowing or lending. Liabilities are obligations
that the entity owes to external parties.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Definition of Liabilities
− Definition of Liability (VAS 01, para. 18b): A liability
represents a present obligation of the enterprise arising from
past transactions or events, the settlement of which is
expected to result in an outflow of resources from the
enterprise.
− Present versus Future Commitment: It's important to
distinguish between present obligations and future
commitments.
 Example: Assets already bought  Asset managers decided
to acquire in the future
− Liabilities result from past transactions: Arise from
past transactions or events that have created a present
obligation. They represent financial commitments that the
entity is obligated to fulfill.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Definition of Liabilities
Current Obligation Defined:
• A current obligation represents a duty or
responsibility of the entity to other entities or
individuals.
Characteristics of Current Obligations
• Legally Enforceable: Current obligations may
be legally enforceable due to binding contracts
or statutory requirements.
• Settlement Methods: These obligations can be
settled through various means, including cash
payments, transferring other assets, or
providing services
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Recognition of Liabilities
Criteria for Recognition (VAS 01, para. 41): An item
qualifies for recognition as a liability when two
conditions are met
• Probability of Outflow: There must be a
probable outflow of resources embodying
economic benefits resulting from the settlement
of a present obligation.
• Reliable Measurement: The amount at which
the settlement will occur should be measurable
with reliability.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Methods of Settling Liabilities
Obligations are settling by
▪ Transfering an Economic Resource:
This involves settling the obligation by paying in cash, delivering
goods, providing services, or other means.
▪ Negotiating a release:
In some cases, obligations can be settled by negotiating and
securing a release from the obligation
▪ Transfering to a Third Party:
Obligations can also be settled by transferring them to a third
party, often through contractual agreements
▪ Replacing with a New Obligation :
Another method is to replace the existing obligation to transfer an
economic resource with a new obligation through a new
transaction or agreement
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of LIABILITIES
Excerpt from the Balance Sheet as at June 30, 2023 of Vietnam Joint
Stock Company (VNM)
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of LIABILITIES
Current Liability (Debt).
▪ These are debts with a payment term of 12 months or less.
▪ Some items are always classified as current liabilities:
o Accrued expenses: Liabilities for expenses incurred
but not yet paid, such as salaries, rent, and utilities
▪ Some other items must be based on the provisions of the
contract:
o Short-term loans: If a loan agreement specifies a
repayment within 12 months, it's classified as a
current liability.
o Trade Payables (Accounts payable): Depending on
the terms outlined in the contract, trade payables
can be either current or non-current liabilities.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of LIABILITIES
Non-Current Liability (Debt).
▪ These are debts with a payment term of more than 12
months.
▪ Non-Current (Long-Term) Liabilities (Debts) are
classified based on the provisions of the contract:
o Long-term loans: If a loan agreement specifies a
repayment period beyond 12 months, it's classified
as a long-term liability.
o Trade Payables (Accounts payable): Accounts
payable with a maturity date exceeding 12 months
are considered long-term liabilities.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Equity
Definition (VAS 01, para. 18c):
▪ Equity represents the residual interest in the enterprise's
assets after deducting all its liabilities.
Measurement:
▪ Equity is the amount by which the total assets of the
business exceed its total liabilities
Recognition
▪ There are no explicit requirements for the recognition of
equity because it is inherently determined as the
difference between assets and liabilities.
Examples of Owner’s Equity:
▪ Common stock, Retained earnings, etc.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of Equity
Excerpt from the Balance Sheet as at June 30, 2023 of Vietnam Joint
Stock Company (VNM)
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of Equity
Classification Based on Source of Equity:
▪ Owner’s Investment Capital: Represents the capital
invested by the owner(s) into the business.
▪ Retained Earnings: Accumulated profits retained within
the business for future use.
Classification Based on intended use
▪ Equity for Business Purposes: Capital intended for the
normal operations and activities of the business.
▪ Equity for Specialized purposes: Funds designated for
specific purposes, such as investment and development
funds, or capital expenditure fund (which is earmarked for
capital construction and long-term asset investments).
▪ Other equity: Equity not falling into the above categories
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Revenues and Other Incomes
Definition (VAS 01, para. 31, 34, 35)
−
Revenues and other incomes are increases in economic
benefits resulting from the ordinary activities and other events
of the enterprise during the accounting period.
Revenues and Other Incomes (Gains)
−
−
Revenues:
▪ Revenues arise in the ordinary course of business and
include sales, royalties, interest, and dividends.
Other incomes (Gains)
▪ Other Incomes represent items arising from activities
other than those generating revenues, such as disposals
of fixed assets or receipts from penalties.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Recognition of Revenues and Other Incomes
Recognition Criteria (VAS 01, para 43)
▪ Income is recognized when two conditions are
met:
1) Increase in Future Economic Benefits
o An increase in future economic benefits, which can
be related to an increase in an asset or a decrease in a
liability, has arisen and can be measured reliably.
2) Reliability and Certainty
o The income can be measured reliably and has a
sufficient degree of certainty.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Excerpt from the Income Statement for the six month period
ended June 30, 2023 of Vietnam Joint Stock Company (VNM)
Classification of Revenues and Other Incomes
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of Revenues and Other Incomes
Classification (VAS 01, para. 34 & 35)
−
−
−
Revenues:
▪ Revenues arise in the ordinary course of business and
include sales, royalties, interest, and dividends.
Other incomes (Gains)
▪ Other Incomes represent items arising from activities
other than those generating revenues, such as
disposals of fixed assets or receipts from penalties.
Three separate items be presented in the Income
Statement
▪ Revenues from Sales of Goods and Provision of
Services
▪ Financial Income (Interest Revenue)
▪ Other Income
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of Revenues and Other Incomes
Revenue from sale of goods and provision of services:
▪ This category includes income generated by using capital to
trade in products, goods, and services as part of the core
business activities. It's the revenue generated from the primary
operations of the business.
Financial Income
▪ Financial income comprises revenue earned from the use of
capital in financial investments, such as stocks, bonds, and
investments in other entities. This income is generated from
investments made with surplus capital.
Other Income
▪ Other income covers activities that do not involve using capital
for profit-seeking purposes in the ordinary course of business.
It includes proceeds from the sale and liquidation of assets, as
well as receipts from other entities like fines or penalties.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Definition of Expenses
Definition (VAS 01, para. 31b)
− Expenses are decreases in economic benefits
during the accounting period in the form of
▪ Outflows or depletions of assets, or
▪ Incurrence of liabilities that result in
decreases in equity,
▪ Expenses do not include dividends paid
to owners and shareholders
− Expenses include items that are incurred in the
ordinary course of business and other expenses.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Recognition of Expenses
Recognition Criteria (VAS 01, para. 44-47):
▪ Expenses are recognized when two conditions are
met
1) Decrease in Future Economic Benefits:
o A decrease in future economic benefits, which can
be related to a decrease in an asset or an increase
in a liability, has arisen and can be measured
reliably
2) Association with Income
o Expenses are recognized based on their
association with the earning of specific items of
income, adhering to the matching principle and
the accounting period concept
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Excerpt from the Income Statement for the six month period
ended June 30, 2023 of Vietnam Joint Stock Company (VNM)
Classification of Expenses
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Classification of Expenses
Expenses encompass two main categories (VAS 01. para 36-38)
1) Ordinary Expenses: Arise during the normal
activities of the entity and include:
− Cost of Sales/Good Sold: Expenses related
to producing or purchasing goods sold.
− Wages: Employee compensation.
− Depreciation: Allocation of asset costs over
their useful life.
2) Losses represent other items that meet the
definition of expenses and may, or may not,
arise in the course of the ordinary activities of
the entity
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Expenditure <> Expenese <> Cost
1)Expenditure [Chi tiêu]
Definition: Expenditure refers to any financial outflow,
whether for expenses or costs. It encompasses all monetary
transactions, representing the complete financial activity of
the business.
Example: Expenditures can include paying for utilities (an
expense), acquiring inventory (a cost), or settling a vendor
invoice
Accounting Treatment: Expenditures are recorded in the
financial records as they occur, reflecting the immediate
impact on the income statement or balance sheet.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Expenditure <> Expenese <> Cost
2)Expense [Chi phí]
Definition: Expenses are regular, recurring outflows of
funds that a business incurs to support its daily operations.
They are associated with the consumption of goods, services, or
resources used in generating revenue.
Example:
▪ Rent, utility bills, salaries, office supplies, and marketing
expenses are typical examples of expenses.
▪ Cost of Goods Sold is an expense. It's the expense directly
tied to the production or purchase of goods that a company sells.
[While "cost" is in the name, COGS is considered an expense
because it reflects the resources expended (or "costs") in
generating revenue through the sale of goods.]
Accounting Treatment: Expenses are recognized on the
income statement in the period they are incurred, reflecting
the ongoing operational costs.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Expenditure <> Expenese <> Cost
3) Cost [Giá phí/Giá thành]
Definition: Costs represent the expenditures made to acquire
assets or produce goods and services. They can be initial or
acquisition expenses that contribute to enhancing or creating
value.
Example: The cost of purchasing inventory, machinery, or a
building are examples of costs. These expenditures are
associated with acquiring or improving assets that will
benefit the business over time.
Accounting Treatment: Costs are capitalized as assets on the
balance sheet and are subsequently depreciated or amortized
over their useful life, reflecting their long-term value to the
business.
LO2: Elements of Accounting Equation
© 2023 by Nguyen Huu Cuong
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Basic Accounting Equation (A = L + OE)
Showing where the
money came from to buy
the assets.
Assets = Liabilities + Owner’s Equity
Resources
Rights of
controlled by a creditors are the
business
debts of the
business
LO1 & LO2: Accounting Equation - Recap
Rights of the
owners
© 2023 by Nguyen Huu Cuong
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Basic ACCOUNTING EQUATION
Showing how to
dertermine EQUITY
Owner’s Equity = Assets – Liabilities
Rights of the
owners
Resources
Rights of
controlled by creditors are the
a business
debts of the
business
LO1 & LO2: Accounting Equation - Recap
© 2023 by Nguyen Huu Cuong
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Expanded ACCOUNTING EQUATION
Net income (loss) = Revenues & Other
Incomes – Expenses
Ending Owner’s Equity = Existing OE + NI
(or - NL) of the period
Assets = Liabilities + OE + Revenues (and
Other Incomes) – Expenses
 Revenues and Other Incomes include Sales
Revenues, Financial Incomes and Other
Incomes
 Expeneses includes COGS, periodic expenses,
and other expenses.
LO1 & LO2: Accounting Equation - Recap
© 2023 by Nguyen Huu Cuong
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Accounting Equation
Example (1)
Once the debts are paid, the remaining
assets belong to the owner (owner’s equity).
If a business has total assets of $60,400 and
total liabilities of $5,400, what is the owner’s
equity?
ASSETS – LIABILITIES = OWNER’S EQUITY
60,400
–
5,400
LO2: Construct the Accounting Equation
=
55,000
© 2023 by Nguyen Huu Cuong
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The Accounting Equation
Example (2)
Gerry Gallery is the owner and operator of You’re A
Star, an educational consulting business. At the end of
its accounting period, December 31, 2015, You’re A
Star has assets of $800,000 and liabilities of
$350,000. Using the accounting equation, determine
the following amounts:
a. Owner’s equity as of December 31, 2015.
b. Owner’s equity as of December 31, 2016,
assuming that assets increased by $130,000 and
liabilities decreased by $25,000 during 2016.
LO2: Construct the Accounting Equation
© 2023 by Nguyen Huu Cuong
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Business Transactions and
Accounting Equation
 Business Transaction: An economic event
(or condition) that has a direct impact on
the business (its financial condition or its
results of operations)
 Analysing Business Transactions:
 What happened?
 Which elements of financial statements
are affected?
 How is the accounting equation
affected?
LO3: Analyse Business Transactions
© 2023 by Nguyen Huu Cuong
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BUSINESS TRANSACTIONS and
ACCOUNTING EQUATION
TÀI SẢN
(Assets)
1
3
NGUỒN
VỐN
(Liability &
Owner’s Equity)
TÀI SẢN
(Assets)
4
2
NGUỒN
VỐN
(Liability &
Owner’s Equity)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
52
BUSINESS TRANSACTIONS and
ACCOUNTING EQUATION
Relationship Between Business Transactions and the
Accounting Equation
Category 1 “Asset Increase - Asset Decrease”:
▪ Explanation: Transactions that involve both an increase
and decrease in assets.
▪ Examples: Purchasing inventory by cash (increase in
inventory, decrease in cash)
Category 2 “Equity (Liability or Owner Equity) Increase Equity (Liability or Owner Equity) Decrease”:
▪ Explanation: Transactions that impact equity or liability
accounts.
▪ Examples: Obtaining a loan (increase in liability), paying a
trade payable (decrease in owner's equity).
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
53
BUSINESS TRANSACTIONS and
ACCOUNTING EQUATION
Relationship Between Business Transactions and the
Accounting Equation
Category 3 “Asset Increase - Equity (Liability or Owner Equity)
Increase”:
▪ Explanation: Transactions that result in both increased
assets and equity.
▪ Examples: Purchasing inventory on credit from a supplied
(increase in inventory, increase in accounts payable)
Category 4 “Asset Decrease - Equity (Liability or Owner Equity)
Decrease”:
▪ Explanation: Transactions affecting both asset and equity
accounts.
▪ Examples: Paying off a trade payable by cash (decrease in
cash, decrease in accounts payable).
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
54
Business Transactions & Acc. Equation
Asset()-Owner’s Equity() Transactions
 What happened: Gerry took $2,000 from
his personal bank account and deposited it
in a new account in the business’s name.
Gerry Gallery, the owner, invested $2,000 in
the business, called Solution.
 Which elements (of FS) are affected
and  How are they affected? CASH
(A) and G.G CAPITAL (OE)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
Gerry Gallery, the owner, invested $2,000
in the business
Assets
CASH
= Liabilities + Owner’s Equity
=
+ $2,000 =
G.G., CAPITAL
+ $2,000
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
Asset()- Asset() Transactions
 What happened: Solution purchased
delivery equipment and paid by cash $1,200.
Solution purchased delivery equipment for
$1,200 cash.
 Which elements (of FS) are affected
and  How are they affected? Delivery
Equipment (+A) and Cash (-A)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
57
Business Transactions & Acc. Equation
Solution, the business, purchased delivery
equipment and paid by cash $1,200.
A
= L + OE
CASH + Delivery Equip.
=
- $1,200 +
$1,200
L + OE
No effect
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
58
Business Transactions & Acc. Equation
ASSETS
CASH
BAL. $2,000
- 1,200
DEL. EQUIP.
+ $1,200
$ 800
$1,200
LEFT SIDE OF EQUATION:
CASH
$ 800
DEL. EQUIP.
1,200
BAL.
TOTAL ASSETS
$2,000
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
LIABILITIES
BAL.
$0
BAL.
$0
OWNER’S EQUITY
$2,000
$ 2,000
RIGHT SIDE OF EQUATION:
LIABILITIES
OWNER’S EQUITY
$
0
2,000
TOTAL LIAB. & O.E.
$2,000
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
60
Business Transactions & Acc. Equation
Asset ()–Liability () Transactions
 What happened: Solution bought a
delivery equipment $900 on credit.
Solution purchased delivery equipment on
account for $900.
 Which elements (of FS) are affected and
 How are they affected? Delivery
equipment (A) and Accounts payable (L)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
61
Business Transactions & Acc. Equation
Solution acquired delivery equipment for
$900 and agreed to pay the supplier in
the near future.
Assets = Liabilities + Owner’s Equity
DEL.
EQUIP.
=
ACCOUNTS
PAYABLE
+ $900 = + $900
+
OWNER’S
EQUITY
No effect
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
ASSETS
BAL.
DEL. EQUIP.
$1,200
CASH
$800
+
900
$ 800
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 800
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,900
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
63
Business Transactions & Acc. Equation
LIABILITIES
BAL.
$0
+ 900
OWNER’S EQUITY
$2,000
$900
$2,000
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 900
OWNER’S EQUITY
2,000
BAL.
TOTAL L & OE
$2,900
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
64
Business Transactions & Acc. Equation
Asset ()–Liability () Transactions
 What happened: Solution paid a loan of
$300 by cash.
Solution made $300 payment on equipment
loan.
 Which elements (of FS) are affected and
 How are they affected? Cash (A) and
Accounts payable (L)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
65
Business Transactions & Acc. Equation
Solution paid an equipment loan of $300
by cash.
Assets = Liabilities + Owner’s Equity
CASH
=
- $300
ACCOUNTS
PAYABLE
= - $300
+
OWNER’S
EQUITY
No effect
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
66
Business Transactions & Acc. Equation
ASSETS
BAL.
CASH
$800
- 300
DEL. EQUIP.
$2,100
$ 500
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 500
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,600
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
LIABILITIES
BAL.
$900
- 300
OWNER’S EQUITY
$2,000
$600
$2,000
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 600
OWNER’S EQUITY
2,000
BAL.
TOTAL L & OE
$2,600
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
68
Business Transactions & Acc. Equation
Asset () – OE () Transactions
 What happened: Gerry Gallery withdrew
$150 for his personal use.
Gerry Gallery withdrew $150 for personal
expenses.
 Which elements (of FS) are affected and
 How are they affected? Cash (A) and
G.G, Capital (OE)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
69
Business Transactions & Acc. Equation
Gerry Gallery took $150 in cash from the
business for his personal use.
Assets = Liabilities + Owner’s Equity
CASH
=
- $150
=
ACCOUNTS
PAYABLE
+
OWNER’S
EQUITY
- $150
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
ASSETS
BAL.
CASH
$500
- 150
DEL. EQUIP.
$2,100
$ 350
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 350
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,450
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
LIABILITIES
BAL.
$900
OWNER’S EQUITY
$2,000
- 150
$600
$1,850
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 600
OWNER’S EQUITY
1,850
BAL.
TOTAL L & OE
$2,450
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
Liability () – Liability () Transactions
 What happened: Solution paid $200 to the
seller by taking out a bank loan.
Solution get a bank loan to pay for the debt of
$200 (to the seller of delivery equipment)
 Which elements (of FS) are affected and
 How are they affected? Bank loan (L)
and Accounts payable (L)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
Solution got a bank loan of $200 to pay
the debt from buying a delivery
equipment.
Assets = Liabilities +
Owner’s Equity
Assets = Bank Loan + Acc. Payable + OE
No
= + $200
effect
- $200
No
effect
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
ASSETS
BAL.
CASH
$350
DEL. EQUIP.
$2,100
$ 350
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 350
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,450
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Business Transactions & Acc. Equation
LIABILITIES
BAL.
$600
- 200
+ 200
OWNER’S EQUITY
$1,850
$600
$1,850
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 600
OWNER’S EQUITY
1,850
BAL.
TOTAL L & OE
$2,450
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
76
Business Transactions Categories
Assets
1
3
Liability
Owner’s
Equity
Assets
4
2
Liability
Owner’s
Equity
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
77
Expense Transactions and AE
Asset () – Expense () ➔ O.E ()
 What happened: Solution paid cash wages
of $100 to its part-time employees.
Solution paid its part-time employees $100 in
wages.
 Which elements (of FS) are affected and
 How are they affected? Wages Expense
(Expense, then O.E ) and Cash (Asset)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Expense Transactions and AE
Solution paid cash wages of $250 to its
part-time employees.
Assets = Liabilities + Owner’s Equity
Cash
= Liabilities
- $100 = No
effect
+
Owner’s Equity
- $100
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
79
Expense Transactions and AE
ASSETS
BAL.
CASH
$350
- 100
DEL. EQUIP.
$2,100
$ 250
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 250
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,350
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
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Expense Transactions and AE
LIABILITIES
BAL.
$600
OWNER’S EQUITY
$1,850
- 100
$600
$1,750
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 600
OWNER’S EQUITY
1,750
BAL.
TOTAL L & OE
$2,350
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
81
Revenue Transactions and AE
Asset () – Revenue () ➔ O.E ()
 What happened: Solution received
delivery fees of $150 in cash.
Solution charged delivery fees of $150 and
received by cash.
 Which elements (of FS) are affected and
 How are they affected? Delivery Fees
(Revenue, then O.E ) and Cash (Asset)
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
82
Revenue Transactions and AE
Solution received delivery fees of $150 in
cash.
Assets = Liabilities + Owner’s Equity
Cash
= Liabilities
+ $150 = No
effect
+
Owner’s Equity
+ $150
Does the accounting equation balance?
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
83
Revenue Transactions and AE
ASSETS
BAL.
CASH
$250
+ 150
DEL. EQUIP.
$2,100
$ 400
$2,100
LEFT SIDE OF EQUATION:
CASH
$ 400
DEL. EQUIP.
2,100
BAL.
TOTAL ASSETS
$2,500
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
84
Revenue Transactions and AE
LIABILITIES
BAL.
$600
OWNER’S EQUITY
$1,750
+
150
$600
$1,900
RIGHT SIDE OF EQUATION:
LIABILITIES
$ 600
OWNER’S EQUITY
1,900
BAL.
TOTAL L & OE
$2,500
LO3: Business Transactions and Accounting Equation © 2023 by Nguyen Huu Cuong
85
References
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Ministry of Finance (2002). VAS 01. Dated December 31, 2002.
Ministry of Finance (2002). Circular 200/2014/TT-BTC. Dated December 22, 2014.
Atrill, P., & McLaney, E. (2022), Accounting and Finance for Non-Specialists (12th edn),
Pearson.
Atrill, P., & McLaney, E. (2022), Financial Accounting for Decision Makers (10th edn),
Pearson.
Burnley, C.D. (2022), Understanding Financial Accounting (3rd Canadian edn), Wiley.
Annand, D., & Dauderis (2023), Introduction to Financial Accounting (Version 2023 –
Revision A), Lyryx.
Franklin, M. et al. (2019), Principles of Accounting: Financial Accounting, OpenStax.
Libby, R., Libby, P.A., & Hodge, F. (2023), Financial Accounting (11th edn), McGraw Hill.
Phillips, F., Clor-Proell, S., Libby, R., & Libby, P.A. (2022), Fundamental of Financial
Accounting (7th edn), McGraw Hill.
Haji, A.M., Mohohlo, T., Mutshutshu, T., & Sibiya, B. (2022), Fundamental of Financial
Accounting (5th edn), LexisNexis.
Nguyen, H.C., Ngo, H.T. & Phan, T.D.Q (2020), Principles of Accounting (in Vietnamese),
Danang Publishing House.
Nguyen, H.C., Ngo, H.T. & Phan, T.D.Q (2023), Introduction to Accounting (in
Vietnamese), Danang Publishing House.
Warren, Carl S., Jones, J.P., & Tayler, W.B. (2023), Financial and Managerial Accounting
(16th edn), Cengage Learning.
© 2023 by Nguyen Huu Cuong
86
The End
Chapter 2
Question
s???
Questions ????
© 2023 by Nguyen Huu Cuong
87