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.)
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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
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Ownership Interest
Often referred to as ‘Capital’, ‘Capital Employed’,
‘Equity’ or ‘Shareholders Funds’
The liability of the entity to
the owners of the entity
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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
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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.
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Accounting Equation Examples
1.
Initial
Bank
Capital
€10,000
€10,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
2.
Bank
€2,000
Initial
100 Shoes
Capital
€8,000
€10,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
3.
Initial
Capital
Bank
50 Shoes
€10,000
€4,000
€9,000
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Accounting Equation Examples
4.
Bank
€9,000
Initial
50 Shoes
Profit
Capital
€4,000
€3,000
€10,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
5.
The Entity
Bank
50 Shoes
€9,000
€4,000
Ownership Interest
Profit
Capital
€3,000
€10,000
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.
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Accounting Equation Examples
1.
Initial
Boat
Capital
€20,000
€20,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
2.
Initial
Boat
Bank
€20,000
(Profit) Capital
€2,000
€2,000
€20,000
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
3.
Boat Bank Fees Due
€20,000 €2,000
(€500)
Initial
(Profit) Capital
€1,500
€20,000
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Accounting Equation Examples
4.
Boat Bank Fees Due
€20,000 €1,250
(€500)
Residual
Profit
Capital
€1,500
€19,250
J. E. Cairnes School of Business & Economics
Accounting Equation Examples
5.
The Entity
Boat Bank Fees Due
€20,000 €1,250
(€500)
Ownership Interest
Profit Capital
€1,500
€19,250
J. E. Cairnes School of Business & Economics
The Accounting Equation
•  Assets – Liabilities =
Capital
+ Revenue
- Expenses
- Drawings
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The Accounting Equation
Assets – Liabilities
=
Capital
+Revenue
- Expenses
- Drawings
or Debit (Dr)
Assets
Credit (Cr)
=
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
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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.
INCREASE
ASSET
Cr.
REDUCE
ASSET
J. E. Cairnes School of Business & Economics
Accounting Equation
T - Accounts
Dr.
REDUCE
LIABILITY
LIABILITY
Cr.
INCREASE
LIABILITY
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Accounting Equation
T - Accounts
REVENUE
Dr.
REDUCE
REVENUE
Cr.
INCREASE
REVENUE
J. E. Cairnes School of Business & Economics
Accounting Equation
T - Accounts
EXPENSE
Dr.
INCREASE
EXPENSE
Cr.
REDUCE
EXPENSE
J. E. Cairnes School of Business & Economics
Rules for Recording Transactions
through Double Entry
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
•  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
J. E. Cairnes School of Business & Economics
Interested in pursuing an accounting career?
Study at NUI Galway
•  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,
contact:accounting@nuigalway.ie
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