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Accounting equation

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Accounting equation

Basic Accounting Equation
Assets
Liabilities
Owner’s Equity
Investment
Drawing
Revenue
Expenses
Explanation of the transaction

Basic Accounting Equation
Assets
Liabilities
Owner’s Equity
Investment
Drawing
Revenue
Expenses
Explanation of the transaction

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Accounting equation

1. 1. Accounting Equation www.googlevu.blogspot.com Accounting Equation
2. 2. Accounting Equation Chapter at a Glance • Basic Accounting Equation • Assets • Liabilities • Owner’s Equity • Investment • Drawing • Revenue • Expenses • Explanation of the transaction
3. 3. Accounting Equation The Basic Accounting Equation According to the Dual Aspect Concept every transaction has two aspect. One is debited and other is credited. The above concept of the accounting forms a equation that is called Accounting equation. The basis of accounting equation is Assets = Liabilities + Owner’s Equity
4. 4. Accounting Equation Assets • Assets are resources owned by a business. • They are things of value used in carrying out such activities as production and exchange. To recognize the assets quickly we can say that Cash is an asset and all the things that could be convert into cash or have some future value and benefit is an assets.
5. 5. Accounting Equation Liabilities • Liabilities are claims against assets. • They are existing debts and obligations.
6. 6. Accounting Equation Owners Equity • Owner’s Equity is equal to total assets minus total liabilities. • Owner’s Equity represents the ownership claim on total assets. • Owner’s Equity are effective by: 1. Capital 2. Drawings 3. Revenues 4. Expenses
7. 7. Accounting Equation Investment • Investments by owner are the assets put into the business by the owner. • These investments in the business increase owner’s equity. It also has the following meaning. Deployment of funds  with the intention and expectation that it will earn a return.  In common parlance, it refers to shares and debentures of companies or mutual funds or bonds issued by the financial institutions or by the Government.
8. 8. Accounting Equation Drawings • Drawings are withdrawals of cash or other assets by the owner for personal use. • Drawings decrease total owner’s equity.
9. 9. Accounting Equation Revenues • Revenues are the gross increases in owner’s equity resulting from business activities entered into for the purpose of earning income. • Revenues may result from sale of merchandise, performance of services, rental of property, or lending of money. • Revenues usually result in an increase in an asset.
10. 10. Accounting Equation Expenses • Expenses are the decreases in owner’s equity that result from operating the business. • Expenses are the cost of assets consumed or services used in the process of earning revenue. • Examples of expenses include utility expense, rent expense, and supplies expense.
11. 11. Accounting Equation Increase and Decrease in Owner’s Equity In next slide we will analyze some transaction and will check the effect on capital, assets and Liability in form of equation i.e. Capital + Liabilities = Assets INCREASES DECREASES Investments by Owner Revenues Withdrawals by Owner Expenses Owner’s Equity
12. 12. Accounting Equation Transaction Analysis 1. Mr. Ahmad started a business with cash of \$5,000 2. He took a bank loan of \$8,000 Assets = Owner’s Equity Liabilities Cash↑ 5,000 Capital ↑ 5,000 Assets = Owner’s Equity Liabilities Cash↑ 5,000 Capital ↑ 5,000 Cash ↑ 8,000 -- Bank Loan ↑ 8,000 Total 13,000 5,000 8,000
13. 13. Accounting Equation Transaction Analysis 3. Purchased Motor vehicle of \$2,000 You can see here that the Assets is equal to the Owner’s Equity plus Liabilities Assets = Owner’s Equity Liabilities Cash↑ 5,000 Capital ↑ 5,000 Cash ↑ 8,000 -- Bank Loan ↑ 8,000 Total 13,000 5,000 8,000 Motor Vehicle↑ 2,000 Cash ↓ (2,000) -- -- Total 13,000 5,000 8,000
14. 14. Accounting Equation Transaction Analysis 4. Purchased trading goods of \$1000. • Trading goods is special type of assets that we purchased with and indentation to resale Assets = Owner’s Equity Liabilities Cash↑ 5,000 Capital ↑ 5,000 Cash ↑ 8,000 -- Bank Loan ↑ 8,000 Total 13,000 5,000 8,000 Motor Vehicle↑ 2,000 Cash ↓ (2,000) -- -- Total 13,000 5,000 8,000 Goods ↑ 1,000 -- -- Cash ↓ (1,000) Total 13,000 5,000 8,000
15. 15. Accounting Equation Transaction Analysis 5. Sold Goods of costing \$500 in \$800. Assets = Owner’s Equity Liabilities Cash↑ 5,000 Capital ↑ 5,000 Cash ↑ 8,000 -- Bank Loan ↑ 8,000 Total 13,000 5,000 8,000 Motor Vehicle↑ 2,000 Cash ↓ (2,000) -- -- Total 13,000 5,000 8,000 Goods ↑ 1,000 -- -- Cash ↓ (1,000) Total 13,000 5,000 8,000 Goods ↓ (500) Profit ↑ 300 Cash ↑ 800 Total 13,300 5,300 8,000
16. 16. Accounting Equation Transaction Analysis 6. Salary Paid \$200 in cash • Salary is an expense and increase in expense will reduce the owner’s equity Here the equation is continue with the balancing figure Assets = Owner’s Equity Liabilities Total 13,300 5,300 8,000 Cash ↓ 200 Expense ↑ (200) Total 13,100 5,100 8,000
17. 17. Accounting Equation Transaction Analysis 6. Purchase Furniture of \$100 from ABC Ltd. on credit. Here the liabilities is increasing and also Assets (Furniture) Assets = Owner’s Equity Liabilities Total 13,300 5,300 8,000 Cash ↓ 200 Expense ↑ (200) Total 13,100 5,100 8,000 Furniture ↑ 100 ABC Ltd. 100 Total 13,200 5,100 8,100 We can show the summary of the above transaction in form of Balance sheet. We transfer the net result of( revenue and profit) Less (Expenses and loss) in owner’s equity. In next slide you can see the balance sheet.
18. 18. Accounting Equation Transaction Analysis We know that Capital + Liabilities = Assets Capital and Liabilities Amount Assets Amount Owner’s Equity (Capital) 5,100 Motor Vehicle 2, 000 Bank Loan 8,000 Goods (Unsold Stock) 500 Liabilities 100 Cash 10,700 13,200 13,200
19. 19. Accounting Equation For More Content go to Virtual University To download PPT go to Virtual University (www.googlevu.com) Thank You