1. Objective 3
Use the Accounting
Equation

2. The Accounting Equation
Assets = Liabilities + Owner’s Equity
Economic Claims to
Resources Economic
Resources

3. Accounting Equation
For a corporation, stockholders’ equity
is divided into two main categories.
Paid-in capital Retained earnings
Assets = Liabilities + Stockholders’ equity
Assets = Liabilities + Paid-in capital + Retained earnings

4. Accounting Equation
Paid-in capital is the amount invested
in the corporation by its owners.
The basic component of paid-in
capital is common stock.
Retained earnings is the amount earned
by income-producing activities and
kept for use in the business.

5. Assets
What is an asset?
It is something a company owns which has
future economic value.
– land
– building
– equipment
– goodwill

6. Liability
What is a liability?
It is something a company owes.
“outsider claims” or “creditors’ claim”

7. Liabilities
Accounts Notes
Payable Payable
Creditors’
claims on
assets
Taxes Wages
Payable Payable

8. Owner’s Equity
What is owner’s equity?
It is what’s left of the assets after liabilities
have been deducted.
– “insider claims” or “owners’ claims on the
entity’s assets

9. Equity
Owner
Investments/
Capital paid- in Owner’s
claims Owner
Withdrawals
on
assets
Retained earnings

10. Owner’s Equity
What are some owner’s equity accounts?
– Capital or owner’s interest in the business
– Withdrawals
– Revenues
– Expenses

11. Revenues
What are revenues?
They are amounts received or to be
received from customers for sales of
products or services.
– sales
– performance of services
– rent
– interest

12. Expenses
What are expenses?
They are amounts that have been paid or
will be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising

13. Quiz
Q1: Accounting equation
Assets = Liabilities + Owners’ Equity
Case 1
$125,000 = $75,000 + $
Case 2
$400,000 = $ + $100,000
Case 3
$ = $320,000 + $95,000

14. Q2. Elements of financial statements
Classify the following items into assets (A), liabilities (L), owner’s equity
(OE), revenues (R), expenses (E)
Cash
Salaries paid for staff
Equipment
Payable to Ms X
Amount earned from selling a product
Capital
Receivable from Mr Y
Building
Payment for advertising

15. began the year with retained earnings of
217. During the year,
the company issued 294 of common stock,
recorded expenses of 840, and
paid dividens of 56. If ending retained
earnings was 231. What ưas
the company revenue for the year?