Accounting

Topic
Equation and

3 Financial Statement

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 Learning
Learning Objectives
Objectives
 Explain the concept and
accounting equation
 Identify effects of business
transactions on the accounting
equation
 Prepare financial statement

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 Concept
Concept of
of Accounting
Accounting Equation
Equation
 Accounting equation present the resources of
the business and claims to those resources
 Assets are the resources owned by a business
 Equities are the rights or claims against these
resources
 Equities divided into :
 1) Claims of creditor (Liabilities)
 2) Claims of owner (Owner Equity)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Concept
Concept of
of Accounting
Accounting Equation
Equation (con’t)
(con’t)
Asset = Liabilities + Owner’s Equity
(economic resources) (claims to economic resources)
 Asset must equal to the sum of liabilities and owner’s equity
 Because creditors’ claims are paid before ownership claims
if a business is liquidated, liabilities are shown before
owner’s equity
 Accounting equation applies to all economic entities
regardless of size, nature of business or form of business
organisation
 The equation provides the underlying framework for
recording and summarizing the economic events of a
business enterprise.
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 Accounting
Accounting Equation
Equation
Assets
Assets = Liabilities
Liabilities + Equity
Equity

Liabilities
Assets & Equity

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 Assets
Assets
Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles controlled
controlled
Vehicles Land
by
by aa Land
company
company
Store
Store Buildings
Buildings
Supplies
Supplies Equipment
Equipment
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 Liabilities
Liabilities

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable

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 Equity
Equity

Owner
Owner Owner
Owner
Investments
Investments Withdrawals
Withdrawals

Owner’s
Owner’s
claims
claims
on
on
assets
assets
Revenues
Revenues Expenses
Expenses

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 Expanded
Expanded Accounting
Accounting Equation
Equation
Assets
Assets = Liabilities
Liabilities + Equity
Equity

Owner
Owner _ Owner
Owner _
Capital
Capital Withdrawals
Withdrawals + Revenues
Revenues Expenses
Expenses

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 Transaction
Transaction Analysis
Analysis Equation
Equation
The accounting equation must remain in
balance after each transaction.

Assets
Assets = Liabilities
Liabilities + Equity
Equity

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 Transaction
Transaction Analysis
Analysis -- Example
Example
J. Scott, the owner, contributed $20,000
cash to start the business.

The accounts involved are:

(1)
(2)

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 Transaction
Transaction Analysis
Analysis
1)J. Scott, the owner, contributed $20,000
cash to start the business.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transaction
Transaction Analysis
Analysis
2) Purchased supplies paying $1,000
cash.
The accounts involved are:
(1)
(2)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transaction
Transaction Analysis
Analysis
2)Purchased supplies paying $1,000
cash.

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 Transaction
Transaction Analysis
Analysis
3)Purchased equipment for $15,000
cash.

The accounts involved are:

(1))
(2))

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 Transaction
Transaction Analysis
Analysis
3)Purchased equipment for $15,000
cash.

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 Transaction
Transaction Analysis
Analysis
4)Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1)
(2)
(3)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transaction
Transaction Analysis
Analysis
4.Purchased Supplies of $200 and
Equipment of $1,000 on account.

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 Transaction
Transaction Analysis
Analysis
5) Borrowed $4,000 from 1st
American Bank.
The accounts involved are:
(1)
(2)

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 Transaction
Transaction Analysis
Analysis
5)Borrowed $4,000 from 1st American
Bank.

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 Transaction
Transaction Analysis
Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.

Now let’s look at transactions involving

revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2007
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 Transaction
Transaction Analysis
Analysis
6) Rendered consulting services
receiving $3,000 cash.

The accounts involved are:

(1)
(2)

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 Transaction
Transaction Analysis
Analysis
Rendered consulting services
receiving $3,000 cash.

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 Transaction
Transaction Analysis
Analysis
7) Paid salaries of $800 to employees.

The accounts involved are:

(1)
(2)
.

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 Transaction
Transaction Analysis
Analysis
7) Paid salaries of $800 to employees.

Remember that expenses decrease equity.

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 Transaction
Transaction Analysis
Analysis
8) J. Scott withdrew $500 from the
business for personal use.
The accounts involved are:
(1)
(2))
.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Transaction
Transaction Analysis
Analysis
8)J. Scott withdrew $500 from the
business for personal use.

Remember that withdrawals decrease equity.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Financial
Financial Statements
Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows

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 Profit is the
difference
between
Revenues and
Expenses.

The income statement describes a

company’s revenues and expenses
along with the resulting profit or loss
over a period of time due to earnings
activities.

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 The profit of
$2,200
increases
Scott’s capital
by $2,200.

The Statement of
Owner’s Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 The
The Balance
Balance
Sheet
Sheet
describes
describes aa
company’s
company’s
financial
financial
position
position at at aa
point
point inin time.
time.

Owner’s Equity in Balance Sheet

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 From Statement of Owner’s Equity
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Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.
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