Unit 1

Introduction of business equation

IN THIS
CHAPTER

 Business

 Accounting

 Separate Entity

 Duality concept

 Types of Asset & Liabilities

1.1 what is Accounting

accounting is an art of RECORDING, CLASSIFYING, and SUMMARISINS the business transaction

 Business is a set of activities to earn profit

 The activities of business are business transactions

1.2_SEPARTE ENTITY CONCEPT:

Owner and Businees are separate economic entities ,the properties entites ,obligations
,income and expenes of owner are separate from the business.

1.3-Business Equation

Resources of business = Resources provided in the business

Liabilities
ASSETS CAPIYAL
+

The properties of business Investment of owner Paysbles of business

ASSETS LIABILITIES

Buildings Loan from Mr.C

Vehicles Bank overdraft
Machinery creditors (payables)
Equipment
Fixture & fittings
Cash
Detors (Receivabies)

ASSETS = Capital + Liabilities

Income Expenses

Profit /Loss
PROFIT: When income exceed Expenses .

Loss: When Expenses exceed income.

So , a result of profit or loss accounting equation will become :

ASSETS = Capital + profit - Loss + Liabilities

Or
ASSETS = Capital + income - expenses + Liabilities
1.3.1: Effect of accounting transactions on business Equation
1_ Owner of the business introduced $20,000 as opening capital in bank a/c
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 20,000 20,000 NIL
2_ for business purpose got a bank loan $10,000
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 30,000 20,000 Loan 10,000
3_Purchased furniture for business use paid by cheque $5,000.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 25,000 20,000 bank loan 10,000
Furniture 5,000
4_ Withdraw $2,000from business bank a/c for use in business.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 23,000 20,000 bank loan 10,000
Furniture 5,000
Cash in hand 2,000
5_ Buy good for use in business on credit $1,000 from Mr. X.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 23,000 20,000 bank loan 10,000
Furniture 5,000 Creditor (Mr ,X )1,000
Cash in hand 1,900
Good 1,000
6_ Owner of the business withdraw cash $100for his personal use.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 23,000 19,900 bank loan 10,000
Furniture 5,000 creditor (Mr .X) 1,000
Cash in hand 1,900
Good 1,000
7_Good sold to Mr. Q on credit $300 (Ignore the profit)
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank 23,000 19,900 bank loan 10,000
Furniture 5,000 creditor (Mr.) 1,000
Cash in hand 1,900
Goods 700
Debtor (Mr., Q) 300
 ASSETS CAPITAL LIABILITIES
1 Inc Inc -
2 Inc - Inc
3 Dec Inc - -
4 Dec Inc - -
5 Inc - Inc
6 Dec Dec -
7 Dec inc � - -
Effect of above transactions on business equation.

1.3.2 Duality Concept:

Every transaction has a dual effect on accounting equation.

Activity 1.2
Classify between Assets and Liabilities Assets Liabilities
Cash at Bank
Bank Overdraft
Loan from bank

Activity 1.3
Complete the business equation.
ASSETS = CAPITAL + LIABILITIES
50,000 ? 30,000
25,000 14,000 ?
? 19,000 11,000
Activity 1.4
Record the following transactions in business equation
1_ started business with $6,000 in the bank
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank
2_purchased office equipment for $2,000 paying by cheque
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank
Equipment
3_ Withdrew $500 from bank for use in the cash till.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank
Equipment
Cash till
4_Bought office furniture on credit from A Powell for $700
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank creditor (A Powell)
Equipment
Cash till
Furniture
5_ Purchased motor car on credit from sleepy Star Motor for $900
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank creditor (A POWELL)
Equipment creditor (Sleepy Star)
Cash till
Furniture
Motor car
6_ Paid cheque to sleepy Bro for $350.
ASSETS = CAPITAL + LIABILITIES
$ $ $
Bank creditor (A Powell)
Equipment creditor (Sleepy star)
Cash till Creditor (Sleepy Bro)
Furniture
Motor car
7_Returned $350 of furniture to Sleepy bro .due to its unsuitability
Assets = Capital + Liabilities
$ $ $
Bank Creditor (A Powell)
Equipment Creditor (Sleepy star)
Cash till Creditor (Sleepy Bro)
Furniture
Motor Car
8_ Sent cheque to Speed Star Motors for $900
Assets = Capital + Liabilities
$ $ $
Bank Creditor (A Powell)
Equipment Creditor (Sleepy star)
Cash till Creditor (Sleepy Bro)
Furniture
Motor car
 Activity 1.5
Increase/decrease effect
Effect on business equation in Activity 1.4 Assets Liabilities Capital
1 Stared business with $6,000 in the bank
2 Purchased office equipment for $2,000 paying by cheque
3 Withdrew $500 from bank for use cash till
4 Bought office furniture on credit from sleepy Bro for $700
5 Purchased motor car on credit from Speed Star motor for
$900
6 Paid cheque to Sleepy Bro for $350
7 Returned $350 of furniture to Sleepy Bro due to its
unsuitability
8 Sent cheque to Speed Star Motors for $900
9 Bought office fixtures for $100 cash

1.4 –Types of Assets and Liabilities

ASSETS

Non-current Assets /Fix Assets Current Assets

(For long term use in business) (Cash or convertible in to within coming
e.g. 12 moths / accounting period)
Building, Land, Machinery, Equipment e.g.
Investments vehicles, Fixture & Fittings creditors, Bank overdraft

LIABILITIES

Long Term Liabilities Short Term Liabilities

(Payables after 12 months / accounting period) (Payable within coming 12 months
Accounting period)
e.g., e.g.,
Loan from bank payable after 2 years creditors, bank overdraft
 Practice Question

01 _Which of the following statement is correct?

1. Assets +capital = Liabilities
2. Liabilities +Capital = Assets
3. Liabilities + Assets =Capital
4. Assets +Liabilities =Capital
02_When goods are taken out of the business for personal use by owner of a business , these will be
recorded as.
1. drawings
2. As expense
3. Stock
4. A liability

03_which of the following is not an asset?

1. Building
2. Cash balance
3. Debtors
4. Loan bank Mr. Jims
04_The owner of a small business draw out some money for personal use.
Which of the following correctly states the effect of drawing upon the accounting equation?
1. assets increase , Capital increase
2. Assets decrease ,Capital increase
3. Assets decrease , Capital decrease
4. Assets decrease, Liabilities decrease
05_ Which of the following correctly records the repayment of a loan of £ 10,000 plus outstanding
interest of £ 500?
A…Assets-£10,500, Liabilities-£10,000, expenses+£500
B…Assets+£10,500, Liabilities+10,500
C…Assets -£10,500, Liabilities-£10,500
D…Assets - £10,500, Liabilities -£10,500
06_Which of the following is true for capital ?
A…All those things which the owner has invested
B…The fund that that is invested by its owners
C…The objects that the owner has bought for resale
D…All those things which the owner has invested outside the business
07_which of the following is correct?
A…Profit does not alter capital
B…Profit reduces capital
C…Capital can only come profit
D…profit increase capital
08_Which of the following liability?
A…Machinery
B…Creditors
C…Motor vehicles
D…Cash at bank
09_The accounting equationcan be written as:
A…Assets = Owner’s Capital +Liabilities
 B…Assets-Liabilities = capital –profit +drawing
C…Net assets=assets –liabilities
D…Net assets + assets = Capital –expenses-drawings
10_The capital of sole trader would change as a result of:
A…A creditor being paid his account by cheque
B…Raw materials being purased on credit
C…Fixed assets being purased on credit
D…Wages being paid in cash
11_Which of the following best explains the term Crrent Assets:
A…Money which the business currently has in its bank account
B…An assets currently in use by a business
C…An amount owed to somebody else which is due for rep
D…Something a business has or uses , which islikely to be held onlyfor a short time
12_ Jackson pays for computer equiment by a cheque from the business bank overdraft ..Which parts of
the accounting equation are changed by this transation?
A…Assets and Liabilities
B…Assets and income
C…Liabilities and profit
D…Capital and income
13_Which parts of the accounting aquation are affected by paying off a loan by cash
A…Assets, capital
B…Assets, liabilities
C…Capital, Liabilities
D…Assets, capital ,Liabilities
14_Which of the following is not Assets
A…Buildings
B…Cash balance
C…debtors
D…Loan from K Harris
15_whuch of following is an Asset?
A…Owner’s Capital
B…petty cash
C…Salesmen’s motor car
D…Computer software
16_Owner’s equity $100,000 and liabilities$50,000 what would be assets of business?
A…$50,000
B…$ 150,000
C…$100,000
D…None of the above
17_An increase in capital at the end of a period is the result of ………………..made by the business.
A…Profit
B…Loss
C…Expanses
D…None of above
18_Which of the following is an current liabilitty?
A…Trade debtors
B…Stock
C…Bank overdraft
 D…Drawings
19_Which of the following describes the accounting equation ?
A…Net assets = capital –profit –drawings
B…net assets = capital –profit +drawings
C…net assets = Capital +profit +drawings
D…Net assets = Capital +profit –drawings
20_If the of a business withdraws cash from the business bank account in order to meet her own
expenses, this is classified as drawings this is an example of the operation of;
A…Internal control
B…Personal ledger accounting
C…Segregation of duties
D…The separate entity principle
21_When stock is purchased on credit:
A…Net assets and owner’s capital do not change
B…Net assets increase and owner’s capital increase
C…Net assets decrease and owner’s capital decrease
D…net assets increase and owner’s capital stays the same
22_When and expense is paid in cash
A…Net assets increase and profit increase
B…Net assets decrease and profit decrease
C…Net assets remain the same and profit increase
D…Net assets remain the same and profit decrease
23_Which of the following would be a fixed assets
A…Stock/ inventory
B…debtors/ accounts recivable
C…Factory premises
D…Bank overdraft
24_Which of the following is an assets?
A…Bank deposit account
B…premises/ Land
C…Computer
D…Tools
25_Which of the following is a currect Liabilities?
A…Goodwill
B…A loan from a director of the company repayable in two year time
C…A bank overdraf
D…Capiyal

The End