Chapter 2 Accounting Elements and Accounting Equation

FUNDAMENTALS OF ACCOUNTING
CHAPTER 2
THE RELATED ACCOUNTING ELEMENTS AND

ACCOUNTING EQUATION
INTERNATIONAL SCHOOL
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

[1] Explain the related accounting elements: assets, liabilities,
equity, revenue, expense and income of a business.
[2] State the accounting equation.
[3] Analyze the effects of business transactions on the accounting
equation.
PREVIEW OF CHAPTER 2
CHAPTER 2
The basic
Accounting
accounting
Elements
equation
- Assets - Basic accounting
- Liabilities
equation.
- Owner’s Equity - Using the basic
- Revenues
accounting equation:
- Expenses
Business
- Income
transactions.
ACCOUNTING ELEMENTS
 ASSETS
 LIABILITIES
 OWNER’S EQUITY
 REVENUES
 EXPENSES
 INCOME
ASSETS
 Resources a business owns.

 Provide future services or benefits.
ASSETS
 Recognition of assets:
 Owned by a business.
 Probability of future economic
benefits.
 The cost of the asset can be
measured reliably.
 Assets are classified into two
categories: current assets
and non-current assets.
CURRENT ASSETS
 Asset that is converted to cash within 12 months of

the balance sheet date.
 It is held primarily for the purpose of being traded.
NON-CURRENT ASSETS
• Asset that is not to be converted to cash within

12 months of the balance sheet date, including:
• Tangible fixed assets.
• Intangible fixed assets.
TANGIBLE FIXED ASSETS
• Tangible assets are assets having physical substance.

• Land
• Building
• Equipment
• Machineries
• Furniture and fixtures…
INTANGIBLE FIXED ASSETS
Intangible assets are assets without physical substance.

Example:
• Copyright
• Patent
• Trademark or brand name
LIABILITIES
 Claims against assets of creditors (debts and

obligations).
 Accounts payable, Salaries and Wages
Payable, etc.
 Recognition of liabilities:
 Probability of future sacrifice of economic benefits.
 Reliable measurement.
 Liabilities are classified into current and non-current liabilities.
OWNER’S EQUITY
 Ownership claim on total assets.

 Investment by owners and revenues (+).
 Drawings and expenses (-).
 Equity combined:
 Share capital (contributed equity).
 Retained profits.
Let’s practice
BE 1-5 - Page 33
REVENUES
 Revenues result from business activities entered into for

the purpose of earning income.
 Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, and rent.
EXPENSES
 Expenses are the cost of assets

consumed or services used in
the process of earning revenue.
 Common expenses are: salary
expense, rent expense, utilities
expense, tax expense, etc.
INCOME
• Income is defined as the increase in economic benefits

during accounting period.
• Net income = Revenues - Expenses
• Income may be derived from:
 Sales of merchandise to customers
 Sales of providing services
 Other type of income realized
in the operation of the business
Let’s practice
BE 1-8 - Page 34
The Basic Accounting Equation
Assets Liabilities +
Owner’s
=
Equity
Provides the underlying framework for recording and

summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
The Basic Accounting Equation
Assets Liabilities +
Owner’s
=
Equity
Each transaction must have a dual effect on the accounting

equation. For example, if an asset is increased, there must be
a corresponding:
(1) decrease in another asset, or
(2) increase in a specific liability, or
(3) increase in owner’s equity.
Owner’s Equity
Illustration 1-6
Increases in Owner’s Equity

 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.
 Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Owner’s Equity
Illustration 1-6
Decreases in Owner’s Equity

 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.
 Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
EXERCISES
Exercise 1: BE 1-1, 1-2 page 34
EXERCISE
Exercise 2: True/False
1. Assets minus owner’s equity is equal to liabilities.
2. A decrease in asset may result to a decrease in liabilities.
3. An increase in liabilities may cause an increase to assets.
4. Claims of creditors against assets are called owner’s equity.
BUSINESS TRANSACTIONS
Transactions are business’s economic events recorded by

accountants.
 Business transactions should be authenticated by
business forms like sales invoices, purchase invoices
and official receipts.
 Not all activities represent transactions.
 May be external or internal.
Using the Accounting Equation
Illustration: Are the following events recorded in the accounting

records?
Discuss
Purchase guided trip
Event computer options with Pay rent
customer
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record
Account Criteria
Increase (Tăng) Decrease (Giảm)
Code (Chỉ tiêu)
When a company receives When a company spends

111 Cash (Tiền mặt)
cash (Khi doanh nghiệp cash (Khi doanh nghiệp
thu tiền) chi tiền)
When a company owes When the customers pay

Accounts money to its customers their debts to the
Receivable (Khi doanh nghiệp cho company (Khi doanh
131
(Khoản phải thu khách hàng nợ tiền hàng, nghiệp thu lại được số
khách hàng) phát sinh 1 khoản tiền tiền khách hàng nợ)
phải thu từ khách hàng
trong tương lai)
Account Criteria
Code (Chỉ tiêu)
When a company buys/ When the company sells

purchases supplies (Khi out supplies or supplies
doanh nghiệp mua văn were being used in the
Supplies (Văn phòng phẩm (VPP) accounting period (Khi
153
phòng phẩm) doanh nghiệp bán VPP
hoặc VPP bị hao mòn
trong quá trình sử dụng
trong kì)
When a company buys/ When the company sells

purchases equipment out equipment or it was
Equipment (Khi doanh nghiệp mua depreciated (Khi doanh
211 nghiệp bán Trang thiết bị
(Trang thiết bị) Trang thiết bị)
hoặc Trang thiết bị bị
khấu hao trong kì)
Account Criteria
Code (Chỉ tiêu)
When a company owes money When the company

Accounts to its suppliers (Khi doanh pays the debt to the
331 Payable (Phải trả nghiệp phát sinh 1 khoản nợ suppliers (Khi
người bán) đối với nhà cung cấp, doanh doanh nghiệp trả
nghiệp nợ tiền nhà cung cấp) nợ nhà cung cấp)
When owners of a company

Owner’s Capital invest more money and/or
411 (Vốn đầu tư của assets to the company (Khi chủ
chủ sở hữu) sở hữu đầu tư thêm tiền, tài
sản vào doanh nghiệp)
Account Criteria
Code (Chỉ tiêu)
When owners of a company

Owner’s
withdraw money and/or assets
Drawings (Khoản
411 out of the company (Khi chủ sở
thu hồi của chủ
hữu rút tiền, tài sản ra khỏi
sở hữu)
doanh nghiệp)
When a company provides When the company
products/goods or services to incurs revenue
Revenues
511 its customers (Khi doanh deductions (Phát
( Doanh thu)
nghiệp cung cấp hàng hóa, sinh các khoản làm
dịch vụ cho khách hàng) giảm trừ doanh thu)
When a company incurs

632/635/ expenses while performing its
Expenses
641/642 activities (Khi phát sinh chi phí
(Chi phí)
… trong quá trình hoạt động
SXKD của doanh nghiệp) INTERNATIONAL SCHOOL
EXERCISE
BE 1-6 and BE 1-7 – page 34
Transaction Analysis
Transaction (1): David decides to open a computer programming
service which he names Softbyte. On September 1, 2018, David
invests $15,000 cash in the business.
LO 7
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.
LO 7
Transaction (3): Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to last several
months. The purchase is made on account.
LO 7
Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.
LO 7
Transaction (5): Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment until a later date.
LO 7
Transaction (6): Softbyte provides $3,500 of programming services
for customers. The company receives cash of $1,500 from customers,
and it bills the balance of $2,000 on account.
LO 7
Transaction (7): Softbyte pays the following expenses in cash for
September: store rent $600, salaries of employees $900, and utilities
$200.
LO 7
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
LO 7
Transaction (9): Softbyte receives $600 in cash from customers who
had been billed for services [in Transaction (6)].
LO 7
Transaction (10): David withdraws $1,300 in cash from the business
for his personal use. Illustration 1-8
Tabular summary of
Softbyte transactions
LO 7
Exercise 1: P 1-1A – page 40
Exercise 2:
Wayne Rooney opened a Beauty Spa on January 1, 2018. The

transactions for the month were as follows:
1. Rooney invested $80,000 to the business
2. Purchased supplies and paid the full amount of $7,500 by cash
3. Paid office rent for the month $5,600
4. Purchased equipment and paid the full amount of $20,000 by cash
5. Purchased furniture on credit $15,000
6. Provided services to customers and received $15,000 in cash.
7. Provided $5,000 services to a customer. The client promised to pay the
full next month.
8. Paid the following expenses: Water and Light: $3,000, Salaries: $8,000,
Transportation: $1,500.
Analyze transactions on the accounting equation.
Homework
1) BE-3,4,9,10 page 34, 35

2) E1-5, E1-7 page 37
3) P1-4A page 41

Chapter 2 Accounting Elements and Accounting Equation

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Chapter 2 Accounting Elements and Accounting Equation

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FUNDAMENTALS OF ACCOUNTING

THE RELATED ACCOUNTING ELEMENTS AND

After studying this chapter, you should be able to:

 Resources a business owns.

 Asset that is converted to cash within 12 months of

• Asset that is not to be converted to cash within

• Tangible assets are assets having physical substance.

Intangible assets are assets without physical substance.

 Claims against assets of creditors (debts and

 Ownership claim on total assets.

 Revenues result from business activities entered into for

 Expenses are the cost of assets

• Income is defined as the increase in economic benefits

 Sales of providing services

 Other type of income realized

in the operation of the business

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership claims.

Each transaction must have a dual effect on the accounting

(1) decrease in another asset, or

(2) increase in a specific liability, or

(3) increase in owner’s equity.

Increases in Owner’s Equity

Decreases in Owner’s Equity

Exercise 1: BE 1-1, 1-2 page 34

Transactions are business’s economic events recorded by

Illustration: Are the following events recorded in the accounting

Criterion Is the financial position (assets, liabilities, or

When a company receives When a company spends

When a company owes When the customers pay

When a company buys/ When the company sells

When a company buys/ When the company sells

When a company owes money When the company

When owners of a company

When owners of a company

When a company incurs

BE 1-6 and BE 1-7 – page 34

Wayne Rooney opened a Beauty Spa on January 1, 2018. The

1) BE-3,4,9,10 page 34, 35

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