THE ELEMENTS OF ACCOUNTING

AND THE ACCOUNTING EQUATION

 ELEMENTS OF ACCOUNTING
• ASSETS
– Resources owned by the enterprise as a result of
past events and from which future economic
benefits are expected to flow to the enterprise
– In short, they are properties and rights owned by a
firm
• LIABILITIES
– Present obligations of an enterprise arising from
past transactions or events, the settlement of
which is expected to result in an outflow from the
enterprise of resources embodying economic
benefits
• CAPITAL
– Residual interest in the assets of the enterprise
after deducting all is liabilities.
– It is the owner’s contribution to the business
– SOLE PROPRIETORSHIP : Owner’s Equity
– PARTNERSHIPS: Partners’ Equity
– CORPORATION: Stockholders’ Equity
THE ACCOUNTING EQUATION

A= L + C
WHAT ARE BUSINESS TRANSACTIONS?
 There are 9 possible two fold effects
1 Increase in Assets = Increase in Capital

2 Increase in Assets = Increase in Liabilities

3 Increase in Assets = Decrease in other forms of assets

4 Decrease in Assets = Decrease in Liabilities

5 Decrease in Assets = Decrease in Capital

6 Decrease in Liabilities = Increase in Capital

7 Decrease in Liabilities = Increase in other forms of liabilities

8 Decrease in Capital = Increase in Liabilities

9 Decrease in Capital = Increase in other forms of capital