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Learning Guide
INTRODUCTION
Basic
Equation Assets = Liabilities + Stock holders equity
+ - - + - + + - - + + -
Assets, liabilities, and capital
Assets are the properties owned by a business enterprise and equities refer to the rights or claims to the
properties. If the assets owned by a business amount to Br. 50, 000 the equities amounted to Br.50, 000,
and the relationship between the two may be stated in the form of an equation, as follows.
Assets = equities
Equities may be subdivided in the two principal types:the rights of creditors and the rights of owners’.
Liabilities refer to the equities of creditors or debts of the business and capital refers to the equity of the
owners. Expansion of the equation to give recognition to the two basic types of equities yields the
following, which is known as the accounting equations.
It is customary to place “liabilities” before “capital” in the accounting equation because creditors have
preferential rights to the assets. The residual claim of the owner or owners is called owner’s equity and is
given greater emphasis by transposing liabilities to the other side of the equation, yielding:
Transaction (2)
TTLM Development Manual Date September ,2021
Compiled by Accounting and business department
Training, Teaching and Learning Materials
Perez Inc. next transaction is to purchase land as a future building site, for which Br. 7, 500 in cash is
paid. This transaction changes the composition of the assets but does not change the total amount. The
items in the equation prior to this transaction, the effects of this transaction, and the new balances after
the transaction are as follows.
Assets = Capital
Transaction (3)
During the month Perez purchases Br. 850 of gasoline, oil, and other supplies from various
suppliers, agreeing to pay in the near future. This type of transaction is called a purchase on
account and the liability created is termed as account payable. Consumable goods purchased,
such as supplies, are considered to be prepaid expenses, or assets. The effect is to increase assets
and liabilities by Br. 850, as follows.
The principal objective of the owner of a business enterprise is to increase capital through earnings. For
Perez Income to means that the cash and other assets acquired through the sale of taxi services must be
greater than the cost of the gasoline and other supplies used, the wages of drivers, the rent, and all of the
other expenses of operating the business.
In general, the amount charged to customer for goods or services sold to them is called revenue.
Other terms may be used for certain kinds of revenue, such as sales for the sale of merchandise
or business services, fees earned for charges by physician to patients, rent earned for the use of
real estate or other property, and fees earned for Perez income.
Expenses are the amount of assets consumed or services used in the process of earning revenue
would include supplies used, wage of employees, and other assets and services used in operating
business. In addition, net income or profit is the excess of the revenue over the expenses incurred
in earning the revenue. And net loss is the excess of the expenses of the enterprise over the
revenue.
During the first month of the operations Perez Inc. earned fares of Br. 4, 500 and to yield
revenue in the same amount. The revenue can be viewed as though is affected a Br. 4, 500
increase in capital. At the time expenses of the business are incurred, they are treated as offsets
against revenue and hence as reductions in capital. In terms of the accounting equation, the effect
of the receipt of cash for services performed is as follows
Transaction (6)
Various business expenses incurred and paid during the month were as follows. Wages, Br. 1,125, rent,
Br. 850, utilities, Br. 150, miscellaneous, Br. 75. The effect of this group of transaction is to reduce cash
and to reduce capital, as indicated in the following manner
Transaction (7)
At the end of the month it is determined that the cost of supplies on hand Br. 250, the remainder (Br. 850-
Br. 250) having been used in the operations of a business. This illustration of Br. 600 in supplies and
capital may be shown a follows:
Assets Liability + capital
Cash + supplies + Land = account payable + perez income capital
Bal.4400 850 7, 500 450 12, 300
(7) - -600 - -600 supp. expense
Bal 4400 250 7,500 450 11700
Transaction (8)
At the end of the month Perez inc withdraws from the business Br. 1,000 in cash for his personal use.
This transaction, which affects a decrease in cash and decrease in capital, is the exact opposite of an
investment in the business by the owner. The withdrawal is not a business expense, and it should be
excluded from consideration in determining the net income from operations of the enterprise. The balance
in the equation, the effect of the Br. 1, 000 withdrawals and the new balance are as follows.
Assets Liabilities + Capital
Cash + supplier + Land Accounts payable Perez capital
Bal. 4,400 250 7, 500 = 450 11, 700
(7) – 1000 ____ ____ ____ -1, 000 withdrawal
Bal. 3,4002507, 500 450 10, 700
Summery
The business transactions of Perez Inc. are summarized in tabular form as follows. The transactions are
identified by number, and the balance of each item is shown after each transaction.
Assets = Liabilities + Capital
Cash + supplies + land = accounts payable + Perez income capital
1 +10,000 - - - +10,000
2 –7,500 - +7,500 - -
Bal. 2,500 - 7,500 - 10,000
3 - +850 - +850 -
Bal 2,500 850 7,500 850 10,000
4-400 - - -400 -
Bal 2,100 850 7,500 450 10,000
5 +4,500 - - - +4500 Fares earned
Bal 6, 600 850 7, 500 450 14500
6 -2200 -1125 wages expense
-850 rent expense
-150 utilities expense
-75 misc. expense
Bal 4,400 850 7,500 450 12,300
7 _____ -600 ____ ___ -600 supplies expense
Bal4, 400 250 7,500 450 11,700
8 –1000 ___ ____ ___ -1,000 withdrawal
Bal3, 400 250 7,500 450 10,700
The following observations which apply to all types of a business should be noted:
1. The effect of every transaction can be stated in terms of increases and /or decreases in
one or more of the accounting equation elements.
2. The equality of the two sides of accounting equations is always maintained.
3. The owner’s equity is increased by amounts invested by the owner and is decreased by
withdrawals by the owner.
Accounting statements
The principal financial statements in a business firm are the income statement, the statement of
owner’s equity and the balance sheet. They are usually accompanied by a less important, but
nevertheless useful note.
Balance sheet: It is a list of the assets, liabilities, and capital of a business entity as a specific
date, usually of the close of the last day of a month or a year. All financial statements should be
identified by the name of the business, title of the statement and date.
There are two kinds of balance sheet forms: they are report forms and accounts forms. Report
from is a form of balance sheet, with liability and owner’s equity sections presented below the
asset section, where asaccount form lists, the assets on the left and the liabilities and the capital
account on the right side.
For example the account form and the report form of the balance sheet for Perez Inc. are given
A. account form
Perez Inc.
Balance sheet
August 31 1999
Asset Liability
Cash Br.3400 00 Account payable Br. 450 00
Supplies 250 00
Land 7,500 00 450 00
Capital
Perez capital 10700 00
B. report form
Perez Inc.
Balance sheet
August 31, 1999
Asset
Cash
Supplies 3400
Land 250
7500
11,250
Liability and Capital
Accounts payable
Perez Inc. Capital 450
Total 10,700
11,250
Income statement:It is the summary of the revenue and the expense of a business entity for a
specific period of time, such as a month or a year. Revenue earned and expanses incurred during
the month were recorded in the equation as increases and decrease in capital respectively.
The excess of the revenue over the expense incurred in earning the revenue is called net income
or net profit. If the expenses of the enterprise exceed the revenue the result is loss. It is ordinary
imposable to determine the exact amount of expense incurred in connection with each revenue
transaction. Therefore, it is considered satisfactory to determine the net income or the net loss for
a year, rather than for each sale or small group of sales.
Perez Inc.
Income statement
For the month ended August 31, 1999
Capital statement: isa summary of change in capital of a business entity that have occurred
during a specific period of time, such as a month or a year
Comparison of the original Investment Br. 10,000 at the beginning of the month with the 10, 700
of capital reported in the balance sheet at the end of the month reveals an increase in capital of
Br. 700. This net increase is composed of two significant changes in capital that occur during the
period:
1. The net income of Br. 1, 700 and
2. A withdrawal of Br. 1,000 by the owner
Perez Inc.
Capital statement
For the month ended august 31, 1999
expansion to new facilities. The actual work of dry cleaning is done by another company at
wholesale rates. Business transactions during October are summarized as follows:
a. Received cash from cash customers for dry cleaning sales Br. 4928
b. Paid creditor on account Br. 1,755
c. Received cash from M.A Morgan as an additional investment Br. 3700
d. Paid rent for the month Br. 1,200
e. Charged customers for dry cleaning sale on accounts Br. 1,025
f. Purchase supplies on account Br. 245
g. Received cash from customers on account Br. 2,000
h. Received monthly invoice For dry cleaning expense for October (to be paid on November
10) Br. 1, 635.
i. Paid the following wages expense, Br. 850; truce expense Br. 250; utilities expense Br.
325; miscellaneous expanse Br. 75
j. Determined, by taking an inventory, the cost of supplies used during the month, Br. 115.
Instructions
1. Determine the amount of owner’s equity (M.A margins capital) as of October 1 of
the current year.
2. State the assets liabilities, and owner’s equity as of october1, in equation form
similar to that shown as illustration in this chapter. In tabular form below the
equation, indicate the increases and decreases resulting from each transaction and
the new balances after each transaction. Explain the nature of each increase and
decrease in owner’s equity by an appropriate notation (using the + or - signs) at
the right of the amount.
3. Prepare:
a. An income statement for October
b. A statement of capital for October
c. Balance sheet of October 31
Solution
1. Assets – liabilities = owner’s equity (M.A margin, capital)
Br. 15, 500- Br. 2, 030= owner’s equity (M.A margin, capital)
Br.13470= owner’s equity (M.A margin, capital)
Assets = liability + owners equity
Cash + A/R + supplies + land = Acc. Payable M.A Morgen capital
Bal. 1000 2,200 850 11,450 2,030 13,470
a) +4,928 _____ _____ _____ _____ +4,928 dry dean. Sales
Bal. 5,928 2,200 850 11,450 2,030 18,398
b) -1755 _____ _____ _____ -1755 ______
Bal. 4,173 2,200 850 11,450 275 18,398
c) +3,700 _____ ____ ______ -1755 +3,700 Add. Investment
Bal. 7, 873 2,200 850 11, 450 275 22,098
d) –1,200 _____ ____ ______ ____ -1,200 Rent expense
bal 6,673 2,200 850 11,450 275 20,898
e) ____ +1,025 _____ ______ ____ +1,025 dry cle.sale
bal 6,673 3,225 850 11,450 275 21,923
f) _____ _____ +245 _____ +245 ______
Bal. 6,673 3,225 1,095 11,450 520 21,923
g) +2000-2000 _____ _____ ____ ______
Bal. 8,673 1,225 1,095 11,450 520 21, 923
h) _____ _____ _____ _____ +1,635-1, 635 Dry cle. Expense
Bal. 8,673 1,225 1,095 11,450 2, 155 20,288
i) -1500 -850-wage Expense
-250-truck Expense
-325 utilities Expense
-75 misce. Expenses
Bal. 7,173 1,225 1,095 11,450 2,155 18,788
j) _____ ____ -115 _____ _____ -115 supplies expense
7,1731,22598011,4502,15518,673
Self test - 1
1. Distinguish between private accounting and public accounting.
2. (A) If the assets owned by a business enterprise total Br. 275,000. What is the amount of
the equities of the enterprise? (B) What are the two principal types of equities?
3. (A) An enterprise has assets of Br. 250,000 and liabilities of Br. 175,000 what is the
amount of its owner’s equity?
(B) An enterprise has assets of Br. 480,000 and owner’s equity of Br. 200,000.what is
the total amount of its liabilities?
(C) A corporation has assets of Br. 995,000, liabilities of Br. 590,000, and capital stock
of
Br. 250,000. What is the amount of its retained earnings?
(D) An enterprise has liabilities of Br. 500,000 and owner’s equity of Br. 300,000. what
is the total amount of its assets?
4. Indicate whether each of the following types of transactions will (a) increase owner’s
equity or (b) decrease owner’s equity:
1. Owner’s investments
2. Owner’s withdrawals
3. Expenses
4. Revenues
5. Indicate whether the data in each of the financial statements (a) covers a period of time
(b) Is for a specific date:
1. Incomes statement
2. Balance sheet
3. Statement of owner’s equity
4. Statement of cash flows
6. Following are the amount of assets and liabilities of Cole Personnel Service, a sole
proprietorship, at June 30, the end of the current year, and its revenue and expenses for the
year ended on that date. The capital of A.C. Cole owner was Br. 13,350 at July 1, the
beginning of the current year, and the owner withdrew Br. 14,000 during the current year.
Cash received from customers was Br. 74,500 and cash paid for expenses and to creditors was
Br. 56,900.
Cash …………………………………………….. Br. 6,125
Accounts receivable ………………………………….7, 600
Supplies ……………………………………………...….675
Prepaid insurance ……………………………………….650
Accounts payable ……………………………………..1,100
Salaries payable …………………………………………300
Fees earned …………………………………………..68,775
Salary expense. ……………………………………….28,900
Rent expense……………………………………………9,000
Advising expense ……………………………………….5,950
Utilities expense ………………………………………...4,500
Supplies expense ………………………………………..2,600
Taxes expense …………………………………………..1,800
Insurance expense …………………………………………900
Miscellaneous expense …………………………………….825
Instructions
1. Prepare an income statement for the current year ended June 30.
2. Prepare a statement of owner’s equity for the current year ended June 30.
3. Prepare a balance sheet as of June 30 of the current year
4. Prepare a statement of cash flows for the current year ended June 30. The cash balance on
July 1, beginning of the current year, was Br. 2, 525.
Activity – One
I. Multiple choice
1. A profit making business that is a separate legal entity and in which ownership is divided
into shares of stock is known as a:
A. sole proprietorship C. partnership
B. single proprietorship D. corporation
2. the properties owned by a business enterprise are called:
A. assets C. stockholder’s
B. liabilities D. owner’s equity
3. A list of assets, liabilities and owner’s equity of a business entity as of a specific date is:
A. A balance sheet C. a statement of owner’s equity
B. An income statement D. a retained earnings statement
4. if total assets increased Br. 20,000 during a period of time and total liabilities increased
by Br. 12,000 during the same period, the amount and direction (increase or decrease) of
the period’s change in owner’s equity is:
A. Br. 32,000 increase C. Br. 8, 000 increase
B. Br. 32,000 decrease D. Br. 8, 000 decrease
5. if revenue was Br. 45, 000, expenses were Br. Br. 37, 500, and the owner’s withdrawals
were Br. 10,000, the amount of net income or net loss was:
A. Br. 45,000 net income C. Br. 37,500 net loss
B. Br. 7,500 net income D. 2,500 net loss
II. Exercise
A) The following selected transactions were completed by Lopez delivery service during June:
1. Received cash from owner as additional investment Br. 10,000
2. Purchased supplies of gas and oil for cash Br. 850
3. Billed customer for delivery services on account, Br. 900
4. Received cash from cash customers Br. 1,750
5. Paid advertising expense Br. 750
TTLM Development Manual Date September ,2021
Compiled by Accounting and business department
Training, Teaching and Learning Materials
B). Joan Bowan established Joan Bowan services on July 1 of the current year. The effect of
each transaction and the balances each transaction for July are as follows:
Instructions
1. Prepare an income statement for the month ended July 31.
2. Prepare a statement of owner’s equity for the month ended July 31
3. Prepare a balance sheet as of July 31