CSEC Principles of Accounts

SECTION 2: ACCOUNTING AS A SYSTEM

The Accounting .Equation & Balance Sheet

Accounting is based on the Dual Aspect Principle. This concept assumes that every transaction has a dual
effect, i.e. it affects two accounts in their respective opposite sides (the transaction should be recorded
at two places). If we have Notre Dame T-shirts for $50, when a customer buys a T shirt with cash, we
receive $50 in cash but then give out a T-shirt worth $50 – 2 sides to the transaction.

From this Dual Aspect Principle comes the Accounting Equation.

Capital = Assets – Liabilities

The equation above basically says that the resources the owner has put into the business is equal to
what the business has, minus what the business owes.

The equation can be changed around to solve for the various elements.

Assets = Capital + Liabilities or Liabilities = Assets – Capital

How might you start a business? You need to put in capital, resources. What are those resources? Assets
– cash, machinery, tools, furniture, a building or vehicle to start the business. These resources may come
from 2 places, your savings and personal belongings (capital) or you may take out a loan (requires
repayment) from a financial institution or a family member or friend for the business to get started. The
Assets of your business are then funded by your Capital (savings & belongings) and Liabilities (loan).
Hence, Assets = Capital + Liabilities. This equation will always remain true.

The Balance Sheet is a financial statement that expresses the accounting equation. It focuses on the
value of your business at any particular point in time. It follows the accounting equation and reports
assets, liabilities and capital at a specific point in time. The Balance Sheet or Statement of Financial
Position is the last financial statement to be completed in the Accounting Cycle.

BTW Notes:

 Inventory or stock refers to the goods purchased by a business for resale.

 The term “loan” can be used to describe any financial transaction where one party receives a
lump sum (a single payment of funds) and agrees to pay the money back. A mortgage is a type
of loan that's used to pay for property. A mortgage is a type of loan, but not all loans are
mortgages. A loan to repair my vehicle is not a mortgage. Mortgages are long term loans.
 A Bank Overdraft is a short-term or current liability. It is a small ‘loan’ or credit facility issued by
banks and financial institutions. An overdraft occurs when there isn't enough money in an
account to cover a transaction or withdrawal, but the bank allows the transaction anyway. It is
granted when the business’s bank account reaches zero, allowing the account holder to
continue withdrawing money, up to a specified limit.
CSEC Principles of Accounts

This is a basic template for your Balance Sheet.

Company Name
Balance Sheet
as at 31 December 2021
$ $ These boxes are
Non-Current Assets: just Notes &
Premises X Guidelines
Land X **Remember
Equipment X Assets = Capital +
Liabilities
Machinery X
Vehicles X
Fixtures and Fittings _X_ XX Total Non-Current
Assets

Current Assets:
Inventory/Stock (goods for resale) X
Accounts Receivable (customers who owe us) or Debtors X
Total Current Assets
Cash at bank X
Cash in hand X
Prepaid Expenses (made by us) _X_ XX__ Total Non-Current
$ XXXX Assets + Total Current
Assets = Total Assets

Capital X

Non-Current Liabilities:
Total Non-Current
Mortgage X
Liabilities
Bank Loan _X_ XX

Current Liabilities:
Total Current Liabilities
Accounts Payable (suppliers we owe) or Creditors X
Bank Overdraft X
Prepayments made (by customers to us) _X_ XX_ Capital + Total Non-
Current Liabilities +
$ XXXX
Total Current Liabilities

Notes: (This figure should be

equal to Total Assets
1. There is no need to rule up your book, it table/lines used above are for guidance in
learning the template. See sample on next page.
2. The correct heading of your Financial Statements is important. Please take note, do not shorten
any words, including the date. Always include the Company name at the beginning.
3. The first $ column is used to show detail, while the second $ column is used to give totals
4. This is known as the vertical style classified Balance Sheet/Statement of Financial Position –
classified meaning we have sorted the assets and liabilities by non-current and current.
5. Assets and Liabilities are listed in order of permanence and liquidity. More permanent assets
and liabilities and Less liquid assets and liabilities are listed first on the balance sheet.

Permanence: Order of permanency is that where the assets and liabilities are shown
CSEC Principles of Accounts

as per their permanency in the business. Your Building is more “permanent” than the
cash in hand.

Liquidity: Liquidity refers to the ease with which an asset, or security, can be converted
into ready cash. Cash is the most liquid of assets, while tangible items are less liquid.
Remember in class we said that your kiss cake snack was easier to “convert” to cash, as
opposed to your cellphone or glasses? The kiss cake in this case is more liquid.

Fixed/Non-current/Long Term assets and liabilities are listed before Short Term/Current
assets and liabilities on the balance sheet.

In exams, points are awarded for format, so even if your totals are incorrect, format and placing the
right items in the right places will add to your marks. Easy way to ensure marks.

An example of what your Balance Sheet should look.

CSEC Principles of Accounts

Non-Current vs. Current

When deciding how to categorize your assets and liabilities, take the ‘lifespan’ of the item into
consideration. If the lifespan exceeds 1 year, it can be considered Non-current, and if it is within 1 year,
it is classified as current.

Non-current Assets – also known as fixed assets or long term assets, these are resources that are not
easily converted to cash or are not expected to become cash within 1 year. It’s permanence within the
company is more than 1 year. Eg. Machinery and Equipment, Buildings and Property, Office Furniture,
Computer Equipment.

Current Assets – assets or resources that are expected to be converted to cash within a year e.g.
inventory/stock, cash at bank, cash in hand, accounts receivable/debtors (we expect that our customers
who have purchased on credit will pay us well within 1 year’s time).

Non-current Liabilities – A liability is money we (our company) owes. If we have more than 1 year to
repay, it can be considered a non-current or long term liability. This usually refers to Mortgages and
Bank Loans. Look out for questions that will specify how long the loan is for, that’s a major hint.

Current Liabilities – If we must repay liabilities within 1 year, it will be considered current. We expect our
debtors or accounts payable (customers who owe is money) to pay within 1 year – unless otherwise
stated. Bank over drafts and short term loans (3mth/6mth/etc) are also current liabilities.
CSEC Principles of Accounts

How Transactions Affect the Balance Sheet

Remember, for every transaction there is a dual effect. 2 accounts are affected by every transaction.

Process to record transactions using the balance sheet/statement of financial position:

1. For each transaction, by order of occurrence, identify which 2 items will be affected by the
transaction – is assets, liabilities and/or capital affected?
2. Determine for each effect, the value of that effect
3. A new financial statement should eb completed to show the change in details and the change in
totals. Remember Assets must equal Capital and Liabilities.

E.g 1. If the owner invests $200 cash more into his business, the cash of the business will increase by
$200 (cash is a current asset) and the Capital of the business will also increase by $200.
E.g. 2 If the owner of a company writes a cheque for the purchase of a new office desk, the bank balance
(current asset – cash at bank) will decrease and the non-current assets of the company would increase.