FINANCIAL ACCOUNTING

INTRODUCTION TO FINANCIAL ACCOUNTING - PART 2

1. DEFINITIONS

¡ ASSET
Something of value owned by a business. It is anything a business owns.
¡ LIABILITIES
Anything a business owes.
¡ CAPITAL/EQUITY
Funds invested in the business by the owner/Resources supplied by the
owner into the business.
2. THE ACCOUNTING EQUATION

¡ Accounting equation is a summary of a balance sheet/statement of

financial position
3. THE ACCOUNTING EQUATION WITH RESOURCES FROM ONLY
THE OWNER OF BUSINESS

RESOURCES SUPPLIED BY OWNER = RESOURCES IN THE BUSINESS

CAPITAL = ASSETS
4. THE ACCOUNTING EQUATION WITH RESOURCES FROM
BORROWINGS (LOANS) ONLY

LIABILITIES = ASSETS
5. THE ACCOUNTING EQUATION WITH RESOURCES FROM CAPITAL
AND LIABILITIES

¡ Accounting equation with capital liability and assets where the owner
does not have enough resources to put into the business he/she will
borrow. The accounting equation thus becomes

CAPITAL + LIABILITIES = ASSETS

CAPITAL = ASSETS – LIABILITIES

6. EXAMPLES

EXAMPLE A – THE INTRODUCTION OF CAPITAL

¡ On 1st May 2019, Pawemi started in business with 600,000 into a bank
account opened specifically for the business.
CAPITAL = ASSETS
600,000 = 600,000
Cash at the bank

¡ Pawemi Balance sheet as at 1st May 2019

Asset cash at the bank 600,000
Capital 600,000
EXAMPLE B – THE PURCHASE OF AN ASSET
¡ On 3rd May 2019 Pawemi buys a kiosk (small shop) for 320,000 and pays
from the business bank account.

¡ Pawemi balance sheet as at 3rd May 2019

Assets

Shop 320,000
Cash at Bank 280,000
600,000

¡ Capital 600,000
EXAMPLE C – THE PURCHASE OF AN ASSET ON CREDIT
¡ On 6th May 2019 Pawemi buys goods for the shop on credit from
Lindie worth K70,000
¡ Pawemi balance sheet as at 6th May 2019
Assets
Shop 320,000
Cash at Bank 280,000
Inventory 70,000
670,000
Less creditors (70,000)
600,000
¡ Capital 600,000