7/17/2019 Assets, liabilities and the accounting equation 1

ASSETS AND LIABILITIES

 An asset – Something valuable which a business
owns or has the use of
 Two types of assets
 Current assets (e.g.)
 Non – current assets (e.g.)
 A liabilities – Sums of money owed by the business
to somebody else.
 Two types of liabilities
 Current liabilities (e.g.)
 Long term liabilities (non-current liabilities)

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ACCOUNTING EQUATION
 Business entity concept
 Capital – Money put into business by its owners
 Accounting equation formula
 Different assets in an equation
 Introduction of profit
 Net asset and increase in net assets
 Drawings
 Relationship between accounting equation and
double entry
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ACCOUNTS PAYABLES AND ACCOUNTS
RECEIVABLES
 Accounts payable – person from whom business has
purchased items and to whom the business owes money
 accounts receivables – a person to whom the business
has sold item and by whom the business is owed money
 Trade account payable – person whom business owes
money for debts incurred in the course of trading
operations
 Trade account receivable- person who owes the
business money for debts incurred in the course of
trading operations
 Other accounts payable

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DOUBLE ENTRY BOOKKEEPING
 Double entry bookkeeping:
 Accounting system which reflects that every transaction gives
rise to two accounting entries, debit entry and credit entry.
 A debit entry means:
 An increase in an asset.
 An increase in an expense
 A decrease in a liability and income
 A credit entry means:
 An increase in a liability
 An increase in an income
 A decrease in an asset and expense
 Dual effect of transactions
 Double entry for cash and credit transactions
 Recording transactions in ledger accounts (use of “T”a/cs)
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CAPITAL EXPENDITURE AND
REVENUE EXPENDITURE
 Capital expenditure – one which result from the acquisition
of non-current assets or improvement in their earning
capacity
 Capital income
 Revenue expenditure- expenditure incurred for the
purpose of the trade of the business, including
expenditures classified as selling and distribution expenses,
administration expense and finance charges.
OR
One incurred to maintain the existing earning capacity of
the non-current assets
• Revenue income
 Impact on profit caused by incorrect classification
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PRACTICE QUESTION- DOUBLE ENTRY
Identify the debit and credit entries in the following
transactions and record them in the appropriate ledger
accounts
a) Bought a machine on credit from A, cost $8,000
b) Bought goods on credit from B, cost $ 5,000
c) Sold goods on cash to C, value $1,200
d) Paid A $4,000 for good bough earlier
e) Paid wages of $2,000
f) Received rent bill of $7,00 from landlord G
g) Paid rent of $ 700 to Landlord G
h) Paid Insurance premium of $60
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