ASSETS, LIABILITIES AND

ACCOUNTING EQUATION

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

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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

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ACCOUNTING EQUATION
Business entity concept
Capital – Money put into business by its owners
Accounting equation – Demonstrates the
relationship between assets and liabilities
Accounting equation formula;
ASSETS = CAPITAL + LIABILITIES
This equations indicates that at any particular point in
time assets of the business should be enough to
payoff the capital and liabilities of the business.

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ACCOUNTING EQUATION
Different assets in an equation
Introduction of profit
Assets = capital + Profit + Liabilities
Net asset and increase in net assets
Net assets = Total assets – Total liabilities
 NB: Net assets = Capital

Increase in net assets = Profit

Drawings
Assets = Capital + Profit – Drawings + Liabilities
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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CAPITAL AND REVENUE TRANSACTIONS
Capital expenditure – one which result from the acquisition of
non-current assets or improvement in their earning capacity
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
Impact on profit caused by incorrect classification of items
between capital or revenue expenditure

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 CAPITAL AND REVENUE TRANSACTIONS
Capital income
Gain or profit arising from disposal of non-current
assets
• Revenue income
• Income arising from business activities of the business.
Impact on profit caused by incorrect classification of
items between capital or revenue income

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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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