ACCOUNTING

EQUATION
ASSETS = LIABILITY +
OWNER’S EQUITY
ASSETS
 An asset is a resource with economic value that an individual, corporation, or country owns or
controls with the expectation that it will provide a future benefit. Assets are reported on a
company's balance sheet and are bought or created to increase a firm's value or benefit the
firm's operations. An asset can be thought of as something that, in the future, can generate cash
flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment
or a patent.
ASSETS
 An asset is a resource with economic value that an individual, corporation, or country owns or
controls with the expectation that it will provide a future benefit.
 Assets are reported on a company's balance sheet and are bought or created to increase a firm's
value or benefit the firm's operations.
 An asset can be thought of as something that, in the future, can generate cash flow, reduce
expenses or improve sales, regardless of whether it's manufacturing equipment or a patent.
TYPES OF ASSETS
Current Assets
Current assets are short-term economic resources that are expected to be converted into cash
within one year. Current assets include cash and cash equivalents, accounts receivable,
inventory, and various prepaid expenses.

Fixed assets are long-term resources, such as plants, equipment, and buildings. An adjustment
for the aging of fixed assets is made based on periodic charges called depreciation, which may
or may not reflect the loss of earning powers for a fixed asset.
LIABILITY
 A liability is something a person or company owes, usually a sum of money. Liabilities are
settled over time through the transfer of economic benefits including money, goods, or
services
 An obligation between one party and another not yet completed or paid for.
SHORT-TERM VERSUS LONG-
TERM LIABILITIES
Businesses sort their liabilities into two categories: current and long-term. Current liabilities are
debts payable within one year, while long-term liabilities are debts payable over a longer period.
For example, if a business takes out a mortgage payable over a 15-year period, that is a long-
term liability. However, the mortgage payments that are due during the current year are
considered the current portion of long-term debt and are recorded in the short-term liabilities
section of the balance sheet.
EXAMPLES OF COMMON
CURRENT LIABILITIES
 Wages Payable: The total amount of accrued income employees have earned but not yet
received. Since most companies pay their employees every two weeks, this liability changes
often.
 Interest Payable: Companies, just like individuals, often use credit to purchase goods and
services to finance over short time periods. This represents the interest on those short-term
credit purchases to be paid.
 Dividends Payable: For companies that have issued stock to investors and pay a dividend, this
represents the amount owed to shareholders after the dividend was declared. This period is
around two weeks, so this liability usually pops up four times per year, until the dividend is
paid.
LESS COMMON CURRENT
LIABILITIES
 Unearned Revenues: This is a company's liability to deliver goods and/or services at a future
date after being paid in advance. This amount will be reduced in the future with an offsetting
entry once the product or service is delivered.
 Liabilities of Discontinued Operations: This is a unique liability that most people glance over
but should scrutinize more closely. Companies are required to account for the financial impact
of an operation, division, or entity that is currently being held for sale or has been recently
sold. This also includes the financial impact of a product line that is or has recently been shut
down.
OWNER’S EQUITY
 Owner's equity represents the owner's investment in the business minus the owner's draws or
withdrawals from the business plus the net income (or minus the net loss) since the business
began.

 Owner's equity is viewed as a residual claim on the business assets because liabilities have a
higher claim. Owner's equity can also be viewed (along with liabilities) as a source of the
business assets.
EXAMPLE OF OWNER'S
EQUITY
 If a sole proprietorship's accounting records indicate assets of $100,000 and liabilities of
$70,000, the amount of owner's equity is $30,000.
ASSETS = LIABILITY +
OWNER’S EQUITY
Expanded Equation

ASSETS = LIABILITY + OWNER’S EQUITY + (REVENUE – EXPENSES)

NOTE: REVENUE and EXPENSES are temporary account or nominal account of OWNER’S
EQUITY
EXPENSE
An expense in accounting is the money spent, or costs incurred, by a business in their effort to
generate revenues. Essentially, accounts expenses represent the cost of doing business; they are
the sum of all the activities that hopefully generate a profit.
REVENUE
Revenue is the income generated from normal business operations and includes discounts and
deductions for returned merchandise. It is the top line or gross income figure from which costs
are subtracted to determine net income.
EXPLAIN IN YOUR OWN
WORDS THE DEFINITION OF
THE FOLLOWING TERMS
 Assets
 Current Assets (Give Examples)
 Fixed Assets (Give Examples)
 Liability
 Short-Term Liability (Give Examples)
 Long-Term Liability (Give Examples)
 Owner’s Equity
 Expense
 Revenue