Objective 3

Use the Accounting Equation

The Accounting Equation

Assets = Liabilities + Owner’s Equity

Economic Claims to
Resources Economic
Resources
Accounting Equation

For a corporation, stockholders’ equity

is divided into two main categories.

Paid-in capital Retained earnings

Assets = Liabilities + Stockholders’ equity

Assets = Liabilities + Paid-in capital + Retained earnings

Accounting Equation

Paid-in capital is the amount invested

in the corporation by its owners.
The basic component of paid-in
capital is common stock.
Retained earnings is the amount earned
by income-producing activities and
kept for use in the business.
Assets
 What is an asset?
 It is something a company owns which has
future economic value.
– land
– building
– equipment
– goodwill
Liability
 What is a liability?

 It is something a company owes.

 “outsider claims” or “creditors’ claim”
Liabilities

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable
Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable
Owner’s Equity
 What is owner’s equity?
 It is what’s left of the assets after liabilities
have been deducted.
– “insider claims” or “owners’ claims on the
entity’s assets
 Equity
Owner
Owner
Investments/
Investments/
Capital
Capitalpaid-
paid-in
in Owner’s
Owner’s
claims
claims Owner
Owner
Withdrawals
Withdrawals
on
on
assets
assets
Retained
Retainedearnings
earnings
Owner’s Equity
 What are some owner’s equity accounts?
– Capital or owner’s interest in the business
– Withdrawals
– Revenues
– Expenses
Revenues
 What are revenues?
 They are amounts received or to be received
from customers for sales of products or services.
– sales
– performance of services
– rent
– interest
Expenses
 What are expenses?
 They are amounts that have been paid or will be
paid later for costs that have been incurred to
earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
Quiz

Q1: Accounting equation

Assets = Liabilities + Owners’ Equity
Case 1
$125,000 = $75,000 + $
Case 2
$400,000 = $ + $100,000
Case 3
$ = $320,000 + $95,000
Q2. Elements of financial statements

Classify the following items into assets (A), liabilities (L), owner’s equity
(OE), revenues (R), expenses (E)
1. Cash
2. Salaries paid for staff
3. Equipment
4. Payable to Ms X
5. Amount earned from selling a product
6. Capital
7. Receivable from Mr Y
8. Building
9. Payment for advertising