ACCOUNTING

EQUATION
BASIC ACCOUNTING EQUATION

ASSETS = LIABILITY + EQUITY

ASSETS
Some examples are:
• Cash
• Accounts receivable
• Inventories
• Equipment
• Land and building
• Intangible assets
CASH
• Generally, it is the money that we use comprising of bills and coins we
use in our daily lives in order to buy the goods we want and also avail
the services we need.
• However, when accounting for cash, we also consider cash as the
money that is deposited in the banks and even undeposited checks
from costumers.
ACCOUNTS RECEIVABLE
• Amounts that are collectibles from costumers
• When a business sells its goods on account or
credit
INVENTORIES
• refer to the goods and materials that a company holds for the
purpose of resale or for use in the production process
• includes raw materials, work-in-progress, and finished goods that are
either awaiting sale or are in the process of being manufactured
EQUIPMENTS
• refers to the tangible assets that a business uses in its operations to
generate income.
• these are not intended for sale but are instead used for ongoing
business activities.
• Equipment can include a wide range of items, such as machinery,
vehicles, computers, furniture, and fixtures.
LAND AND BUILDING
• For some businesses, a physical store is necessary for
them to operate.
• Used for business operation.
INTANGIBLE ASSETS
• Tangible assets are those that can be seen or touched.
• However, assets also encompass tangible things that can either be
seen nor touched.
• Examples: software, loyal customer, brand equity, intellectual
(includes patents, trademarks, copyrights, and trade), Software
licenses, Long-term contracts, leases
LIABILITIES
Liabilities can take form in the following:
• Accounts payable
• Unearned revenue
ACCOUNTS PAYABLE
• refers to the amount a company owes to its suppliers or vendors for
goods and services received but not yet paid for
• It's essentially a liability on the balance sheet, representing the
company's obligation to pay off its short-term debts.
UNEARNED REVENUE
• also known as deferred revenue or deferred income, refers to money
received by a company for goods or services that it has not yet
provided
• it represents an obligation for the company to deliver goods or
services in the future
• EXAMPLES: telecom companies
EQUITY
• refers to the residual interest in the assets of an entity after deducting
its liabilities.
• It represents the ownership interest or stake that shareholders or
owners have in a company.
• Equity can also be referred to as shareholders' equity, owner's equity,
or net assets.
Net Income/(Net Loss)= Revenues − Expenses
REVENUES
• also known as sales or income
• refer to the total amount of money earned by a company from its
primary business activities during a specific period, typically a quarter
or a fiscal year.
• generated from selling products or services to customers, and it is a
key component of a company's income statement.
EXPENSES
• refer to the costs incurred by a company during its normal business
operations in order to generate revenue.
• These costs are subtracted from the revenue earned to determine the
net income or net loss of the company for a specific period.
• Examples: Cost of Goods Sold (COGS),Operating Expenses,nterest
Expense
CAPITAL
• refers to financial resources that a company uses to fund its
operations and investments.
Suppose a business owner invests $10,000 of their own money into their
new company to start operations. They also take out a $5,000 loan from
the bank.
Now, let's represent these changes in the accounting equation:
Assets=$15,000
Liabilities=$5,000
Owner’s Equity=$10,000

$5,000(Liabilities)+$10,000(Owner′s Equity)=$15,000
 The company purchases equipment for $8,000, paying $3,000
in cash and the rest on credit.
• Purchase of Equipment:
• Assets increase by $8,000 (equipment).
• Cash decreases by $3,000.
• Liabilities increase by $5,000 (accounts payable).

Assets=$8,000
Liabilities=$5,000
Owner's equity decreases by $5,000 (investment in equipment)

Left side: $8,000=Right side: $5,000+Owner’s Equity

 A company has total assets of $50,000, total liabilities of $20,000,
and owner's equity of $30,000. Is the accounting equation balanced?

Solution:
Assets = Liabilities + Owner’s Equity
$50,000=$20,000+$30,000

Since the assets equal the sum of liabilities and owner's

equity, the accounting equation is balanced.