Basic Accounting

Equation
The Teaching Machine Tutorials
Definition

 Accounting equation is a relationship between the

elements of account, namely Assets , Equity and
Liabilities
Accounting equation can be expressed according to the
following equations
 Assets = Equity + Liabilities
 Equity = Assets – Liabilities
 Liabilities = Assets – Equity
Assets
 Resources controlled by the business for future
economic benefits
 Belongings of the business
 Assets increase on the debit side and decrease on the
credit side
Non-current assets
 Assets that are held for a long period of time such as
• Land and buildings / Property
• Machinery
• Equipment
• Vehicles
• Long-term investment
Current assets
 Assets that are held for a short period of time such as
• Debtors control / Trade and other receivables
• Bank – favourable
• Inventory
• Petty cash
• Cash float
• Prepaid expense
• Accrued income
 Owner vs Business

Entity concept
 Financial affairs of the owner should be kept separately
from the ones of the business
Equity

 Net worth of the owner

 The belongings of the owner
 Equity accounts consists of Capital, Drawings , Income
and expenses
 Equity increase on the credit side and decrease on the
debit side
 Capital and Income accounts increases Equity (credit)
 Drawings and Expenses decreases Equity ( debit)
Income accounts

• Rental income
• Commission income
• Dividend income
• Credit losses recovered
• Profit on sale of non-current asset
• Sales
• Interest income
Expenses

• Rent expense • Rates and taxes

• Telephone • Packing material
• Stationery • Interest on loan
• Water and electricity • Credit losses
• Insurance • Loss on sale of non-current
asset
• Advertising
• Carriage on sales
• Wages and salaries
• Repairs and maintenance
Liabilities
 Present obligations of the business
 Debts of the business
 Liabilities increase on the credit side and decrease on
the debit side
Non-current liabilities
 Debts of the business that are paid for a long period of
time such as
• Loan
• Mortgage bond
Current liabilities
 Debts that are paid within a short period of time such as
• Creditors control / Trade and other payables
• Short-term loan
• Income received in advance
• Accrued expense
• Current portion of loan
• Bank overdraft
Recognition criteria
Assets – belong to the business/controlled by the business
Equity – belongs to the owner
Liabilities – debts of the business
Income – made from daily operations/ influence equity
positively
Expenses – paid for business operations / affect equity
negatively