3. Accounting Equation

7/24/2019 3. Accounting Equation

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STATEMENT OF FINANCIALPOSITION/

Balance sheet


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Lesson Outcome

At the end of the lesson, students shouldbe able to:

! Ident"f# the elements "n the balancesheet $SoFP%

&!'esc("be the bas"c account"n) e*uat"on+!elate the balance sheet com-onents to

the account"n) e*uat"on.!'esc("be the etended account"n)e*uat"on

0!elate the "ncome statementcom-onents to the account"n) e*uat"on


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F"nanc"al statements

The(e a(e th(ee $+% ma1o( 2nanc"alstatements :

!Statement of Com-(ehens"3e Income

$SOCI%/ Income Statement Measu(es the 2nanc"al -e(fo(mance o(-(o2tab"l"t# o3e( a s-ec"2c -e("od of t"me

&!Statement of F"nanc"al Pos"t"on $SOFP%/ Balance Sheet Summa("4es the bus"ness5 assets, l"ab"l"t"es and

e*u"t# at a s-ec"2c -o"nt of t"me

+! Cash Flo6 Statement Sho6s the 7o6 of cash "n and cash out of the

bus"ness!


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Classification of

business transactionsAssets Statement of F"nanc"al

Pos"t"on

O6ne(5se*u"t#

Statement of F"nanc"alPos"t"on

L"ab"l"t"es Statement of F"nanc"alPos"t"on

e3enues Income Statement

E-enses Income Statement


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Statement of F"nanc"al Pos"t"on

$SOFP% '"scloses the 2nanc"al -os"t"on of a

bus"ness on a )"3en date, sho6"n)

the assets, l"ab"l"t"es and o6ne(s5e*u"t#!

Statement of F"nanc"al Pos"t"on ma#be (e-(esented "n t6o 6a#s:

! T(ad"t"onal o( ho("4ontal fo(m

&! 8e(t"cal fo(m


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A9I9I ENTEPISEStatement of F"nanc"al Pos"t"on as at +'ecembe( &0

RM RMASSETS EQUITY

Land and bu"ld"n) &, Ca-"tal &+,

8eh"cles ;,

In3ento("es ;0, LIABILITIESAccount(ece"3ables

., Ban< loan 0,

Cash and ban< +0, Account-a#ables

.,

320,000 320,000


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A9I9I ENTEPISEStatement of F"nanc"al Pos"t"on as at +'ecembe( &0

RM

ASSETS

Land andbu"ld"n)

&,

8eh"cles ;,

In3ento("es ;0,

Account(ece"3ables

.,

Cash and ban< +0,

320,000EQUITY

Ca-"tal &+,

LIABILITIES

Ban< loan 0,

Account .,


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Assets

An asset is a resource controlled by theenterprise as a result of past events andfrom which future economic benets areexpected to ow to the enterprise!

Econom"c (esou(ces 6h"ch a(e of 3alue tothe bus"ness!

P(o3"de e"the( -(esent o( futu(e bene2ts tothe bus"ness

=sed to ass"st "n the -(oduct"on of )oodsand se(3"ces to )ene(ate "ncome and(e3enues to the bus"ness


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Assets

Non cu((ent Assets Assets ac*u"(ed not fo( -u(-ose of (esale to be

held fo( mo(e than one account"n) -e("od! Land, Bu"ld"n), 8eh"cles, In3estments, Patents

Cu((ent Assets Cash and assets ac*u"(ed fo( (esale and a(e

e-ected to be con3e(t"ble "nto cash 6"th"n

one #ea( of balance sheet date In3ento("es, 'ebto(s o( ece"3ables, Cash and

Ban< balances


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Non>cu((ent Assets

Tan)"ble Assets Assets that ha3e -h#s"cal e"stence

Land, Bu"ld"n), 8eh"cles


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Non-current Assets

Intan)"ble Assets Assets that ha3e no -h#s"cal e"stence

Patents, ?ood6"ll, T(adema(


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Non-current Assets

In3estment @uoted and un*uoted "n3estment, 2ed

de-os"t


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L"ab"l"t"es

A liability is the present obligation of anentity arising from past events, thesettlement of which is expected to result in

an outow of resources embodyingeconomic benets. e-(esent 6hat the bus"ness o6es to outs"de(s!

F"nanc"al obl")at"ons of the bus"ness toouts"de(s

L"ab"l"t"es (e-(esent outs"de(s $non>o6ne(%su--l"ed funds 6h"ch a(e used b# the bus"nessto ac*u"(e assets!


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L"ab"l"t"es

Non cu((ent L"ab"l"t"es Obl")at"ons 6h"ch a(e e-ected to be settled

afte( #ea( f(om the balance sheet date Te(m loans, Mo(t)a)es, Bonds, 'ebentu(es

Cu((ent L"ab"l"t"es Obl")at"ons 6h"ch a(e e-ected to be settled

6"th"n #ea( f(om the balance sheet date C(ed"to(s o( Pa#ables, Ban< o3e(d(afts, Sho(t>

te(m Loans


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O6ne(s5 e*u"t#

!uity is the residual interest in theentity"s assets after deducting all itsliabilities

e-(esents the cont("but"on of assets,usuall# "n the fo(m of cash, "nto thebus"ness, b# the o6ne(s

An# -(o2t made b# the bus"ness and not

ta


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ee(c"se Class"f# the follo6"n) "tems "nto assets, l"ab"l"t"es

and ca-"tal!

Fixtures andfittings

Office equipment Term loan fromMaybank

Accountreceivable

Cas in and !and and buildings

!easeoldpremises

"ank overdraft Account payables

#nventory Motor veicles Capital by o$ner

Cas at bank %ort term loan Mortgage on landand building


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Bas"c Account"n) E*uat"on

Fo(ms a bas"s of 6hole double ent(#boo


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Bas"c Account"n) E*uat"on


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Ee(c"se: 'ete(m"ne the

m"ss"n) 2)u(eASSETS LIABILITIES OWNERS EQUITY! M +, M ,

&! M , M 0,

+! M 0, M 00,

.! M , M 0,

0! M ++, M ,


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Bus"ness T(ansact"on


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EDects Of T(ansact"ons on the Account"n)E*uat"on

Transaction Efect UonAssets Lia!i"ities O#ners

E$%it&

ass"m"nt(oduces

M, "ntobus"ness

Cash "nc(eases M,

Ca-"tal"nc(eases

M,

Sell )oodsM,& toaml#

In3ento(#dec(easesG M,&'ebto( "nc(eases

M,&Bu# fu(n"tu(eM, f(omAhSen), -a"d b#che*ue M,

Fu(n"tu(e"nc(eases M,Ban< dec(eases> M,

C(ed"to("nc(eases M&,


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EDects Of T(ansact"ons on the Account"n)E*uat"onTransaction Efect Uon

Assets Lia!i"ities O#ners

E$%it&A4"4" "n3ested cash ofM0, "nto bus"ness

A4"4" de-os"ted M.,"nto bus"ness ban< account

Bus"ness bo((o6s M,f(om ban

Pu(chased )oods ofM0, f(om su--l"e(s

Pa"d su--l"e(s M, b#che*ue


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Ee(c"se

! Hhen a bus"ness (ece"3es -a#mentf(om an account (ece"3able, theeDect on the balance sheet of the

2(m "s a! An "nc(ease "n assets

b! A dec(ease "n l"ab"l"t"es

c! An "nc(ease "n l"ab"l"t"esd! No chan)e "n amount of assets


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Ee(c"se

&! S#a2na4 Jotel sold some of "ts e*u"-ment atcost of M+,, (ece"3"n) M, cashand fu(n"tu(e 6o(th M0,! The M0,(ema"nde( 6as to be -a"d "n cash at a late(date! The eDect of th"s t(ansact"on on the

balance sheet of S#a2na4 Jotel 6ould beK

a! An "nc(ease and "n total assets and total l"ab"l"t"esb! A dec(ease "n total assets and total l"ab"l"t"es

c! No chan)e "n total assets and no chan)e "n totall"ab"l"t"es

d! An "nc(ease "n total assets but not "n totall"ab"l"t"es


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e3enue

A ow in economic benets during the accountingperiod arising in rm"s ordinary activities, in the formof inow or enhancement of assets or decrease inliabilities, Ea(ned o( (eco)n"4ed 6hen )oods a(e -(oduced and

del"3e(ed o( se(3"ces a(e (ende(ed In7o6s "n the fo(m of cash f(om cash sale o( ne6 accounts

(ece"3able f(om a c(ed"t sale Enhancement of assets 6hen e"st"n) fac"l"t"es a(e u-)(aded 'ec(ease "n l"ab"l"t"es 6hen the 2(m sells to an e"st"n)

c(ed"to( and a((an)es to (educe the debt a)a"nst theamount o6"n)

Sales, fees, (ent (ece"3ed, d"3"dend "ncome,comm"ss"on (ece"3ed, d"scount (ece"3ed


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&evenue - 'xamples

Sales (e3enue G (e3enue f(om sale of)oods to custome(s

Fees G (e3enue f(om (ende("n) of se(3"ces

ent "ncome G (e3enue f(om (ental of lando( bu"ld"n) '"3"dend "ncome G (e3enue f(om

"n3estments "n sha(es Inte(est "ncome G (e3enue f(om ban ban


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'xample+ 'ffects ofTransactions a4" "n3ests M0, cash "nto the bus"ness Bou)ht a moto( 3an on c(ed"t M0, Bou)ht )oods fo( M0 -a#"n) b# che*ue! Bou)ht )oods on c(ed"t M&,

Bou)ht sho- -(em"ses -a#"n) M0, b# che*ueand loan f(om ban< M&0, Bou)ht 2tu(es M& -a#"n) b# che*ue e-a"d b# cash a loan o6ed to aman M, a4" "nt(oduces anothe( M0 cash "nto the 2(m a4" ta

3. Accounting Equation

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