accounting equation with examples, presented by shir shah fahim, abdul nasir soroush
TRANSCRIPT
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Accounting Equation
By Shir Shah Fahim, Abdul Nasir SoroushDD 29-01-2015
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The Accounting Equation
in the previous chapters we disuse the basic terms that used in accounting balance sheet is the most important terms in this chapter, and in this chapter we are going to know more and more about this terms
Its also called balance sheet equation, represent the relationship between asset, liability and equity
Assets = Capital + Liabilities
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Equation
• This word equation comes from the word equal , for every equation One side always equal other side.
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So, what Does the Accounting Equation means
• Well, in order to know this Answers, we are going to look the mentioned below terms.
• Assets • Liabilities • Owner Equity •
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Assets
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Assets • Anything which have some future benefits to
the business
• Anything which owned by the business and have some future benefits.
• That resources which is controlled by an entity.• There are 2 types of assets• Current assets and Non-current assets or long
term assets
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Liabilities • Any type of borrowing from persons or banks for
improving a business or personal income that is payable during short or long time
• Liabilities are the claims of other against assets.• There are 2 types of liabilities• Current liabilities and non current assets
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Owner’s Equity• The ownership claim on total assets.
• Are the assets which owner invest into business.
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Basic Accounting Equation
A=L+CASSETS = LIABILITIES + OWNER’S EQUITY
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Assets and Eguations Asset any valuable thing belong to the Business and have some future benefits. And equity means the claim against these assets.
Equity is divided in capital and liabilities
Capital: refers to the owner equity, which means the right of the owners in the assets in the firm, and liabilities refers to the outside equity which means the right of outsiders on the asset of the firm.
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Balance sheet Equation• When an asset is purchased, that owner of that
asset have the full authority of that asset, and that asset become equity of that person.
ASSETS = EQUITIESASSETS = EQUITIES
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Con’t• As you know that every person which start the
business, all assets are not from its pocket, he must to increase the fund from credit, or give lone from bank, and equity divided, 1st owner equity and outsiders equity, the outsiders equity is called Liability and owner equity is called as capital.
Assets = liability + capitalAssets= Other people claim+ my claim
Assets = liability + capitalAssets= Other people claim+ my claim
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Transaction and accounting equation
• Whenever a transaction taken place, if effect increasing and decreasing, in the above slides we define the 3 terms which are assets, liability and equity, so the look equation below,
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Mr,Irfan start a business of printing for Rs.200,000 by the name of Irfan printing service
• The effect of this transaction will be like Cash Increase for 200,000 and Equity is also increase by 200,000 like,
Assets Cash RS 200,000
= EquitiesIrfan’s CapitalRS 200,000
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Irfan Purchased Building, for Rs 100,000 and its paid as cash
• This transaction, will change the assets, and cash will decrease by 100,000 and building will increase, see the equation
Assets CashRs. 100,000+
BuildingRs. 100,000
=Equities Irfan’s CapitalRS. 200,000
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Irfan purchased machinery wroth Rs. 150,000 from liaqat and 50,000 paid in cash
• In this transactions the machinery will be increase by 150,000 and 50,000 is the claim of owner in this asset, and 100,000 is account payable, and the cash will be decrease by 50,000 look
AssetsCash200,000+
Building100,000 +
Machinery150,000+ =
EquitiesIrfan Capital200,000 +
A/c payable100,000
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Irfan Purchased Raw Material for RS 30,000 in cash
• In this transaction the assets increase and cash decrease by 30,000 look below.
Assets Cash20,000
Building100,000 +
Machinery150,000 +
Material30,000
=Equities Irfan Capital200,000 +
A/C Payable100,000
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Irfan received an order of printing book, shoukat which paid 35,000 in cash and he will pay 15,000 when the order completed.
• In this the owner equity increase by 50,000 and cash increase by 35,000 and A/c Receivable will increase by 15,000 look the mentioned
Assets Cash20,000
Building100,000 +
Machinery150,000 +
Material30,000
A/R15,000
=Equities Irfan Capital200,000 +
A/C Payable100,000
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