Accounting equation

Double Entry
System

DR

CR


Accounting Equation


Assets = Owner’s Equity + Liabilities
Items of
value
owned
by the
business

The funds of a
business provided
by its owners and
the profits entitled
to him

Debts owed
by a
business to
external
parties such
as suppliers

Assets = Owner’s Equity + Liabilities
Building

Capital

Creditors

Motor vehicle

Profits

Loan from bank

Office Equipment

Other creditors

Fixtures
Stock (closing)
Cash in hand
Cash at bank

* Explain these terms to students


Assets = Owner’s Equity + Liabilities
Every transaction will affect 2 items.
The equation will still balance!

A

=

OE

+

L

TRANSACTION THAT AFFECTS BOTH
ASSET AND LIABILITY

A SSET ↑

L IABILITY ↑

A SSET ↓

L IABILITY ↓

TRANSACTION THAT AFFECTS BOTH
ASSET AND OWNER’S EQUITY

A SSET ↑

↑

A SSET ↓

O WNER’S E QUITY
O WNER’S


A

=

OE

+

L
TRANSACTION THAT AFFECTS
ASSETS ONLY

A SSET ↑ A SSET ↓
TRANSACTION THAT AFFECTS
LIABILITIES
ONLY
L IABILITY
↑

L IABILITY ↓


Example s : A
a)

=

OE

+

L

Jo hn be g an bus ine s s with c as h in hand
$5000.
Cash

↑ $5000

Capital

↑ $5000

b) The firm to o k a bank lo an o f $8000.
Cash

c)

↑ $8000

Bank Loan

↑ $8000

Be ing purc has e o f mo to r ve hic le fro m

ABC
Trading
fo
r
$2000.
Motor Vehicle ↑ $2000

Cas h ↓ $2000


Example s : A

=

OE

+

L

d) Be ing payme nt o f $500 to Cre dito r, Pe te r.
Cash ↓ $500

Creditors ↓ $500

e ) Be ing re c e ipt o f $3500 in c he que fro m a
de bto r.
Debtors ↓ $3500

Cash at Bank

↑ $3500


Example s : A

=

OE

+

L

f) Be ing re payme nt o f bank lo an fo r $1500.
Cash ↓ $1500

Bank Loan ↓ $1500

g ) Be ing purc has e o f o ffic e e quipme nt fro m
Le e Trading o n c re dit fo r $780.

Office Equipment

(Lee Trading)

↑ $780

Creditors ↑ $780

ACCOUNTING
EQUATION

Assets
Owner’s Equity
Liabilities

=
+


What is a Balance Sheet?
It is a report that is used to present the
Accounting Equation that involves a firm’s
total assets, total owner’s equity and total
liabilities of an accounting period.
It is a report that external parties like investors or
bankers look at when making important business
decisions.
Click
me!

How does it look like?


Assets

2000

Owner’s Equity +
Liabilities

BALANCE SHEET AS AT 1

Fixed Assets

$

=

$

Building
Office Equipment
Motor Vehicle
Fixtures
Current Assets
Stock (*closing)
Debtors
Bank
Cash

Jan

Owner’s Equity
$

Capital
Add: Profits

Less: Drawings
Long Term Liabilities
Loan from bank
Current Liabilities
Creditors
Other creditors

Same figure


Example 2 :

2000

=

OE

+

L

BALANCE SHEET AS AT 1 Jan

Fixed Assets

$

A
$

Motor Vehicle 25000
Fixtures
10050

35050
Current Assets
Stock
4570
+ 2000
Debtors
7400
Cash
630
12600
47650

Owner’s Equity
$

Capital
38000

+ 2000

Long Term Liabilities
Loan from bank
3000
Current Liabilities
Creditors

6650
47650

a) Owner brought in cash $2000 as
additional capital


Example 2 :

2000

BALANCE SHEET AS AT 1 Jan

Fixed Assets

$

$

Motor Vehicle 25000
Fixtures
10050

35050
Current Assets
Stock
4570
- 1000
+ 2000
Debtors

7400
Cash
630
12600
47650

Owner’s Equity
$

Capital
38000

+ 2000

- 1000
Long Term Liabilities
Loan from bank
3000

Current Liabilities
Creditors
6650

b) Owner paid off the loan $1000

47650


Example 2 :

2000

BALANCE SHEET AS AT 1 Jan

Fixed Assets

$

$

Motor Vehicle 25000
Fixtures
10050

35050
Current Assets
Stock
4570
- 1000 - 1100
+ 2000
Debtors
7400
Cash
630
12600
47650

Owner’s Equity
$

Capital
38000

+ 2000

- 1000
Long Term Liabilities
Loan from bank
3000
- 1100
Current Liabilities
Creditors
6650

c) Owner paid creditors $1100

47650


BALANCE SHEET
AS AT 31 Dec 2000
Fixe d As s e ts $
$
Mo to r Ve hic le 25000
Fixture s
10050
35050
Curre nt As s e ts
S to c k
4570

De bto rs
7400
Cas h
530
12500
47550

Owne r’s Equity
Capital

$

$

40000

Lo ng Te rm Liabilitie s
Lo an fro m bank

2000

Curre nt Liabilitie s
Cre dito rs

5550

47550


IN CLOSING…