Elements of Accounting and Accounting Equation Delivered by Subhanie Tennekoon
Session Outline • Elements of Financial Statements • Accounting Equation 2
Elements of Financial Statements . Form the basis of the statement of financial position Assets Liabilities Capital Income Expenses Form the basis of the statement of profit or loss 3
Elements of Financial Statements Assets A resource owned or controlled by a business to benefit from its use. • “A resource controlled by the entity as a result of past events and from which • future economic benefits are expected to flow to the entity” . Assets may directly generate revenue for the organisation (e.g. inventory) or it • may be something which supports the primary operations of the organisation (e.g. buildings). 4
Elements of Financial Statements Assets Non-current Assets Current Assets Assets whose benefits are expected Assets the organisation expects to to last more than one year from the use within one year from the reporting reporting date. date. Examples: Land, building, machinery, Examples: Inventory, receivables, equipment, furniture, long term short term investment, cash and bank investments 5
Elements of Financial Statements Liabilities What the company owes and has obligations to pay in the future to an individual • or other business entity. “An entity’s obligation to transfer economic benefits as a result of past transactions • or events”. Examples: long term loan, payable and short term loan • 6
Elements of Financial Statements Liabilities Non-current Liabilities Current Liabilities A liability that the entity expects to A liability that the entity expects to settle after one year from the reporting settle within one year from the date. reporting date. Examples: Long term loans Examples: Payables and short term loan 7
Elements of Financial Statements Capital/ Equity Capital refers to what the owners have invested in the entity. • This represents the amount the business owes to its owners. • Capital is also known as “equity or net assets” • • Capital also represents what is left to the owners after liabilities are settled (residual value): Total Assets – Total Liabilities “The residual interest in the assets of the entity after deducting all its liabilities” . • • Capital is affected by; Initial and additional contributions of owners (will increase the capital) Withdrawals made by owners (will decrease the capital) Income and Expenses (Profit will increase capital. Loss will decrease capital) 8
Elements of Financial Statements Income “The inflow of economic benefits to the business entity during an accounting period” . • This will be the sales revenue earned on the sale of goods or provision of services to • customers. • It can also include other forms of revenue such as interest income. • Income will increase the net assets (capital) of the entity during an accounting period. However, money invested by owners in the business is not an income. • Examples: Revenue from sale of inventory • Interest received on a fixed deposit • Gain from selling a building owned by the business • 9
Elements of Financial Statements Expenses “Outflow of economic benefits during an accounting period” . • • Expense will decrease the net assets (capital) of the entity over an accounting period. However, drawings made by owners is not an expense. Examples: Salaries and wages, utility expenses, administration expenses, finance • expenses 10
Elements of Financial Statements Class Activity Classify the below accounts into the elements of accounting. Equipment and Furniture 1. Accounts Receivable 2. Advertising Expenses 3. Bank Loan 4. Commission Income 5. Cost of Sales 6. Delivery Expenses 7. Depreciation Expenses 8. Interest Income 9. Inventory 10. Repairs and Maintenance 11. Telephone Expenses 12. 11
Elements of Financial Statements Questions – 1.3, and 1.5 12
Accounting Equation The accounting equation shows the relationship between elements in accounting. • This is the foundation for the ‘Double entry system of Accounting” - double entry is recorded • in a manner that the accounting equation is always in balance. Assuming that the owner of a business supplied all resources needed to start the business: • Resources supplied by the owner = Resources in the business In accounting, the amount of resources supplied by the owner is called capital . The actual • resources that are then in the business are called assets . The accounting equation can then be shown as: Capital = Assets In reality, other parties other than the owner supply some of the resources. This is referred • to as labilities . The accounting equation will change to: Assets = Liabilities + Capital 13
Accounting Equation Question 1 1. Woods started a business by investing cash $100,000. Purchased stocks for cash amounting to $15,000. 2. Purchased stocks amounting to $11,500 from Jack on credit. 3. Purchased furniture from YT Limited worth $25,000 on credit. 4. Goods worth $6,000 sold on cash at the same amount. 5. Sold goods worth $4,000 to Jill on credit. 6. Paid $2,500 to Jack in part payment of the amount owing. 7. Received cash from Jill $2,000. 8. 14
Accounting Equation Question 2 1. Kate started a business by investing cash $60,000. Purchased stocks amounting to $17,600 from Mary payable within 30 days. 2. Purchased a motor vehicle for office use, $30,000 on cash. 3. Goods worth $10,500 sold on cash at the same amount. 4. Paid $8,000 to Mary in part payment of the amount owing. 5. 15
Accounting Equation Question – 1.11 16
Accounting Equation Calculation of Capital using the Accounting Equation When Assets and Liabilities of a business is known, then the capital could be calculated by re-arranging the accounting equation as; Total Assets – Total Liabilities = Total Capital 17
Accounting Equation Question 3 The asset and liability account balances of Wood’s business as at 31 December 2019 was as follows: Bank loan - $60,000 Inventory - $25,000 Debtors - $16,000 Buildings - $75,000 Furniture - $10,000 Creditors - 12,000 Calculate the capital of Wood’s Business as at 31st December 2019. 18
Accounting Equation Question – 1.2A 19
Homework Questions in class – 1.4A, 1.6A, 1.12A 20
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