Accounting Equation-An Introduction

Accounting Equation-An Introduction

• 1.
  The Accounting Equation An Introduction 1
• 2.
  All businesses havethree parts to their financial makeup: • The things or property that the company owns. We call these things ASSETS. • The money that the company owes to other people. We call these obligations LIABILTIES. • The claim of the owner of the business to the Assets after the Liabilities are paid. We call this claim OWNER’S EQUITY (or just EQUITY). 2
• 3.
  These three partsALWAYS have the same relationship to each other. We call this relationship the Accounting Equation Assets = Liabilities + Equity 3
• 4.
  The Accounting Equationcould also apply to a personal situation. Suppose you buy a car for $5,000, borrow $4,000 from the bank, and pay the rest yourself. Here’s the result: Accounting Equation Assets = Liabilities + Equity $5,000 = $4,000 + $1,000 4
• 5.
  ASSETS are the RESOURCES OWNED BY A BUSINESS . Here are some types of assets that might be owned by a business company: Cash Notes Accounts Receivable Receivable Vehicles ASSETS Land Store Buildings Supplies Equipment 5
• 6.
  LIABILITIES are the CREDITOR’S CLAIMS ON ASSETS. • Creditors are the people or companies to whom a business owes something (like money). • Here are some types of liabilities that a company might owe: Accounts Notes Payable Payable LIABILITIES Taxes Wages Payable Payable 6
• 7.
  EQUITY is theOWNER’S CLAIM ON ASSETS In a business EQUITY is composed of four parts that either increase or decrease equity: EQUITY CAPITAL: WITHDRAWALS: REVENUES: EXPENSES: What the owner puts − What the owner takes out of the + What the company − What the company into the business receives for pays to business sales operate the business. INCREASE DECREASE INCREASE DECREASE 7
• 8.
  Sometimes we expandthe Accounting Equation to show all the Equity components. This is called the EXPANDED ACCOUNTING EQUATION. This equation must ALWAYS BE IN BALANCE 8