ACC 2208 – BUSINESS ACCOUNTING BAF -IU

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THE ACCOUNTING EQUATION AND ITS COMPONENTS

Learning outcomes

 Describe the accounting equation, including how it is reflected in the balance

sheet.
 Explain the nature of assets, liabilities and owners equity.
 Prepare a simple balance sheet and compute the profits.
 Explain the effect of accounting equation on business transactions.

The Accounting Equation

Assets = Liabilities + Owners equity

Owners equity consist of Capital + Net Profit / (Net Loss) – Drawings.

Net Losses and Drawings will reduce the owner equity where as net profits and
any additional capital will increase owner’s equity.

THE NATURE OF ASSETS, LIABILITIES AND CAPITAL

Assets
An asset is a tangible or intangible resource that is owned or controlled by an
accounting entity, and which is expected to generate future economic benefits.
An item cannot be shown as an asset on a balance sheet unless it will be of some
future value to the business.

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ASSETS

NON CURRENT CURRENT ASSETS

ASSETS

TANGIBLE ASSETS

INTANGIBLE ASSETS

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Liabilities
Liabilities consist of the financial obligation to external parties (amounts
owed by a business to a bank or supplier). This is shown as a liability only
if the transaction or event which gives rise to that obligation has already
occurred by the balance sheet date. The financial obligation of a business
to its owner or owners is not included within the definition of liabilities

LIABILITIES

NON CURRENT LIABILTIES CURRENT LIABILITIES

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Owner’s Equity
Capital consists of investment made by the owner into the business. Capital is
increased by any amount paid into the business by the owner and any profit
earned by the business.
Owners Equity consist of:

Net Income - ________________________________________________________

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Net Loss -___________________________________________________________

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Drawings: ___________________________________________________________
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Additional Investment: _________________________________________________

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Capital : ____________________________________________________________
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The items recorded in the balance sheet are carried forward to the following
year but the income and expenses are only accounted for in that accounting
period.

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Summary of Owner’s Equity

INCREASES DECREASES

Investment Withdrawal by
by owner OWNER’S by owner
owner
EQUITY
Income / Expenses
revenue

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INCOME STATEMENT

REVENUE EXPENSES

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Outline of Financial Statement is as follows

Non current Assets X

Intangible Assets X
Current Assets X
Total assets XX

Owners equity
Capital – beginning x
Additional Capital – invested in the current year x
Net profit / (Net loss) x
Less drawings x
xx
Non current Liabilities x
Current Liabilities x
Total equities and Liabilities xx

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