Balance Sheet & P&L

BASIC ACCOUNTING CONCEPTS
Dual - Aspect Concept
For Every
Debit, there is
a Credit
Every transaction should
have a two- sided effect to
the extent of same amount
This Concept has resulted in
THE
ACCOUNTING
EQUATION
ACCOUNTING EQUATION
OWNERS CAPITAL + LIABILITIES + RETAINED

EARNINGS
=
ASSETS
CLAIMS
=
ECONOMIC RESOURCES
THE BALANCE SHEET

The financial position of an accounting entity as of a specified
moment of time based on generally accepted accounting
principles is shown by a BALANCE SHEET.
Balance sheet reports the ASSETS and LIABILITIES.
The basic balance sheet is
ASSETS = LIABILITIES + OWNERS EQUITY or
RESOURCES = CREDITORS + OWNERS CLAIM ON RESOURCES
Otherwise called as statement of financial position.
THE BALANCE SHEET

Specific
moment
of time
Reports
assets and
liabilities
THE BALANCE SHEET

ASSETS:
Economic resources that are controlled by an entity and whose
cost at the time of acquisition could be objectively measured.
A resource is an economic resource if it provides future
benefits to the entity. Resource provides future benefits if:
1)They are cash or can be converted to cash. (Eg. Shares)
2)They are goods that are expected to be sold and cash
received. (Eg. Stock)
3)They are items expected to be used in future activities that
will generate cash inflows to the entity. (Eg. Machinery)
THE BALANCE SHEET

ASSETS:
Customarily grouped into two categories:
1)CURRENT ASSETS
2)NON CURRENT ASSETS
Current assets are assets that are expected to be realised in
cash or sold or consumed during the normal operating cycle or
within one year, whichever is longer.
Common current assets:
Cash, Cash equivalent like treasury bills,CP etc, Marketable
securities, Accounts receivable (Sundry debtors), Inventories
(Stock), Prepaid expenses
THE BALANCE SHEET

ASSETS:
Customarily grouped into two categories:
1)CURRENT ASSETS
2)NON CURRENT ASSETS
Non current assets consists of assets that are tangible and
relatively long lived. Also referred to as fixed assets. The entity
has acquired these assets in order to use them to produce
goods and service that will generate future cash inflows.
Investments are also non-current assets to the extent they are
not classified as marketable securities.
Eg. Plant, Land, Building, Copyright, Patent, Trademark
THE BALANCE SHEET

LIABILITIES
Liabilities are claims against the entitys assets. Liability is
reported at the amount that would be required to satisfy the
obligation as of the balance sheet date.
THE BALANCE SHEET

LIABILITIES
Customarily classified into three categories:
1)CURRENT LIABILITY
2)NON-CURRENT LIABILITY
3)OWNERS EQUITY
Current liability
Liabilities that are expected to be satisfied or extinguished
during normal operating cycle or within one year whichever is
longer are called current liabilities.
Common current liability: Sundry creditors, Taxes payable,
Accrued expenses, Current portion of long term debt, dividend
payable.
THE BALANCE SHEET

LIABILITIES
1)CURRENT LIABILITY
3)OWNERS EQUITY
Non-current liability
Obligations that do not met the criteria for being classified as
current liability are simply called non-current or long term
Liability
Eg. Debentures, Bank loan, Bonds
THE BALANCE SHEET

LIABILITIES
1)CURRENT LIABILITY
3)OWNERS EQUITY
Owners equity shows the amount the owners have invested in
the entity. Owners equity in the balance sheet is divided into
two parts
1)CAPITAL
The amount the owners have invested directly in the business
by purchasing shares
2)RESERVES AND SURPLUS (RETAINED EARNINGS)
THE BALANCE SHEET

LIABILITIES
1)CURRENT LIABILITY
3)OWNERS EQUITY
Owners equity shows the amount the owners have invested in
the entity. Owners equity in the balance sheet is divided into
two parts
1)CAPITAL
2)RESERVES AND SURPLUS (RETAINED EARNINGS)
Total earnings that has been retained for use in business
(reinvested in business), usually total earnings from inception
less dividend paid). Account is referred as accumulated losses
when aggregate earnings of the company is negative.
THE INCOME STATEMENT

Income statement provides a measure of the operating
performance of a firm by presenting the entitys revenues,
expenses, gains, losses and net income for a period of time.
Basic income statement equation:
REVENUE EXPENSES = NET INCOME

Revenue - Inflows during the period from selling goods,
rendering services or other activities that constitute the entitys
ongoing operation.
Common components of revenue
Sales, Interest, dividend, Professional fees from service etc
Expenses- Outflows during the period for selling goods,
rendering services or other activities that constitute the entitys
ongoing operation.
Common components of expenses
Cost of goods sold, administration expenses, selling expenses,
financial expenses, taxes, dividend paid

Time
period
Using
Using The
The Basic
Basic Accounting
Accounting Equation
Equation
Transactions are a businesss economic events recorded by
accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
Transactions
Transactions (Question?)
(Question?)
Are the following events recorded in the accounting records?
Event
Criterion
Record/ Dont
Record
Supplies are
purchased
for cash.
An employee
is hired.
Owner
withdraws
cash for
personal use.
Is the financial position (assets, liabilities, or

owners equity) of the company changed?
Transactions
Transactions (Problem)
(Problem)
A Co was started on May 1 by B. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested Rs 10,000 cash to start the repair shop.
Cash
1. +10,000
Liabilities
Assets
Accounts
Accounts
+ Receivable + Equipment = Payable
Equity
B, Capital
+10,000
Investment
Transactions
(Problem)
2. Purchased equipment for Rs 5,000 cash.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
2.
-5,000
Equity
B, Capital
+10,000
+5,000
Investment
Transactions
(Problem)
3. Paid Rs 400 cash for May office rent.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
2.
-5,000
3.
-400
Equity
B, Capital
+10,000
Investment
+5,000
-400
Expense
Transactions
(Problem)
4. Received Rs 5,100 from customers for repair service.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
2.
-5,000
3.
4.
-400
+5,100
Equity
B, Capital
+10,000
Investment
+5,000
-400
+5,100
Expense
Revenue
Transactions
(Problem)
5. Withdrew Rs 1,000 cash for personal use.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
Equity
B, Capital
+10,000
Investment
2.
-5,000
+5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
-1,000
-1,000
Drawings
Transactions
(Problem)
6. Paid part-time employee salaries of Rs 2,000.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
Equity
B, Capital
+10,000
Investment
2.
-5,000
+5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
Transactions
(Problem)
7. Incurred Rs 250 of advertising costs, on account.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
Equity
B, Capital
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
+5,000
+250
-250
Expense
Transactions
(Problem)
8. Provided Rs 750 of repair services on account.
Cash
Liabilities
Assets
Accounts
Accounts
1. +10,000
Equity
B, Capital
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
+5,000
+250
+750
-250
+750
Expense
Revenue
Transactions
(Problem)
9. Collected Rs 120 cash for services previously billed.
Cash
Liabilities
Assets
Accounts
Accounts
Equity
B, Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
9.
+5,000
+250
+750
+120
6,820 +
-120
630 +
5,000 =
250 +
-250
+750
12,200
Expense
Revenue
List of Transactions for the months of December

2005 & January 2006
Illustration
Marie Collins invested 100,000 of her own

money into her new pet shop on January 1,
2015. The store will be named Love thy
Pet.
On January 1, 2015, Marie paid 1,350 rent on

the pet shop. (For December last year)
For January 2, 2015, Marie borrowed 50,000

by signing a 4-month, 10% note payable.
For January 5, 2015, Marie purchased pet store

equipment for 7,500 in cash.
For January 6, 2015, Marie hired two salespeople to

begin work on the 9th of January in the shop for a
bi-weekly wage of 800 each.
This was not a transaction; therefore, it requires no journal
entries because assets were not exchanged at the time of
this event.
For January 8, 2015, Marie receives a cash

advance of 1,200 from a customer for an Irish
sheep dog that will not arrive from the breeder
until March 7, 2015.
For January 10, 2015, Marie received 5,500 in

cash for two bulldogs sold to a customer.
For January 14, 2015, Marie purchased 2months of pet supplies on account from
Morrison pet supply store for 500.
For January 15,2015, Marie declared and paid

a dividend to stockholders of 400.
For January 31, 2015, Marie paid the

salespeople their bi-weekly wages 1600.
Transaction Illustrations
Business
Business Transactions
Transactions
a. Sachin deposits RS 25,000 in a bank account
for ABC Ltd
LIABILITIES
ASSETS
44
OWNERS EQUITY
Business
Transactions
for ABC Ltd.
LIABILITIES
ASSETS
Cash
25,000
45
OWNERS EQUITY
Business
Transactions
for ABC Ltd.
LIABILITIES
ASSETS
Cash
25,000
OWNERS EQUITY
Sachin, Capital
25,000
46
Business
Transactions
b. ABC Ltd. buys land for Rs 20,000.
LIABILITIES
ASSETS
47
OWNERS EQUITY
Business
Transactions
b. ABC Ltd. buys land for Rs 20,000.
LIABILITIES
ASSETS
Cash
(20,000)
48
OWNERS EQUITY
Business
Transactions
b. ABC Ltd buys land for RS 20,000.
LIABILITIES
ASSETS
Cash
(20,000)
Land
20,000
49
OWNERS EQUITY
Business
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to
pay the supplier in the near future.
LIABILITIES
ASSETS
50
OWNERS EQUITY
Business
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to
pay the supplier in the near future.
LIABILITIES
ASSETS
Accounts Payable
1,350
Purchases
1,350
51
OWNERS EQUITY
Business
Transactions
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;
utilities, Rs 450; and miscellaneous, Rs 275.
LIABILITIES
ASSETS
52
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Cash
(3,650)
53
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Cash
(3,650)
OWNERS EQUITY
Expenses
(3,650)
54
Business
Transactions
f. ABC Ltd pays Rs 950 to creditors on account.
LIABILITIES
ASSETS
55
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Cash
(950)
56
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Accounts Payable
(950)
Cash
(950)
57
OWNERS EQUITY
Business
Transactions
g. ABC Ltd receives fees Rs 7,500 in cash
LIABILITIES
ASSETS
58
OWNERS EQUITY
Business
Transactions
g. ABC Ltd receives fees Rs 7,500 in cash.
LIABILITIES
ASSETS
Cash
7500
59
OWNERS EQUITY
Business
Transactions
g. ABC Ltd receives fees Rs 7,500 in cash.
LIABILITIES
ASSETS
Cash
7500
OWNERS EQUITY
Fees 7,500
60
Business
Transactions
h. Sachin withdraws Rs 2,000 in cash.
LIABILITIES
ASSETS
61
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Cash
(2,000)
62
OWNERS EQUITY
Business
Transactions
LIABILITIES
ASSETS
Cash
(2,000)
OWNERS EQUITY
Sachins, Drawing
(2,000)
63
Transaction
Transaction Summary
Summary
LIABILITIES
ASSETS
Cash
Purchases
Land
64
5,900
1,350
20,000
OWNERS EQUITY
Transaction
Transaction Summary
Summary
LIABILITIES
Accts. Payable 400
ASSETS
Cash
Purchases
Land
65
5,800
1,350
20,000
OWNERS EQUITY
Transaction
Transaction Summary
Summary
LIABILITIES
Accts. Payable 400
ASSETS
Cash
Purchases
Land
66
5,900
1,350
20,000
OWNERS EQUITY
Sachin, Capital
Sachin, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Misc. Expense
25,000
(2,000)
7,500
(2,125)
(800)
(450)
(275)

Balance Sheet & P&L

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Balance Sheet & P&L

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BASIC ACCOUNTING CONCEPTS

Dual - Aspect Concept

This Concept has resulted in

OWNERS CAPITAL + LIABILITIES + RETAINED

THE BALANCE SHEET

Otherwise called as statement of financial position.

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE BALANCE SHEET

THE INCOME STATEMENT

THE INCOME STATEMENT

THE INCOME STATEMENT

Is the financial position (assets, liabilities, or

1. Invested Rs 10,000 cash to start the repair shop.

2. Purchased equipment for Rs 5,000 cash.

3. Paid Rs 400 cash for May office rent.

4. Received Rs 5,100 from customers for repair service.

5. Withdrew Rs 1,000 cash for personal use.

6. Paid part-time employee salaries of Rs 2,000.

7. Incurred Rs 250 of advertising costs, on account.

8. Provided Rs 750 of repair services on account.

9. Collected Rs 120 cash for services previously billed.

List of Transactions for the months of December

Marie Collins invested 100,000 of her own

On January 1, 2015, Marie paid 1,350 rent on

For January 2, 2015, Marie borrowed 50,000

For January 5, 2015, Marie purchased pet store

For January 6, 2015, Marie hired two salespeople to

For January 8, 2015, Marie receives a cash

For January 10, 2015, Marie received 5,500 in

For January 15,2015, Marie declared and paid

For January 31, 2015, Marie paid the

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