Chapter 1

Assets, liabilities and the

accounting equation

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 Learning Objective
1. Introduction accounting fundamentals
2. What is business
3. Assets and liabilities
4. A business is separate from its owner: the business concept
5. The accounting equation
6. The business equation
7. Account payable and Account receivable
8. Double entry bookkeeping

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 1. Accounting fundamentals
• Accounting is the process that involves the recognition of transaction and
the systematic recording and analysis of the financial information.
✓Accounting practice is based on a number of key accounting principles
which are set out in the Conceptual Framework for Financial Reporting.
✓The qualitative characteristics of accounting, are applied is explained in a number of
International Financial Reporting Standards (IFRS).
✓The Framework and the standards are published by the International Accounting
Standards Board (IASB).

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 2. What is business
• A business may be defined in various ways. Its purpose is to make a
profit for its owner(s) .
• A business is a commercial or industrial concern which exists to deal in
the manufacture, resale or supply of goods and services.
• A business is an organisation which uses economic resources to create
goods or services which customers will buy.
• A business is an organisation providing jobs for people to work in.
• A business invests money in resources (eg it buys buildings, machinery
etc; it pays employees) in order to make even more money for its
owners.

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 3. Assets and liabilities
3.1. Assets
An asset is a resource controlled by an entity as a result of past events and from
which future economic benefits are expected to flow to the entity. They may be
classifies its two part:
✓Non- current assets is
o Assets are held for use in business
o Assets are operation for a long time ( over 1 year)
o Long-term investment, PPE and Intangible assets
Eg. Machine , office premises, Land , Building and intangible assets ..
✓Current assets are assets held for only a short time.
Eg . (inventory, Supplies, Receivable ,Cash, Prepaid expense, …).
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 3. Assets and liabilities (continue)
3.2. Liabilities
A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits. Its classified two part:
✓Non-current liabilities(long term/due over 1 year). Bond , Note payable
, Mortgage payable ..
✓Current liabilities (short term) . example. tax payable, salaries payable,
account payable, …

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 4. The business entity concept
• For accounting purpose it is important to keep business assets
and liabilities separate from the personal assets and liabilities of
the proprietors. This means the transactions of the owner
should never be mixed with the business's transactions .

• A business is always treated as a separate entity from its owners for

accounting purposes. This is known as the business entity concept

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Question 1

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 5.The accounting equation
5.1.The accounting equation
CAPITAL + LIABILITIES = ASSETS
is also know as the balance sheet equation
Net assets or equity = Assets - Liabilities

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Example 1

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Example 2

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Example 3

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Example 4

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Dual effect of transaction on accounting equation

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Practice 1

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 6.The business equation
Profit or Loss = net asset ending - net asset beginning + drawing - capital introduce
❖Equity is the residual interest in the assets of the entity after deducting all its liabilities.
❖Net asset ending or closing net asset are equity at the end of period accounting.
❖Net asset beginning or opening net asset are equity at the opening of period accounting
note

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Practice 2

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 7.Account payable and Account receivable
▪ Credit transaction is a sale or a purchase which occurs some time earlier than
cash is received or paid.
▪ Account payable results from the purchase by a business of items for later
payment. Account payable is a liabilities of the business.
▪ Account receivable results from the sale by a business of items for later payment.
Account Receivable is a assets of the business.

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 8. Double entry bookkeeping
7.1. Define of Double-entry system

◆ Each transaction must affect two or more accounts to keep

the basic accounting equation in balance.

◆ Recording done by debiting at least one account and

crediting at least one other account.

◆ DEBITS must equal CREDITS.

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 8.Double entry (cont)
7.2. Process record double entry:
oDetermine account relate the transaction
oDetermine those account increase or decrease that effect by
transaction.
oChange increase or decrease to debit or credit
oRecord the account Debit first.

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Rule of Debits and Credits Summary
Liabilities
Normal Assets Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr. Normal
Balance
Balance
Debit
Normal Balance
Credit Normal Balance

Chapter
3-23

Chapter
3-24

Equity
Expense
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance

Normal Balance
Chapter
3-27

Chapter
3-25

Revenue
Drawing Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-26

LO 2
Example practice record double entry
Try to explain the dual effects of each of the following transactions.
a) A business receives a loan of $5,000 from its bank
b) A business pays $800 cash to purchase goods for resale.
c) The proprietor of a business removes $50 from the till to buy her
husband a birthday present.
d) A business sells goods costing $300 at a profit of $140.
e) A business repays a $5,000 bank loan , plus interest of $270

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Answer
Date Description ref Debit Credit

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Example 3
Transaction $
1. Shareholders invest in 10,000 $1 shares 10,000
2. Buy a car for cash 5,000
3. Buys goods for cash 3,000
4. Sell goods for cash 4,000
5. Pay wages of 500
6. Sell goods on credit 3,500
7. Buy goods on credit 2,800
Required :present each transaction in the form
Dr name a/c x
Cr name a/c 1- Dr. x

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Transaction Double entry record
1-AV commenced business
introducing $1,000 cash.

2-Bought a motor car for $400 cash.

3-Obtained a $1,000 loan.

4-Purchased goods for $300 cash.

5-Sold goods for $400 on credit.

Transaction Double entry record

6.Invest of cash $90,000 by owner

7. Invest of equipment cost $50,000 by owner

8. Purchased of non-current asset $1,000 for

cash
9. Purchased of non-current asset $2,000 on
credit

10. Purchased of inventory $200 on credit

Transaction Double entry record

11. Purchased of inventory $500 for cash

12. Payment $ 70 to supplier/creditor

13.Returning an item purchased on credit,

$80 to supplier.

14.Making a cash sale $30

15. Making a credit sale $40

Transaction Double entry record
16.Received goods return from customer
that sold on credit $90

17.Cash received from trade receivable $20

18.Payment of electricity bill $150

19.Rent expenses incurs on credit $700

20.Loan received from bank $5,000

Transaction Double entry record
21.Other income earned on credit
$200
22. Cash receipt of other income
$300

23.Cash drawing by owner $800

24. Goods drawing by owner costing

$600

25.Repayment of loan principle $500

Transaction Double entry record

26.Cash deposited in bank $5,000

27.Cash withdrawal from bank $200

28.Writed off irrecoverable debt $60

29. Received cash in advance from
customer $450

30. Provided service on credit $950

Answer

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