You are on page 1of 6

An asset - a resource controlled by an enterprise.

The resource should come from a past transaction or


event and is accompanied by an expectation of an inflow of future economic benefits.
All three aspects control, origin and expectation are necessary to define it.

A liability - present obligation of an enterprise. The obligation should originate in a past transaction or
event and entail the expectation of an outflow of economic benefits.

Equity - is the owners residual claim to the assets or the residual interest in the assets of an enterprise
after deducting all its liabilities. Equity is sometimes called net assets.
Revenue - Income arising from the ordinary activities of a company

Account - increase in assets

Assume the following transactions took place during January, 200X, for Mr. Ady, a dentist. The effect of
these transactions on the accounting equation can be analyzed as follows:

Transaction (a): Owner invested $30 000 cash in the business.


Effect on Accounting Equation. An increase in an asset offset by increase in owners equity.

Assets =

Liabilities

Cash

(a) +30 000

Owners Equity
Mr. A, Capital
+ 30 000

Assets + $30 000 = Liabilities + Owners Equity + $30 000

Total Assets: $30 000 = Total Liabilities + Owners Equity: $30 000

Transaction (b): Purchased office equipment on account, $2 500.

Transaction (b): Purchased office equipment on account, $2 500.

Effect on Accounting Equation. An increase in an asset offset by increase in liability.


Analysis. This transaction caused the asset Office equipment to increase, and the liability Accounts
Payable to increase by the same amount.

Assets
Cash

+ Office
Equip.

Liabilities
Accounts

Owners Equity
Mr. A, Capital

Payable

Bal. $30 000


(b)

+2 500

+2 500

Bal. $30 000 + $2 500

= $2 500

$30 000

Assets + $2 500 = Liabilities + $2 500 + Owners Equity


Total Assets: $32 500 = Total Liabilities + Owners Equity: $32 500

Transaction (c): Purchased office supplies for cash, $350.

Effect on Accounting Equation. An increase in one asset offset by a decrease in another asset.

Analysis. This transaction caused a $350 decrease in the asset Cash. The asset Office Supplies
increased by $350.

Assets

Cash

Liabilities

+ Office + Office = Accounts


Supp.

Bal. $30 000


(c) -$350

Equip

Owners Equity

Mr. A, Capital

Payable

$2 500
+

$350

Bal. $29 650 + $350 + $2 500

$2 500
=

$2 500

$30 000
+

$30 000

Assets + $350 - $350 = Liabilities + Owners Equity

Total Assets :$32 500 = Total Liabilities + Owners Equity: $32 500

Transaction (d): Paid amount owed to a creditor, $500.

Effect on Accounting Equation. A decrease in an asset offset by a decrease in a liability.

Analysis. This payment caused both the asset Cash and the liability Accounts Payable to
decrease by $500. The effect in the equation is as follows:

Assets
Cash

= Liabilities

+ Office + Office
Supp.

Bal. $29 650


(d)

$350

= Accounts

Equip
$2 500

-500

Bal. $29 150 + $350 + $2 500

Owners Equity
Mr. A, Capital

Payable
$2 500
-500
= $2 000

$30 000
+

$30 000

Assets - $500 = Liabilities - $500 + Owners Equity

Total Assets :$32 000 = Total Liabilities + Owners Equity: $32 000

The balance sheet

Assets

Liabilities

taxes payable
unearned revenues
bonds
gage

The income statement

A. Revenues and Gains


1. Revenues from primary/operating activities
2. Revenues or income from secondary/financial activities
3. Gains
B. Expenses and Losses
1. Expenses involved in primary/operating activities
2. Expenses from secondary/financial activities
3. Losses

Income = revenues expenses

Owners Equity is the owners claim on the assets of the business

Rules of using accounts

Asset accounts

Liability accounts

Owners equity accounts

bit side of an account


Revenue accounts

Expense accounts
ecorded in the debit side of an account