Chapter 2 - The Accounting Equation

*The Accounting Equation*

*Accounting equation*: the rule that states assets must always equal liabilities plus owner's equity. Use this equation to find the capital figure *A = L + OE*

*Assets, Liabilities and Owner's Equity*

*Assets*: resources controlled by an entity as a result from past events, from which future economic benefits will flow to the entity. -What the firm owns. *Liabilities*: present obligations of the entity as a result of past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. -What the firm owes. *Owner's Equity*: the residual interest in the assets of the entity after the deduction of its liabilities. -What the business owes to the owner. • Capital • Drawings (-OE) • Any profit earned by the business and thus owed to the owner and owner's equity • Capital Contribution

*The Balance Sheet*

*Balance Sheet*: an accounting report that details the business' assets, liabilities and owner's equity at a particular point in time. Qualitative Characteristic: The report now has more Relevance for decision-making 'As at "date/month" used because the balance sheet is only relevant for that particular day.

*Classification In The Balance Sheet*

*Current Asset*: a resource controlled by the entity as a result of past events, from which a future economic benefit is expected to flow to the entity in the next 12 months • Stock • Cash in business's bank account • Debtors • Prepaid Rent • GST Receivable *Non-Current Asset*: a resource controlled by the entity as a result of past events, from which a future economic benefit is expected to flow to the entity for more than the next 12 months • Fixtures and Fittings (shelving, window coverings etc.) • Premises • Vehicles • Office Equipment • Computer • Term Deposit *Current Liability*: a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits in the next 12 months • Bank Overdraft (- amount in bank) • Creditors • Loan (due within next year) • Accrued Wages (wages owing to employees) • GST Payable *Non-Current Liability*: a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits in more than 12 months • Mortgage (long term loan) • Loan (amount remaining)

*Double-entry Accounting*

*Double Entry Accounting*: a system that records two effects on the accounting equation as a result of each transaction. • Sam contributed $20,000 to establish a business bank account. Effect #1: Increase in assets of $20,000 - Bank Effect #2: Increase in owner's equity - Capital Contribution • Purchased stock on credit from Milano Leather products for $45,000. Effect #1: Increase in assets of $45,000 - Stock Effect #2: Increase in liabilities of $45,000 - Creditors • Paid $12,000 to purchase new shop fittings. Effect #1: Increase in assets of $12,000 - Shop fittings Effect #2: Decrease in assets of $12,000 - Bank