Accounting for Assets and Liabilities

[Pages:13]Financial Accounting for the Hospitality, Tourism and Retail Sectors

Slide Handouts Chapter 2

Accounting for Assets and Liabilities

Chapter 2

? Luby & O'Donoghue (2005) 1

The Accounting Equation

The resources in the business =

The resources supplied by the owner(s)

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The Accounting Equation

The amount of the resources supplied by the owner is called capital. The actual resources that are in the business are called assets.

Assets = Capital Liabilities represent the amounts owing to people other than the owner(s) in relation to supply of the assets.

Assets = Capital + Liabilities

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Slide Handouts Chapter 2

The Accounting Equation

Assets = Capital + Liabilities

or rearrange to have

Assets - Liabilities = Capital

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Business Transactions

Day to day business involves many business transactions. A business transactions occurs when there is a transfer of assets/liabilities between the parties of a transaction. As each transaction is processed it has an effect on the accounting equation however, the accounting equation should always remain equal irrespective of the transaction that has occurred.

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Example ? Henry Spud

The following simplified examples are based upon Henry Spud who has started in business selling baked potatoes and other hot foods from a mobile vehicle. He mainly travels to concerts and festival around Ireland however he also caters for private parties. The eight transactions are typical accounting transactions that affect any type of business. The effect on the accounting equation of this business is shown in each.

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Transaction 1 - Introduction of Capital

The owner (Henry Spud) commences business investing 50,000 which is lodged in a business bank account.

The Accounting Equation ? After Transaction 1

Assets = Capital + Liabilities

Slide Handouts Chapter 2

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Transaction 2 - Purchase of an Asset Paying Immediately

The business purchases an asset (equipment) costing 10,000 paying for it by cheque.

The Accounting Equation ? After Transaction 2

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Transaction 3 - Purchase of an Asset on Credit

The business purchases another asset (a vehicle) on credit for 15,000.

The Accounting Equation ? After Transaction 3

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Transaction 4 - Purchase of Stock on Credit

The business purchases the asset of stock on credit for 2,000.

The Accounting Equation ? After Transaction 4

Slide Handouts Chapter 2

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Transaction 5 ? Payment of a Liability

The business decides to pay amounts owing for the original purchase of the vehicle of 15,000 (transaction 3).

The Accounting Equation ? After Transaction 5

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Transaction 6 ? Selling Stock for Cash

The business sells some stock for 500. Henry has decided that he will sell his produce at cost for the first few weeks thus foregoing a profit just to get a share of the market.

The Accounting Equation ? After Transaction 6

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Transaction 7 ? Selling Stock on Credit

In this transaction stock is sold at original cost (no profit) on credit amounting to 300 when Henry catered for a private party. It was agreed that the customer (a friend) could pay him later on in the month.

The Accounting Equation ? After Transaction 7

Slide Handouts Chapter 2

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Transaction 8 ? Payment by a Debtor

Debtors pay the cash owed by them to Henry by cheque.

The Accounting Equation ? After Transaction 8

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The Balance Sheet

The accounting equation is expressed in a financial position statement called the Balance Sheet. It is NOT the first accounting record to be made. It is usually prepared at the end of a financial period.

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Example - Henry Spud's Balance Sheet

Opening Balance Sheet

Assets: Cash

50,000

50,000

Capital

50,000

Closing Balance Sheet (after 8 transactions)

Assets:

Cash

25,800

Equipment Vehicles Stock Liabilities:

10,000 15,000

1,200

Creditors

(2,000)

50,000

Capital

50,000

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Example - Henry Spud's Balance Sheet

Transaction

Assets: Cash at bank Equipment Vehicles Stock Debtors

After 1

50,000

After 2

40,000 10,000

After 3

40,000 10,000 15,000

After 4

After 5

After 6

After 7

After 8

40,000 10,000 15,000 2,000

25,000 10,000 15,000 2,000

25,500 10,000 15,000

1,500

25,500 10,000 15,000 1,200

300

25,800 10,000 15,000

1,200

Liabilities: Creditors

50,000

50,000

(15,000) 50,000

(17,000) 50,000

(2,000) 50,000

(2,000) 50,000

(2,000) 50,000

(2,000) 50,000

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Points to Remember

1. Accounting is concerned with the recording and classifying and summarising of data, and then communicating what has been learned from it.

2. It may not only be the owner of a business who will need the accounting information; it may need to be shown to others, e.g. the bank or the Inspector of Taxes.

3. Accounting information can help the owner(s) of a business to plan for the future.

4. The accounting equation is: Assets = Capital + Liabilities.

5. The totals of each side of the balance sheet should always be equal to each other.

6. Every transaction affects two items in the balance sheet.

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Slide Handouts Chapter 2 Page 6 of 13

Financial Accounting for the Hospitality, Tourism and Retail Sectors

Slide Handouts Chapter 2

Double-entry Assets and Liabilities

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Double-entry Principle

Every business transaction has a twofold aspect Both sides must be recorded The double-entry system has an account for every asset,

every liability and capital.

DEBIT side Date Details

LEDGER ACCOUNT

Amount Date Details

CREDIT side Amount

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Double-entry Rules

1. A debit (Dr) represents an asset and a credit (Cr) represents a liability or capital

2. If a transaction requires you to increase an asset account you debit the asset account with the amount of the increase; to decrease an asset account you credit the asset account.

3. If a transaction requires you to increase a liability or capital account you credit the account with the amount of the increase; to decrease a liability or capital account you debit the capital or liability account.

4. For every transaction a debit will have a corresponding credit and vice versa

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Financial Accounting for the Hospitality, Tourism and Retail Sectors

Slide Handouts Chapter 2

Double-entry Rules

Accounts

Assets Liabilities Capital

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To record

An increase A decrease An increase A decrease An increase A decrease

Entry in the account

Debit Credit Credit Debit Credit Debit

Double-entry Rules

ASSET ACCOUNTS

Increases +

Decreases -

LIABILITY ACCOUNTS

Decreases -

Increases +

CAPITAL ACCOUNTS

Decreases -

Increases +

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A handy rule for remembering double-entry

Debit the Receiver Credit the Giver

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