Accounting for Assets and Liabilities

[Pages:38]Accounting for Assets and Liabilities

Chapter 2

? Luby & O'Donoghue (2005)

The Accounting Equation

The resources in the business =

The resources supplied by the owner(s)

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

The Accounting Equation

Assets = Capital + Liabilities

or rearrange to have

Assets - Liabilities = Capital

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.

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.

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

Cash at bank

50,000 = Capital

50,000

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

Assets = Capital + Liabilities

Cash at bank

40,000

Capital

50,000

Equipment

10,000

50,000

50,000

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