Chapter 3: The Accounting Equation - FAR

Assets

These are the economic resources you control that have resulted from past events and can provide you with economic benefits

Control

You have the exclusive right to enjoy those benefits and the ability to prevent others from enjoying those benefits

Liabilities

Your present obligations that have resulted from past events and can require you to give up economic resources when settling them

Obligation

Means a duty or responsibility

Legal Obligation

Constructive Obligation

Two types of obligations:

Legal Obligation

An obligation that results from a contract, legislation, or other operation of law

Constructive Obligation

An obligation that results from you past actions that have created a valid expectation on others that you will accept and discharge certain responsibilities

Equity

It is simply assets minus liabilities. Other terms are capital, net assets, and net worth

Expanded accounting equation

Shows all the financial statement elements

Assets = Liabilities + Equity + Income - Expenses

What is the formula of expanded accounting equation

Income

Increases in economic benefits during the period in the form of increase in assets, or decreases in liabilities, that result in increases in equity, excluding those relating to investments by the business owner

Expenses

Decreases in economic benefits during the period in the form of decreases in assets, or increases in liabilities, that result in decreases in equity, excluding those relating to investments by the business owner

Profit

If income is greater than expenses, the difference is?

Loss

If income is less than expenses, the difference is?