Business Transactions & Balance Sheet - Accounting Equation

Module 07: Business Transactions & Balance Sheet

LO 2 - Accounting Equation

Objective and Learning Outcomes
  • Discuss the theory and application of business transactions.
  • Discuss the balance sheet.
  • LO1: Discuss basic Accounting concepts (include accounting entity and accrual accounting concepts) and characteristics of business transactions.
  • LO2: Understand the accounting equation.
  • LO3: Discuss the importance of the financial statements, and in particular, the balance sheet.
  • LO4: Understand the definitions of and recognition criteria for assets, liabilities and equity.
  • LO5: Apply the accounting equation to various transactions, prepare an accounting worksheet, and prepare a balance sheet.
Key Definitions
  • Assets: Resources controlled by the entity.
  • Liabilities: External sources of resources (from creditors).
  • Equity: Internal sources of funds (from owners).
  • Assets need to be funded by owners and/or creditors; the liabilities and equity represent the claims against the entity’s assets.
Accounting Equation
  • The accounting equation is:
    ASSETS=LIABILITIES+EQUITYASSETS = LIABILITIES + EQUITY
    Which can be abbreviated as:
    A=L+EA = L + E
    Or described as:
    (Own)=(Owe)+(Owner)(Own) = (Owe) + (Owner)
  • Important to remember this equation.
  • Any business transaction can be recorded using the balance sheet equation.
  • Double-entry bookkeeping is not used in BUS114.
Concept of Duality
  • The accounting equation must be kept in balance after a transaction is entered.
  • Assets MUST = Liabilities + Equity
Example 1: Purchase of a Delivery Truck via Loan
  • A delivery truck is purchased via a loan for $20,000.
    Assets(A)=Liabilities(L)+Equity(E)Assets (A) = Liabilities (L) + Equity (E)
    Vehicle$20,000=Loan$20,000+$0Vehicle \$20,000 = Loan \$20,000 + \$0
Example 2: Paid for Inventory
  • Paid $500 for inventory to make burgers.
    Assets(A)=Liabilities(L)+Equity(E)Assets (A) = Liabilities (L) + Equity (E)
    Inventory$500=$0+$0Inventory \$500 = \$0 + \$0
    CashinBank$500Cash in Bank \$500
Summary
  • Accounting equation – framework used to analyze business transactions.
  • A=L+OA = L + O (Note: 'O' here represents Owner's Equity)
  • Concept of duality ensures the accounting equation remains balanced.