Lesson 1

Financial Accounting (FA2)
Assets, liabilities and the accounting equation

All other basic foundation
By: Leng Chanreangsey, Tax Consultant, Accountant, BA, CAT

Contants
The purpose of FA
Assets and liabilities
Double entry
Payables and receivables
The accounting equation
Exam Practice
2
The purpose of FA
 To record
 To summary
 To produce Financial Statement
 To reduce fraud…
3
Assets
• Assets are items of value which a business owns or has the
use of.
• Assets are categorised as either non-current or current.
• Non-current assets are those acquired for use over more
than one accounting period, eg land and buildings, machinery,
computers and vehicles.
• Current assets are those owned by the business with the
intention of turning them into cash, eg inventory and
receivables.
4
Liabilities
• Liabilities represent amounts that are owed by the business.
• Liabilities are categorised as either non-current or current.
• Non-current liabilities are those that are not payable within
one year, eg mortgages, a 5 year bank loan, amounts due in
respect of hire purchase agreements.
• Current liabilities are those that are payable within one year,
eg amounts owed to suppliers, overdrafts repayable on
demand.
5
The cash cycle
Cash buys inventory which is sold. Sales of inventory on credit
create receivables. The cash received from receivables is used to
buy more inventory. This represents the cash cycle:
6
Agenda
Double entry
Exam Practice
7
Basic principles in double entry bookkeeping
• Double entry bookkeeping is based on the same idea as the
accounting equation.
• Every accounting transaction has two equal but opposite
effects.
• Equality of assets and liabilities is preserved.
• In a system of double entry bookkeeping every accounting
event must be entered in ledger accounts both as a debit and
as an equal but opposite credit.
8
Double entry rules
Debits Credits
Expenses Liabilities
A ssets Income
Drawings Capital
9
Group activity 1
Identify the debit and credit entries in the following transactions:
A. Bought a machine on credit from A, cost $8000
B. Bought goods on credit from B, cost $500
C. Sold goods on credit to C, value $1200
D. Paid D (a credit supplier) $300
E. Collected $180 from E, a credit customer
F. Paid wages $4000
G. Received rent bill of $700 from landlord G
H. Paid rent of $700 to landlord G
I. Paid insurance premium $90
J. Received a credit note for $450 from supplier, H
K. Sent out a credit note for $200 to customer, I
10
Agenda
Double entry
Exam Practice
11
• Sales and purchases can be paid either with cash or on credit.
• Credit transactions are sales or purchases which occur some
time before the cash is received or paid for them.
• Therefore, the point at which the credit sale/purchase is
recognised in the accounts is not the same as the point at
which cash is received/paid.
• Credit sales result in trade receivables, which are assets of the
business.
• Credit purchases result in trade payables, which are liabilities
of the business.
12
Agenda
Double entry
Exam Practice
13
• The purpose of a business is to make a profit (excess of income
over expenditure) for its owner.
• Under the business entity concept, the assets and liabilities of
a business must be kept separate from the assets and liabilities
of its owner.
• The accounting equation:
ASSETS = CAPITAL + LIABILITIES
14
The business equation
• The business equation is derived from the accounting
equation:
• P = profit earned in current period

• I = increase/decrease in net assets in current period
• D = drawings in current period
• C = capital introduced in current period
15
Group activity 2
How would each of these transactions affect the accounting
equation?
A. purchasing $800 worth of inventory on credit

B. paying the window cleaner $25 in cash
C. selling $450 worth of inventory for $650
D. paying $800 to the supplier
16
Group activity 2 - Solution
Asset Liability Capital
A
B
C
D
17
Agenda
Double entry
Exam Practice
18
Question 1
A trader's net profit for the year may be computed by using which
of the following formulae?
A. Opening capital + drawings - capital introduced - closing capital

B. Closing capital + drawings - capital introduced - opening capital
C. Opening capital - drawings + capital introduced - closing capital
D. Closing capital - drawings + capital introduced - opening capital
19
Question 2
The profit made by a business in 20X7 was $35,400. The
proprietor injected new capital of $10,200 during the year
and withdrew a monthly salary of $500.
If net assets at the end of 20X7 were $95,100, what was the
proprietor's capital at the beginning of the year?
A. $43,500
B. $55,500
C. $63,900
D. $126,300
20
Question 3
A business had net assets at 1 January and 31 December 20X9
of $75,600 and $73,800 respectively. During the year, the
proprietor introduced additional capital of $17,700 and
withdrew cash and goods to the value of $16,300.
What was the profit or loss made by the business in 20X9?
A. $3,200 loss
B. $3,200 profit
C. $400 loss
D. $400 profit
21
Question 4
A business borrowed $1,700 from its bank, and used the cash
to buy a new computer.
How was the accounting equation affected by these

transactions?
Assets Liabilities
A Unchanged Decreased
B Unchanged Increased
C Increased Increased
D Increased Decreased
22
Question 5
Which of the following correctly calculates the difference
between closing capital and opening capital?
A. Profit - Capital introduced - Drawings

B. Profit + Capital introduced + Drawings
C. Profit - Capital introduced + Drawings
D. Profit + Capital introduced - Drawings
23
Question 6
Which one of the following assets may be classified as a non-
current asset in the accounts of a business?
A. A tax refund due next year

B. A motor vehicle held for resale
C. A computer used in the office
D. A hire purchase creditor
24
Question 7
Which of the following items should be included in current
assets?
i. Assets which are not intended to be converted into cash

ii. Assets which will be converted into cash in the long term
iii. Assets which will be converted into cash in the near
future
A. (i) only
B. (ii) only
C. (iii) only
D. (ii) and (iii)
25
Question 8
26
Question 9
27
Question 10
28

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Financial Accounting (FA2)

Assets, liabilities and the accounting equation

By: Leng Chanreangsey, Tax Consultant, Accountant, BA, CAT

• P = profit earned in current period

A. purchasing $800 worth of inventory on credit

A. Opening capital + drawings - capital introduced - closing capital

What was the profit or loss made by the business in 20X9?

How was the accounting equation affected by these

A. Profit - Capital introduced - Drawings

A. A tax refund due next year

i. Assets which are not intended to be converted into cash

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