Basic Accounting Equation

Course Title: Accounting & Financial Management

Course Code: MPSM 513
 Prepared by:

Mohammed Mojahid Hossain Chowdhury

Assistant Professor
Department of Port and Shipping Management
BSMRMU
 BASIC ACCOUNTING EQUATION
The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

 ASSETS AS A BUILDING BLOCK

 Assets are resources owned by a business.

 They are things of value used in carrying out
such activities as production and exchange.
 Examples:.............
LIABILITIES AS A BUILDING BLOCK

 Liabilities are claims against assets

 They are existing debts and obligations
 Examples:...........
 OWNER’S EQUITY AS
A BUILDING BLOCK

 Owner’s Equity is equal to total assets minus

total liabilities
 Owner’s Equity represents the ownership claim
on total assets
 Subdivisions of Owner’s Equity:
1. Capital
2. Drawings
3. Revenues
4. Expenses
 INVESTMENTS BY OWNERS
AS A BUILDING BLOCK

 Investments by owner are the assets put into

the business by the owner.
 These investments in the business increase
owner’s equity.
 DRAWINGS AS A BUILDING BLOCK

 Drawings are withdrawals of cash or other

assets by the owner for personal use.
 Drawings decrease total owner’s equity.
 REVENUES AS A BUILDING BLOCK

 Revenues are the gross increases in owner’s

equity resulting from business activities entered
into for the purpose of earning income
 Revenues may result from sale of merchandise/
product, performance of services, rental of
property, or lending of money
 Revenues usually result in an increase in an asset
and also increase in owner’s equity
 EXPENSES AS A BUILDING BLOCK

 Expenses are the decreases in owner’s equity that

result from operating the business.
 Expenses are the cost of assets consumed or
services used in the process of earning revenue.
 Examples of expenses include utility expense, rent
expense, and supplies expense, salary expense,
interest expense etc
 INCREASES AND DECREASES IN
OWNER’S EQUITY

INCREASES DECREASES
Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses
 TRANSACTION ANALYSIS

Marc Doucet decides to open a computer

programming service.

BANK

Softbyt
e
 TRANSACTION ANALYSIS
TRANSACTION 1
On September 1, he invests $15,000 cash in the
business, which he names Softbyte.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
(1) 15,000 = 15,000 Investment

There is an increase in the asset Cash, $15,000, and

an equal increase in the owner’s equity, M. Doucet,
Capital, $15,000.
 TRANSACTION ANALYSIS
TRANSACTION 2

Softbyte purchases computer equipment for $7,000 cash.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
15,000 15,000 Investment
(2) (7,000) 7,000
Balance 8,000 + 7,000 = 15,000

Cash is decreased $7,000, and the asset

Equipment is increased $7,000.
 TRANSACTION ANALYSIS
TRANSACTION 3
Softbyte purchases computer paper and supplies expected to last
several months from Chuah Supply Company for $1,600 on account.

Trans.
Trans. #
# Assets
Assets == Liabilities
Liabilities ++ Owner's Equity
Owner's Equity
Accounts
Accounts M. Doucet,
M. Doucet,
Cash
Cash Supplies
Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 8,000
8,000 7,000
7,000 15,000
15,000
(3) 1,600 1,600
Balance 8,000 + 1,600 + 7,000 = 1,600 + 15,000

The asset Supplies is increased $1,600, and the liability

Accounts Payable is increased by the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 8,000 1,600 7,000 1,600 15,000
(4) 1,200 1,200 Service Revenue
Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200

Cash is increased $1,200, and

M. Doucet, Capital is increased $1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5
Softbyte receives a bill for $250 for advertising its business
but pays the bill on a later date.

Trans. # Assets = Liabilities + Owner's

Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 9,200 + 1,600
1,600 + 7,000
7,000 = 1,600
1,600 + 16,200
16,200
(5) 250 (250) Advertising Expense
Balance 9,200 1,600 7,000 1,850 15,950

Accounts Payable is increased $250, and M.

Doucet, Capital is decreased $250.
 TRANSACTION ANALYSIS
TRANSACTION 6
Softbyte provides programming services of $3,500 for
customers and receives cash of $1,500, with the balance
payable on account.
Trans. ## Assets == Liabilities
Liabilities ++ Owner's
Owner's Equity
Account
Account Accounts
Accounts M.
M. Doucet,
Doucet,
Cash Receivable
Receivable Supplies
Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 9,200
9,200 ++ 00 ++ 1,600
1,600 ++ 7,000
7,000 == 1,850
1,850 15,950
15,950
(6) 1,500 2,000 3,500 Service Revenue
Balance 10,700 2,000 1,600 7,000 1,850 19,450

Cash is increased $1,500; Accounts Receivable is

increased $2,000; and M. Doucet, Capital is
increased $3,500.
 TRANSACTION ANALYSIS
TRANSACTION 7
Expenses paid in cash for September are store rent,
$600, salaries of employees, $900, and utilities, $200.

Trans. # Assets = Liabilities + Owner's Equity

Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 10,700 2,000 1,600 7,000 1,850 19,450
(7) (600) (600) Rent Exp.
(900) (900) Salaries Exp.
(200) (200) Utilities Exp.
Balance 9,000 + 2,000 + 1,600 + 7,000 = 1,850 + 17,750

Cash is decreased $1,700 and M. Doucet,

Capital is decreased the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 8
Softbyte pays its advertising bill of $250 in cash.

Trans. # AccountAssets = Liabilities

Accounts + M. Doucet,
Owner's Equity
Cash Account
Receivable Supplies Equipment Accounts
Payable M.Capital
Doucet,
Balance Cash
9,000 Receivable
2,000 Supplies
1,600 Equipment
7,000 Payable
1,850 Capital
17,750
Balance 9,000 2,000 1,600 7,000 1,850 17,750
(8) (250) (250)
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750

Cash is decreased $250 and Accounts

Payable is decreased the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 9
The sum of $600 in cash is received from customers who
have previously been billed for services in Transaction 6.

Trans. # Assets = Liabilities + Owner's Equity

Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750
(9) 600 (600)
Balance 9,350 + 1,400 + 1,600 + 7,000 = 1,600 + 17,750

Cash is increased $600 and Accounts

Receivable is decreased by the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 10
Marc Doucet withdraws $1,300 in cash from
the business for his personal use.

Trans. # Assets = Liabilities

Liabilities ++ Owner's
Owner's Equity
Account Accounts
Accounts M.
M. Doucet,
Doucet,
Cash Receivable Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance 9,350 1,400 1,600
1,600 7,000
7,000 1,600
1,600 17,750
17,750
(10) (1,300) (1,300) Doucet, Drawings
Balance 8,050 + 1,400 + 1,600 + 7,000 = 1,600 + 16,450

Cash is decreased $1,300 and M. Doucet,

Capital is decreased by the same amount.
 FINANCIAL STATEMENTS

After transactions are identified, recorded, and

summarized, four financial statements are
prepared from the summarized accounting data:
1. An income statement presents the revenues
and expenses and resulting net income or net
loss of a company for a specific period of time.
2. A statement of owner’s equity summarizes the
changes in owner’s equity for a specific period
of time.
 FINANCIAL STATEMENTS
In addition to the income statement and statement of
owner’s equity, two additional statements are
prepared:
3. A balance sheet reports the assets, liabilities, and
owner’s equity of a business enterprise at a
specific date.
4. A cash flow statement summarizes information
concerning the cash inflows (receipts) and
outflows (payments) for a specific period of time.
The notes are an integral part of the financial
statements.
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended September 30, 2015
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $ 2,750

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the statement of owner’s equity.
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Statement of Owner's Equity
For the Month Ended September 30, 2015

M. Doucet, Capital, September 1 $ -

Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Doucet, Capital September 30 $ 16,450

Net income of $2,750 is carried forward from the income statement to

the statement of owner’s equity. The owner’s capital of $16,450 at the
end of the reporting period is shown as the final total of the owner’s
equity column of the Summary of Transactions.
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
Owner’s SOFTBYTE
capital of Balance Sheet
$16,450 at the September 30, 2015
end of the Assets
reporting Cash $ 8,050
period – shown Accounts receivable 1,400
in the Supplies 1,600
statement of Equipment 7,000
owner’s equity Total assets $ 18,050
– is also shown
on the balance Liabilities and Owner's Equity
sheet. Cash of Liabilities
$8,050 on the Accounts payable $ 1,600
balance sheet is Owner's Equity
reported on the M. Doucet, Capital 16,450
cash flow Total liabilities and owner's equity $ 18,050
statement.
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Cash Flow Statement
Cash of For the Month Ended September 30, 2015
Cash flows from operating activities
$8,050 on the
Cash receipts from customers $ 3,300
balance sheet Cash payments to suppliers and employees (1,950) $ 1,350
and cash flow Net cash provided by operating activities
statement is Cash flows from investing activities
shown as the Purchase of equipment $ (7,000)
final total of Net cash used by investing activities (7,000)
Cash flows from financing activities
the cash
Investments by owner $ 15,000
column of the Drawings by owner (1,300)
Summary of Net cash provided by financing activities 13,700
Transactions. Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050
 Math Practice
1. Mr. Ali started a real estate business with three building cost tk.
5,00,000 and with cash tk. 30,000
2. One buyer bought an apartment costs tk. 35,000 but didn’t pay yet
3. He pays membership fee of REHAB amounted tk. 15,00
4. Depreciation of the building is charged tk. 12,00 for the year
5. Buys a land costing tk. 5,00
6. Pays salary expense tk. 7,00 in cash
7. Utility bill of the year is not paid yet
8. Withdraws tk. 1,000 for personal use by Mr. Ali
9. Gets tk. 2,000 as advance for buying an apartment
10. Pays tk. 3,000 as advance for construction purpose

Required: Show the treatment of these transaction in accounting

equation
End