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Chapter 1:assets, Liabilities and The Accounting Equation

The document discusses key accounting concepts including assets, liabilities, and the accounting equation. Assets are valuable items owned by a business, including non-current assets used for more than one year and current assets that can be converted to cash within a year. Liabilities are debts owed by the business, including current liabilities due within a year and non-current liabilities due after a year. The accounting equation states that assets equal capital (owner's equity) plus liabilities. This establishes that the resources owned by a business are provided by its owners and creditors.

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136 views3 pages

Chapter 1:assets, Liabilities and The Accounting Equation

The document discusses key accounting concepts including assets, liabilities, and the accounting equation. Assets are valuable items owned by a business, including non-current assets used for more than one year and current assets that can be converted to cash within a year. Liabilities are debts owed by the business, including current liabilities due within a year and non-current liabilities due after a year. The accounting equation states that assets equal capital (owner's equity) plus liabilities. This establishes that the resources owned by a business are provided by its owners and creditors.

Uploaded by

Princess Thaabe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 1:ASSETS,LIABILITIES AND THE ACCOUNTING EQUATION

A business is an organisation set up to make profits for its owner/owners.

Profits: the excess of income over expenditure, vice versa resulting into loss

Assets:Valuable items owned and controlled by the entity

 Non current assets:assets that are acquired by the business for use for more than one
accounting period.e.g.Land,Furniture and Fittings,Machinery

 Current assets:assets that can easily be converted into cash within one accounting
period.e.g.Cash,Bank,Receivables and Inventory.

Liabilities: Obligations(debts) of the business as a result of past transactions,and from which future
economic benefits are expected to flow out of the entity as a result.

 Current liabilities:debts of the business repayable within one year.e.g.accounts payable,bank


overdafts

Non current liabilities:debts payable for more than a year.e.g.Bank loans

Business entity concept: it states that a business is a separate legal entity from its owner, hence,
shoud always be treated separately from its owners. Assets and liabilities of the business must
always be treated separately from assets and liabilities of the owner of the business.

This means that, since a business is an independent entity, it can owe or owed money by the owner.

The accounting equation

1.Assets =Capital + Liabilities

Resources=Owners funds + obligations

Capital: Investments(funds) with the intention of getting profits.


2.Assets=(capital + retained profits)+ liabilities

Net assets=Assets – Liabilities

Therefore ,Net assets=(Capital + Retained profits)

We can draw following facts based on equation above,

 Net assets represents capital and any retained profits at any point in time
 Increase in net assets represents additional profits made

Drawings:amounts of money taken by the owner of the business for personal use

3.Assets=Capital +(Retained profits-Drawings)+ liabilities

Increase/Decrease in net assets=net assets at the beginning of the period less net assets at the end
of the period.

Business equation is used to calculate profits earned for a period,its as follows;

Profits earned=Increase/Decrease in net assets + Drawings – Capital introduced

4.Assets=(Capital+profits of previous period+profits of current period-drawings)Liabilities

Accounts payable and Accounts receivables

Accounts payable and accounts receivables arises from credit transactions(when a sale or purchase
occurs earlier than payment is made.

Accounts payable: obligation to a supplier for buying goods/services on credit.

Accounts receivables: amounts owed by customers for selling goods/services to.

The dual effect Principles(Duality)

Every transaction has two equal effects, that is,a debit entry and a credit entry.

Total value of debit entries are always equal to the value of credit entries

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