Accounting Equation

Mohammed Moin Uddin Reza Nadim

Bangladesh University of Professionals (BUP)
 Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

A = L + OEA
 Problem
Presented below is the basic accounting equation. Determine the
missing amounts.
Assets = Liabilities + Owner’s Equity
90,000 50,000 ?
? 40,000 70,000
94,000 ? 53,000
 Solution

Assets = Liabilities + Owner’s Equity

90,000 50,000 40,000
1,10,000 40,000 70,000
94,000 41,000 53,000
 Problem
At the beginning of the year, Danks Company had total assets of 8,00,000
and total liabilities of 3,00,000. Answer the following questions.
(a) If total assets increased 1,50,000 during the year and total liabilities
decreased 80,000, what is the amount of owner’s equity at the end of
the year? 7,30,000
(b) During the year, total liabilities increased 1,00,000 and owner’s equity
decreased 70,000. What is the amount of total assets at the end of the
year? 8,30,000
(c) If total assets decreased 80,000 and owner’s equity increased 1,20,000
during the year, what is the amount of total liabilities at the end of the
year? 1,00,000
 Solution

Beginning 8,00,000 3,00,000 5,00,000

a. + 1,50,000 - 80,000 + 2,30,000 7,30,000
b. + 30,000 +1,00,000 - 70,000 8,30,000
c. - 80,000 - 2,00,000 + 1,20,000 1,00,000
 Expanded Accounting Equation

Assets = Liabilities + Owner’s Capital - Owner’s Drawing

+ Revenues - Expenses
A = L + C – D + R - EA
 Problem
Square Unilever Pran Fresh
January 1:
Assets 80,000 90,000 (g) 1,50,000
Liabilities 48,000 (d) 80,000 (j)
Owner’s Equity (a) 40,000 49,000 90,000
December 31:
Assets (b) 1,12,000 1,80,000 (k)
Liabilities 60,000 72,000 (h) 1,00,000
Owner’s Equity 50,000 (e) 82,000 1,51,000
Owner’s Equity Changes in the Year:
Additional Investments (c) 8,000 10,000 15,000
Drawings 15,000 (f) 12,000 10,000
Total Revenues 3,50,000 4,10,000 (i) 5,00,000
Total Expenses 3,33,000 3,85,000 3,50,000 (l)
 Solution
Square:
Assets = Liabilities + Owner’s Equity
January 1 80,000 48,000 32,000
December 31 1,10,000 60,000 50,000

a. 32,000 ; b. 1,10,000
c. Opening Equity + Add. Inv. – Drawings + Rev – Exp = Closing Equity
= 32,000 + - 15,000 + 3,50,000 – 3,33,000 = 50,000
= 16,000
Do the Rest Unilever, Pran and Fresh by yourself
 Problem
Use the expanded accounting equation to answer each of the following
questions.
(a) The liabilities of Falk Company are 90,000. Owner’s capital account is
150,000; drawings are 40,000; revenues, 450,000; and expenses,
320,000. What is the amount of Falk Company’s total assets?
(b) The total assets of Pierogi Company are 57,000. Owner’s capital account
is 25,000; drawings are 7,000; revenues, 52,000; and expenses, 35,000.
What is the amount of the company’s total liabilities?
(c) The total assets of Yanko Co. are 600,000 and its liabilities are equal to
two-thirds of its total assets. What is the amount of Yanko Co.’s owner’s
equity?
 Solution
a.
Assets = Liabilities + Capital - Drawings + Revenues - Expenses
= = 90,000 + 1,50,000 – 40,000 + 4,50,000 – 3,20,000
= 3,30,000

Using the same equation, do the rest (b) and (c)

Transaction & Tabular Analysis
Mohammed Moin Uddin Reza Nadim
Bangladesh University of Professionals (BUP)
 Transaction
• Transactions are those events which change the Financial Position of
an organization. Financial position means balance sheet or accounting
equation (A=L+OE).
• Each transaction must have a dual effect on the accounting equation.
For example, if an asset is increased, there must be a corresponding:
(1) decrease in another asset, or (2) increase in a specific liability, or
(3) increase in owner’s equity.
• External transactions involve economic events between the company
and some outside enterprise. Internal transactions are economic
events that occur entirely within one company
 Change of Financial Position

1. Net
Change •Payment to Accounts Payable

2. Structural
Change •Purchase of Furniture in Cash
 Identification of Transactions
Serial Events Assets = Liabilities + Equity
1. Opening Balance 20,000 14,000 6,000
2. Payment to Accounts Payable 3,000 Taka - 3,000 - 3,000
17,000 11,000 6,000
3. Purchase of Furniture in Cash 5,000 Taka + 5,000
- 5,000
17,000 11,000 6,000
4. Owner invested 10,000 Taka in the business + 10,000 + 10,000
27,000 11,000 16,000
5. Received 5,000 Taka from Accounts Receivable + 5,000
- 5,000
27,000 11,000 16,000
6. Owner withdrew 10,000 Taka from business - 10,000 - 10,000
17,000 11,000 6,000
Transaction Analysis
Transaction (1): Ray Neal decides to open a computer programming
service which he names Softbyte. On September 1, 2012, Ray Neal
invests $15,000 cash in the business.
Transaction Analysis
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.
Transaction Analysis
Transaction (3): Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to last several
months. The purchase is made on account.
Transaction Analysis
Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.
Transaction Analysis
Transaction (5): Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment until a later date.
Transaction Analysis
Transaction (6): Softbyte provides $3,500 of programming services
for customers. The company receives cash of $1,500 from customers,
and it bills the balance of $2,000 on account.
Transaction Analysis
Transaction (7): Softbyte pays the following expenses in cash for
September: store rent $600, salaries of employees $900, and utilities
$200.
Transaction Analysis
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
Transaction Analysis
Transaction (9): Softbyte receives $600 in cash from customers who
had been billed for services [in Transaction (6)].
Transaction Analysis
Transaction (10): Ray Neal withdraws $1,300 in cash from the
business for his personal use.
 Problem
Transactions for the month of August are shown below. Prepare a
tabular analysis.
1. The owner invested 25,000 cash in the business.
2. The company purchased 7,000 of office equipment on credit.
3. The company received 8,000 cash in exchange for services
performed.
4. The company paid 850 for this month’s rent.
5. The owner withdrew 1,000 cash for personal use.
Solution
Carla Quentin started her own consulting firm, Quentin Consulting, on May 1, 2012. The
following transactions occurred during the month of May.
May 1. Carla invested 7,000 cash in the business.
2. Paid 900 for office rent for the month.
3. Purchased 600 of supplies on account. DO IT
5. Paid 125 to advertise in the County News.
9. Received 4,000 cash for services provided.
12. Withdrew 1,000 cash for personal use.
15. Performed 5,400 of services on account.
17. Paid 2,500 for employee salaries.
20. Paid for the supplies purchased on account on May 3.
23. Received a cash payment of 4,000 for services provided on account on May 15.
26. Borrowed 5,000 from the bank on a note payable.
29. Purchased office equipment for 4,200 on account.
30. Paid 275 for utilities.
Requirement: Prepare a Tabular Analysis using the following chart of accounts
 Continued - DO IT
Chart of Accounts
Cash, Accounts Receivable, Supplies, Equipment, Notes Payable,
Accounts Payable, Owner’s Capital, Owner’s Drawings, Revenues,
Expenses
Now, Create the template as follow and conduct the tabular analysis.

Hint: Total Assets = 20,800, Total Liabilities & Equity = 20,800

 Definition of Accounting
Accounting is an information system consisting of three basic activities—it
identifies, records, and communicates the economic events of an organization to
interested users.

1 •Identification of Transaction
2 •Recording of Transaction
3 •Communication to Users
 Users of Accounting Information

Internal • Finance Manager, Marketing Manager,

Users HR Manager, Procurement manager etc.

External • Investors (Owners/Shareholders),

Users Creditors, Auditors etc.
 Quick Note 5.1
• Accounting and Book-Keeping are the Same - NO
• Communication is the main objective of modern Accounting – YES
• Accounting Information means Financial Statements such as Income
Statement, Balance Sheet, Owner’s Equity Statement, Cash Flow
Statement – YES
• Stock Holder and Stake Holder are the Same – NO
• Father of Accounting – Luca Pacioli
• Input of Accounting Information System – Transaction
• Output of Accounting Information System – Financial Statements
Branches of Accounting

External

Branches of
Accounting

Internal
 Branches of Accounting

E Financial Accounting

Cost Accounting

Management Accounting
Assumptions, Principles and Constraints

Mohammed Moin Uddin Reza Nadim

Bangladesh University of Professionals (BUP)
 Accounting Assumptions
1. Economic Entity Assumption – company keeps its activity separate from its
owners and other businesses.

2. Going Concern Assumption - a company is financially stable enough to meet

its obligations and continue its business for the foreseeable future.

3. Monetary Unit Assumption - a company should only record measurable

transactions in monetary terms in its accounting books.

4. Periodicity Assumption – a company can divide its economic activities into

time periods so that it can report its financial information within certain designated
or artificial periods of time.
 Accounting Principles
1. Historical Cost Principle – the value of an asset on the balance sheet is recorded at its
original cost when acquired by the company. Exception – Marketable Securities (Fair Value)

2. Revenue Recognition Principle - requires that companies recognize revenue in the

accounting period in which the performance obligation is satisfied.

3. Matching Principle – a company reports expenses at the same time as the revenues
they are related to. “Let the expense follow the revenues.”

4. Full Disclosure Principle – a company should report all the necessary information in
their financial statements, so that the users who are able to read the financial information
are in a better position to make important decisions regarding the company.
 Accounting Constraints
1. Conservatism Constraint – the idea that expenses and liabilities should be recognized
as soon as possible in a situation where there is uncertainty about the possible outcome
and in contrast record assets and revenues only when they are assured to be received.

2. Cost Effectiveness Constraint- the cost of providing accounting information should not
exceed the benefit of the information it is reporting.

3. Materiality Constraint – the requirements of any accounting principle may be ignored

when there is no effect on the decisions of the users of financial information (immaterial).

4. Industry Practice Constraint– accepted industry practices should be followed even if

they differ from GAAP.
Financial Statements
Mohammed Moin Uddin Reza Nadim
Bangladesh University of Professionals (BUP)
 Four (4) Financial Statements
Companies prepare four financial statements from the summarized
accounting data:
1. An income statement presents the revenues and expenses and resulting
net income or net loss for a specific period of time.
2. An owner’s equity statement summarizes the changes in owner’s equity
for a specific period of time.
3. A balance sheet reports the assets, liabilities, and owner’s equity at a
specific date.
4. A statement of cash flows summarizes information about the cash
inflows (receipts) and outflows (payments) for a specific period of time.
These statements provide relevant financial data for internal and
external users.
Remember this Tabular Analysis?
Income Statement
Owner’s Equity Statement
Balance Sheet
Statement of Cash Flows
 Problem
Joan Robinson opens her own law office on July 1, 2012.
1. Joan invested 11,000 in cash in the law practice.
2. Paid 800 for July rent on office space.
3. Purchased office equipment on account 3,000.
4. Provided legal services to clients for cash 1,500.
5. Borrowed 700 cash from a bank on a note payable.
6. Performed legal services for client on account 2,000.
7. Paid monthly expenses: salaries and wages 500, utilities 300, and supplies 100.
8. Joan withdraws 1,000 cash for personal use.
(a) Prepare a tabular summary of the transactions.
(b) Prepare the income statement, owner’s equity statement, balance sheet at July 31.
Solution
Solution
Solution
Solution