BUS10250

Week 1 Lecture

The Basic Accounting

Framework and the
Accounting Equation
(Chapter 1)
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Learning objectives
After this lecture, students should be able to:
• Identify the role of accounting in business
• Explain what accounting is about
• Describe the three different types of business
organisation
• List the main users of accounting information and
what accounting information they are interested in
• Present and explain the accounting equation
• Explain the meaning of the terms assets, capital,
and liabilities
• Use the accounting equation to analyze simple
business transactions
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Business and Accounting

Business is about making decisions.

Accounting information plays a

significant role in decision making.

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Purpose of a Business

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What is Accounting?
Accounting is the language of business.
• It is the process of recognizing, measuring,
recording, and reporting information about a
business’s transactions.
• Understanding accounting enables you to
recognize and understand business
transactions.
• Understanding business transactions enables
you to manage them successfully.

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Who Uses Accounting Information?

Government
Individuals regulatory
agencies

Taxing
Businesses
authorities

Investors and Nonprofit

creditors organizations
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 Example of McDonald’s Shareholders and Stakeholders

Investors Banks Franchisees

Shareholder

Labor Unions Pressure Group

Employees Competitors

Suppliers Customers Government

Stakeholders
3-7
©McGraw-Hill Education.
 Who Needs Accounting Information?

User group Information needs

Investors • Assess the financial performance of
the organization to consider the risk
& return of their investments
Lenders • The ability of the organization to
repay loans and interest; whether to
lend, and on what terms
Suppliers & other • Should suppliers sell to the
trade creditors organization? Will they be paid?

Employees • Employer’s stability & profitability,

ability of their employer to pay their
wages and pensions

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 Who Needs Accounting Information?

User group Information needs

Customers • If the organization will continue
to exist?
Governments and their • Assemble economic statistics,
agencies enables tax to be assessed
The public • Information relevant to local
communities, pressure groups
The management of the • For decision making
organization

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Types of business organisation
There are three main types of business organisation
within the private sector:
• Sole Traders (Proprietorship)- A business
organisation owned and controlled by one
person.
• Partnerships- A business organisation owned
and controlled by a small group of people.
• Limited Companies (Corporation)- A business
whose ownership is divided into “shares” and
may be owned by a large number of people.
– Private limited companies
– Public limited companies
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 Commonly Used Terms With Similar Meaning
Accounts Receivable ~ Debtors

Accounts Payable ~ Creditors

Inventory ~ Stocks

Shares ~ Stocks

Capital ~ Equity ~ Owner’s Equity

Income Statement ~ Trading & Profit & Loss ~

Statement of Profit & Loss
Balance Sheet ~ Statement of Financial Position
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 Three Very Basic Concepts
As a starting points, there are three basic concepts as a
foundation to build on ….
(1) Accounting Equation : Assets = Liability + Capital
(2) Theory of Double Entry : Debit (DR) = Credit (CR)
(3) Accounting Cycle :

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(1) Accounting Equation ( A=L+C )
Accounting Equation : Assets = Liability + Capital

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(2) Theory of Double Entry
Theory of Double Entry : Debit (DR) = Credit (CR)

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(3) Accounting Cycle
Accounting Cycle :

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 Simplified Version of Accounting Cycle
Transactions

Books of Original Entries

Posting
Ledgers
Balance-Off
Trial Balance
Adjustment :
> Depreciation
Trading and Profit and Loss > Bad Debt
> Prepayment & Accrual

Balance Sheet 16
Fundamental accounting equation
Resources in the business = Resources supplied by the owner

Assets = Capital

But if someone else has provided some of the resources:

Assets = Capital + Liabilities

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The Accounting Equation and the Statement of Financial Position
(Balance Sheet)

Assets - Liabilities = Capital

Or
Assets = Capital + Liabilities

A = C + L
•The financial position of an entity is represented by the
accounting equation;

•Thus the accounting equation is used to prepare a company’s

statement of financial position. 18
 The Nature of Assets, Liabilities & Capital

• An asset is a tangible or intangible resource that is

owned or controlled by an accounting entity, and
which is expected to generate future economic
benefits (e.g. plant & machinery, office equipment,
stock, debtors, cash).
• A liability is a legal obligation to transfer assets or
provide services to another entity which arises from
some past transaction or event (eg loans, creditors).
• Capital is the difference between an entity's assets
and liabilities: C = A – L
= owner’s contribution to the company
= the interest which the owners have in the business

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 Assets normally are sub-classified into
‘Non Current Assets’ and ‘Current Assets’
Examples
Non Current Assets Current Assets

Equipment
Cash in hand
Motor vehicles
Cash at bank
Land and building
Accounts receivables (Debtors)
Fixtures and fittings
Stock (Inventory)
Furniture
Prepayment
Machinery

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Liabilities normally are sub-classified into ‘Non
Current Liabilities and ‘Current Liabilities’
Examples
Non Current Liabilities Current Liabilities

Accounts Payable (Creditors)

Bank Loan
Accruals
Debentures
Bank overdraft (O/D)

Capital : The interest which the owners have in

their business. 21
Accounting for Business Transactions
What is a transaction?
It is any event that both affects the financial
position of the business and can be reliably
recorded.

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Examples - Accounting for Business Transactions
1 Chan invests $30,000 to begin Wing In eTravel.
2 Chan purchases an office location, paying $20,000 in cash.
3 He buys office supplies, agreeing to pay $500 in 30 days.
4 He earns and collects $5,500 revenues.
5 Chan performs services, and the client agrees to pay $3,000
within one month.
6 During the month, he pays $3,100 for expenses incurred.
7 Chan pays $300 to the store from which he purchased $500
worth of supplies in Transaction 3.
What is the effect of these transactions on the accounting
equation?
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Accounting for Business
Transactions

Chan invests $30,000 to begin Wing In eTravel

Assets = Liabilities + Capital

(1) Cash + 30,000 = + 30,000

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Accounting for Business
Transactions

Chan purchases an office location,

paying $20,000 in cash.

Balance + 30,000 = + 30,000

(2) Cash – 20,000
Office + 20,000
30,000 = + 30,000
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Accounting for Business
Transactions

He buys office supplies, agreeing to

pay $500 in 30 days.

Balance + 30,000 = + 30,000

(3) Supplies + 500 = + 500
30,500 = 500 + 30,000
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Accounting for Business
Transactions

He earns and collects $5,500 revenues.

Balance + 30,500 = 500 + 30,000

(4) Cash + 5,500 = + 5,500
36,000 = 500 + 35,500
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Accounting for Business
Transactions

Chan performs services, and the client

agrees to pay $3,000 within one month.

Balance + 36,000 = 500 + 35,500

(5) Receivable + 3,000 = + 3,000
39,000 = 500 + 38,500
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Accounting for Business
Transactions

During the month, he pays $3,100

for expenses incurred.

Balance + 39,000 = 500 + 38,500

(6) Cash - 3,100 = - 3,100
35,900 = 500 + 35,400
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Accounting for Business
Transactions

Chan pays $300 to the store from which he

purchased $500 worth of supplies in Transaction 3.

Balance + 35,900 = 500 + 35,400

(7) Cash - 300 = - 300
35,600 = 200 + 35,400
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Accounting for Business
Transactions - summary
Assets
Accounts Office
Cash + Receivable + Supplies + Office
(1) + 30,000
(2) – 20,000 + 20,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 3,100
(7) – 300
Bal. 12,100 3,000 500 20,000

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Accounting for Business
Transactions - summary
Liabilities + Owners’ Equity
Accounts Type of Capital
Payable + Capital + Profit Transaction
(1) + 30,000 Investment
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 3,100 Expenses
(7) – 300
Bal. 200 30,000 5,400

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 Accounting for Business
Transactions - summary
Assets = Liabilities + Capital + (Revenue - Expense)
Cash + Office + Supplies + Receivable

1) +$30,000 + $30,000
2) – 20,000
+ 20,000
3) +500 + 500
4) + 5,500 + 5,500
5) +3,000 + 3,000
6) – 3,100 – (+3,100)
7) – 300 – 300
T 12,100 + 20,000+500+3,000 = + 200 + $30,000 + 8,500 - 3,100

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Expansion of The Accounting Equation
Assets = Liabilities + Capital

A = L + C, or
Assets = Liabilities + [Capital + (Revenue – Expenses)]
e.g. Asset accounts total $35,600
Liability accounts total $ 200
Capital accounts total $ 30,000
Revenue accounts total $ 8,500
Expense accounts total $ 3,100
➢ $35,600 = $200 + $30,000 + $8,500 - $3,100 or
➢ $35,600 = $200 + $35,400 34
Remarks: Accounting for
Business Transactions
A. Notice that the equation always stays in
balance.
B. Each transaction affects at least two accounts,
sometimes more.
C. Some transactions affect only one side of the
equation; some affect both sides.

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Additional Examples - Accounting for
Business Transactions

Other transactions that took place were as

follows:
8 Chan remodel his home at a cost of $10,000,
paying cash from his personal funds.
9 The business collected $1,000 from the client
in transaction 5.
10 Chan sold part of the office at cost for $9,000.
11 Chan withdrew $2,100 from the business.
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Accounting for Business
Transactions
Assets
Accounts Office
Cash + Receivable + Supplies + Office
(1) + 30,000
(2) – 20,000 + 20,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 3,100
(7) – 300
(8) Not a transaction of the business
(9) + 1,000 - 1,000
(10) + 9,000 - 9,000
(11) - 2,100
Bal. 20,000 2,000 500 11,000

33,500 37
Accounting for Business
Transactions
Liabilities + Owners’ Equity
Accounts Type of Capital
Payable + Capital + Profit Transaction
(1) + 30,000 Investment
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 3,100 Expenses
(7) – 300
(8)
(9)
(10)
(11) -2,100 Withdrew
Bal. 200 27,900 5,400

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33,500
 Revisit Two of the Three Basic Concepts
As a starting points, there are three basic concepts as a foundation to build on ….
(1) Accounting Equation :
Assets = Liability + Capital

(2) Theory of Double Entry :

Debit (DR) = Credit (CR)
(3) Accounting Cycle :

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Demonstrative Example on Double Entry

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(2) Theory of Double Entry
Theory of Double Entry : Debit (DR) = Credit (CR)

┼ ꟷ ꟷ ┼ ꟷ ┼

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Demonstrative Example on Double Entry

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Demonstrative Example on Double Entry

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In-Class Exercise (Ex 2.12)

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Recording Transactions in Journal
Date Details Folio DR ($) CR ($)

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Recording Transactions in Journal
Date Details Folio DR ($) CR ($)

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Recording Transactions in Journal
Date Details Folio DR ($) CR ($)

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END

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