Scribd
Upload
13 views

Lecture 2 Accounting Equation 18092024 032755pm

Uploaded by

hafsashahid2704
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
13 views

Lecture 2 Accounting Equation 18092024 032755pm

Uploaded by

hafsashahid2704
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 21

Accounting and

Finance
Lecture 2
Review of last class
• What is Accounting?
• Why accounting standard is required? Which system is used in
Pakistan?
• Name some forms of business organizations? Which one is you are
most interested in?
Business Activities:
• Financing
• Investing
• Operating
Classify each item as an asset, liability,
common stock, revenue, or expense:

1. Cost of renting property

2. Truck purchased

3. Notes payable

4. Issuance of ownership shares

5. Amount earned from providing service

6. Amounts owed to suppliers


Accounting Equation (cont.)
• The fundamental characteristic of every financial position is that the total
for assets always equals the total of liabilities plus the owner’s equity.
• This congruence between the both sides of the statement makes it call a
“balance sheet”.
• This list of accounts represents that how owner have invested and how
much is owed by the creditors.
• Equity+ Liabilities = Assets
• Rs. 1,000,000+2,000,000=Rs.30,000,000
• A balance sheet is simply a detailed statement of this equation.
Accounting Equation:
Equity+ Liabilities = Assets

Owner Owner
Revenue Expenses
Capital Withdrawal

Owner equity/Shareholders Equity


Business Transactions and
Accounting Equation:
Assets
• Assets are economic resources that are owned by a business and are
expected to benefit future operations.
• Benefit to firm in the form of positive future cash flows.
• Positive cashflow may come from the conversion of receivable into
cash or directly from the sell of physical asset.
• Current assets: asset which can reasonably be expected to be sold,
consumed, or exhausted through the normal operations of a business
within the current fiscal year. Example: Cash, inventories, prepaid
• Non-current assets: assets which represent a longer-term investment
and cannot be converted into cash quickly. They are likely to be held
by a company for more than a year. Example: Long-term investments,
Intangible fixed assets (such as patents, trademarks, Goodwill),
Tangible fixed assets (such as equipment and real estate).
Assets are two types:
• Tangible Assets:
Physical existence of the asset, like building, furniture,
equipment, machinery etc.

• Intangible Assets:
Non-physical existence in the form of legal claims or rights
like, patent rights, copyright claims, goodwill etc.
Liabilities:
• Liabilities are financial obligations or debt.
• They represents the negative future cashflows of the
company.
• Businesses purchase merchandise, supplies and services “on
account”. Such purchase is called “accounts payable”.
• Businesses borrow money for business needs (example:
plant expansion, new office building purchase etc.), they sign
formal note to obtain loan called “ notes payable”.
• Liabilities represent claims against the borrower’s assets.
• Notes payable: written promise to repay the amount
owed by a particular date and usually calls for the
payment of interest as well.

• Accounts payable: It does not call for interest


payment. It is less informal than notes payable.
Liabilities are two types:
• Current Liabilities:
amounts due to be paid to creditors within twelve months.
Example: Accounts payable, Sales taxes payable, notes payable, Interest payable (is
expense that has been incurred but not yet paid), Accrued expenses (Accrued
expenses are recognized on the books when they are incurred, not when they are
paid. Represent a company's obligation to make future cash payments) etc.
• Non-current Liabilities:
Also called long-term liabilities or long-term debts, are long-term financial
obligations listed on a company’s balance sheet. These liabilities have obligations
that become due beyond twelve months in the future.
Example: Debentures (unsecured corporate bond), Long Term Loans, Bonds Payable
(long-term: PIB/Sukuk), Deferred Tax Liabilities, Long Term Lease Obligations.
Owner’s Equity:
• It represents the owner’s claim on the assets.
• This is called a residual amount because if you are the owner of a
business, you are entitled to assets that are left after the claims of
creditors have been satisfied in full. Therefore, owners’ equity is
always equal to total assets minus total liabilities.
• Example:
Total Assets (ABC company) ……………………………………. Rs. 30,000,000
Total Liabilities (ABC Company)……………………………….. Rs. (12,000,000)
Owner’s equity………………………………………………………… Rs. 18, 000,000
Increase in Owner’s Equity

Two primary sources of Owner’s equity:


• Investment of cash and assets by owner.
• Earning from profitable operation of the business.
Decrease in Owner’s Equity

Decrease in owner equity in two ways:


• Payments of cash or transfers of other assets to
owners.
• Losses from unprofitable operation of the business.
Review questions:
• What is accounting equation?
• Types of Assets?
• Types of Liabilities?
• Components of owner’s equity?
• Can you give some examples of business transaction?
Definitions:
• Accounting profit = total monetary revenue - total
costs.
• Economic profit is the monetary costs and opportunity
costs a firm pays and the revenue a firm receives.
• Profit is calculated as total revenue less total expenses.
Rules for debit and credit:
• First: Debit what comes in, Credit what goes out.
• Second: Debit all expenses and losses, Credit all incomes and gains.
• Third: Debit the receiver, Credit the giver.
Home Assignment:
• Imagine you own a manufacturing Business.
• write down 10 business activities of your own newly launched
business.
• Hints: Include Financing activities and purchase of assets for business
• Note: Bring these recorded activities in next class for further task
(hardcopy).
The End

You might also like