The Accounting Equation.ppt

The Accounting Equation The Accounting Equation The equation must be in balance. If there is an increase to the left side the right side must increase as well. Or an increase to the left side could cause a decrease in another account on the left side. Assets = Liabilities + Owner’s Equity Shift in assets: A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same. Example: Cash is used to purchase inventory. Both are assets – the composition has changed but the total of assets is still the same. Assets = Liabilities + Owner’s Equity + Revenue Revenue: An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash and/or accounts receivable. A subdivision of owner’s equity: as revenue increases, owner’s equity increases. Assets = Liabilities + Owner’s Equity - Expense Expense: A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity. Assets = Liabilities + Owner’s Equity + Capital – Withdrawals Capital: The owner’s investment of equity in the company. Withdrawals: A subdivision of owner’s equity that records money or other assets an owner withdraws from a business for personal use. Assets + Accounts Receivables = Liabilities + Accounts Payable + Owner’s Equity Accounts Payable: Amounts owed to creditors that result from the purchase of goods or services on account: a liability. Accounts Receivable: An asset that indicates amounts owed by customers. Assets = Liabilities + Owner’s Equity beyond Review When you increase your assets You increase your Owner’s Equity You have affected two accounts: Assets Owner’s Equity The equation is in balance This is double-entry bookkeeping * * Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity * * * 13