The Accounting Equation ္The Accounting Equation The resources controlled by a business are referred to as its assets. For a new business, those assets originate from two possible sources:Investors who buy ownership in the businessCreditors who extend loans to the businessThose who contribute assets to a business have legal claims on those assets. Since the total assets of the business are equal to the sum of the assets contributed by investors and the assets contributed by creditors, the following relationship holds and is referred to as the accounting equation : Assets = Liabilities + Owners EquityResources Claims on the Resources Initially, owner equity is affected by capital contributions such as the issuance of stock. Once business operations commence, there will be income (revenues minus expenses, and gains minus losses) and perhaps additional capital contributions and withdrawals such as dividends. At the end of a reporting period, these items will impact the owners equity as follows: Assets = Liabilities + Owners Equity + Revenues - Expenses + Gains - Losses + Contributions - Withdrawals These additional items under owners equity are tracked in temporary accounts until the end of the accounting period, at which time they are closed to owners equity.The accounting equation holds at all times over the life of the business. When a transaction occurs, the total assets of the business may change, but the equation will remain in balance. The accounting equation serves as the basis for the balance sheet, as illustrated in the following example. The Accounting Equation - A Practical ExampleTo better understand the accounting equation, consider the following example. Mike Peddler decides to open a bicycle repair shop. To get started he rents some shop space, purchases an initial inventory of bike parts, and opens the shop for business. Here is a listing of the transactions that occurred during the first month: Date TransactionSep 1Owner contributes $7500 in cash to capitalize the business.Sep 8Purchased $2500 in bike parts on account, payable in 30 days.Sep 15Paid first months shop rent of $1000.Sep 17Repaired bikes for $1100; collected $400 cash; billed customers for the $700 balance.Sep 18$275 in bike parts were used.Sep 25Collected $425 from customer accounts.Sep 28Paid $500 to suppliers for parts purchased earlier in the month.These transactions affect the accounting equation as shown below. Assets=Liabilities + Owners Equity Cash+BikeParts+AccountsReceivable=AccountsPayable+Peddler,Capital+Revenue(Expenses)Sep 17500 = 7500 Sep 8 2500 =2500 Sep 15(1000) = (1000)Sep 17400 700= 1100Sep 18 (275) = (275)Sep 25425 (425)= Sep 28(500) =(500) Totals:6825+2225+275=2000+7500+(175) $9325=$9325Note that for each date in the above example, the sum of entries under the Assets heading is equal to the sum of entries under the Liabilities + Owners Equity heading. In most of these cases, the transaction affected both sides of the accounting equation. However, note that the Sep 25 transaction affected only the asset side with an increase in cash and an equal but opposite decrease in accounts receivable.At the end of the month of September, the net income (revenues minus expenses) is closed to capital and the balance sheet for the business would appear as follows:Peddlers BikesBalance SheetSeptember 30, 20xxAssets Liabilities & Owners EquityCash6825 Accounts Payable2000Accounts Receivable275 Peddler, Capital7325Bike Parts2225 Total Assets$9325 Total Liabilities$9325 The bike parts are considered to be inventory, which appears as an asset on the balance sheet. The owners equity is modified according to the difference between revenues and expenses. In this case, the difference is a loss of $175, so the owners equity has decreased from $7500 at the beginning of the month to $7325 at the end of the month. @ ဖတ္ရတာေလး ျပန္လည္မွ်ေ၀ျခင္းပါဗ်ာ....
Posted on: Mon, 25 Nov 2013 09:00:24 +0000
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