Week 2 Accounting Equation
Week 2 Accounting Equation
Week 2 Accounting Equation
Learning Objectives
P1
THE ACCOUNTING EQUATION
Assets = Equities
Current Assets
• Those assets that are either cash, or these assets which
are expected to be converted into cash, within a year.
• Examples : inventory, accounts receivable, prepaid
expenses and cash.
ACCOUNT RECEIVABLE = DEBTOR
• Money owed by customers (individuals or
corporations) to another entity in exchange for
goods or services that have been delivered or used,
but not yet paid for.
• Receivables usually come in the form of operating
lines of credit and are usually due within a relatively
short time period, ranging from a few days to a year.
• On a public company's balance sheet, accounts
receivable is often recorded as an asset because this
represents a legal obligation for the customer to
remit cash for its short-term debts
Liabilities
liability or debt of
RM5. You friend is
your creditor.
Liability- RM5 Your creditor
Liabilities
Long-term Liabilities
• Financial indebtedness or obligations of the business that
are expected to be paid only after one year period.
• Example: long term loan
Current Liabilities
• Consist of financial obligations of the business that are
expected to be repaid within a year.
• Example: account payable, short term loan, accrued
expenses
ACCOUNT PAYABLE = CREDITOR
• An accounting entry that represents an entity's
obligation to pay off a short-term debt to its
creditors. The accounts payable entry is found on a
balance sheet under the heading current liabilities.
• Accounts payable are often referred to as
"payables".
• Another common usage of AP refers to a business
department or division that is responsible for making
payments owed by the company to suppliers and
other creditors.
Owner’s Equity
• Owners’ equity represents the claims by the owners
of a business to the assets of the business.
• Also called Capital
• Owners’ equity is the residual equity that remains
after deducting liabilities from assets.
• Amounts belonging to the owner.
• Say Sally puts RM10,000 into the business.
Therefore RM10,000 of the business belongs to
company. Owner’s equity = RM10,000
Drawings by owner
• From time to time, the owner of business might take
cash or goods out of business for personal or
private use.
• Such withdrawal are referred as drawings
• Drawings decrease both assets of business and
decreases owners equity (capital)
PROFIT DETERMINATION
REVENUES EXPENSES
Earned (recognized) when Incurred when using up
a business sells goods assets in earning
and/or services to its expenses.
customers, which result in
Assets consumed to
an inflow of assets such
produce revenue.
as cash or accounts
receivables (debtors).
PROFIT
Difference between the total revenue earned and
total expenses incurred for the same period of time
REVENUES