Chapter 3 The Balance Sheet And The Accounting Equation

The balance sheet and the accounting equation

Chapter 3

Wood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning Objective 1

Understand the accounting equation.

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (The Accounting Equation)

Assets Assets are are the the items items owned owned by by the the business. business.

Equities Equities are are the the claims claims against against the the assets. assets.

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (The Accounting Equation)

Liabilities Liabilities are are the the creditor’s creditor’s equity. equity.

Owner’s Owner’s equity equity is is the the rights rights of of ownership. ownership.

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (The Accounting Equation)

Assets –

Liabilities =

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

Owner’s Equity 3-5

Learning Objective 2 & 4

What is meant by assets, liabilities and capital?

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (assets, liabilities & capital) Assets Assets consist consist of of property property of of all all kind kind

Capital Capital is is often often called called the the owner’s owner’s equity equity or or net net worth worth

Liabilities Liabilities is is money money owed owed for for assets assets supplied supplied to to the the business business

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Learning Objective 3

Draw up balance sheets after different transactions have occurred

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (draw up balance sheet: a worked example) A. A. August August 28: 28: Cathy Cathy Hall Hall invested invested $7,000 $7,000 in in cash cash and and $800 $800 of of office office equipment equipment into into the the business. business. B. B. August August 29: 29: Law Law practice practice buys buys office office equipment equipment for for cash cash $900. $900. C. C. August August 30: 30: Buys Buys additional additional office office equipment equipment on on account account $400. $400.

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (Draw up balance sheet) Assets

a) a) Cash Cash Equipment Equipment b) b) Cash Cash Equipment Equipment c) c) Equipment Equipment

++ $7,000 $7,000 ++ 800 800 –– 900 900 ++ 900 900 ++ 400 400

=

Liabilities

Owner’s + Equity

++ $7,800 $7,800

++ 400 400

$8,200 = $8,200

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (Draw up balance sheet)

The The makeup makeup of of the the assets assets has has changed, changed, but but the the total total of of the the assets assets remains remains the the same. same.

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (introducing 6 rules for double entry)

Accou

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (The Balance Sheet) The The balance balance sheet sheet shows shows the the company’s company’s financial financial position position as as of of aa particular particular date. date. Company Company name name Name Name of of the the statement statement Date Date

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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Learning (The Balance Sheet: horizontal format) Cathy Hall, Attorney-at-Law Balance Sheet August 31, 200x Assets Liabilities Assets Liabilities and and Owner’s Owner’s Equity Equity Cash $6,100 $$ 400 Cash $6,100 Accounts Accounts Payable Payable 400 Equipment 2,100 Equipment 2,100 Owner’s Owner’s Equity Equity Cathy 7,800 Cathy Hall, Hall, Capital Capital 7,800 Total $8,200 $8,200 Total $8,200 Total Total $8,200

ood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009

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End of Chapter 3

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