Basic Accounting Equation

Course Title: Accounting & Financial Management

Course Code: MPSM 513
 Prepared by:

Mohammed Mojahid Hossain Chowdhury

Assistant Professor
Department of Port and Shipping Management
BSMRMU
 BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets Liabilities Owner’s Equity

= +
 ASSETS AS A BUILDING BLOCK

 Assets are resources owned by a business.

 They are things of value used in carrying out
such activities as production and exchange.
 Examples:.............
LIABILITIES AS A BUILDING BLOCK

Liabilities are claims against assets

They are existing debts and obligations
Examples:...........
 OWNER’S EQUITY AS A BUILDING

 Owner’s Equity is equal to total assets

minus total liabilities
 Owner’s Equity represents the ownership
claim on total assets
 Subdivisions of Owner’s Equity:
1. Capital
2. Drawings
3. Revenues
4. Expenses
 INVESTMENTS BY OWNERS AS A BU

 Investments by owner are the assets put into

the business by the owner.
 These investments in the business increase
owner’s equity.
 DRAWINGS AS A BUILDING BLOCK

 Drawings are withdrawals of cash or other

assets by the owner for personal use.
 Drawings decrease total owner’s equity.
 REVENUES AS A BUILDING BLOCK

Revenues are the gross increases in owner’s

equity resulting from business activities entered
into for the purpose of earning income
Revenues may result from sale of merchandise/
product, performance of services, rental of
property, or lending of money
Revenues usually result in an increase in an asset
and also increase in owner’s equity
 EXPENSES AS A BUILDING BLOCK

Expenses are the decreases in owner’s equity that

result from operating the business.
Expenses are the cost of assets consumed or
services used in the process of earning revenue.
Examples of expenses include utility expense, rent
expense, and supplies expense, salary expense,
interest expense etc
 INCREASES AND DECREASES IN OWNE

INCREASES DECREASES
Investments by Owner Withdrawals by Owne
Owner’s Equity

Revenues Expenses
 TRANSACTION ANALYSIS

Marc Doucet decides to open a computer

programming service.

BANK

Softbyt e
 TRANSACTION ANALYSIS
TRANSACTION 1
On September 1, he invests $15,000 cash in the business, w

Trans. # Assets= Liabilities + Owner's Equity

Accounts M. Doucet,
Cash Supplies Equipment Payable 15,000 Capital
(1) = 15,000Investment

asset Cash, $15,000, and an equal increase in the owner’s equity

 TRANSACTION ANALYSIS
TRANSACTION 2

Softbyte purchases computer equipment for $7,000 cash.

Trans. ##
Trans. Assets
Assets == Liabilities
Liabilities ++ Owner'sEquity
Owner's Equity
Accounts
Accounts M. Doucet,
M. Doucet,
Cash
Cash Supplies
Supplies Equipment
Equipment Payable
Payable Capital
Capital
15,000
15,000 15,000 Investment
15,000 Investment
(2) (7,000) 7,000
Balance 8,000 + 7,000 = 15,000

h is decreased $7,000, and the asset Equipment is increased $7,0

 TRANSACTION A
TRANSACTI
Softbyte purchases computer paper and supplies expected to last severa

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Trans. # Cash Assets
Supplies Equipment = Liabilities
Payable + Capital Owner's Equity
Balance 8,000 7,000 Accounts M. Doucet,
15,000
(3) Cash Supplies
1,600 Equipment Payable
1,600 Capital
Balance
Balance 8,000
8,000 + 1,600 + 7,000 =
7,000 1,600 + 15,000
15,000

increased $1,600, and the liability Accounts Payable is increased

 TRANSACTION ANALYSIS
TRANSACTION 4
Softbyte receives $1,200 cash from customers for program

Trans. # Assets = Liabilities + Owner's Equity

Accounts M. Doucet,
Trans. # Cash Supplies
Assets Equipment Payable +
= Liabilities CapitalOwner's Equity
Balance 8,000 1,600 7,000 1,600
Accounts 15,000
M. Doucet,
(4) 1,200
Cash Supplies Equipment Payable 1,200 Service Revenue
Capital
Balance
Balance 9,200 +
8,000 1,600 +
1,600 7,000
7,000 = 1,600 +
1,600 16,200
15,000

Cash is increased $1,200, and

M. Doucet, Capital is increased $1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5
Softbyte receives a bill for $250 for advertising its business but p

Trans.
Trans. ## Assets
Assets= Liabilities + = LiabilitiesOwner's
+ EquityOwner's Equity
Accounts AccountsM. Doucet,
M. Doucet,
Cash
Cash Supplies Equipment
Supplies Equipment Payable Payable Capital 1,600+16,200
Capital
Balance
Balance (5) 9,200
9,200+ + 1,600 +
1,600+7,000= 7,000 = 1,600 250 + (250)16,200
Advertising Expense
Balance 1,85015,950
9,200 1,600 7,000

ts Payable is increased $250, and M. Doucet, Capital is decreased

 TRANSA
TRA
Softbyte provides programming services of $3,500 for custom
Trans. # Ass ets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 9,200 0 + 1,600 7,000 = 1,850 15,950
Trans. # Assets = Liabilities + Owner's Equity
+ Account + Accounts M. Doucet,
(6) 1,500
Cash 2,000
Receivable Supplies Equipment Payable 3,500 Service Revenue
Capital
Balance
Balance 10,700
9,200 + 2,000
0 + 1,600
1,600 + 7,000
7,000 = 1,850
1,850 19,450
15,950

0; Accounts Receivable is increased $2,000; and M. Doucet, Cap

 TRANSACTION ANALYSIS
TRANSACTION 7
Expenses paid in cash for September are store rent,
$600, salaries of employees, $900, and utilities, $200.

Trans. ##
Trans. Ass ets
Assets == Liabilities
Liabilities ++ Owner'sEquity
Owner's Equity
Account
Account Accounts
Accounts M. Doucet,
M. Doucet,
Cash
Cash Receivable Supplies
Receivable Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 10,700
10,700 2,000
2,000 1,600
1,600 7,000
7,000 1,850
1,850 19,450
19,450
(7) (600) (600) Rent Exp.
(900) (900) Salaries Exp.
(200) (200) Utilities Exp.
Balance 9,000 + 2,000 + 1,600 7,000 = 1,850 + 17,750
+

decreased $1,700 and M. Doucet, Capital is decreased the same

 TRANSACTION ANALYSIS
TRANSACTION 8
Softbyte pays its advertising bill of $250 in cash.

Trans. # Account Ass ets = Accounts

Liabilities + M. Doucet,
Owner's Equity
Cash Account
Receivable Supplies Equipment Accounts
Payable M.Capital
Doucet,
Balance Cash
9,000 Receivable
2,000 Supplies
1,600 Equipment
7,000 Payable
1,850 Capital
17,750
Balance 9,000 2,000 1,600 7,000 1,850 17,750
(8) (250) (250)
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750

s decreased $250 and Accounts Payable is decreased the same am

 TRANSACTION A
TRANSACTIO
The sum of $600 in cash is received from customers who have

Trans. ##
Trans. Ass ets
Assets == Liabilities ++
Liabilities Owner'sEquity
Owner's Equity
Account
Account Accounts
Accounts M. Doucet,
M. Doucet,
Cash
Cash Receivable Supplies
Receivable Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 8,750 +
8,750 2,000 +
2,000 1,600 +
1,600 7,000 =
7,000 1,600 +
1,600 17,750
17,750
(9) 600 (600)
Balance 9,350 1,400 + 1,600 7,000 = 1,600 + 17,750
+ +

creased $600 and Accounts Receivable is decreased by the same

 TRANSACTION ANALYSIS
TRANSACTION 10
Marc Doucet withdraws $1,300 in cash from the busine

Trans. ##
Trans. Ass ets
Assets = Liabilities
= Liabilities ++ Owner's Equity
Owner's Equity
Account
Account Accounts M. Doucet,
Cash
Cash Receivable Supplies
Receivable Supplies Equipment
Equipment Payable
Payable Capital
Capital
Balance
Balance 9,350
9,350 1,400
1,400 1,600
1,600 7,000
7,000 1,600
1,600 17,750
17,750
(10) (1,300) (1,300) Doucet, Drawings
Balance 8,050 + 1,400 + 1,600 7,000 = 1,600 + 16,450
+

creased $1,300 and M. Doucet, Capital is decreased by the same a

 FINANCIAL STATEMENTS

After transactions are identified, recorded, and

summarized, four financial statements are
prepared from the summarized accounting data:
1. An income statement presents the revenues
and expenses and resulting net income or net
loss of a company for a specific period of time.
2. A statement of owner’s equity summarizes the
changes in owner’s equity for a specific period
of time.
 FINANCIAL STATEMENTS

In addition to the income statement and statement of

owner’s equity, two additional statements are
prepared:
3. A balance sheet reports the assets, liabilities,
and owner’s equity of a business enterprise at a
specific date.
4. A cash flow statement summarizes
information concerning the cash inflows (receipts)
and outflows (payments) for a specific period of
time.
The notes are an integral part of the financial
statements.
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR INTERRELATIONS

SOFTBYTE
Income Statement
For the Month Ended September 30, 2015
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $
900 Rent
expense 600
Advertising expense 250
Utilities expense 200 1,950
Total expenses $ 2,750
Net income

the income statement is added to the beginning balance of owner’s capital in t

 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR INTERRELATION

SOFTBYTE
Statement of Owner's Equity
For the Month Ended September 30, 2015

M. Doucet, Capital, September 1 $ -

Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Doucet, Capital September 30 $ 16,450

wner’s equity.The owner’s capital of $16,450 at the end of the reporting period
 ILLUSTRATION
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
Owner’s SOFTBYTE
capital of Balance Sheet
$16,450 at the September 30, 2015
end of the Assets
reporting Cash $ 8,050
period – shown Accounts receivable 1,400
in the Supplies 1,600
statement of Equipment 7,000
owner’s equity Total assets $ 18,050
– is also shown
on the balance Liabilities and Owner's Equity
sheet. Cash of Liabilities
$8,050 on the Accounts payable $ 1,600
balance sheet is Owner's Equity
reported on the M. Doucet, Capital 16,450
cash flow Total liabilities and owner's equity $ 18,050
statement.
 ILLUSTRATION FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS

Cash of
$8,050 on the balance sheet and cash flow statement is shown as the final tot
 SOFTBYTE
Cash Flow Statement
For the Month Ended September 30, 2015
Cash flows from operating activities
Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950) $ 1,350
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment $ (7,000)
Net cash used by investing activities (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by financing activities 13,700
Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050
 Math Practice
1. Mr. Ali started a real estate business with three building cost
tk. 5,00,000 and with cash tk. 30,000
2. One buyer bought an apartment costs tk. 35,000 but didn’t pay yet
3. He pays membership fee of REHAB amounted tk. 15,00
4. Depreciation of the building is charged tk. 12,00 for the year
5. Buys a land costing tk. 5,00
6. Pays salary expense tk. 7,00 in cash
7. Utility bill of the year is not paid yet
8. Withdraws tk. 1,000 for personal use by Mr. Ali
9. Gets tk. 2,000 as advance for buying an apartment
10. Pays tk. 3,000 as advance for construction purpose

Required: Show the treatment of these transaction in accounting

equation
End