CHAPTER 2-Accounting Equation

LOGO
Danang University of Economic - University of Danang
CHAPTER 2
- ACCOUNTING EQUATION-
LEARNING OBJECTIVES
LO1 Understand and differentiate basic accounting

equation and expanded accounting equation;
Define, explain and give examples of the elements in

LO2 the accounting equation (assets, liabilities, owner's
equity, revenue, expenses);
Analyze the effects of business transactions on the

LO3
accounting equation.
THE BASIC ACCOUNTING EQUATION
The Basic Accounting Equation
Financial rights/claims to the

assets of a business
Assets = Liabilities + Owner’s Equity
The resources Creditor’s The owner’s claim

owned/controlled claims on on assets
by a business assets
(right)
The EXPANDED Accounting Equation
Retain
Earnings
Assets = Liabilities + Owner’s + Revenues - Expenses

Equity
What the What the

company company
receives pays to
for sales operate
the
business
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
Equity
Provides the underlying framework for recording and summarizing

economic events.
• The resources owned/controlled by a business are called assets
• Financial rights to the assets of a business are called equities
The rights/claims to the properties are normally divided into two

principal types: the rights of creditors and the rights of the owners.
- The rights of creditors represent debts: liabilities.
- The rights of the owners are called owner’s equity.
Claims of creditors must be paid before ownership claims.
Assets
Definition:
• present economic resources controlled by entity as a result
of past event
• have the potential to produce economic benefit.
(According to IFRS-International financial report standards)
Assets
• Controlled : The present ability to direct the use of the

economic resource (the right to deploy that economic
resource in its activities, or to allow another party to
deploy the economic resource in that other party’s
activities)
The present ability to prevent other parties from directing
the use of the economic resource
• Controlled = owned?
Own or do not own but can control them and gain future
economics benefits there from
Ex: financial leases
• Future economic benefit: the potential to produce cash
inflow or to avoid cash outflow
Assets
Recognition:
• certain to gain future economic benefits
• The cost of asset can be measured reliably
Ø customer loyalty?
Ø a dedicated employee?
Assets
Assets
The operating cycle is the process by which a company

spends cash, generates revenues, and receives cash from
customers
Assets
Current assets include assets that are sold, consumed or

realized as part of the normal operating cycle.
When the entity’s normal operating cycle is not clearly

identifiable, it is assumed to be twelve months.
An entity shall classify all other assets as non‑current

assets.
CURRENT ASSETS
CURRENT ASSETS
Cash & cash Cash on hand, cash in bank, cash
equivalents in transit
Short-term Short term security investments:
investments stock, bond; term deposits….
Short-term Trade receivables…
receivables
Inventories Goods in transits, materials, tools/
instruments, work in process,
finished goods, merchandises,
goods on consignments
Other current assets
The liquidity decreasingly
CURRENT ASSETS
Current assets
Cash
Ø The most liquid assets
Ø Cash includes
lCash on hand
lCash in bank
lCash in transit
Cash equivalents – Short-term, highly liquid investments

(maturity term <= 3 months) that are readily convertible to
known amounts of cash and which are subject to an
insignificant risk of changes in value
Current assets
Short-term investments – time to maturity is due within 12 months

(except cash equivalents), trading securities
Receivables – The term receivables includes all money claims against

other entities, including people, companies, and other organizations.
• Accounts receivable: a receivable is selling merchandise or services on

account (on credit).
• VAT deducted
• Intercompany receivable
• Other receivables
Current assets
Inventories:
1. held for sale in the ordinary course of business;
2. in the process of production for such sale;
or
3. in the form of materials or supplies to be consumed in the
production process or in the rendering of services
• Raw materials (cement, sand, steel… to be used in production)

• Tools and supplies (chairs, fans, working clothes…)
• Work in process (or partially finished goods)
• Finished goods (completely finished goods)
• Merchandise inventory (for reselling)
• Goods in transit
• Goods on consignment
Current assets
Prepaid expenses
Expenses which are paid in advance and the related benefits are
expected to be received in the future accounting period.
• Prepaid insurance
• Prepaid rent
• Prepaid interest
• Other prepaid Utilities
Non-current assets
NON-CURRENT ASSETS
Tangible fixed Buildings and architectures, machinery and equipment,
assets Means of transport and conveyance equipment,
Managerial equipment and instruments , perennial
plants, working and producing animals….
Intangible fixed Land use rights, publishing rights, copyright, patents,
assets trademarks, computer software, licenses and franchise…
Investment property (land or a building or part of a building or both)

properties held (by the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation or both.
Long term Investments in affiliates, Shares in joint ventures,
investment Investments in associates, stock, bond
Construction in
progress
Other non-
current assets
Non-current assets
Non-current assets
Fixed Assets
Tangible fixed assets: physical substance
Are held for use in the production or supply of goods or services, or for
administrative purposes; and
Are expected to be used during more than one accounting period?
Intangible fixed assets:

Long-term assets that are used in the operations of the business, but do
not exist physically, are called intangible assets.
Intangible assets may be acquired through innovative, creative
activities or from purchasing the rights from another company.
Examples of intangible assets include patents, copyrights, trademarks,
and goodwill.
Non-current assets
Fixed Assets
Regognition: Must meet all following criteria

• certain to gain future economic benefits
• The cost of asset can be measured reliably,

• Items that a company plans to use over the long term (>=1 year)
to help generate income.
Determining whether an item is an asset
Consider these necessary components of the definition in

determining which of the following are (or are not) assets of an
organisation:
1. A factory building 7. Employees
2. Some unused housing near an 8. The managing director who is
abandoned and remote mine site, very valuable to an organisation
where there is no demand for such 9. The underground water supply
buildings that flows under the organisation,
3. Machinery and from which the organisation
4. Inventory extracts water
5. Debtors (accounts receivable) 10. The river the organisation uses to
6. Shares held in another firm transport its goods to market.
Solution: The above items can be split into those that should be
considered assets of the organisation and those that should not
Liabilities
Definition
A liability is a present obligation of the entity to transfer an
economic resource as a result of past events.
• The entity has an obligation
• The obligation is to transfer an economic resource
• The obligation is a present obligation that’s exists as a result of
past events
Recognition:
• The outflow of resources embodying economic benefits (such as

cash) from the entity is probable.
• The cost / value of the obligation can be measured reliably.

Liabilities
As we have discussed, there are three separate components to a liability.

That is:
1. There must be a present obligation.

2. The obligation must have arisen because of a past event.
3. The obligation is expected to culminate in an outflow of economic
benefits
Liabilities
LIABILITIES
CURRENT LIABILITIES NON-CURRENT LIABILITIES
Short - term borrowings Long - term borrowings
Trade payables Long - term debts
Taxes and obligations Issued bonds
payable to the state budget
Payables to laborers Other long-term liabilities
Other payables
Ø Current liabilities: are liabilities that need to be paid within the
next 12 months.
Ø Non-curent liabilities: are liabilities that the business does not
have to pay for more than 12 months
Responsible for paying the debt
decreasingly
Liabilities
Determining whether an item is a liability
Consider these necessary components of a liability and then

determine which of the following items are (or are not) liabilities:
1. Bank overdraft 6. Obligation to clean up
2. Loan from bank contaminated land.
3. Rent payable 7. An organisation has guaranteed
4. Wages payable the debts of another organisation
5. Creditors (accounts payable) 8.An organisation has spilled
tonnes of oil into the sea.
Owner’s equity
Ø is the residual interest in the assets of the entity after

deducting all its liabilities.
(Owners’ equity = assets - liabilities)
Owner’s investment
(Share capital)
The origin of formation
Retain Earnings
Owner’s equity for

The purpose of use business purposes
Specialized Owner’s
equity
Other Owner’s equity

Revenues
Revenue and other income is the total value of economic

benefits obtained by the entity in the accounting period from:
• normal business activities (providing services or selling
goods to customers)
• investment activities: interest...
AND;
• other activities: commissions, liquidation of assets...
Expenses
Expense is the total value of items that reduce economic benefits in the
accounting period in the form:
• Outflow of money
• The use of other asset
• The incurring of liabilities
Expenses are decreases in assets, or increases in liabilities, that result in
decreases in owner’s equity, (other than those relating to distributions
to holders of equity claims)
EXPENSES
Expense is the amount incurred or paid in earning the

revenue and running the business, and includes:
Based on activities that generate expenses:
1. Business operating expenses:

• Cost of goods sold and services provided (also known as
cost of goods sold)
• Financial expenses
• Sales expenses
• Business administration expenses
(2) Other expenses

Business transactions & the accounting equation
An economic event or condition that directly changes an entity’s

financial condition or its results of operations is a business
transaction.
For example,
Purchasing land for $50,000 is a business transaction.
In contrast, a change in a business’s credit rating does not

directly affect cash or any other asset, liability, or owner’s equity
amount.
Business transactions & the accounting equation
Classification of business transaction:
(1) Normal business transactions in business operations
(2) Business transaction with special nature:
• Transactions that require a period of time, usually until

the end of the period (depreciation of fixed assets)
• Transactions are formed as required by accounting

principles (adjusting transactions - Chapter 4)
Transactions (Question?)
Q1-1: Are the following events recorded in the accounting records?

Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record
Transactions
Discussion Question
In February 20X1, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is this
treatment appropriate? Why or why not?
ANALYZING BUSINESS TRANSACTIONS
Three questions:
1. Make certain you understand the
1. What happened? event that has taken place.
2.1 Identify the accounting elements that
2. Which elements of are affected.
accounting equation
2.2 Classify these accounting elements as
are affected?
assets, liabilities, owner ’s equity,
revenues, or expenses
3.1 Determine which accounting elements
have increased or decreased.
3. How is the accounting
equation affected? 3.2 Determine how much the value
(amount) increases or decreases.
3.3 Establish the new accounting equation
Ø Make certain that the accounting equation remains in balance after
the transaction has been entered.
ANAM, the owner, invested 8.000.000 office

1. What building, 300.000 cash on hand, 11.700.000
happened? cash in bank to set up the business in
1/1/20X1.
2.1 Identify the CASH CASH OFFICE ANAM,

a c c o u n t i n g ON IN BUILDING CAPITAL
elements that are HAND BANK
affected.
2.2 Classify these
accounting elements CURRENT CURRENT NON- OWNER’S
as assets, liabilities, ASSET ASSET CURRENT EQUITY
ASSET
o w n e r ’s e q u i t y,
revenues or expenses
3.1 Determine
which accounting CASH IN CASH IN OFFICE ANAM,
elements have HAND BANK BUILDING CAPITAL
increased or (ASSET) (ASSET) (ASSET) (OWNER’S
EQUITY)
decreased.
3.2 Determine how +300.000
+ + +
11.700.000 8.000.000 20.000.000
much the value
NON-
(amount) increases CURRENT OWNER’S
CURRENT +
or decreases. ASSETS + ASSETS = LIABILITIES
EQUITY
3.3 Does the 12.000.000 + 8.000.000 = 0 + 20.000.000
accounting equation Assets of 20.000.000 = Liabilities of 0 + Owner’s equity

balance? of 20.000.000
LET’S ANALYZE
THE EFFECT OF
TRANSACTIONS
ON THE
ACCOUNTING
EQUATION FOR
JESSIE JANE’S
CAMPUS
DELIVERY.
Investment Example
Jessica Jane, the owner, invested

$2,000 in the business.
1. What Jessica took $2,000 from her personal

bank account and deposited it in a new
happened? account in the business’s name.
2.1 Identify the CASH J.J ,

accounting IN CAPITAL
elements that are BANK
affected.
2.2 Classify these
accounting elements CURRENT OWNER’S
as assets, liabilities, ASSET EQUITY
3.1 Determine which

accounting elements CASH IN J.J, CAPITAL
have increased or BANK (OWNER’S
decreased. (ASSET) EQUITY)
3.2 Determine how

+ $2.000 +$ 2.000
much the value
(amount) increases NON-
or decreases. CURRENT CURRENT OWNER’S
+ ASSETS = LIABILITIES + EQUITY
ASSETS
3.3 Does the 2.000 + 0 = 0 + 2.000
accounting Assets of 2.000 = Liabilities of 0 + Owner’s equity of 2.000

equation balance?
Cash Purchase Example
Purchased delivery equipment for

$1,200 cash.
1. What Purchased delivery equipment for

$1,200 cash.
happened?
.
2.1 Identify the Delivery Cash

accounting equipment
elements that are
affected.
2.2 Classify these
accounting elements CURRENT CURRENT
as assets, liabilities, ASSET ASSET
3.1 Determine which

accounting elements Delivery Cash
have increased or equipment
(ASSET)
decreased. (ASSET)
3.2 Determine how + $1. 200 -$ 1.200

much the value
(amount) increases NON-
or decreases. CURRENT CURRENT OWNER’S
ASSETS + ASSETS = LIABILITIES + EQUITY
Delivery Cash
3.3 Does the equipment
+1.200 -1.200 + 0 = 0 + 0
accounting
equation balance? Assets of 0 = Liabilities of 0 + Owner’s equity of 0
Proving The Accounting Equation Balances
LIABILITIES OWNER’S
ASSETS EQUITY
CASH DEL. EQUIP. J.J Capital
$2,000 BAL. $0 $2,000
– 1,200 $1,200
BAL1. $ 800 $1,200 BAL1. $0 $2,000
LEFT SIDE OF EQUATION: RIGHT SIDE OF EQUATION:

CASH $ 800 LIABILITIES $0
DEL. EQUIP. $ 1,200 OWNER’S EQUITY $2,000
TOTAL ASSETS $ 2,000 TOTAL LIAB. & O.E. $2,000
Purchase On Account Example
Purchased delivery equipment on

account for $900.
Jessica is buying this delivery equipment

1. What “on account.” She will be making
happened? payments on it over the next three months.
NO CASH WAS EXCHANGED TODAY
.
2.1 Identify the Delivery Account
accounting equipment payable
elements that are
affected.
2.2 Classify these
accounting elements CURRENT LIABILITY
as assets, liabilities, ASSET
3.1 Determine which

accounting elements Delivery Account
have increased or equipment payable
decreased. (ASSET) (LIABILITY)
3.2 Determine how

+ $900 +$ 900
much the value
(amount) increases CURRENT
NON-
or decreases. ASSETS + CURRENT
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Delivery equipment Account payable
3.3 Does the +900 + 0 = +900 + 0
accounting
equation balance? Assets of 900 = Liabilities of 900 + Owner’s equity of 0
LIABILITIES OWNER’S
ASSETS
EQUITY
CASH DEL. EQUIP. Account J.J Capital
$2,000 payable
BAL. $0 $2,000
– $1,200 $1,200
$ 800 $1,200 BAL. $ 900
BAL. + $ 900 BAL2. $ 900 $2,000
BAL2. $ 800 $ 2,100
LEFT SIDE OF EQUATION: RIGHT SIDE OF EQUATION:

CASH $ 800 LIABILITIES $ 900
DEL. EQUIP. $ 2,100 OWNER’S EQUITY $2,000
TOTAL LIAB. & O.E. $2,900
TOTAL ASSETS $ 2,900
Loan Payment Example
Made $300 payment

on equipment loan.
1. What Made $300 payment on equipment

happened? loan.
2.1 Identify the Cash Account

accounting payable
elements that are
affected.
2.2 Classify these
accounting elements CURRENT LIABILITY
3.1 Determine which

accounting elements Cash Account
have increased or payable
(ASSET)
decreased. (LIABILITY)
3.2 Determine how

- $300 -$ 300
much the value
NON-
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Cash Account payable
3.3 Does the - $300 + 0 = -$300 + 0
accounting
equation balance? Assets decreased by 300 = Liabilities decreased by 300
ASSETS LIABILITIES OWNER’S EQU

CASH DEL. EQUIP. Account J.J. Capital
$2,000 payable
– $1,200 $1,200 BAL. $0 $2,000
$ 800 $1,200 BAL. $ 900
BAL. + $ 900
BAL2. $ 900 $2,000
BAL2. $ 800 $ 2,100
-$ 300 -$ 300
BAL3. $ 500 $ 2,100 BAL3. $ 600 $2,000
$2,600 $2,600
Revenue Example
Jessie
performed
services and
received $500
in cash.
1. What Jessie performed services and

happened? received $500 in cash.
2.1 Identify the Delivery

Cash
accounting
fees
elements that are
affected.
2.2 Classify these
accounting elements CURRENT Revenue
3.1 Determine which

accounting elements Cash Delivery fees
have increased or
(ASSET) (Revenue)
decreased.
3.2 Determine how

+ $500 +$ 500
much the value
NON-
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Cash Delivery fees
3.3 Does the + $500 + 0 = 0 + $500
accounting
Assets increased by 500 = Owner’s equity increased by 500
equation balance?
ASSETS LIABILITIES OWNER’S EQU

Account J.J. Capital Delivery
CASH DEL. EQUIP.
payable fees
$2,000
– $1,200 $1,200 BAL. $0 $2,000
$ 800 $1,200 BAL. $ 900 $2,000
BAL. + $ 900
BAL2. $ 900 $2,000
BAL2. $ 800 $ 2,100
-$ 300 -$ 300
BAL3. $ 500 $ 2,100 BAL3. $ 600 $2,000
+ $ 500 + $500
BAL4. $1.000 $ 2,100 BAL4. $ 600 $2,000 $500
$3,100 $3,100
Expense Example
Jessie paid $200 for office rent.

1. What Jessie paid $200 for office rent.

happened?
2.1 Identify the Rent

Cash
accounting expense
elements that are
affected.
2.2 Classify these
accounting elements CURRENT Expense
3.1 Determine which

accounting elements Cash Rent Expense
have increased or
(ASSET) EXPENSE
decreased.
3.2 Determine how

- $200 -$ 200
much the value
NON-
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Cash Rent Expense
3.3 Does the - $200 + 0 = 0 - $200
accounting
Assets decreased by 200 = Owner’s equity decreased by 200
equation balance?
ASSETS LIABILITIES OWNER’S EQUITY

CASH DEL. EQUIP. Account J.J Delivery Rent
$2,000 payable Capital fees expense
– $1,200 $1,200 BAL. $0 $2,000
$ 800 $1,200
BAL. + $ 900 $ 900 $2,000
BAL2. $ 800 $ 2,100 BAL2. $ 900 $2,000
-$ 300 -$ 300
BAL3. $ 500 $ 2,100
BAL3. $ 600 $2,000
+ $ 500
$500
BAL4. $1.000 $ 2,100 $2,000 $500
- $ 200 BAL4. $ 600
-$200
BAL5. $ 800 $ 2,100 BAL5. $ 600 $2,000 $500 -$200
$2,900 $2,900
Expense Example
Jessie paid $50 for telephone

expense.
1. What Jessie paid $50 for telephone

happened? expense.
.
2.1 Identify the telephone
Cash
accounting expense
elements that are
affected.
2.2 Classify these
3.1 Determine which

accounting elements Cash Tele. Expense
have increased or
(ASSET) EXPENSE
decreased.
3.2 Determine how

- $50 $ 50
much the value
NON-
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Cash Tele. Expense
3.3 Does the - $50 + 0 = 0 - $50
accounting
Assets decreased by 50 = Owner’s equity decreased by 50
equation balance?

CASH DEL. EQUIP. Account J.J Delivery Rent
– $1,200 $1,200 BAL. $0 $2,000
BAL. $ 800 $1,200
+ $ 900 $ 900
BAL2. $ 800 $ 2,100 BAL2. $ 900 $2,000
-$ 300 -$ 300
BAL3. $ 500 $ 2,100
BAL3. $ 600 $2,000
+ $ 500
$500
BAL4. $1.000 $ 2,100 $2,000 $500
- $ 200 BAL4. $ 600
-$200
BAL5. $ 800 $ 2,100 $2,000 $500 -$200
BAL5. $ 600
- $ 50 -$50
BAL6. $ 750 $ 2,100 BAL6. $ 600 $2,000 $500 -$250
Revenue On Account Examp
Jessie
performed
$600 of
services on
account.
Jessie has performed services for

1. What this client. The client will be paying
happened? Jessie at a later date.
2.1 Identify the .

Account Delivery
accounting fees
receivable
elements that are
affected.
2.2 Classify these
3.1 Determine which

accounting elements Account delivery fees
have increased or receivables
EXPENSE
decreased. (ASSET)
3.2 Determine how

+ $600 +$600
much the value
NON-
= LIABILITIES
OWNER’S
+ EQUITY
ASSETS
Account receivable Delivery fees
3.3 Does the +$600 + 0 = 0 + +$600
accounting
Assets increased by 600 = Owner’s equity increased by 600
equation balance?
CASH DEL. Acc.
Account J.J Delivery Rent
EQUIP. Receivable.
– $1,200 $1,200 BAL. $0 $2,000
BAL. $ 800 $1,200 $ 900
+ $ 900
BAL2. $ 900 $2,000
BAL2. $ 800 $ 2,100
-$ 300 -$ 300
BAL3. $ 600 $2,000
BAL3. $ 500 $ 2,100
$500
+ $ 500 $2,000 $500
BAL4. $ 600
BAL4. $1.000 $ 2,100 -$200
- $ 200 BAL5. $ 600 $2,000 +$500 -$200
BAL5. $ 800 $ 2,100 - $50
- $ 50
BAL6. $ 750 $ 2,100 BAL6. $ 600 $2,000 +$500 -$250
+$600 +$600
BAL7. $ 750 $ 2,100 +$600 BAL7. $ 600 $2,000 +$1.100 -$250
Purchase Of Supplies Example
Purchased supplies
for $80 cash.
Purchased supplies
1. What
happened? for $80 cash.
2.1 Identify the Cash

Supplies
accounting
elements that are
affected.
2.2 Classify these
accounting elements CURRENT CURRENT
as assets, liabilities, ASSET ASSET
3.1 Determine which

accounting elements Supplies Cash
have increased or
(ASSET) (ASSET)
decreased.
3.2 Determine how

+ $80 -$80
much the value
NON-
= LIABILITIES +
OWNER’S
ASSETS EQUITY
SuppliesCash
3.3 Does the +$80 -$80 + 0 = 0 + 0
accounting Total assets stayed the same. One asset increased, the
other decreased. No change in liabilities or owner’s
equation balance? equity.
CASH Supplies DEL. Acc.
Account J.J Delivery Rent
EQUIP. Receivable.
payable Capital fees expense
BAL5. $ 800 $ 2,100 BAL5. $ 600 $2,000 +$500 -$200
- $ 50 - $50
BAL6. $ 750 $ 2,100 BAL6. $ 600 $2,000 +$500 -$250
$ 600 +$600
BAL7. $ 750 $ 2,100 $ 600 BAL7. $ 600 $2,000+$1.100 -$250
- $80 +$80
BAL8. $ 750 $ 2,100 $ 600
Customer Payment Example
Received $570 in cash for services

recognized in an earlier transaction.
Supplier Payment Example
Make payment 500 to suppliers by a

bank loan
ASSETS (1) ASSETS
(3) (4)
(2)
EQUITY EQUITY
(liabilities & (liabilities & owner’s
owner’s equity) equity)
Transactions
Classification:
+Category 1: increase one asset and decrease another
+Category 2: increase one liability/equity and decrease
another liability/equity
+Category 3: increase asset and increase liability/equity
+Category 4: decrease asset and decrease liability/equity
Transactions
Classification:
Class 1
↑ASSETS ASSETS ↓
Class 3 Class 4
↑ LIABILITIES/EQUITY LIABILITIES/EQUITY ↓
Class 2
Transactions (Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by

Nancy. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. Purchased equipment for $5,000 cash.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. Paid $400 cash for May office rent.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. Received $5,100 from customers for repair service.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. Withdrew $1,000 cash for personal use.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. Paid part-time employee salaries of $2,000.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. Incurred $250 of advertising costs, on account.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. Provided $750 of repair services on account.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. Collected $120 cash for services previously billed.

1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250 + 12,200
Chapter summary
v The effect of every transaction is an increase or a

decrease in one or more of the accounting
equation elements.
v The two sides of the accounting equation are
always equal.
v The owner’s equity is increased by amounts
invested by the owner and is decreased by
withdrawals by the owner. In addition, the owner’s
equity is increased by revenues and is decreased
by expenses.
vQuestions?

CHAPTER 2-Accounting Equation

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CHAPTER 2-Accounting Equation

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LOGO

Danang University of Economic - University of Danang

LO1 Understand and differentiate basic accounting

Define, explain and give examples of the elements in

Analyze the effects of business transactions on the

Financial rights/claims to the

Assets = Liabilities + Owner’s Equity

The resources Creditor’s The owner’s claim

Assets = Liabilities + Owner’s + Revenues - Expenses

What the What the

Provides the underlying framework for recording and summarizing

The rights/claims to the properties are normally divided into two

• Controlled : The present ability to direct the use of the

The operating cycle is the process by which a company

Current assets include assets that are sold, consumed or

When the entity’s normal operating cycle is not clearly

An entity shall classify all other assets as non‑current

Cash equivalents – Short-term, highly liquid investments

Short-term investments – time to maturity is due within 12 months

Receivables – The term receivables includes all money claims against

• Accounts receivable: a receivable is selling merchandise or services on

• Raw materials (cement, sand, steel… to be used in production)

Investment property (land or a building or part of a building or both)

Intangible fixed assets:

Regognition: Must meet all following criteria

• The cost of asset can be measured reliably,

Consider these necessary components of the definition in

• The outflow of resources embodying economic benefits (such as

• The cost / value of the obligation can be measured reliably.

As we have discussed, there are three separate components to a liability.

1. There must be a present obligation.

Consider these necessary components of a liability and then

Ø is the residual interest in the assets of the entity after

Owner’s equity for

Other Owner’s equity

Revenue and other income is the total value of economic

Expense is the amount incurred or paid in earning the

1. Business operating expenses:

(2) Other expenses

An economic event or condition that directly changes an entity’s

Purchasing land for $50,000 is a business transaction.

In contrast, a change in a business’s credit rating does not

Classification of business transaction:

(1) Normal business transactions in business operations

(2) Business transaction with special nature:

• Transactions that require a period of time, usually until

• Transactions are formed as required by accounting

Q1-1: Are the following events recorded in the accounting records?

Criterion Is the financial position (assets, liabilities, or

ANAM, the owner, invested 8.000.000 office

2.1 Identify the CASH CASH OFFICE ANAM,

3.3 Does the 12.000.000 + 8.000.000 = 0 + 20.000.000

accounting equation Assets of 20.000.000 = Liabilities of 0 + Owner’s equity

Jessica Jane, the owner, invested

1. What Jessica took $2,000 from her personal

2.1 Identify the CASH J.J ,

3.1 Determine which

3.2 Determine how

3.3 Does the 2.000 + 0 = 0 + 2.000

accounting Assets of 2.000 = Liabilities of 0 + Owner’s equity of 2.000

Purchased delivery equipment for

1. What Purchased delivery equipment for

2.1 Identify the Delivery Cash