Lecture 1

Assets, Liabilities and the

Accounting Equation
 Accounting Terms
UK Accounting International
Terms Accounting Terms
1. Sales Revenue
2. Trading, profit & Loss Account Statement of Comprehensive Income
3. Balance Sheet Statement of Financial Position
4. Stock Inventory
5. Fixed Assets Non-Current Asset
6. Trade Debtors Trade Recivables
7. Trade Creditors Trade Payable
8. Long-term Liability Non-Current Liability
9. Bad Debt Irrecoverable Debt
10. Provision for Bad debt Allowance for Receivables
 Assets
IASB defines an Asset as a’ resource controlled by the entity as
a result of past events and from which future economic benefits
are expected to flow to the entity.’

Types of Asset

(1) Non-Current Asset – These are assets that are for long term use in
the business and are used to generate profits. They are physical in
nature e.g. land and buildings, plant and machinery, equipment,
motor vehicles, fixtures and fitting etc.

(2) Current Assets – These are assets that are short term in nature and
comprise the liquidity (cash) of a business. The Least liquid asset is
listed first and the most liquid asset last.
 Current Assets
Examples of Current Assets are:

(1) Closing Inventory – These are unsold goods at the end of the financial
year

(2) Trade Receivables – These are customers who owe the business for
goods sold on credit

(3) Prepayments – These are expenses paid in advance for the following
financial year

(4) Bank – This is money held in a bank current account in the name of the
business

(5) Cash – Money held in the business premises

 Liabilities
IASB defines a Liability as a ‘present economic
obligation of the entity arising from past
events’. A Liability is something or someone the
business owes.
Types of Liabilities:

(1) Current Liabilities – These are debts that must be repaid

within one (1) year.

(2) Non-Current Liabilities – These are debts that can be

repaid in more than one years’ time. E.g. bank loans,
mortgages, debentures.
Examples of Current Liabilities

(1) Trade Payables – These are suppliers to whom

the business owe for goods bought on credit

(2) Bank Overdraft – This is a demand loan that is

granted to the business by the bank to pay their
everyday expenses. Interest is accrued only when
the overdraft facility is used.

(3) Accruals – These are expenses owing at the end

of the financial year
 Capital
This is referred to as the amount
of money the owner invests in the
business. If the business makes a
profit, it increases the owner’s
capital and a loss decreases the
capital. Drawings decrease the
owner’s capital.
 Questions
(1)Tania’s year end trial balance includes the following
balances:
$
Opening inventory 12,964
Trade receivables 43,728
Bank overdraft 5,872
Trade payables 28,627
Tania’s closing inventory is valued at 11,625

Based on the above figures, what is the value of

Tania’s current assets?
 Questions
(2) Which one of the following statements correctly describes the difference
between current liabilities and non-current liabilities?

(a) Current liabilities are amounts which it is currently known must be paid, while
non-current liabilities are amounts which might need to be paid in the long
term.

(b) Current liabilities are amounts which must be paid within the next year, while
non-current liabilities are amounts which must be paid in more than one year.

(c) Current liabilities are amounts under a certain value, while non-current
liabilities are amounts greater than that value.

(d) Current liabilities are amounts for which there is currently a known value,
while the value of non-current liabilities requires confirmation.
 Question
(3) On 1 December 2006 Pat borrowed $40,000 at a fixed
rate of interest. A single capital repayment is due on 1
December 2009. During the year to 30 November 2007 the
interest of $300 per month has been paid on the last day
of each month.
How should the loan be reported on Pat’s Balance
Sheet at 30 November 2007?
Current liability Non-current liability
A $3,600 $40,000
B $40,000 $3,600
C nil $40,000
D $40,000 nil
 Question
(4) On 1 March 2004 Andrew took out a loan for $50,000.
The loan is to be repaid in five equal annual instalments,
with the first repayment falling due on 1 March 2006.
How should the balance on the loan be reported on
Andrew’s year end balance sheet as at 30 April 2004?
A $50,000 as a current liability
B $50,000 as a non-current liability
C $10,000 as a current liability and $40,000 as a non-
current liability
D $40,000 as a current liability and $10,000 as a non-
current liability
 Question
(5) Which of the following correctly defines non-
current assets?
(a) Items which are intended for long-term use in
the business
(b) Items which will lead to cash outflow in the
long term
(c) Items which are intended for short-term use in
the business
(d) Items which will be converted into cash in the
next year
Accounting Equation
The relationship between Asset, Liabilities and
Capital can be shown in the Accounting Equation.

Accounting Equation

Assets = Capital + Liabilities

Liabilities = Assets – Capital

Capital = Assets – Liabilities

 Recording Assets, Liabilities & Capital

Assets, Liabilities and Capital are recorded in a

ledger ( T) account. It is posted according to the
rules of double entry which states that for every
debit entry, there is an equal and
corresponding
credit entry and vice-versa.
Example of a Ledger Account
Rules for Recording Assets, Liabilities
and Capital
Accounts To Record Entry in the Account
Assets An Increase Debit

A Decrease Credit

Liabilities An Increase Credit

A Decrease Debit

Capital An Increase Credit

A Decrease Debit
 Examples
2017
June 1 Started business with $12,000 in Cash
June 2 Paid $10,000 of the opening cash into a
bank account for the business
June 8 Bought office furniture on credit from
Dream Ltd for $1,900
June 15 Bought a Van paying by cheque $5,000
June 21 Paid Dream Ltd $1,900 by cheque
June 30 F. Brown lent us $5,000 giving us the money
by cheque
 Asset of Inventory
Increase Decrease
Purchases Sales/Revenue
Return Inwards/Sales Return
Return Outwards/Purchases
Return
 Purchases
Definition: Goods bought for resale.

Types of Purchases:
 Credit Purchases – goods bought and paid at a later date
 Cash Purchases – Goods bought and paid for immediately

Bought Motor Van – Not Purchases

Bought Goods – Purchases

Double Entry Principle for Purchases

Debit: Purchases Account

Credit: Cash/Bank/Trade payables account (if goods
were bought on credit)
 Return Inwards

Definition: Goods return to the business that

was previously sold maybe it was damaged,
faulty etc.

Double Entry – Return Inwards

Debit: Return Inwards account

Credit: Trade Receivables Account
 Sales/Revenue
Definition: Sales are goods sold at a profit.

Types of Sale Transactions

 Cash Sales – Goods are sold and money received immediately

 Credit Sales – Goods are sold and money received at a later date

Sold Goods – Sales

Sold Motor Vehicle – Not Sales

Double Entry Principle for Sales

Cash Sales – Debit Cash/Bank Account, Credit Sales Account

Credit Sales – Debit Trade Receivables Account, Credit Sales Account

 Return Outwards
Definition: Goods returned to the supplier that
was previously bought because they may be
faulty, damaged etc.

Double Entry – Return Outwards

Debit: Trade Payables Account

Credit: Return Outwards Account
 Expenses
Expenses represent the cost of operating a
business. Example wages and salaries, rent,
stationery, motor expenses etc

Double Entry :
Debit: Expense a/c e.g. rent, wages,
Credit: Bank/Cash
 Drawings
Definition: – This is where the owner takes
goods or cash out of the business for his own
personal use.

Double Entry:
Debit Drawings a/c ,
Credit: Cash/Bank a/c or Purchases account
 Discount Allowed
Definition: A deduction from the amount due
given to customers who pay their accounts
Within the time allowed.

Discount Allowed is shown as an expense in

The Income Statement.

Double Entry:
Debit: Discount Allowed Account
Credit: Trade Receivables Account
Discount Received
Definition: A deduction from the amount due
given to a business by a supplier when their
account is paid before the time allowed has
Elapsed.
Discount Received is treated as additional
income i.e. added to gross profit in the
Income Statement.
Double Entry:
Debit: Trade Payables Account
Credit: Discount Received Account
Bad/Irrecoverable Debt
Definition: is a specific debt which is not
expected to be repaid.

Bad Debt is treated as an expense in the

Income Statement.
Double Entry:
Debit: Bad Debt Account
Credit: Trade Receivables Account
 Carriage
Carriage is the cost of transportation.

Carriage Inwards is transportation costs

incurred on goods purchased. Carriage
inwards is added to purchases

Carriage Outwards is transportation costs

incurred on goods sold. Carriage outwards is
treated as an expense
 Recording and Summarizing
Transactions
Introduction: The main objective of a business
is to make profits. Therefore it is important that
businesses keep financial records for both
Internal and external use. Examples:
(1) Managers of the business
(2) Owners of the business
(3) Suppliers
(4) Providers of finance
(5) Tax authority
(6) Employees
Examples of Accounting Records

(1) Source Documents e.g. sales invoices,

purchases invoices, credit notes etc.
(2) Books of Prime Entry
(3) Ledger Accounts – These are summaries of
source documents
(4) Financial Statements i.e. statement of
comprehensive income and financial position.
 Recording Source Documents
Books of Prime Entry

(1) Sales Day Book. This is used to record credit sales

(2) Sales Returns Day Book. Records all return inwards
from customers / credit notes issued to customers
(3) Purchases Day Book. Records all credit purchases
transactions
(4) Purchases Returns Day Book. Records all returns out
of the business to its suppliers / credit notes received
from suppliers
(5) Cash Book. Records all cash and bank transactions
(6) Petty cash Book. Records small items of expenditure.
(7) The Journal. Records transfers from one ledger to
another/opening entries and correction of errors.
 Recording and Summarizing
Transactions
Introduction: The main objective of a business
is to make profits. Therefore it is important that
businesses keep financial records for both
Internal and external use. Examples:
(1) Managers of the business
(2) Owners of the business
(3) Suppliers
(4) Providers of finance
(5) Tax authority
(6) Employees
Examples of Accounting Records

(1) Source Documents e.g. sales invoices,

purchases invoices, credit notes etc.
(2) Books of Prime Entry
(3) Ledger Accounts – These are summaries of
source documents
(4) Financial Statements i.e. statement of
comprehensive income and financial position.