the accounting equation - rsc business - yr 12...
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THE ACCOUNTING EQUATION
CHAPTER 2
KEY TERMS
After completing this chapter, you should be familiar with the following terms:
Where are we headed?After completing this chapter, you should be able to:
define identify
explain
calculate
explain
define identify
prepare
apply
analyse
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22 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
2.1 ASSETS, LIABILITIES AND OWNER’S EQUITY
Assets
bankdebtors
stockfixtures and fittings
vehiclespremises
Liabilities
bank overdraft
creditorsloan
Owner’s equity
firm owner
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23C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
equitiesclaims on the assets of
the business, consisting of both liabilities and
owner’s equity
The accounting equation
equities
external parties owner
accounting equation accounting equationthe rule that states that
assets must always equal liabilities plus
owner’s equity
The relationship between assets, liabilities and
owner’s equity is described by the accounting equation
Accounting equation
Assets = Liabilities + Owner’s equity
greater
less
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24 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
REVIEW QUESTIONS 2.1
1 Define2 List
3 Define4 List
5 Define6 explain
7 State
2.2 THE BALANCE SHEET
Balance Sheet
Figure 2.1 The accounting equation and the Balance Sheet
Assets = Liabilities + Owner’s equity
Assets
TOTAL ASSETS
Liabilities
plus Owner’s equity
TOTAL EQUITIES
Figure 2.2 Balance Sheet
MORGAN’S MERCHANDISEBalance Sheet as at 30 June 2015
Assets $ $ Liabilities $ $
Bank 5 000 Creditors 6 000
Stock 34 000 Loan – MHB Bank 36 000 42 000
Debtors 12 000 Owner’s Equity
Vehicles 45 000 Capital – Morgan 54 000
Total Assets 96 000 Total Equities 96 000
Balance Sheet an accounting report that details the business’s assets, liabilities and owner’s equity at a particular point in time
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© Anthony SImmons, Richard Hardy 2012 Cambridge University Press
25C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
whowhat when
REVIEW QUESTIONS 2.2
1 Explain2 Explain
3 State
4 Explain
2.3 CLASSIFICATION IN THE BALANCE SHEET
Classification
Current versus non-current assets
current assets non-current assets
in the next 12 months
for more than 12 months
classification grouping together items that have some common
characteristic
current asset a resource controlled by
the entity as a result of past events, from which
a future economic benefit is expected to flow to the
entity in the next 12 months
non-current asset a resource controlled by
the entity as a result of past events, from which
a future economic benefit is expected to flow to the
entity for more than the next 12 months
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26 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
Current versus non-current liabilities
Current liabilities in the next 12 months
will can
non-current liabilitiesin more than 12 months
If it is expected that an asset will be sold, used up or turned into cash within a year (such as stock held for resale in a warehouse) it should be classified as a current asset
An asset that is expected to provide an economic benefit for more than the next 12 months (such as a business’s premises or truck) should be classified as a non-current asset
current liabilitya present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits in the next 12 months
non-current liabilitya present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits in more than 12 months
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27C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
Loans
Figure 2.3 Classified Balance Sheet
MORGAN’S MERCHANDISEBalance Sheet as at 30 June 2015
Current Assets $ $ Current Liabilities $ $
Bank 5 000 Creditors 6 000
Stock 34 000 Loan – MHB Bank 12 000 18 000
Debtors 12 000 51 000
Non-Current Liabilities
Non-Current Assets Loan – MHB Bank 24 000
Vehicles 45 000
Owner’s Equity
Capital – Morgan 54 000
Total Assets 96 000 Total Equities 96 000
Uses of the classified Balance Sheet
Relevance
STUDY TIP
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28 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
Imelda’s Shoe Shop has presented the following transactions:
REVIEW QUESTIONS 2.3
1 Distinguish2 List3 Distinguish4 List5 Explain6 Explain
2.4 DOUBLE-ENTRY ACCOUNTING
double-entry accountingdouble-entry accountinga system that records two effects on the accounting equation as a result of each transaction
Rules of double-entry accounting
1 Every transaction will affect at least two items in the accounting equation: a double entry.
2 After recording these changes, the accounting equation must still balance.
Assets $ $ Liabilities $ $
Bank 20 000 nil
Owner’s Equity
Capital – Imelda 20 000
Total Assets 20 000 Total Equities 20 000
Figure 2.4 Accounting equation 1
EXAMPLE
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29C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
Assets $ $ Liabilities $ $
Bank 20 000 Creditors 45 000
Stock 45 000 Owner’s Equity
Capital – Imelda 20 000
Total Assets 65 000 Total Equities 65 000
Assets $ $ Liabilities $ $
Bank 8 000 Creditors 45 000
Stock 45 000 Owner’s Equity
Shop Fittings 12 000 Capital – Imelda 20 000
Total Assets 65 000 Total Equities 65 000
Figure 2.5 Accounting equation 2
Figure 2.6 Accounting equation 3
REVIEW QUESTIONS 2.4
1 Explain 2 State
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30 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
EXERCISE 2.1 CLASSIFYING ITEMS
Classify
WHERE HAVE WE BEEN?
EXERCISES W B page 18
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31C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
EXERCISE 2.2BALANCE SHEET
Required
a Explainb Calculatec Prepared explain
EXERCISE 2.3BALANCE SHEET
W B page 19
W B page 20
Required
a Calculateb Prepare
c explaind
Discuss
Item $ Item $
Term Deposit (matures 2020) 8 000 Bank 700
Debtors 2 490 Creditors 1 400
Wages Owing 600 Motor Vehicle 22 000
Stock 50 000 Loan from ANZ due 2025 36 000(repayable $2 000 p.a.)
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32 C A M B R I D G E V C E A C C O U N T I N G U N I T S 3 & 4
EXERCISE 2.4BALANCE SHEET
Item $ Item $
Bank Overdraft 2 500 Shelving 43 000
Stock 12 000 Mortgage 60 000
Creditors 5 000 Debtors 10 500
Premises 100 000 GST Payable 1 700
Note:
Required
a Prepareb Explainc Explain
d State
EXERCISE 2.5TRANSACTIONS AND THE ACCOUNTING EQUATION
State
EXERCISE 2.6TRANSACTIONS AND THE BALANCE SHEET
Assets $ Equities $
Bank 2 300 Creditors 9 000
Debtors 8 000 Wages Owing 2 000
Fixtures and Fittings 18 000
Delivery Van 25 000
Stock 24 000 Capital – Pete ?
Total Assets 77 300 Total Equities 77 300
W B page 24
W B page 23
W B page 21
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33C H A P T E R 2 T H E A C C O U N T I N G E Q U AT I O N
Apr. 1 Paid $3 000 to a creditor.
2 Borrowed $28 000 cash from the NAB, which was used to purchase
another van. The loan is to be repaid in monthly instalments of
$1 000, commencing in May 2015.
3 Received $2 400 from a debtor.
4 Pete withdrew $1 500 worth of paint for his own purposes.
5 Paid the wages owing.
6 Pete contributed to the business his personal computer. Pete had
paid $4 600 but its agreed value on this date was $4 000.
Required
a Calculateb Explainc Prepare
d Prepare
EXERCISE 2.7 TRANSACTIONS AND THE BALANCE SHEET
Assets $ Equities $
Debtors 3 000 Bank Overdraft 2 500
Fixtures and Fittings 15 000 Creditors 7 000
Stock 25 000 Loan – ANZ (repayable $6 000 p.a) 36 000
Fridges 40 000 Capital – Sam ?
Total Assets 83 000 Total Equities 83 000
Oct. 1 Paid $2 000 to a creditor.
2 Sam contributed $5 000 of his own money to the business.
3 Paid $3 000 off the loan principal.
4 Purchased stock on credit for $10 000.
5 Sam took $2 500 of the fixtures and fittings home for personal use.
6 Paid $1 200 rent in advance for the next 6 months.
Required
a Prepare
b Preparec explain
W B page 26
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ISBN 978-1-107-64070-2 Photocopying is restricted under law and this material must not be transferred to another party.
© Anthony SImmons, Richard Hardy 2012 Cambridge University Press