Basic Accounting Equation Assets Liabilities Owner’s Equity Investment Drawing Revenue Expenses Explanation of the transaction

1. Accounting Equation
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Accounting Equation

2. Accounting Equation
Chapter at a Glance
• Basic Accounting Equation
• Assets
• Liabilities
• Owner’s Equity
• Investment
• Drawing
• Revenue
• Expenses
• Explanation of the transaction

3. Accounting Equation
The Basic Accounting Equation
According to the Dual Aspect Concept every transaction has two
aspect. One is debited and other is credited.
The above concept of the accounting forms a equation that is
called Accounting equation. The basis of accounting equation is
Assets = Liabilities + Owner’s Equity

4. Accounting Equation
Assets
• Assets are resources owned by a business.
• They are things of value used in carrying out such activities
as production and exchange.
To recognize the assets quickly we can say that Cash
is an asset and all the things that could be convert into
cash or have some future value and benefit is an
assets.

5. Accounting Equation
Liabilities
• Liabilities are claims against assets.
• They are existing debts and obligations.

6. Accounting Equation
Owners Equity
• Owner’s Equity is equal to total assets minus total liabilities.
• Owner’s Equity represents the ownership claim on total assets.
• Owner’s Equity are effective by:
1. Capital
2. Drawings
3. Revenues
4. Expenses

7. Accounting Equation
Investment
• Investments by owner are the assets put into the business
by the owner.
• These investments in the business increase owner’s equity.
It also has the following meaning.
Deployment of funds
 with the intention and expectation that it
will earn a return.
 In common parlance, it refers to shares
and debentures of companies or mutual
funds or bonds issued by the financial
institutions or by the Government.

8. Accounting Equation
Drawings
• Drawings are withdrawals of cash or other assets by the
owner for personal use.
• Drawings decrease total owner’s equity.

9. Accounting Equation
Revenues
• 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, performance
of services, rental of property, or lending of money.
• Revenues usually result in an increase in an asset.

10. Accounting Equation
Expenses
• 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.

11. Accounting Equation
Increase and Decrease in Owner’s Equity
In next slide we will analyze some transaction and will check the
effect on capital, assets and Liability in form of equation i.e.
Capital + Liabilities = Assets
INCREASES DECREASES
Investments by
Owner
Revenues
Withdrawals by
Owner
Expenses
Owner’s
Equity

12. Accounting Equation
Transaction Analysis
1. Mr. Ahmad started a business with cash of $5,000
2. He took a bank loan of $8,000
Assets = Owner’s Equity Liabilities
Cash↑ 5,000 Capital ↑ 5,000
Assets = Owner’s Equity Liabilities
Cash↑ 5,000 Capital ↑ 5,000
Cash ↑ 8,000 -- Bank Loan ↑ 8,000
Total 13,000 5,000 8,000

13. Accounting Equation
Transaction Analysis
3. Purchased Motor vehicle of $2,000
You can see here that the Assets is equal to the Owner’s Equity
plus Liabilities
Assets = Owner’s Equity Liabilities
Cash↑ 5,000 Capital ↑ 5,000
Cash ↑ 8,000 -- Bank Loan ↑ 8,000
Total 13,000 5,000 8,000
Motor Vehicle↑ 2,000
Cash ↓ (2,000) -- --
Total 13,000 5,000 8,000

14. Accounting Equation
Transaction Analysis
4. Purchased trading goods of $1000.
• Trading goods is special type of assets that we purchased with
and indentation to resale
Assets = Owner’s Equity Liabilities
Cash↑ 5,000 Capital ↑ 5,000
Cash ↑ 8,000 -- Bank Loan ↑ 8,000
Total 13,000 5,000 8,000
Motor Vehicle↑ 2,000
Cash ↓ (2,000) -- --
Total 13,000 5,000 8,000
Goods ↑ 1,000 -- --
Cash ↓ (1,000)
Total 13,000 5,000 8,000

15. Accounting Equation
Transaction Analysis
5. Sold Goods of costing $500 in $800.
Assets = Owner’s Equity Liabilities
Cash↑ 5,000 Capital ↑ 5,000
Cash ↑ 8,000 -- Bank Loan ↑ 8,000
Total 13,000 5,000 8,000
Motor Vehicle↑ 2,000
Cash ↓ (2,000) -- --
Total 13,000 5,000 8,000
Goods ↑ 1,000 -- --
Cash ↓ (1,000)
Total 13,000 5,000 8,000
Goods ↓ (500) Profit ↑ 300
Cash ↑ 800
Total 13,300 5,300 8,000

16. Accounting Equation
Transaction Analysis
6. Salary Paid $200 in cash
• Salary is an expense and increase in expense will reduce the owner’s equity
Here the equation is continue with the balancing figure
Assets = Owner’s Equity Liabilities
Total 13,300 5,300 8,000
Cash ↓ 200 Expense ↑ (200)
Total 13,100 5,100 8,000

17. Accounting Equation
Transaction Analysis
6. Purchase Furniture of $100 from ABC Ltd. on credit.
Here the liabilities is increasing and also Assets (Furniture)
Assets = Owner’s Equity Liabilities
Total 13,300 5,300 8,000
Cash ↓ 200 Expense ↑ (200)
Total 13,100 5,100 8,000
Furniture ↑ 100 ABC Ltd. 100
Total 13,200 5,100 8,100
We can show the summary of the above transaction in form of Balance sheet. We transfer
the net result of( revenue and profit) Less (Expenses and loss) in owner’s equity. In next
slide you can see the balance sheet.

18. Accounting Equation
Transaction Analysis
We know that Capital + Liabilities = Assets
Capital and Liabilities Amount Assets Amount
Owner’s Equity (Capital) 5,100 Motor Vehicle 2, 000
Bank Loan 8,000 Goods (Unsold Stock) 500
Liabilities 100 Cash 10,700
13,200 13,200

19. Accounting Equation
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