Summary Accounting Equation

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The Accounting Equation (CH.3)
Outline:
• Transactions
• The accounting equation
• Effects of transaction on the accounting equation
• Analysis of transaction and preparation of financial statements using the accounting
equation
• Conceptual proof of profit

Transactions:
Economic events which have an impact on the financial position of the entity



Transactions are categorized as:


Internal External

The accounting equation
• Businesses are financed from 2 sources:

Source of financing known as:
o Owner' funds (Investors) = Owners' Equity
o Borrowed funds (Lenders) = Liabilities

• Funds used to buy assets.
• Owners' funds and borrowed funds represent claims on assets.

Sum of assets = Claims on assets
Sum of assets = Total source of finance
Assets = Funds provided by investors and lenders
Assets = Owners funds and borrowed funds
Assets = Owners' equity and liabilities
A =O+L

, A=O+L
Elements within equity
(excluding OCI)

OE is affected by 4 transactions:

1. + investments of CAPITAL by owner contributions
2. + earning an INCOME
3. (-) incurred EXPENSES
4. DISTRIBUTION of funds to owner

Big Picture:




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