Slide 1.

Frank Woods
Business Accounting 1
Twelfth Edition

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.2

Chapter 1
The accounting equation
and the statement of
financial position

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.3

Learning objectives
After you have studied this chapter, you
should be able to:
Explain what accounting is about
Explain the relationship between
bookkeeping and accounting
List the main users of accounting
information and what accounting information
they are interested in

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.4

Learning objectives
(Continued)
Present and explain the accounting equation
Explain the relationship between the
accounting equation and the layout of the
statement of financial position (balance
sheet)
Explain the meaning of the terms assets,
capital, liabilities, accounts receivable
(debtors) and accounts payable (creditors)

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.5

Learning objectives
(Continued)
Describe how accounting transactions affect
the items in the accounting equation
Draw up statements of financial position
after different accounting transactions have
occurred

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.6

What is accounting?
Accounting can be defined as:
The process of identifying, measuring and
communicating economic information to
permit informed judgements and decisions
by users of that information.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.7

What is bookkeeping?
Bookkeeping is the process of recording
data relating to accounting transactions
in the accounting books.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.8

Users of accounting information

Managers
Owner(s) of the business
A prospective buyer
The bank
Tax inspectors
A prospective partner
Investors
Creditors

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.9

STAKEHOLDERS
External:
Internal:
Customers,
Owners,
creditors,
managers,
government
employees

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.10

What are the objectives of

accounting?
Is the business making a profit or a loss?
What is the business worth?
What is a transaction worth?
How much cash is in the business?
How wealthy is the business?
How much is the business owed?
How much does the business owe?
Keeping a financial check on activities.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.11

The accounting equation

Resources supplied by the owner = Resources in the
business

Capital = Assets
But if someone else has provided some of the assets:
Capital = Assets - Liabilities
@
Assets = Liabilities + Capital
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.12

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The resources
resources
owned
owned by
by aa
business
business

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.13

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The rights
rights of
of the
the
creditors,
creditors, which
which
represent
represent debts
debts of
of
the
the business
business

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.14

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The rights
rights of
of the
the
owners
owners

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.15

Major Account Classifications

Assets
Assets are
are
resources
resources owned
owned
by
by the
the business.
business.

Liabilities
Liabilities are
are debts
debts
owed
owed to
to outsiders
outsiders
(creditors).
(creditors).

Cash
Supplies
Building
Accounts
receivable

Accounts
payable
Notes payable
Wages payable

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.16

Major Account Classifications

Liabilities
Liabilities are
are often
often identified
identified
on
the
balance
sheet
by
titles
on
the
balance
sheet
by
titles
Assets
are
Liabilities
are
debts
Assets are
Liabilities are debts
that
include
payable
.
that
include
payable
.
resources
owned
owed
to
outsiders
resources owned
owed to outsiders
by
(creditors).
by the
the business.
business.
(creditors).
Cash
Supplies
Building
Accounts
receivable

Accounts
payable
Notes payable
Wages payable

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.17

Major Account Classifications

Owners
Ownersequity
equity
isis the
the owners
owners
right
right to
to the
the
assets
assets of
of the
the
business.
business.
Chris Clark,
Capital
Chris Clark,
Drawing

Revenues
Revenues are
are
increases
increases in
in
owners
ownersequity
equity as
as
aa result
result of
of selling
selling
services
services or
or
products.
products.
Fees Earned
Fares Earned
Commission
Revenue
Sales Revenue

Expenses
Expenses are
are the
the
using
using up
up of
of assets
assets
or
or consuming
consuming of
of
services
services to
to
generate
generate revenue.
revenue.
Rent Expense
Salary Expense
Utilities
Expense

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.18

What is a business
transaction?

A business transaction is an economic event or

condition that directly changes an entitys financial
condition or directly affects its results of
operations.
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.19

Balancing the Accounting

Equation
Step 1: Accounts and effects
Identify the accounts affected and classify them by
type of account (A, L, OE).
Determine the direction of the effect (increase or
decrease) on each account.

Step 2: Balancing
Verify that the accounting equation (A = L + OE)
remains in balance.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.20

The statement of financial position and

the effects of business transactions
On 1 May 2011, B. Blake started in
business and deposited 60,000 into a
bank account opened specially for the
business
Statement of financial position as at 1
May 2011
Assets: Cash at bank
60,000
Capital
60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position

and the effects of business
transactions (Continued)
Slide 1.21

On 3 May 2011, Blake buys a small shop for

32,000, paying by cheque
Statement of financial position as at 2 May 2011
Assets

Shop 32,000
Cash at bank (60,000-32,000)
60,000
Capital 60,000

28,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position and

the effects of business transactions
(Continued)

Slide 1.22

On 6 May 2011, Blake buys some goods for

7,000 from D. Smith and agrees to pay for
them some time within the next two weeks
Statement of financial position as at 6 May 2011
Assets

Shop 32,000
Inventory
7,000
Cash at bank 28,000
67,000
Capital 60,000
Account payable-Smith
67,000

7,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position and

the effects of business transactions
(Continued)

Slide 1.23

On 10 May 2011, goods which cost 600 were sold to J.

Brown for the same amount, the money to be paid later
Statement of financial position as at 10 May 2011
Assets

Shop 32,000
Inventory
6,400
Account receivable
Cash at bank
28,000
67,000
Capital
60,000
Account payable
67,000

600

7,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position and

the effects of business transactions
(Continued)

Slide 1.24

On 13 May 2011, goods which cost 400 were sold

to D. Daley for the same amount. Daley paid for
them immediately by cheque
Statement of financial position as at 13 May 2011
Assets

Shop 32,000
Inventory
6,000
Account receivable
600
Cash at bank
28,400
67,000
Capital
60,000
Account payable
67,000

7,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position and

the effects of business transactions
(Continued)

Slide 1.25

On 15 May 2011, Blake pays a cheque for 3,000

to D. Smith in part payment of the amount owing
Statement of financial position as at 15 May 2011
Assets

Shop 32,000
Inventory
6,000
Account receivable
600
Cash at bank 25,400
64,000
Capital 60,000
Account payable
64,000

4,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

The statement of financial position and

the effects of business transactions
(Continued)

Slide 1.26

J. Brown, who owed Blake 600, makes a part

payment of 200 by cheque on 31 May 2011
Statement of financial position as at 31 May 2011
Assets

Shop
32,000
Inventory
6,000
Account receivable
400
Cash at bank
25,600
64,000
Capital
Account payable

60,000
4,000
64,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.27

Learning outcomes
You should have now learnt:
1. Accounting is concerned with the
recording, classifying and summarising
of data, and then communicating what
has been learnt from it
2. It may not only be the owner of a
business who will need the accounting
information. It may need to be shown to
others, e.g. the bank or the Inspector of
Taxes.
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.28

Learning outcomes
(Continued)
Accounting information can help the
owner(s) of a business to plan for the
future.
4. The accounting equation is:
Capital = Assets Liabilities
6. The two sides of the accounting
equation are represented by the two
parts of the statement of financial
position.
3.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 1.29

Learning outcomes
(Continued)
The total of one part of the statement
of financial position should always be
equal to the total of the other part.
8. Every transaction affects two items in
the accounting equation. Sometimes
that may involve the same item being
affected twice, once positively (going
up) and once negatively (going down).
9. Every transaction affects two items in
the statement of financial position.
7.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012