The Accounting Equity Owning and Owing. Introducing Jack  Jack has just been left $100,000 by a rich aunt and he has $10,000 in the bank.  He has always.

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Presentation transcript:

The Accounting Equity Owning and Owing

Introducing Jack  Jack has just been left $100,000 by a rich aunt and he has $10,000 in the bank.  He has always dreamt of running business of his own.

Accountants advice  Jack is no fool and goes to his accountant, Frank, who suggests to Jack he open a bank account for the business and put the $110,000 in it.  This way his personal affairs will not get mixed up with his business.

Before buying the business  Before Jack visits the bank manager Jackowns$110,000 Businessowns$0

Smart Milk Bar  As soon as Jack opens the bank account in the name of Smart Milk Bar and puts the money into that account, the money belongs to the business.

So now…  The business owns the $110,000.  If Jack wanted his money back, he would have to sell the business.  So the business can be said to owe $110,000 to Jack.

The Accounting equation  The business owns the $110,000 in the bank  And it owes this $110,000 to Jack What the business owns = what the business owes

Owning  Everything owned by the business is called an: Asset

Assets  Any item: –the business owns. –that earns the business revenue e.g. stock for sale. –the business has control over. –that create a future economic benefit for the business.

Assets - examples  Money  Debtor – who owe the business money  Stock  Delivery Truck  Computers  Shelving

Owing inside the business  The money the business owes to Jack is part of: OWNER’S EQUITY

Owner’s Equity - examples  Capital – money put in the business by the owner  Drawings – money taken out of the business by the owner  Profit or Loss – made by the business

Owing outside the business  Any money owed to the Bank or suppliers is called Liabilities

Liabilities - examples  Loans  Creditors – suppliers of stock bought on credit  GST

Back to Smart Milk Bar The left-hand side of the equation shows everything the business owns while the right- hand side shows everything the business owes. Assets= Owner’s Equity Bank $110,000= Capital $110,000

What Jack does next  Jack finds a suitable shop to rent and decides to buy some goods for sale $50,000  Goods for sale are called STOCK  They are Assets because…

Stock are Assets because…  They are owned by the business.  They will be sold to earn revenue.

The Accounting Equations Assets= Owner’s Equity Bank $60,000= Capital $110,000 Stock $50,000

And then…  Jack decides to buy the business a freezer from United Electric for $15,000.  United Electric agrees to wait a month for payment.  So the business owes United Electrical $15,000

The Accounting Equation Assets= Liabilities +Owner’s Equity Bank $60,000= CreditorCapital $110,000 Stock $50,000 United Electric Freezer $15,000 $15,000 What is Total Assets? What is Total Equities?

The Accounting Equation Assets = Liabilities +Owner’s Equity Bank $60,000 = Creditor + Capital $110,000 Stock $50,000 United Electric Freezer $15,000 $15,000 Total Assets = $125,000 Total Equities = $125,000

The Accounting Equation  Every time Jack buys or sells some thing, the Accounting Equation changes.  If Jack sold his business, how much money could he get?

Selling up  Jack would get the value of the assets less what he owed to his Creditors.  Total Assets Less Liabilities = Capital $125,000- $15,000 = $110,000

Balance Sheet This report:  lists all the Assets, Liabilities & Owner’s Equity.  shows the Accounting Equation for the business.  shows the state of the business at a certain point in time.  calculated Total Assets & Total Equities.  Is prepared once during the reporting period.

Balance Sheet For the Smart Milk Bar as at 30 th June 200X AssetsLiabilities Bank 60,000Creditor United Electric 15,000 Stock 50,000 Freezer 15,000 Owner’s Equity Capital 110,000 Total Assets 125,000Total Equities125,000

Owner’s Equity Assets Bank Equipment Debtors (owe business money) Stock (for sale) Liabilities Overdraft Loan GST Payable Owner’s Equity Capital (What the owner put into the business) Net Profit Drawings (What the owner takes out of the business

 The Total Assets must equal the Total Equities (Liabilities + Owner’s Equity) Balance Sheet

Quiz – True or False A liability issomething owed An asset issomething owed Owner’s Equityis owed to the owner The accounting equationis Assets – Liabilities = Owner’s Equity The owner’s private affairsmust be separate from the business Total Assets are allassets Total Equities are allassets

What to do now Complete “The Accounting Equation” and file it in your Home Directory to study for the test.