1. ACCOUNTING EQUATION LEVEL 7 Omar + Salem = Group B

2. Managing Financial Resources Project- 3 (Problem 1B)2 Definition of Accounting Equation : The resources controlled by a business are referred to as its assets. For new business those assets originate from two possible sources: Investors - Ownership to business Creditors - Extends loans to business Since the total sum of assets is equal to sum of assets contributed by Investor and Creditor is known as accounting equation.

3. Managing Financial Resources Project- 3 (Problem 1B)3 Transaction recording: Assets = Liabilities + Owners equity Credit for decreases Debit for increases Credit for Increases Debit for decreases Credit for Increases Debit for decreases

4. Managing Financial Resources Project- 3 (Problem 1B)4 Debit & Credit : For every transaction recordings two accounts are always effected which is divided as left hand side column - Debit right hand side column - Credit. Debit entry Credit entry

5. Managing Financial Resources Project- 3 (Problem 1B)5 Owners Equity : Initially Owners equity is effected by capital contribution Assets = Liabilities + Owners Equity + Revenues + Expenses + Profit - Loss + Contributions - Withdrawals

6. Managing Financial Resources Project- 3 (Problem 1B)6 Accounting equation Example : Change is Assets Increase in asset is generally accompanied with : Increase in Capital/Loan – Purchases on credit Decrease in Cash = Example - Purchased plant for cash Profit and Cash: Profit may be more or less or equal to the cash at a particular point of time. One of the reasons for profit not being equal to cash is "Accrual Concept" Profit is a source and cash is a form

7. Managing Financial Resources Project- 3 (Problem 1B)7 Activity: Sept 1 – owner contributes $ 7,500 in cash to start the business Sept 8 – purchased bike parts for $ 2,500 pay later 30 days Sept 15 – paid shop rent $ 1,000 Sept 17 – repaid bike for $ 1,100 collected $ 400 cash remaining $ 700 on balance Sept 18 – $ 275 bike parts used Sept 25 – collected $425 from customer account Sept 28 – paid $500 to supplier for parts purchased early this month

8. Managing Financial Resources Project- 3 (Problem 1B)8 Transactions affect: Assets = Liability + Owners Equity Cash + Bike Parts + Accounts Rece = Account Pay + Capital + Revenue (Exp) SEP-1 7,500 = 7,500 SEP-8 2,500 = 2,500 SEP-15 (1,000) = (1,000) SEP-17 400 700 = 1,100 SEP- 18 (275) = (275) SEP-25 425 (425) = SEP-28 (500) = (500) TOTALS: 6,825 + 2,225 + 275 = 2,000 + 7,500 + (175) $9,325

9. Managing Financial Resources Project- 3 (Problem 1B)9 Sep 30 th Balance Sheet transaction: Assets Cash 6,825 Acct Rec275 Bike parts2,225 Total Assets $9,325 Liability + Owner’s equity Acct pay2,000 Capital7,325 Total liability $ 9,325

10. Managing Financial Resources Project- 3 (Problem 1B)10 Result of Accounting Equation: Bikes parts considered to be inventory which appears as an assets on the balance sheet. The Owner’s Equity is modified according to Revenue and expenses. In this case Owner’s equity has decreased by $175 at the beginning by $7500 to end at $7325

11. Managing Financial Resources Project- 3 (Problem 1B)11 Capital Vs Revenue Expenses: The benefit of which extends over a long period (more than one year). Non-recurring in nature. Shown in the Balance sheet Purchase of fixed assets (Capital Good) The benefit of which expires in one period Recurring in nature Shown in the Income statement Purchase of goods for trading (Revenue Goods)

12. Managing Financial Resources Project- 3 (Problem 1B)12 Relationship : flow of accounts to financial statements Information and events RevenueExpenses Owner’s Capital AssetsLiabilities Income Statement Statement of change in Owners Equity Balance Sheet