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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.
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
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.
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
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 STOCKThey are Assets because…
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 = Creditor Capital $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 30th June 200X
Assets LiabilitiesBank 60,000 Creditor United Electric 15,000 Stock 50,000
Freezer 15,000
Owner’s Equity Capital
110,000
Total Assets 125,000 Total Equities125,000
Owner’s Equity
Assets
Bank
EquipmentDebtors (owe business money)
Stock (for sale)
Liabilities
Overdraft
Loan
GST Payable
Owner’s EquityCapital (What the owner put into
the business)
Net ProfitDrawings (What the owner takes
out of the business
Quiz – True or False
A liability is something owed
An asset is something owed
Owner’s Equity is owed to the owner
The accounting equation is Assets – Liabilities = Owner’s Equity
The owner’s private affairs must be separate from the business
Total Assets are all assets
Total Equities are all assets