Accounting Equation

a) THE ACCOUNTING EQUATION

A business owns properties. These properties are called assets. The assets are the business resources that enable it to trade and carry out trading. They are financed or funded by the owners of the business who put in funds.

These funds, including assets that the owner may put is called capital. Other persons who are not owners of the firm may also finance assets. Funds from these sources are called liabilities.

The total assets must be equal to the total funding i.e. both from owners and non-owners. This is expressed inform of accounting equation which is stated as follows:

ASSETS = LIABILITIES + CAPITAL

Each item in this equation is briefly explained below.

Assets:

An asset is a resource controlled by a business entity/firm as a result of past events for which economic benefits are expected to flow to the firm.

An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will flow towards the firm i.e. in form of cash once the customers pays.

Assets are classified into two main types:

i) Non current assets (formerly called fixed assets).

ii) Current assets.

Non current assets are acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in business for a period of more than one year.

Major examples include:

▪ Land and buildings

▪ Plant and machinery

▪ Fixtures, furniture, fittings and equipment

▪ Motor vehicles

Current assets are not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. Examples include:

▪ Stock of goods – for purpose of selling.

▪ Trade debtors/accounts receivables – owe the business amounts as a resort of trading.

▪ Other debtors – owe the firm amounts other than for trading.

▪ Cash at...