ion is to understand what makes up "owner's equity".
By rearranging the accounting equation you can see that Owner's Equity is made up of Assets and Liabilities.
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Owner's Equity = Total Assets less Total Liabilities
Owner's Equity can also be expressed as:
Owner's Equity = Capital invested by owner + Profits (Losses) to date
(also known as 'Retained Earnings')
Rearranging the equation again, therefore:
Total Assets - Total Liabilities = Capital + Retained Earnings
The accounting equation establishes the basis of Double Entry Bookkeeping
Double Entry Bookkeeping
All accounting transactions are made up of 2 entries in the accounts: a debit and a credit .
For example, if you purchased a book, your value of books would increase, but your value of cash would decrease by the same value, at the same time. This is double entry bookkeeping.
Ledger Accounts
A ledger account is an item in either the Profit & Loss account (which we'll discuss shortly) or the balance sheet. A Ledger account is either a:
• Asset
• Liability
• Equity
• Income
• Expense
The example of purchasing a book, mentioned above, can be shown in the form of ledger "T" accounts as follows:
"Dr" is short form "Cr" is short form for Debit for Credit
Purchases-Books
Dr Cash Cr
$ 20
Cash
Dr Cr
Books $ 20
If all transactions are entered into the books in this way, then the sum of all of the debits would equal the sum of all of the credits.
Balance Sheet
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Balance Sheet is one of the three main Financial Statements . It reflects structure of the company's assets and financing sources used to finance these assets as of particular date (ie as of year end). p> Referring to the Accounting Equation, where:
Assets
=
Liabilities
+
Equity
Balance Sheet reflects the same principle, i.e. one side of the Balance Sheet represents Assets and the other side - Liabilities and Equity . The must be a balance between the total value of the Assets and the total value of Liabilities and Equity.
Assets are properties (can be material, immaterial, monetary) owned by the entity, i.e. any physical thing (tangible) or right (intangible) that has a monetary value. Assets usually are divided into Current Assets (cash and other assets that may reasonably be expected to realized in cash or sold or used within period less or equal to one year. Examples: inventory, cash, accounts receivable, prepaid expenses) and Long-term Assets (Used by the entity for a period longer that one year. Examples: long-term investments, fixed assets, intangible long-term assets). p> Liabilities are debts owned to outsiders, ie creditors. Divided into Current Liabilities , which are due within one year (accounts payable, salaries payable, taxes payable, interest payable) and Long-term Liabilities which are due after one year
Equity includes amounts invested in a business by owners, special kind of liability residual claim against assets of business after total liabilities are deducted. Includes Share Capital (financial means invested by the shareholders), Retained Earnings - net income retained in the business.
Below there is an example of the Balance Sheet :
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You can see that total value of the Assets ($ 50650) equals to the total value of Liabilities ($ 17900) and Equity ($ 32750). p> Trial Balance
A trial balance is a list of all of the ledger accounts of a business and the balance of each. Debits are shown as positive numbers and credits as negative numbers. The trial balance should therefore always equal zero. p> If the journal entries are error-free and were posted properly to the general ledger, the total of all ...
