Accounting equation
The basic accounting equation is :
Resources supplied by the owner = resources in the business
Resources supplied by the owner is called capital in accounting. Resources present in a business are called assets.
Capital = net assets or
- Capital= assets – liabilities
Balance sheet
It is a statement drawn up at the end of each period stating there in all the assets and liabilities of a business arranged in the customary order to exhibit the true and correct state of affairs of a business on a particular date.
Balance sheet is prepared from a trial balance after the balances of nominal accounts have been transferred to either trading account of profit and loss account. The remaining balances of personal or real accounts either show assets or liabilities.
The accounting equation is presented in a form of financial statement called balance sheet. The balance sheet shows the financial position of a business at a particular time.
There are 2 formats of balance sheet, however i’d only outline the easier one
Working capital : current assets – current liabilities
This capital represents the amount of resources a business has in a form that can be readily converted to cash.
Drawing are the resources the business owner withdraws for his personal use.
Fixed assets
A XXX
B XXX
C XXX
Add Current assets
A XXX
B XXX
C XXX
Less current liabilities XXX
Working capital ( assets – current liabilities) : YYY
Less long term liabilities XXX
Capital YYY
Add net profit XXX
Or
Less net loss XXX
And
Less drawings (If any) XXX
Consider the following example
Balance of k m traders at 31 dec 2011
Premises $1500
Motor vehicle $500
Cash at hand $200
Cash in bank $5000
Drawings $50
Creditors $550
Debtors $300
Loan to be returned 2 years later $500
Net profit $5500
Balance sheet at 31 dec would be
Fixed assets
Premises $1500
Motor vehicle $500
Add Current assets
Debtors $300
Cash in bank $5000
Cash at hand $200 . _______
$7500 .
Less Current liabilities
Creditors $550
_________
Working capital $6950 .
Less Long term liabilities $ 500 ________
Capital $6450 .
Add net profit $5500
Less drawings $50 ____________
$11900