Accounting Equation

and
Financial Statements analysis.

Course Teacher:
Md. Nurul Hoque
Managing Director & ceo, ncrl
ex.General Manager
Sonali Bank Limited
Part time Teacher
IBB(BB),BAFEDA,SBSC & EWU
Guest Speaker
EMBA of Dhaka University
 QUESTIONS ASKED BY QUESTIONS ASKED BY
INTERNAL USERS EXTERNAL USERS

 Is cash sufficient to pay  Is the company earning

bills? satisfactory income?
 What is the cost of  How does the company
manufacturing each unit compare in size and
of product? profitability with its
 Can we afford to give competitors?
employees pay raises this  Will the company be
year? able to pay its debts as
 Which product line is the they come due?
most profitable?
BASIC ACCOUNTING EQUATION
The Basic Accounting Equation:

ASSETS = LIABILITIES + OWMER’S EQUITY

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owners Equity

(Owner’s equity=capital+ income – expenses- drawings)

 ASSETS

Assets:
Are resources owned by a business.
They are things of value used in carrying
out such activities as production and
exchange.
 LIABILITIES

Liabilities:
Liabilities are claims against
assets.
They are existing debts and
obligations of the company..
 OWNER’S EQUITY

Owner’s Equity:
Owner’s Equity = Capital + Revenues – Drawing –
Expenses.
 It is equal to total assets minus total liabilities.
 Owner’s Equity represents the ownership claim on
total assets.
 Components of Owner’s Equity:
 1. Capital
 2. Drawings
 3. Revenues
 4. Expenses
 INVESTMENTS BY OWNERS

Investments by owner:

The assets put into the business by the

owner.
These investments in the business
increase owner’s equity.
 DRAWINGS

Drawings:
These are withdrawals of cash or other
assets by the owner for personal use.

Drawings decrease total owner’s

equity.
 REVENUES
Revenues:
Are the gross increases in owner’s equity
resulting from business activities entered into
for the purpose of earning income.
Revenues may result from sale of
merchandise, performance of services, rental
of property, or lending of money.
Revenues usually result in an increase in an
asset.
 EXPENSES

 Expenses:
 The decreases in owner’s equity that result
from operating expenses of the business.
 Expenses are the cost of assets consumed or
services used in the process of earning
revenue.
 Examples of expenses include utility expense,
rent expense, and supplies expense.
 INCREASES AND DECREASES IN
OWNER’S EQUITY

INCREASES DECREASES

Investments
Investments Withdrawals
Withdrawals
by
byOwner
Owner by
byOwner
Owner
Owner’s
Equity
Revenues
Revenues Expenses
Expenses
 TRANSACTION ANALYSIS
TRANSACTION: 1

On September 1, he invests $=15,000 cash in the

business, which he names Soft byte.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
(1) 15,000 = 15,000 Investment
There is an increase in the asset Cash, $15,000, and
an equal increase in the owner’s equity, M.
Doucette, Capital, $15,000.
TRANSACTION 2
Softbyte purchases computer equipment for
$7,000 in cash.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
15,000 15,000 Investment
(2) (7,000) 7,000
Balance 8,000 + 7,000 = 15,000
TRANSACTION 3

Softbyte purchases computer paper and supplies expected

to last several months from Chuah Supply Company for
$1,600 on account.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 8,000 7,000 15,000
(3) 1,600 1,600
Balance 8,000 + 1,600 + 7,000 = 1,600 + 15,000

.. and the liability Accounts

The asset Supplies is increased $1,600,
Payable is increased by the same amount
TRANSACTION 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 8,000 1,600 7,000 1,600 15,000
(4) 1,200 1,200 Service Revenue
Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200

Cash is increased $1,200, and

M. Doucet, Capital is increased $1,200.
TRANSACTION 5

Softbyte receives a bill for $250 for advertising its business

but pays the bill on a later date.
Trans. # Assets = Liabilities + Owner's Equity
Accounts M. Doucet,
Cash Supplies Equipment Payable Capital
Balance 9,200 + 1,600 + 7,000 = 1,600 + 16,200
(5) 250 (250) Advertising Expense
Balance 9,200 1,600 7,000 1,850 15,950

Accounts Payable is increased

$250, and M. Doucet, Capital is
decreased $250.
 TRANSACTION 6

Softbyte provides programming services of $3,500 for

customers and receives cash of $1,500, with the balance
payable on account.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 9,200 + 0 + 1,600 + 7,000 = 1,850 15,950
(6) 1,500 2,000 3,500 Service Revenue
Balance 10,700 2,000 1,600 7,000 1,850 19,450

..
Cash is increased $1,500; Accounts Receivable is increased $2,000;
and M. Doucet, Capital is increased $3,500.
TRANSACTION 7

Expenses paid in cash for September are store rent, $600,

salaries of employees, $900, and utilities, $200.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 10,700 2,000 1,600 7,000 1,850 19,450
(7) (600) (600) Rent Exp.
(900) (900) Salaries Exp.
(200) (200) Utilities Exp.
Balance 9,000 + 2,000 + 1,600 + 7,000 = 1,850 + 17,750

Cash is decreased $1,700 and M. Doucet, Capital is decreased the

same amount.
 TRANSACTION 8

Softbyte pays its advertising bill of $250 in cash.

Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 9,000 2,000 1,600 7,000 1,850 17,750
(8) (250) (250)
Balance 8,750 + 2,000 + 1,600 + 7,000 = 1,600 + 17,750

Cash is decreased $250 and Accounts Payable is decreased the same

amount.
 TRANSACTION 9

The sum of $600 in cash is received from customers who

have previously been billed for services in Transaction 6.

Trans. # Assets = Liabilities + Owner's Equity

Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 8,750 2,000 1,600 7,000 1,600 17,750
(9) 600 (600)
Balance 9,350 + 1,400 + 1,600 + 7,000 = 1,600 + 17,750

Cash is increased $600 and Accounts Receivable is decreased by the

same amount.
 TRANSACTION 10

Marc Doucet withdraws $1,300 in cash from the

business for his personal use.
Trans. # Assets = Liabilities + Owner's Equity
Account Accounts M. Doucet,
Cash Receivable Supplies Equipment Payable Capital
Balance 9,350 1,400 1,600 7,000 1,600 17,750
(10) (1,300) (1,300) Doucet, Drawings
Balance 8,050 + 1,400 + 1,600 + 7,000 = 1,600 + 16,450

Cash is decreased $1,300 and M. Doucet, Capital is decreased by the

same amount.
 FINANCIAL STATEMENTS

After transactions are identified, recorded, and

summarized, four financial statements are prepared from
the summarized accounting data:

1. An income statement presents the revenues and

expenses and resulting net income or netloss of a
company for a specific period of time.

2. A statement of owner’s equity summarizes the

changes in owner’s equity for a specific period of time.
 FINANCIAL STATEMENTS
In addition to the income statement and statement of
owner’s equity, two additional statements are
prepared:
3. A balance sheet reports the assets, liabilities, and
owner’s equity of a business enterprise at a
specific date.
4. A cash flow statement summarizes information
concerning the cash inflows (receipts) and
outflows (payments) for a specific period of time.
**The notes are an integral part of the financial
statements.
Accounting Equation & financial statements
ILLUSTRATION:01
1.On September 1, In Soft byte invests $15,000 cash in the business M.Doucet.
2.Purchases computer equipment for $7,000 cash.
3.Purchases computer paper and supplies expected to last several months from Chua
Supply Company for $1,600 on account.
4.Receives $1,200 cash from customers for programming services it has provided.
5.Receives a bill for $250 for advertising its business but pays the bill on a later date.
6.Provides programming services of $3,500 for customers and receives cash of $1,500,
with the balance
7.Expenses paid in cash for September are store rent, $600, salaries of employees, $900,
and utilities, $200.
8.Pays its advertising bill of $250 in cash.
9.The sum of $600 in cash is received from customers who have previously been billed for
services in Transaction 5.
10.withdraws $1,300 in cash from the business for his personal use.
Required:
1.Accounting equation.
2.Income statement.
3.Statement of equity.
4.Balance sheet.
5.Cash flow statement.
Solution: 01 Accounting Equation
Accounts supplies Equipment Account Remarks
date cash Notes Equity
Receivable payable payable

Investment
Sep,01 15000 15000
,, 02 (7000) 7000
,, 03 1600 1600
,, 04 1200 1200 Service
revenue
,, 05 250 (250)
,, 06 1500 2000 3500 Revenue
,, 07 ( 600) (600)
Expenses
,, ( 900) (900)
,, (200) (200) “
,, 08 (250) (250) “
,, 09 600 (600)
,, 10 (1300) (1300) Drawing
-------- -------- --------- --------- ---------
--------- --------
8050 1400 1600 7000 1600 00000 16450
===== ====== ====== ====== ====== ====== =====
 Solution:02
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended March 31, 2018
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $ 2,750

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the statement of
owner’s equity.
 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

Solution:03
SOFTBYTE
Statement of Owner's Equity
For the Month Ended March 31, 2018

M. Doucet, Capital, September 1 $ -

Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Doucet, Capital September 30 $ 16,450

Net income of $2,750 is carried forward from the income statement to

the statement of owner’s equity. The owner’s capital of $16,450 at the
end of the reporting period is shown as the final total of the owner’s
equity column of the Summary of Transactions (Illustration 1-9 in
text).
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Solution:04
Owner’s
capital of
$16,450 at the
end of the
reporting
period shown
in the
statement of
owner’s equity
– is also
shown on the
balance sheet.
Cash of $8,050
on the balance
sheet is
reported on
the cash flow
statement.
 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Solution:05

Cash of
$8,050 on
the balance
sheet and
cash flow
statement is
shown as the
final total of
the cash
column of
the
Summary of
Transactions
(Illustration
1-9 in text).
 Problem on Accounting Equation:
Illustration-02:

The following transactions are available of the business concern for the month of
January 2019 as under:
1. January 01 ,Capital invested:
a. Cash---------- ----- TK=15000
b. Almira & table---------- TK=10000
2. : 01 Rent paid for January 19 ------------ TK=1000
3. : 02 purchased medical equipment for cash -- TK=5000
4. ; 04 Medical supplies ------------------ TK=1000
5. ; 10 Cash service revenue received------------ TK=6000
6. ; 15 Billed patient for treatment ---------------- TK=4000
7. ; 20 Cash borrowed from bank against note payable TK=2000
8. : 25 Received from the patient’s bill, January’15 TK=3000
09. : 30 received a telephone bill ------------------------- TK =500
10. : 31 paid salary TK = 1000/-& electric bill TK=600
11. : 31 medical supplies in hand-------------------------- TK=200

Required -
1. Prepare summary of transactions showing the effects on Accounting Equation
2. The financial statements.
solution:01 Summary of accounts.
Assets = Liability + owner’s equity

Date Cash Supplies Accounts Equipment = A/C PAYBLE Notes Capital Remarks
Receivable ------------- ------------ payable
-------- -------- ……………
……………….. ---------- --------- ------------
Jan -1 15000 10000 = 25ooo INVESTMENT

“ – 1 (1000) = (1000)
EXPENSES
-------- --------- ---------
10000 24000
14000 =

(5000) 5000
“ -2 =
…………..
-------- -------------
24000
15000
9000
“- 4 1000 = 1000
6000 6000
=
“ -10 -------- ………. …………….
………….. ……………..
…………. ---------
15000 1000 0000 15000 = 1000 0000 30000
===== ==== ========
===== ===== ======
=====

PTO-
solution: Summary of accounts(cont.)
Assets ==Liability +owner’s equity
a/c Receivable Equipment A/C PAYBLE Notes payable Capital Remarks
Date Cash Supplies 0000 = 000
15000 1000 15000 1000 30000
=
Jan-15
4000 = 4000
= 2000
“ 20 2000

(3000) =
,, 25 3000

,, 30 500
=
=
(1600) (5oo)
,, 31
(1600)
=
(800)
,,
31 ----------- ------------ ------------
-------- --------- ----------- = (800)
1000 15000 1500 2000
18400 ======= ====== ======= =======
===== 200 = ----------
===== 34600 31100
34600 ===== ======
=====
 Income Statement
For the month ending January 31, 2019

Revenue : Amount:
Service Charge (6,000+4,000) TK=10,000
Expenses :
Rent Paid TK=1,000
Telephone Bill TK= 500
Salary TK=1,000
Electric Bill TK= 600
Medical Supplies (1,000-200) TK= 800

Total Expense 3,900

Net Income TK= 6,100
 Statement of owner’s equity
For the month ended January 31, 2019

Particulars Amount Amount

Capital January 1,2018
Cash Investment 15,000
Almirah & Table 10,000
Add Net Income 6,100 31100
Total Owner’s Equity on January’31 31,100
=====
 Balance Sheet
For the month ending January 31, 2019
Assets
Amount
Cash 18,400
Account Receivable 1,000
Medical Supply 200
Equipment 15,000
34600
=====
Liability + Equity Amount
Account Payable 1,500
Notes Payable 2,000
As per equity statement
Capital Equity 31,100
34,600
======
 Cash Flow Statement
For the month ended January 31, 2019
Cash Inflow Amount Amount
Owner Investment Tk. 15,000/-
Service Revenue Tk. 6,000/-
Cash Borrowed Tk. 2,000/-
Patient Bill Received Tk. 3,000/-
26,000/-
=======
Cash outflow
Rent Paid Tk. 15,000/-
Equipment Purchase Tk. 6,000/-
Salary & Electric Bill Tk. 2,000/-
7,600/-
=======
Increase of Cash Inflow 18,400/-
 Exercise
Question -01:
a) What are the various kind of Adjusting entries? Give the example of some adjusting entries.
b) Journalize the following adjusting entries:
1. Prepaid rent expired ---------------------TK=1,000.
2. Supplies on hand------------------------- TK=400 (balance before adjustment equals TK=700).
3. Depreciation on furniture ---------------TK=275.
4. Accrued salary expense -----------------TK=500
5. Unearned revenue ----------------- TK=2000.
Question-02:
Mr Shohag started Shohag travelling agency business on January 01, 2019. He invested cash
TK= 40000 and equipment TK=10000, During the first month the transactions were as follows:

January 2, Paid office rent for January in cash -------- TK=2000

‘’ 4, Purchased office cabinet on account ---------- ‘’ =6000
‘’ 10, Paid for advertising bill in cash ----------- ‘’ =1500
‘’ 13, Received for service rendered in cash ------- ‘’ = 6000
‘’ 16, Purchased office supplies in cash ---------- ‘’ = 500
‘’ 18, Cash withdraw for personal use ------- ‘’ =800
‘’ 24, Service charge earned but not yet received -------‘’ =10000
‘’ 27, Borrowed from Sonali bank against notes payable=5000
‘’ 28, received cash from account receivable ------------ = 5000
‘’ 30, Paid cash salary TK=2000, telephone bill -------TK=500
and electric bill TK=1000
Required:
1. Show the effects of the above transactions on the accounting equation in tabular form.
Question-03:
a) What is the basic accounting equation? Explain the factors which effects to increase and
decrease the owner’s equity in accounting equation.

b) BEXIMCO Limited started travelling agency business on January 01, 2019.He invested
cash TK=20000 and equipment TK=10000. During the first month the transactions were as
follows:
January 02, Paid office rent for January in cash -- TK=2000
‘’ 04, Purchased office cabinet on account ---- ‘’ =6000
‘’ 10, Paid for advertising bill in cash ------ ‘’ =1500
‘’ 13, Received for service rendered in cash ----- ‘’ =6000
‘’ 16, Purchased office supplies in cash ----- ‘’ = 500
‘’ 18, Cash withdraw for personal use ----- ‘’ =800
‘’ 24, Service charge earned but not yet received -------- ‘’ =10000
‘’ 27, Borrowed from bank against notes payable ---------- “=5000
‘’ 28, Received cash from account receivable -------- ‘’ =5000
‘’ 30, Paid cash salary TK=2000 and electric Bill ------- “=1000.
Required:
1. Show the effects of the above transactions on the accounting equation in tabular
form.
2. Prepare income statement, cash flow statement & balance sheet
Question-04:

Bangladesh Limited started Bangla travelling agency business on January 01, 2019.

They invested cash TK= 40000 and equipment TK=10000. During the first month the transactions
were as follows:
1. January 02, Paid office rent for January in cash TK=2000
2. ‘’ 04, Purchased office cabinet on account ‘’ =6000
3. ‘’ 10, Paid for advertising bill in cash ‘’ =1500
4. ‘’ 13, Received for service rendered in cash ‘’ = 6000
5. ‘’ 16, Purchased office supplies in cash ‘’ = 500
6. ‘’ 18, Cash withdraw for personal use ‘’ =800
7. ‘’ 24, Service charge earned but not yet received ‘’ =10000
8. ‘’ 27, Borrowed from Sonali bank against notes payable =5000
9. ‘’ 28, received cash from account receivable ‘’ = 5000
10.‘’ 30, Paid cash salary TK=2000, telephone bill TK=500 and electric bill TK=1000

Required:
1. Show the effects of the above transactions on the accounting equation in tabular form.
2. Prepare cash flow statement & balance sheet.
Any Question?

Thank You !