Accounting Equation: Assets, Liabilities, and Owner's Equity

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Questions and Answers

What is the primary purpose of supplementary schedules and other information in financial statements?

To explain items in the balance sheet and income statement, and disclose risks and uncertainties (correct)

To calculate the accounting equation

To provide a detailed breakdown of income statement items

To recognize resources and obligations not included in the balance sheet

What is the fundamental principle of the double-entry system of recording?

Each transaction affects only one item in the financial accounting records

Each transaction affects all items in the financial accounting records

Each transaction affects three items in the financial accounting records

Each transaction affects at least two items in the financial accounting records (correct)

What is the result of maintaining the equality of the basic accounting equation?

The equation is said to be in 'arrears'

The equation is said to be in 'surplus'

The equation is said to be in 'deficit'

The equation is said to be in 'balance' (correct)

What is the effect on the basic accounting equation when an enterprise acquires assets through an exchange?

Assets increase and owner's equity remains the same Signup and view all the answers

What is not a reason for an increase in assets?

Decrease in liabilities Signup and view all the answers

What can affect at least two items in the basic accounting equation?

Each accounting transaction Signup and view all the answers

What is the result of an increase in an asset category in production?

An increase in assets Signup and view all the answers

What is not a type of transaction that can increase assets?

Decrease in liabilities Signup and view all the answers

What is the fundamental accounting equation?

ASSETS = LIABILITIES + OWNER'S EQUITY Signup and view all the answers

What is a requirement for recognizing an asset?

It is probable that the future economic benefits will flow to the enterprise Signup and view all the answers

What is an example of a liability?

Accounts Payable Signup and view all the answers

How can a liability be settled?

By payment of cash, transfer of non-cash asset, or providing service Signup and view all the answers

What represents the residual interest of the owner over the enterprise's economic resources?

Owner's Equity Signup and view all the answers

What is the mathematical computation of owner's equity?

ASSETS - LIABILITIES = OWNER'S EQUITY Signup and view all the answers

What is the relationship between assets and liabilities in the accounting equation?

Assets are equal to the sum of liabilities and owner's equity Signup and view all the answers

What is the purpose of the accounting equation?

To present assets as equal in value to the sum of liabilities and owner's equity Signup and view all the answers

What is the purpose of identifying transactions to be recorded?

To evaluate the effect of transactions on assets, liabilities, capital, revenue, or expenses Signup and view all the answers

What is the name of the book of original entry where transactions are recorded in a chronological order?

Journal Signup and view all the answers

What is the purpose of the F column in the general journal?

To provide a reference guide to indicate the ledger account to which an entry has been posted Signup and view all the answers

What is the rule in preparing the trial balance?

Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenues, and Expenses Signup and view all the answers

What is the purpose of the debit column in the general journal?

To record the debit amount Signup and view all the answers

What is the first step in the bookkeeping process?

Journalizing Signup and view all the answers

What is the purpose of the journal?

To record transactions and events in a chronological order Signup and view all the answers

What is the rule in preparing the trial balance regarding the peso sign?

The peso sign is placed only in the first debit amount, first credit amount, and on the totals Signup and view all the answers

Study Notes

The Basic Accounting Equation

The basic accounting equation is: Assets = Liabilities + Owner's Equity
This equation presents assets as equal in value to the sum of liabilities and owner's equity

Assets

Assets are resources controlled by the enterprise as a result of past events
Assets are expected to provide future economic benefits to the enterprise
Requirements for recognizing an asset:
- It is probable that future economic benefits will flow to the enterprise
- The asset has a cost or value that can be measured reliably
Examples of assets: Cash, Accounts Receivables, Office Supplies, Tools and Equipment, Vehicle, Land and Building

Liabilities

Liabilities are present obligations of the enterprise arising from past events
Liabilities are expected to result in an outflow of resources from the enterprise
Requirements for recognizing a liability:
- It is probable that an outflow of resources will result from the settlement of a present obligation
- The amount at which the settlement will take place can be measured reliably
Examples of liabilities: Accounts Payable, Notes Payable, Mortgage Payable, Loans Payable
A liability can be settled by:
- Payment of cash
- Transfer of non-cash assets
- Providing services

Owner's Equity

Owner's equity is the interest of an owner in an enterprise
Owner's equity is the excess of an enterprise's assets over its liabilities
Owner's equity can be computed as: Assets - Liabilities = Owner's Equity
Owner's equity represents the residual interest of the owner over the enterprise's economic resources

Double-Entry Bookkeeping

In accounting, each transaction affects at least two items in the financial accounting records
The double-entry system of recording is based on the principle of duality
Each transaction affects the basic accounting equation, maintaining the equality of the equation

Journalizing

Journalizing is the process of recording transactions and events in a chronological order in the book of original entry called the journal
A general journal has columnar headings: date, particulars, F, debit, and credit
These columnar headings provide information about the transaction:
- Date: the date when the transaction occurred
- Particulars: names or titles of accounts where changes have been caused by the transaction
- P/R or F: a reference guide to indicate the ledger account to which an entry has been posted
- Debit and Credit: money columns to record the debit and credit amounts of the entry

Trial Balance

A trial balance is prepared by following specific rules:
- Heading consists of three lines: name of the business, title of the report, and date
- Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenues, and Expenses
- Only accounts with balances appear in the trial balance
- The peso sign is placed only in the first debit amount, first credit amount, and on the totals

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Description

Learn about the basic accounting equation, which represents the relationship between assets, liabilities, and owner's equity. Understand the elements of the equation and their importance in accounting.