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Accounting Equation for Financial Management. It will help to solve equations in a modern manner
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Assets = Liabilities + Owner’s Equity
The resources owned
by a business
The Accounting Equation
The rights of the
creditors, which
represent debts of the
business
The rights of the
owners
a. Chris Clark deposits $25,000 in a bank account in the
name of NetSolutions.
b. NetSolutions purchased land for $20,000.
A company earns revenues by
selling products - Sales
providing services - Fees Earned
renting out premises - Rent Revenue
lending money - Interest Revenue
The amounts used in earning revenue are called expenses.
Revenue and expenses
Expenses that have paid for (or incurred) but not yet been used up are referred to as
prepaid expenses e.g. supplies.
When these prepaid expenses have been used up, they will then become regular
expenses e.g. supplies expenses
Note:
Cash + Supplies + Land
Assets
5,000 1,350 20,
d. NetSolutions provided services to customers, earning
fees of $7,500 and received the amount in cash.
Bal.
12,500 1,350 20,
+7,
d.
Bal.
Liabilities + Owner’s Equity
Accounts Chris Clark, Fees
Payable Capital + Earned
1,350 25,
+7,
1,350 25,000 7,
Note – If the customers did not pay immediately, but opted to pay on account ( i.e. at a
later date), then the asset that would have been increased would have been accounts
receivable
Cash + Supplies + Land
Assets
e. NetSolutions paid the following expenses: wages, $2,125;
rent, $800; utilities, $450; and miscellaneous, $275.
Bal. 12,500 1,350 20,
Bal. 8,850 1,350 20,
e. –3,
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
Liabilities + Owner’s Equity
1,350 25,000 7,
e.
1,350 25,000 7,500 –2,125 –800 –450 –
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
Liabilities + Owner’s Equity
1,350 25,000 7,
400 25,000 7,500 –2,125 –800 –450 –
f. NetSolutions paid $950 to creditors during the month.
f.
g. At the end of the month, the cost of supplies on hand is
$550, so $800 of supplies must have been used up
Cash + Supplies + Land
Assets
Bal. 7,900 1,350 20,
Bal. 7,900 550 20,
g. –
Cash + Supplies + Land
Assets
Bal. 7,900 550 20,
Bal. 5,900 550 20,
h. –2,
h. At the end of the month, Chris withdrew $2,000 in cash from
the business for personal use.
Accounts Chris Clark, Chris Clark Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Drawing Earned Exp. Exp. Exp. Exp. Exp.
Liabilities + Owner’s Equity
400 25,000 7,500 –2,125 –800 –800 –450 –
h.
h. At the end of the month, Chris withdrew $2,000 in cash from
the business for personal use.
400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –
Owner’s
withdrawals
Expenses
Owner’s Equity
Owner’s
investments
Revenues
ECONOMIC VALUE ADDED (EVA)
Is a measure of company’s economic profit, which is profit earned
by the company minus the cost of financing the company’s capital.
Accounting profit is also know as net income.
Economics value added = Net operating profit after tax – (invested
capital * weightage average cost of capital)
It is internal management performance measure used to calculate
true shareholder’s value.
