We are covering the FA1 ACCA paper, this is the second post and chapter of FA1 here, Asset and liability (Accounting Equations). You will learn all concepts which are important to pass the FA1 ACCA exam.

Asset and liability

What Is Asset In Accounting

Any property or resources that a business or economic body owns or controls is referred to as an asset. It is everything that might be used to generate positive financial benefits.  Assets are ownership values that can be easily changed into currency. There are two types of assets.

What Is Current Asset In Accounting

Any asset that can be changed into cash easily, the life is must between 6 months to 1 year. Example cash, receivable, and inventories.

Non-Current Asset or Fixed Asset In Accounting

A fixed asset means any asset or resource which takes time to convert into cash and has a life between 1 to 5 years or more. Examples cars, buildings, furniture, house, etc.

What Is Liability In Accounting

A liability means the upcoming economic gains given by an entity to other businesses as a result of previous actions or other historic events. OR a liability is a debt that an owner owes to another party, usually in the form of monetary.

Liabilities are resolved over time by exchanging financial gains such as money, products, or services.
The followings are examples of liabilities:

  1. Debts
  2. Mortgage debt
  3. Cash owed to suppliers (current liabilities)
  4. Salaries owed
  5. And tax obligations

There are two types of liabilities or obligations.

Current Liability

Obligations that are liable to pay within 1 year such as supplier payable, bank interest, sales tax, etc.

Non-Current Liability

The obligation takes 1 to 5 years to pay or more such as a bank loan.

What Is Accounting Equations

Accounting equations depict the connection between a person’s or company’s assets, liabilities, and ownership. The dual aspect system is designed on this basis. Debit balance equals total credits for each transaction. The accounting equation is very helpful when you check your balance or reconcile.

Equation 1: Asset is equal to Capital + Liability

For Example, W wants to start a business of wholesale. He starts the business with 5000. (accounting equation will be)

5000=5000 +0 (because he invests his own money (go ahead with the second scenario)

W take 1000 to X (now the accounting equation will be)

? =5000 +1000 (means asset will be now 6000)

Equation 2: Net Asset = (Capital introduced + retained profit) + liability.

John introduced 5000 capital and sell an item worth 2000 at 3000.

The equation will be =(5000 + 1000(3000-2000), so the asset will be 6000 as there is no liability.

Equation 3: Asset is equal to (capital introduced +(earned profit-drawings) + liability

Y drop 2000 cash in the business and earn a profit for the day 500 with drawings of 200.

The equation will be? (2000 + (500-200) = asset is 2300 in this case liability is not given.

What Are Drawings In Accounting

The amount is taken by the owner from his business for his personal use and reduces the profit.

Two Most Important Account In Accounting

Account Payable

A trade payable account is an individual to whom a company owes money for obligations accrued while conducting business. The word could relate to unpaid debts resulting from the acquisition of materials, components, or commodities for reselling from vendors.

Account Receivable

A trade receivable account is a customer that owes the company money for obligations acquired through trading operations, such as when the company sells its services or goods. It is a company or business’s current asset.

Basic double-entry examples

1. Furniture on cash 4000

The double entry will be (debit furniture or non-current assets and credit cash).

2. Sale a car on credit worth 100000

Double entry (Receivable 100000 and sales account credit with 100000)

3. Purchase the phone at 5000 and pay 3000 and make a promise to pay 2000 in the next week.

Double entry ( purchase debit 5000, credit 3000, and A/C payable credit with 2000)

4. Mumford buy an electronic toy for his baby on cash for 5000

Double entry (fixed asset(toy) debit with 5000 and credit cash 5000.

5. An organization purchases a machine worth 10000 along with some other equipment for machine operating worth 2000. Make the purchase return entry for equipment assuming that it was a credit purchase.

Double entry (Account payable debit with 2000 and purchase return credit)

Credit transactions

Those transactions in which cash is not involved. A credit transaction is usually a current liability.

Capital Expenditure

It is spending that leads to the purchase of fixed assets or an increase in their earnings potential.
The presence of a fixed asset in the financial records is the result of capital spending on non-current assets. When determining profit during an accounting cycle, the cost of the item of capital expenditure is not (less -) from income. It is specified as an expense that benefits the firm over a period of more than one accounting cycle.

Revenue Expenditure

To sustain non-current assets’ present earning capability, such as non-current asset maintenance.
Revenue expenditure incorporates in the profit and loss statement if it is related to the trading operation and revenue for that period.

Note:

  • Machinery and automobiles are examples of capital expenditures that record as an asset in the accounts.
  • The term “revenue expenditure” refers to spending on products that will be in operation over time, such as storage, stationery, and power. For the accounting cycle, these are records as expenses.
  • When capital expenditures are considered revenue expenditures, they are mistakenly added to expenses, resulting in a profit understatement (too low).
  • If revenue expenditure is classified as capital expenditure, it will exclude from expenses, resulting in an overstatement of profit (too high).

Must read:

Business transaction and documentation

ACCA-FA1 practice questions

Journal entries-double entry system for beginners

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