ACCA FA1 notes

Asset and liability (Accounting Equations)

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

Asset and liability

Asset

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 benefit.  Assets are ownership values that can be easily changed into currency.
There are two types of asset.

1 current Asset:

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

2 Non current asset or fixed asset:

A fixed asset means any asset or resource which take time to convert in cash and have life between 1 to 5 years or more. Example car, building, furniture, house etc.

Liability

A liability is 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.
Debt, mortgage debt, cash owing to suppliers (current liabilities), salaries owed, and tax obligation are all examples of liabilities. There are two types of liability and obligations.

Current Liability

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

Non current liability

Obligation which take 1 to 5 years to pay or more such bank loan.

Accounting equations

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

Equation 1: Asset is equal to Capital + Liability

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

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

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

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

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

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

Equation will be ? =(5000 + 1000(3000-2000). so 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 business and earn a profit for the day 500 with drawings of 200.

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

Drawings

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

Account payable: A trade payable account  is an individual to whom a company owes money for an 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’s 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

Double entry will ( debit furniture or non current asset and credit cash).

2. sale a car on credit worth 100000

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

3. Purchase phone at 5000 and pay 3000 and make promise to pay 2000 in 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 purchase 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 transaction in which cash is not involved.

Capital Expenditure

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 specify as an expense that benefits the firm over a period of more than one accounting cycle.

Revenue Expenditure

It is for the objective of the business’s operation, comprising expenses such as sale and supply costs, administration costs, and finance costs.
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 records as an assets 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 as 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 excludes from expenses, resulting in an overstatement of profit (too high).

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Must read:

Business transaction and documentation-FA1(ACCA)

ACCA-FA1 practice questions-chapter 1

Journal entries-double entry system for beginners

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