FACULTY ECONOMICS AND BUSINESS

EBA 6113 ACCOUNTING FOR MANAGERS
INDIVIDUAL ASSIGNMENT
ASSIGNMENT 1 (BASED ON CASE STUDY)

LECTURER: MR. MICHAEL TINGGI
DUE DATE: 9TH MARCH 2013

Done by:
Satnam Singh 13030035

CASE 1 1.0 An accountant prepared a balance sheet for a business. In the balance sheet, the equity of the owner was shown next to the liabilities. This confused the owner, who argued: My equity is my major asset and so should be shown as an asset on the balance sheet. How would you explain this misunderstanding to the owner?

As an accountant, we must first establish what the definition of asset is and what the definition of equity is. An asset is defined as a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefits (Gilbertson et al, 2008). Whereas, equity is the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses) invested to purchase assets, therefore cannot be recognized as asset (Gilbertson et al, 2008). The difference can be further explained by the Accounting equation of Assets, which shows:
ASSETS = LIABILITIES + OWNER’S EQUITY

From the equation we can derive that assets are comprised by liabilities and owner’s equity. Therefore, equity cannot be shown as an asset on the balance sheet because equity is the balance of assets minus the liabilities of the owner. So when we look at the Accounting Equation rearranged, it shows:
OWNER’S EQUITY = ASSETS – LIABILITIES

Equity cannot be regarded as an asset because it is considered a “borrowed” income provided by the owner for the business. In general, equity can be thought of any assets after all its debts associated with that asset have been paid off. For example, a car or house with no outstanding debt is considered the owner’s equity