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October 2, 2015 at 2:26 pm
I have a little doubt with accruals example in this lecture
Assests= Equity+ liability
Now when we took account of £950 we deducted that amount from our income statement as an expense which means Profit /Cash( current Assent) will be less in statement of financial position. In order to have balance of above equation either equity or liability should decrease. The amount £950 doesn’t have any effect on equity so if assets in form of cash is reducing, liabilities should decrease. But on financial statement we show that accruals as liability and it will increase by 950
John Moffat says
October 2, 2015 at 2:38 pm
But it does affect equity!! Equity is capital plus profits, so if profits fall then so does equity.
However, if you are watching the lectures in order (as you should) then for the moment we are only looking at sole traders where we do not use the word equity. The total capital owing to the owner is what it was at the start of the period + profits – drawings.
When we come to look at limited companies later in the lectures, we use the word equity for the total owing to the owners instead.
Making an accrual increases the expense and therefore reduces the profit and therefore reduces the total capital (equity).
Making an accrual increases liabilities and therefore reduces the net assets.
The total capital (equity) will still equal the net assets (which is the basic accounting equation).
October 2, 2015 at 3:08 pm
sorry John i didn’t watch full lecture ( example 4) and therefore there was a doubt but now its all clear.
Thanks for the lecture video
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