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Categories: AccountingAccounting & Finance

Financial Management for F&B Business #6 – Accounting Equation

One of the important aspects of the accounting equation is assets, equity, and liabilities. With these assets, equity, and liabilities, the most basic accounting equation explains what the restaurant owns and what involves loans or debt.

Assets, Liabilities, and Equity

Assets in a food business and restaurant include cash, accounts receivable, goods, land, buildings, food and beverage inventory, and also investments made.

Assets can be provided by the owner or obtained through loans from banks or lenders.

Assets provided by the owner are called equity. Assets acquired through loans/debt are liabilities.

Accounting Equation

The most basic form of the accounting equation explains what the restaurant owns versus what it owes.

The most basic accounting equation:

Assets = Liabilities + Owner’s Equity

If the restaurant’s debts (liabilities) are subtracted from the assets:

Assets – Liabilities = Owner’s Equity

Basics of Financial Statements

The basics of a financial statement (balance sheet) – assets must equal (balance against) liabilities and (+) owner’s equity. Let’s use the example of Warung Terlolap Mato and Kak Ya as its owner.

Let’s say Kak Ya has RM 5,000 in cash. Kak Ya uses this RM 5,000 as capital to open a restaurant:

                 WARUNG TERLOLAP MATO 
             ------------------------- 
           Assets        =      Owner's Equity 
      Cash RM 5,000           Capital   RM 5,000

OK, Kak Ya rents a restaurant building, let’s say for RM 700 per month for three (3) months, totaling RM 2,100. This means cash has decreased (RM 5,000 – RM 2,100 = RM 2,900). So, what is the impact of this transaction on the basic accounting equation? Let’s take a look:

           Assets       =      Owner's Equity 
      Cash   RM 2,900         Capital  RM 5,000 
                + 
      Rental RM 2,100

Let’s say Kak Ya buys a kitchen set for RM 5,000, but she only has RM 2,900 in cash. So, Kak Ya takes out a loan and pays a down payment of RM 1,000. This leaves RM 1,900 in cash and a debt of RM 4,000 (notes payable).

         Assets             =         Liability + Equity 
    Cash        RM 1,900           Notes Payable   Capital 
                                     RM 4,000      RM 5,000

    Rental      RM 2,100 
    Kitchen Set RM 5,000 
    --------------------
    Total       RM 9,000   =        RM 4,000   +  RM 5,000 
   =====================            ========      ========

So, the financial statement/balance sheet prepared would look something like this:

                   ASSETS                  LIABILITY 
                     (RM)                                                (RM)

   Cash        1,900.00         Notes Payable       4,000.00
   Rental      2,100.00 
   Kitchen Set 5,000.00        EKUITI PEMILIK 
                                Capital             5,000.00 
               --------                             --------
   Total       9,000.00        Liability + Equity   9,000.00 
   Assets      ========                             ========