Accounting Equation

STATEMENT OF FINANCIAL
POSITION/
Balance sheet
Lesson Outcome
At the end of the lesson, students should
be able to:
1. Identify the elements in the balance
sheet (SoFP)
2. Describe the basic accounting equation
3. Relate the balance sheet components to
the accounting equation
4. Describe
the
extended
accounting
equation
5. Relate
the
income
statement
components to the accounting equation
Financial statements
There
are three (3) major financial

statements :
1. Statement of Comprehensive Income
(SOCI)/ Income Statement
Measures
the
financial
performance
profitability over a specific period of time
or
2. Statement of Financial Position (SOFP)/

Balance Sheet
3.
Summarizes the business assets, liabilities and

equity at a specific point of time
Cash Flow Statement

Shows the flow of cash in and cash out of the
business.
Classification of
business transactions
Assets
Owners
equity
Liabilities
Statement of Financial
Position
Position
Revenues
Position
Income Statement
Expenses
Income Statement
Statement of Financial Position

(SOFP)
Discloses the financial position of a
business on a given date, showing

the assets, liabilities and owners
equity.
Statement of Financial Position may
be represented in two ways:

1. Traditional or horizontal form
2. Vertical form
RM
ASSETS
Land and building
RM
EQUITY
120,000 Capital
230,000
Vehicles
60,000
Inventories
65,000 LIABILITIES
Account
receivables
40,000 Bank loan
50,000
Cash and bank
35,000 Account
payables
40,000
320,000
AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2015
320,000
AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2015
RM
ASSETS
Land and
building
120,000
Vehicles
60,000
Inventories
65,000
Account
receivables
40,000
Cash and bank
35,000
320,000
EQUITY
Capital
230,000
LIABILITIES
Bank loan
50,000
Account
40,000
Assets
An asset is a resource controlled by the
enterprise as a result of past events and

from which future economic benefits are
expected to flow to the enterprise.
Economic resources which are of value to
the business.
Provide either present or future benefits to
the business
Used to assist in the production of goods
and services to generate income and
revenues to the business
Assets
Non current Assets
Assets acquired not for purpose of resale to be
held for more than one accounting period.

Land, Building, Vehicles, Investments, Patents
Current Assets
Cash and assets acquired for resale and are
expected to be convertible into cash within

one year of balance sheet date
Inventories, Debtors or Receivables, Cash and
Bank balances
Non-current Assets
Tangible Assets
Assets that have physical existence
Land, Building, Vehicles
Non-current Assets
Intangible Assets
Assets that have no physical existence
Patents, Goodwill, Trademarks, Franchise
rights
Non-current Assets
Investment
Quoted and unquoted investment, fixed
deposit
Liabilities
A liability is the present obligation of an
entity arising from past events, the

settlement of which is expected to result in
an outflow of resources embodying
economic benefits.
Represent what the business owes to outsiders.
Financial obligations of the business to
outsiders
Liabilities represent outsiders (non-owner)
supplied funds which are used by the business
to acquire assets.
Liabilities
Non current Liabilities
Obligations which are expected to be settled
after 1 year from the balance sheet date

Term loans, Mortgages, Bonds, Debentures
Current Liabilities
Obligations which are expected to be settled
within 1 year from the balance sheet date

Creditors or Payables, Bank overdrafts, Shortterm Loans
Owners equity
Equity is the residual interest in the
entitys assets after deducting all its

liabilities
Represents
the contribution of assets,

usually in the form of cash, into the
business, by the owners
Any profit made by the business and not
taken out by the owner, becomes part of the
owners equity
Other terms
are capital, net worth,
shareholders fund and shareholders equity
exercise
Classify the following items into assets, liabilities
and capital.
Fixtures and
fittings
Office equipment
Term loan from

Maybank
Account
receivable
Cash in hand
Land and buildings
Leasehold
premises
Bank overdraft
Account payables
Inventory
Motor vehicles
Capital by owner
Cash at bank
Short term loan
Mortgage on land
and building
Basic Accounting Equation

Forms a basis of whole double entry
bookkeeping system
The equality is always maintained.
Any change in the ringgit amount of

the
total
assets
is
always
accompanied by an equal change in
the ringgit amount of the total
liabilities and/or the owners equity
Basic Accounting Equation
Exercise: Determine the

missing
figureLIABILITIES OWNERS EQUITY
ASSETS
1.
RM 130,000
2.
RM 890,000
3.
RM 70,000
RM 500,000
RM 50,000
4.
RM 111,000
5.
RM 330,000
RM 550,000
RM 50,000
RM 110,000
Business Transaction
Effects Of Transactions on the Accounting

Equation
Transaction
Effect Upon
Assets
Kassim
introduces
RM10,000 into
business
Cash increases
+ RM10,000
Sell goods
RM1,200 to
Ramly
Inventory
decreases
RM1,200
Debtor increases
+ RM1,200
Buy furniture
RM10,000 from
AhSeng, paid by
cheque RM8,000
Furniture
increases
+ RM10,000
Bank decreases
- RM8,000
Liabilities
Owners
Equity
Capital
increases
+ RM10,000
Creditor
increases
+ RM2,000
Effects Of Transactions on the Accounting

Transaction
Effect Upon
Equation
Assets
Azizi invested cash of
RM50,000 into business
Azizi deposited RM40,000
into business bank account
Business borrows RM10,000
from bank. Cheque of
RM10,000 received and
deposited into bank.
Furniture of RM5,000
acquired and paid by
cheque
Purchased goods of
RM15,000 from suppliers
Paid suppliers RM10,000 by
cheque
Liabilities Owners
Equity
Exercise
1. When a business receives payment
from an account receivable, the

effect on the balance sheet of the
firm is ________
a. An increase in assets
b. A decrease in liabilities
c. An increase in liabilities
d. No change in amount of assets
Exercise
2. Syafinaz Hotel sold some of its equipment at
cost of RM30,000, receiving RM10,000 cash

and furniture worth RM15,000. The RM5,000
remainder was to be paid in cash at a later
date. The effect of this transaction on the
balance sheet of Syafinaz Hotel would be
________?
a. An increase and in total assets and total liabilities

b. A decrease in total assets and total liabilities
c. No change in total assets and no change in total
liabilities
d. An increase in total assets but not in total
liabilities
Revenue
A flow in economic benefits during the accounting
period arising in firms ordinary activities, in the form

of inflow or enhancement of assets or decrease in
liabilities,
Earned or recognized when goods are produced and

delivered or services are rendered
Inflows in the form of cash from cash sale or new accounts
receivable from a credit sale
Enhancement of assets when existing facilities are upgraded
Decrease in liabilities when the firm sells to an existing
creditor and arranges to reduce the debt against the
amount owing
Sales,
fees, rent received, dividend

commission received, discount received
income,
Revenue - Examples
Sales revenue revenue from sale of
goods to customers
Fees revenue from rendering of services
Rent income revenue from rental of land
or building
Dividend
income
revenue
from
investments in shares
Interest income revenue from bank
deposits or loans to others
Discount received amount by which the
seller agrees to reduce his or her price to
the customer.
Expenses
Decreases
in economic benefits
during the accounting period in the
form of
outflows or depletion of
assets or incurrence of liabilities
Outflows of assets occur when cash is
paid for wages, rent or interest

Assets are depleted when they are
used up as in depreciation of
noncurrent assets or when prepaid
insurance expires
Liabilities are incurred when wages
are owing to employees
Expenses
Expenses are classified into
Cost of sales cost of goods sold
Selling and distribution carriage
outwards, advertizing
Administration rent, insurance,
salaries
Finance loan interest
Expenses Examples
Cost of sales cost of goods that have
been sold to customers

Selling and distribution expenses
expenses incurred in selling and
distributing goods or services
Carriage outwards delivery charges for
goods sold, advertizing

promoting the business
cost
of
Administration expenses expenses
incurred in administering the office

Rent, insurance, salaries
Finance expenses expenses incurred
from borrowings
Interest on loans
Statement of
Comprehensive Income
Safi Trading
Vertical
FormIncome for the year ended 31
Statement of Comprehensive
December 2012
Sales revenue
RM 100,000
Cost of sales
(40,000)
Gross profit
Add: Other revenue:
60,000
Interest income
8,000
Dividend income
2,000
70,000
Less: Expenses
Rent
Salaries
Net profit
(6,000)
(10,000)
Motor expenses
(4,000)
Depreciation
(5,000)
45,000
Drawings and the Extended

Accounting Equation
At times, the owner will withdraw goods or
cash from the business.

These withdrawals or drawings will reduce
owners equity
ASSETS = OWNERS EQUITY + PROFIT +
LIABILITIES - DRAWINGS
OR
ASSETS = OWNERS EQUITY + REVENUE
EXPENSES DRAWINGS + LIABILITIES
OR
ASSETS + EXPENSES + DRAWINGS = OWNERS
EQUITY + REVENUE + LIABILITIES
Profit and the Extended Accounting

Equation
As business begins, goods are purchased
and subsequently sold, expenses are

incurred and revenues are earned.
Profit belongs to the owner and increases
owners equity.
Profit is the excess of revenue over
expenses.
ASSETS = OWNERS EQUITY + PROFIT +
LIABILITIES
OR
ASSETS = OWNERS EQUITY + REVENUE
EXPENSES + LIABILITIES
Profit and the Extended

Accounting Equation
Profit belongs to the owner and increases
owners equity.
ASSETS = LIABILITIES + OWNERS

EQUITY + PROFIT
OR
ASSETS = LIABILITIES + OWNERS
EQUITY + REVENUE EXPENSES
OR
ASSETS + EXPENSES = LIABILITIES +
OWNERS EQUITY + REVENUE
Assets
Abby invests
RM100,000 into
business bank
Expenses Liabilitie Equity

s
+ bank
100,000
Revenu
e
+
capital
100,00
0
Issued RM10,000 - bank

cheque for
10,000
employees salary
+ salary
10,000
Issued RM15,000
to suppliers for
purchased goods
- bank
15,000
+
purchase
s 15,000
Sell RM25,000
goods to
customers on
credit
+
receivable
s 25,000
+ sales
25,000
Example: Effects of
Transactions
Razi invests RM50,000 cash into the business

Bought a motor van on credit RM5,000
Bought goods for RM150 paying by cheque.
Bought goods on credit RM2,000
Bought shop premises paying RM5,000 by cheque
and loan from bank RM25,000
Bought fixtures RM200 paying by cheque
Repaid by cash a loan owed to Raman RM1,000
Razi introduces another RM500 cash into the firm
Razi takes out RM1,000 cash for personal use
Business paid creditor RM190 by cheque
Cash sales of RM5,000
Sold goods on credit RM20,000

Accounting Equation

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STATEMENT OF FINANCIAL

1. Identify the elements in the balance

are three (3) major financial

2. Statement of Financial Position (SOFP)/

Summarizes the business assets, liabilities and

Cash Flow Statement

Statement of Financial Position

business on a given date, showing

be represented in two ways:

40,000 Bank loan

Cash and bank

Cash and bank

enterprise as a result of past events and

Economic resources which are of value to

held for more than one accounting period.

expected to be convertible into cash within

entity arising from past events, the

after 1 year from the balance sheet date

within 1 year from the balance sheet date

entitys assets after deducting all its

the contribution of assets,

Term loan from

Land and buildings

Short term loan

Basic Accounting Equation

Any change in the ringgit amount of

Basic Accounting Equation

Exercise: Determine the

Effects Of Transactions on the Accounting

Effects Of Transactions on the Accounting

from an account receivable, the

cost of RM30,000, receiving RM10,000 cash

a. An increase and in total assets and total liabilities

period arising in firms ordinary activities, in the form

Earned or recognized when goods are produced and

fees, rent received, dividend

paid for wages, rent or interest

been sold to customers

goods sold, advertizing

Administration expenses expenses

incurred in administering the office

Finance expenses expenses incurred

Drawings and the Extended

At times, the owner will withdraw goods or

cash from the business.

Profit and the Extended Accounting

As business begins, goods are purchased

and subsequently sold, expenses are

Profit and the Extended

ASSETS = LIABILITIES + OWNERS

Expenses Liabilitie Equity

Issued RM10,000 - bank

Razi invests RM50,000 cash into the business

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