Topic 2 Acc Equation

ABAB113
Business Accounting
Semester 2 2015/2016
Topic 2 Accounting Equation
Course Outcome 2
Illustrate the effect of various transactions on

the accounting equation, Assets = Liabilities
+ Equity, prepare the accounting journals,
ledgers, debtors and creditors control
accounts and record business transactions in
a complete accounting cycle, and prepare the
financial statements.
Basic Accounting Equation
Assets = Liabilities + Equity/Capital
The resources
owned by a
business
Assets = Liabilities + Equity
The rights of the

creditors are the
debts of the
business.
4
Assets = Liabilities + Equity
The rights of the

owners

An asset is a tangible or intangible resource that
is owned or controlled by an accounting entity,
and which is expected to generate future
economic benefits (e.g. plant & machinery, office
equipment, inventories, trade receivables, cash).
A liability is a legal obligation to transfer assets or
provide services to another entity which arises
from some past transaction or event (e.g. loans,
trade payables).
Capital is the proprietors ownership interest in
the business or net resources of the business.
6
Example 1
A. Brown commenced business on the 1
January 20X2 with RM10,000 in cash:
A. Brown
Balance sheet at 1 January 20X2
RM
Assets:
Cash
10,000
Less: liabilities
0
Capital
10,000
Example 2
On 2 January he bought goods for resale costing
RM3,000 on credit:
A. Brown
RM
Assets:
Cash
10,000
Inventories
3,000
13,000
Less: liabilities
Trade payables
3,000
Capital
10,000
8
Example 3
On 3 January he sold the goods on credit for
RM4,000:
A. Brown
RM
Assets:
Cash
10,000
Trade receivables
4,000
14,000
Less: liabilities
Trade payables
3,000
Capital
11,000
9
Analysis of transactions using accounting equation
A business transaction is an economic event or

condition that directly changes an entitys financial
condition or its results of operations.
Refer to p.16
10
Expanded Accounting Equation
The Expanded Accounting Equation breaks out

the Owners Equity section into two
components; Revenues and Expenses.
11
Revenues from the sale of goods and services

increase equity, while expenses and drawings
incurred in the course of business decrease equity.
Drawings occur when the owner of the business
take whatever assets for his/her personal use such
as cash, goods etc.
Expanded Accounting Equation
Therefore, the accounting equation can be

expanded to assets equal liabilities plus equity
plus revenues minus expenses minus
drawings.
If the business makes profit:
12
A = L + (Capital + Profit)
A = L + Capital + Revenue Expenses
A = L + Capital + Revenues Expenses
Drawings OR;
A+E=L+C+R
Revenue expenditure v capital expenditure

Capital - items that appear in the balance sheet
Revenue - items that appear in the income
statement.
Expenditure of the type which is to be matched against

the periods revenue and is used up in the period is
identified as revenue expenditure.
have no value at the end of the period to which it
relates.
for example, heat and light, rent, rates, etc.
Capital expenditure - amounts which it is appropriate
to carry forward as part of the next years opening
statement of financial position.
because it will be used over a number of periods and
contributes to several periods revenues.
Premises, motor vehicles, fixtures and fittings, etc.
13
Rules of debit and credit
Double-entry bookkeeping is a systematic

method of recording an enterprises
transactions in a book called the general
ledger. Each page of the ledger is split into
two halves:
Left half debit side

Right half credit side
There is usually an account for every class of

expenditure, income, asset, and liability.
14
T-account
Account name
DateDescription RM
1 Jan Bank
900
15
Date Description
RM
Debit and credit balances, and types/classes

of accounts
16
When the total amount of money on the debit

side of an account is greater than that on the
credit side, the account is said to have a debit
balance. When the reverse is the case, the
account is said to have a credit balance.
An account with a debit balance represents
either drawings, an asset (e.g. cash), an
expense (including purchases) or a loss.
An account with a credit balance represents
either capital, a liability, income (e.g. sales) or
a gain.

Posting updating the accounting records with
transactions
3 steps
1.
Determine the 2 accounts affected.
2.
Consider the flow of value (when the value
leaves an account it is credited, when the value
enters an account it is debited).
3.
Identify the money value that is transferring.
17

Which accounts do you debit and credit?
a) Bought office machinery in cash
b) Bought lorry for cash
c) A loan of RM200 is received by cheque from
Earls
d) Paid stationery by cheque
e) Paid rates by cash
f)
Sale of goods for RM100 cash on 3 Feb.
The value enters cash a/c (DEBIT) and leaves sales a/c (flow
of inventory out) (CREDIT).
18
Introduction to Financial Statements
After transactions have been recorded and

summarized, reports are prepared for users. The
accounting reports providing this information are
called financial statements.
19
Income statement/Statement of comprehensive income

Balance sheet/Statement of financial position
Cash flow statement
The income statement provides a summary of the

results of a business's trading activities during a
given accounting year. It shows the profit or loss
for the year.
to enable users, such as the owner(s), to
evaluate the financial performance of a
business.
20
The structure of income statement

ABC
Income statement for the year ended..
Revenue X
Less: cost of sales/goods sold
X
Gross profit X
Add: Other Income
Discount received X
X
Less: other costs and expenses Selling and distribution costs X
Administrative expenses
X
Interest payable on loans X X
Profit/(Loss) for the period X
21
RM
RM

Balance sheet is a list of the assets,
liabilities and capital of a business at the
end of a given accounting year.
It provides information about the resources
and debts of the reporting entity. This
enables users to evaluate its financial
position, in particular whether the business
is likely to be unable to pay its debts.
22
The contents of balance sheet

1.
Non-current assets
Items not specifically bought for resale
Items to be used in the production or
distribution of those goods normally sold by the
business.
Durable goods that usually last for several years
There must be an intention to keep them for
more than one accounting year
Examples
Land and buildings; plant and machinery; motor
vehicles; office equipment; furniture, fixtures and
fittings.
23

Current assets:
2.
Items that are normally kept by a business for

less than one accounting year.
The composition of each type of current asset is
usually continually changing.
Examples
Inventories, trade receivables, short term
investments, money in a bank cheque
account and in cash.
24

3.
4.
5.
Current liabilities
Debts owed by a business that are payable
within one year (often considerably less) of
the reporting period date; e.g. trade
payables and bank overdrafts.
Non-current liabilities
These are debts owed by a business that
are not due until after one year (often
much longer) of the reporting period date;
e.g. loans and mortgages.
Capital (Equity)
This refers to the amount of money
invested in the business by the owner(s).
25
The structure of balance sheet

ABC Sdn Bhd
Balance sheet as at ...
Non-current assets
+
Current assets
=
Total assets
=
Equity and Reserves
+
Non-current liabilities
+
Current liabilities
=
Total equity and liabilities
26
Cash flow statement
27
discloses net cash flow for a particular period.

lists out the various sources from which the
business receives cash and how the cash is
spent i.e. the liquidity of the business.
contains information about operating,
investing and financing activities.
further details to be revisited in Topic 5

Topic 2 Acc Equation

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ABAB113

Topic 2 Accounting Equation

Illustrate the effect of various transactions on

Basic Accounting Equation

Assets = Liabilities + Equity/Capital

Basic Accounting Equation

Assets = Liabilities + Equity

The rights of the

Basic Accounting Equation

Assets = Liabilities + Equity

The rights of the

Basic Accounting Equation

Analysis of transactions using accounting equation

A business transaction is an economic event or

Expanded Accounting Equation

The Expanded Accounting Equation breaks out

Revenues from the sale of goods and services

Expanded Accounting Equation

Therefore, the accounting equation can be

Revenue expenditure v capital expenditure

Expenditure of the type which is to be matched against

Rules of debit and credit

Double-entry bookkeeping is a systematic

Left half debit side

There is usually an account for every class of

Rules of debit and credit

Rules of debit and credit

Debit and credit balances, and types/classes

When the total amount of money on the debit

Rules of debit and credit

Rules of debit and credit

Introduction to Financial Statements

After transactions have been recorded and

Income statement/Statement of comprehensive income

Introduction to Financial Statements

The income statement provides a summary of the

The structure of income statement

Introduction to Financial Statements

The contents of balance sheet

The contents of balance sheet

Items that are normally kept by a business for

The contents of balance sheet

The structure of balance sheet

Introduction to Financial Statements

Cash flow statement

discloses net cash flow for a particular period.

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