Accounting entrep

1. ACC 106
Chapter 3
Accounting Equation and
Classification

2. Learning Objectives:
After going through this chapter, you should be able to:
 Define & explain the balance sheet, assets, liabilities and owner’s equity.
 Define & understand the use of the accounting equation in analyzing
transactions
 Define revenue & expenses
 Identify the relationship of profit to the to the accounting equation
 Show the effect of the transaction on the accounting equation
 Identify the movement of stock

3. Introduction
Business transaction
- is an event or happening that affects the financial position of a business, &
requires recording
- Usually involves:
 2 @ more parties, such as a seller & a buyer.
 Some exchange of goods @ services between the 2 parties
 Some kind of payment which may be in the form of cash or things in value,
immediately @ at some future date
- It can be classified into 5 categories as follows:
a) Assets
b) Owner’s equity
c) Liabilities
d) Revenues
e) Expenses
Recorded in the Balance
Sheet
Recorded in the Trading
Profit & Loss

4. The Balance Sheet Presentation
Sole Proprietorship
Dr. Balance Sheet as at 31 December 20xx Cr.
Assets: RM Owner’s equity: RM
Fixed Assets: Opening Capital xxx
Land & Building xxx Add: Net Profit xxx
Machinery xxx Less: Drawings (xxx)
xxx xxx
Current Asset: Liabilities:
Stock xxx Long Term Liabilities xxx
Debtors xxx Current Liabilities:
Cash xxx Creditors xxx
TOTAL LIABILITIES
TOTAL ASSETS XXX & OWNER’S EQUITY XXX

5. BS (Assets = Owner’s Equity+Liabilities)
Assets Owner’s Equity Liabilities
- Economic resources which are of
the value to the business
- are property own by the business
- It is represents owner-
supplied fund to the business
for the acquisitions of assets
for the business
- It is financial obligation
of the business to the
external parties
- 2 types of assets:
i) Fixed Assets/ Non Current Assets
- assets acquired / bought not for
resale and it is to be used in the
running of the business.
Tangible Fixed Assets - i.e
Land&Building,Machinery
Intangible Fixed Assets- i .e
Goodwill,Trademark
Investment – i.e Fixed deposit
ii)Current Assets – assets that are
either cash or those that can be
converted in to cash i.e debtors,stock.
- it is financial obligation of
the business to the owner.
 Owner’s Equity
= Capital + Profit/ (-)
(Losses) - drawings
- 2 types of liabilities:
i) Long term Liabilities
- it is an amount owing by
the business that have
repayment period > 1 yr
- i.e Long term loan
ii) Current liabilities
- it is an amount owing by
the business that is to be
paid in within 1 yr
- i.e Creditors, bank
overdraft
(See pg14 textbook)

6. - All assets that a business owns have to be supplied by the owner and the external
parties
- Therefore, the relationship between The assets and the equities ( that of the
owner and the external parties) of the business can be expressed in the following
equation:
- The above equation is known as basic accounting equation or the balance sheet
equation.
-The accounting equation A = OE + L is expressed in a financial statement
known as the Balance Sheet.
- Balance Sheet is an accounting report that shows all the assets, liabilities &
owner’s equity of an organization at a particular time.
Accounting Equation (A = OE + L )
Assets = Owner’s Equity + Liabilities
A = OE + L
OE = A – L

7. The Balance Sheet & The Effects of Business
Transaction
2.5.1 The Introduction of Capital
On 1st
January 20XX, Beckham started business & invested RM50,000 cash to the
business. i)The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 01 January 20XX Cr.
Assets: RM Owner’s equity: RM
Cash 50,000 Opening Capital 50,000
ii)The effect on the accounting equation
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
2006
01/01
Cash increase by
RM50,000
Effect: Increase A
Capital increase by
RM50,000
Effect:Increase OE
-
Effect: NO

8. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
2.5.2 The Transfer of Cash to a Bank Account
On 2nd
January 20XX, the business opens bank account & deposit RM45,000 of
the cash into the account. i)The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 02 January 20XX Cr.
Assets: RM Owner’s equity: RM
Cash 5,000 Capital 50,000
Bank 45,000
50,000 50,000
ii)The effect on the accounting equation
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
2006
02/01
Cash decrease to 5,000
Bank increase by 45,000
#Increase & Decrease A(=)
Capital still = 50,000
#OE still equal with A
-
# NO effect

9. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
2.5.3 The Borrowing from Bank
On 3rd
January 200XX, the business borrows from bank amount RM30,000 and
deposited the loan into bank. i)The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 03 January 20XX Cr.
Assets: RM Owner’s equity: RM
Cash 5,000 Capital 50,000
Bank 75,000 Long Term Liability:Loan30,000
80,000 80,000
ii)The effect on the accounting equation
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
2006
03/01
Bank increase by 30,000
#Increase A to 80,0000 &
Bank to 75,000
Capital still = 50,000
#No effect
Loan increase
by 30,000
#Increase L

10. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
2.5.4 Purchase of Fixtures & Fittings by cheque
On 4th
January 20XX, the business purchase Fixtures & Fittings by cheque amount
RM10,000. i)The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 04 January 20XX Cr.
Assets: RM Owner’s equity: RM
Fixtures&Fittings 10,000 Capital 50,000
Cash 5,000 Long Term Liabilities:
Bank 65,000 Long Term Loan 30,000
80,000 80,000
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
2006
04/01
F&F increase by 10,000
Bank decrease to 65,000
#Increase & decrease A (=)
Capital still = 50,000
#No effect
Loan still =
30,000
#No effect
ii)The effect on the accounting equation

11. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
2.5.5 Purchase of Stock of Goods on Credit
On 5th
January 20XX, the business purchase Stock of Goods on credit amount
RM18,000.
i)The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 05 January 20XX Cr.
Assets: RM Owner’s equity: RM
Fixtures&Fittings 10,000 Capital 50,000
Cash 5,000 Long Term Liabilities:
Bank 65,000 Long Term Loan 30,000
Stock 18,000 Creditors 18,000
98,000 98,000

12. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
20XX
05/01
Stock increase by
18,000
#Increase A to 98,000
Capital still = 50,000
#No effect
Creditor increase by
18,000
#Increase L to 48,000
ii)The effect on the accounting equation
2.5.6 Payment to suppliers by cheque
On 6th
January 20XX, the business paid a cheque amount RM8,000 to its supplier.
The effect on the accounting equation
Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)
20XX
06/01
Bank decrease by
8,000
#Decrease A to 90,000
Capital still = 50,000
#No effect
Creditor decrease by
8,000
#Decrease L to 40,000

13. The Balance Sheet & The Effects of Business
Transaction (Cont’d)
2.5.6 Payment to suppliers by cheque
The Balance sheet would appear as follows:
Beckham Enterprise
Dr. Balance Sheet as at 06 January 20XX Cr.
Assets: RM Owner’s equity: RM
Fixed Assets: Capital 50,000
Fixtures&Fittings 10,000
Liabilities:
Current Assets: Long Term Liabilities:
Cash 5,000 Long Term Loan 30,000
Bank 57,000 Current Liabilities:
Stock 18,000 Creditors 10,000
90,000 90,000

14. Trading Profit & Loss Presentation
Beckham Enterprise
Trading and Profit and Loss Accounts for the year ended 31st
December 20xx
Opening Stock RM 14,000 Sales RM100,000
Purchases 60,000
74,000
Less: Closing Stock (14,000)
Cost of Goods Sold 60,000
Gross Profit c/d 40,000
100,000 100,000
Telephone & Electricity 200 Gross Profit b/d 40,000
Salary 5,000 Rent received 800
Stationery 100 Commission Received 500
Net Profit 36,000
41,300 41,300

15. TPL(P) = Revenue(R) – Expenses(E)
Revenue Expenses
- is the gross increase in owner’s
equity resulting from business
activities entered into for the
purpose of earning income
- are the cost of assets consumed or
services used in the process of
earning revenue.
- i.e sales of goods, services,
commission received interest
received etc.
- i.e purchased of goods, salary,
interest expense, rent expense,
discount allowed etc.
- Profit is the differences between revenue & expenses
- the relationship of profit to the accounting equation is that profit belongs
to owner of the business, so it should be added to the capital of the
business.
A = OE + P + L , A = OE + R – E + L, A + E = OE + R + L
See pg 54 textbook

16. Effect of transactions on the expanded
accounting equation

17. Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities
Jan
06
F&F 10,000
Cash 4,800
Bank 57,000
Stock 18,000
Insurance 200 Capital 50,000 Loan 30,000
Creditor 10,000
Jan
07
F&F 10,000
Cash 4,800
Bank 57,350
Stock 18,000
Insurance 200 Capital 50,000 Commission 350 Loan 30,000
Creditor 10,000
Jan
08
F&F 10,000
Cash 4,700
Bank 57,350
Stock 18,000
Insurance 200
Electricity 100
Capital 50,000 Commission 350 Loan 30,000
Creditor 10,000
Jan
09
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Insurance 200
Electricity 100
Capital 50,000 Commission 350
Rent 400
Loan 30,000
Creditor 10,000
Effect of transactions on the expanded accounting
equation

18. Accounting for stock

19. Accounting for stock

20. Movement of stock
1. Increase in Stock Effect of
transaction
Accounts
Purchase- goods bought by the business for the
purpose of resale
Purchase Expense
increase
Purchases A/c
Purchases Return (Return Inward) – goods
return by buyer
Sales revenue
decrease
Return inward
A/c
2. Decrease in Stock Effect of
transaction
Accounts
Sales – sale of goods with prime intention of
resale
Sales revenue
increase
Sales A/c
Sales Return (Return outward) – goods return
to supplier
Purchase Expense
decrease
Return
outward A/c

21. Purchase & Sales of Goods
Purchase and sales of goods can be divided into 2 categories:
Transactions Accounts Involved
a. Cash Purchase Cash Account & Purchase Account
b. Credit Purchase Creditors Account & Purchases Account
c. Cash Sales Cash Account & Sales Account
d. Credit Sales Debtors Account & Sales Account

22. Purchase & Sales of Goods

23. Example: Purchase & Sales Return

24. Purchase & Sales Return
Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities
Jan
10
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Insurance 200
Electricity 100
Purchases 3,000
Capital 50,000 Commission 350
Rent 400
Loan 30,000
Creditor 13,000
Jan
11
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Insurance 200
Electricity 100
Purchases 2,900
Capital 49,900 Commission 350
Rent 400
Loan 30,000
Creditor 13,000
Jan
12
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Debtor 1,000
Insurance 200
Electricity 100
Purchases 2,900
Capital 49,900 Commission 350
Rent 400
Sales 1,000
Loan 30,000
Creditor 13,000

25. Jan
13
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Debtor 1,000
Insurance 200
Electricity 100
Purchases
2,700
Capital 49,900 Commission 350
Rent 400
Sales 1,000
Loan 30,000
Creditor 12,800
Jan
14
F&F 10,000
Cash 5,100
Bank 57,350
Stock 18,000
Debtor 900
Insurance 200
Electricity 100
Purchases
2,700
Capital 49,900 Commission 350
Rent 400
Sales 900
Loan 30,000
Creditor 12,800
Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities
Purchase & Sales Return