ACCOUNTING

CLASSIFICATION AND
ACCOUNTING EQUATION

LEARNING OBJECTIVES:
After going through this chapter, you should be able to:

Define & explain the balance sheet, assets, liabilities and

owners equity.

Define & understand the use of the accounting equation

in analyzing transactions

Define revenue & expenses

Show the effect of the transaction on the accounting

equation

acc 115

ASSETS
EXPENSE
S

BUSINESS
TRANSACTION
S

Income
Statement

LIABILITIES

Balance
sheet

REVENUES
OWNERS
EQUITY

CLASSIFICATION OF ASSET
Non-current
assets

b) It has a useful
life of more than
one year.
c) Divided by 3:
a) Tangible
non-current
assets
b) Intangible
non-current

Definition:
property owned
by the business

a) Are assets that

are either cash
or those can be
converted into
cash within one
year.
acc 115

a) Are assets
acquired/bought
not for resale
but to be used in
the running of
the business.

ASSETS

Current
assets

b) E.g: a/c
receivables or
debtors, cash in
bank, cash in
hand, prepaid
expenses, 5
accrued
revenue, notes

CLASSIFICATION OF LIABILITIES
Non-current
liabilities

b) E.g: Longterm loan,

mortgage on
premises,
debenture.

Definition:
financial
obligation
of the business to
external parties

a) An amount
owing by the
business that
is to be paid
within one
year.
b) E.g: short-term
loan, bank
overdraft,
creditors ar
acc.
Payable,notes
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payable,
accrued
expenses,
acc 115

a) An amount
owing by the
business that
is not repaid
within one
year.

Liabilities

Current
liabilities

OWNERS EQUITY
Financial

obligations of the business to the owner:

amount which the owners have invested in the
business.
Under owners equity:
Capital: Resources supplied by owner (
OE )
Profit : Revenue > expenses (
OE)
Loss : Expenses > revenue (
OE )
Drawing : occur when the owner takes whatever
assets of the business for his own use. ( OE)
Owners

equity = capital + profit - losses - drawing

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STATEMENT OF FINANCIAL POSITION

The financial position of a business on a given date,

showing the assets, liabilities and owners equity.
Presentation of Balance Sheet

ACCOUNTING
EQUATION

10

ACCOUNTING EQUATION
Accounting equation is the foundation of accounting
It explains the relationship between assets, owners
equity and liabilities
Basic equation associated with double-entry accounting
The relationship between the assets and equities of the
business can be expressed by the following equation:

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ACCOUNTING EQUATION
Resources in the
business

Asset

=
=

Resources
supplied by
owner

Owners
equity
(capital)

ACCOUNTING EQUATION
(CONTD)
Resources in the
business

Asset

Resources
supplied by
owner

Owners
equity + Liabilities
(capital)

Profit

Drawing

Losses

Resources
supplied by
others

ACCOUNTING EQUATION
(CONTD)

With profit or loss

Assets

Capital

Profits

Liabilities

Assets

Capital

Losses

Liabilities

With drawings

Assets

Capital

Profit

- Drawings

Liabilities

Assets

Capital

Loss

- Drawings

Liabilities

ACCOUNTING EQUATION
(CONTD)
Assets

Capital +Profit/-losses - Drawings + Liabilities

Revenue - Expenses

Assets

Capital + Revenue - Expenses - Drawings

=
+

Liabilities

EXPANDED OF ACCOUNTING
EQUATION
acc 115

The expanded accounting equation is:

Assets + expenses + Drawing =

Capital + Revenues + liabilities

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ACCOUNTING EQUATION (CONTD)

Debit

Credit

Assets

Liabilities

Expenses

Revenues

Drawings

Capital

EFFECTS OF TRANSACTIONS ON THE

ACCOUNTING EQUATION

Every transaction will have double effects on the accounting equation

Dt. Cash
Cr. Capital

Dt. Elec. expenses

Cr. Bank
2. Paid electricity expenses by cheque amounting RM100

acc 115

Some examples:
1. Amin started a business with RM15,000 cash in hand.
Effect: Cash increase, capital increase

Effect: Electricity expenses increase, bank decrease.

3. Received loan by cheque RM10,000
Effect: Bank increase, loan increase

Dt. Bank
Cr. Loan

4. Purchased equipment worth RM2,000 by cheque

Effect: equipment increase, bank decrease
5. The owner took RM500 cash for his own use
Effect: Cash decrease, capital decrease.

Dt. Equipment
Cr. Bank

Dt. Drawing
Cr. Cash

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EXERCISES

Classify the following items into current assets, non current assets, current
liabilities, non current liabilities and owners equity :
Items
Debtors

Current

Non-current

Current

Non current

assets

assets

liabilities

liabilities

Owners equity

Cash at bank
Land
Capital
Long-term loan from
Bank

acc 115

Building

Motor vehicles
Creditor
Cash at bank
Mortgage
Inventory/stock/goods
Bank overdraft
Patents
Office Machinery
Account Receivables
Account Payables
Goodwill
Fixture and Fittings
Fixed deposit
Drawing

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EXERCISES

Classify the following items into current assets, non current assets, current
liabilities, non current liabilities and owners equity :
Items

Debtors
Cash at bank

Current

Non-current

Current

Non current

assets

assets

liabilities

liabilities

Building

Capital

Long-term loan from

Bank

Motor vehicles

Creditor

Mortgage
Inventory/stock/goods

Bank overdraft
Patents

Office Machinery

Account Receivables

Account Payables
Goodwill

Fixture and Fittings

Fixed deposit

Drawing

acc 115

Land

Cash at bank

Owners equity

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REFLECTION
Complete

acc 115

the following statement:

1. An accounting equation shows the
relationship between _______,______ and
_______.
2. Assets = __________ + owners equity.
3. Owners equity = __________ + __________
- _______ - _______

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ACCOUNTING EQUATION
Assets
(RM)
100,000
80,000
?
65,400
58,000
400,000

Liabilities
(RM)
60,000
?
100,000
?
23,000
?

Owners Equity
(RM)
?
30,000
200,000
30,000
?
20,000

HOMEWORK
NOVEMBER 2005 (PART B, Q5b)
APRIL 2005 (PART B, Q5b)
Answer

acc 115

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