ACCOUNTING

EQUATION
AND ACCOUNTING
CLASSIFICATION
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
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 (SOFP)/
Income Statement
Measures the financial performance or profitability
over a specific period of time
2. Statement of Financial Position (SOFP)/
Balance Sheet
Summarizes the business ’ s assets, liabilities and
equity at a specific point of time
3. Cash Flow Statement
Shows the flow of cash in and cash out of the business.
 Classification of business
transactions
Assets Statement of Financial
Position
Owner’s Statement of Financial
equity Position
Liabilities Statement of Financial
Position
Revenues 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 RM
ASSETS EQUITY
Land and building 120,000 Capital 230,000
Vehicles 60,000
Inventories 65,000 LIABILITIES
Account receivables AZIZI40,000
ENTERPRISE
Bank loan 50,000
Statement
Cash and bank of Financial 35,000
Position as atpayables
Account 31 December 2012
40,000
320,000 320,000
 AZIZI ENTERPRISE
Statement of Financial Position as at 31 December 2012
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 payables 40,000
320,000
 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.
 Useful life more than 1 year
 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 (Long-Term 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, Short-term Loans
 Owners’ equity
Equity is the residual interest in the entity’s 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 owner’s 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

 Resources of a business are equal to the sources of

those resources.
 If the resources are provided by the owners, then
ASSETS = EQUITIES

 If the resources are provided by both the owner and

outsiders, then
ASSETS = LIABILITIES + OWNERS’ EQUITY
 Exercise: Determine the missing
figure
ASSETS LIABILITIES OWNER’S EQUITY

1. RM 130,000 RM 70,000

2. RM 890,000 RM 500,000

3. RM 50,000 RM 550,000

4. RM 111,000 RM 50,000

5. RM 330,000 RM 110,000
 Business Transaction
 An event or happening that affects the firm’s financial
position

 Involves
 2 or more parties – seller and buyer
 Exchange of goods or services
 Involves some kind of payment – immediate or future

 Transactions are recorded when they occur in proper

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

Transaction Effect Upon

Assets Liabilities Owner’s Equity
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
 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
 Revenue
A flow in economic benefits during the accounting period
arising in firm’s 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 income, commission

received, discount received
 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 – cost of promoting the business
Administration expenses – expenses incurred in
administering the office
Rent, insurance, salaries
Finance expenses – expenses incurred from
borrowings
Interest on loans
 Statement of Comprehensive Income
– Vertical Form
Safi Trading
Statement of Comprehensive Income for the year ended 31 December 2012
Sales revenue RM 100,000
Cost of sales (40,000)
Gross profit 60,000
Add: Other revenue: Interest income 8,000
Dividend income 2,000
70,000
Less: Expenses Rent (6,000)
Salaries (10,000)
Motor expenses (4,000)
Depreciation (5,000)
Net profit 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 owner’s
equity

ASSETS = OWNER’S EQUITY + PROFIT + LIABILITIES - DRAWINGS

OR
ASSETS = OWNER’S EQUITY + REVENUE – EXPENSES –
DRAWINGS + LIABILITIES
OR
ASSETS + EXPENSES + DRAWINGS = OWNER’S 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 owner’s
equity.
Profit is the excess of revenue over expenses.

ASSETS = OWNER’S EQUITY + PROFIT + LIABILITIES

OR
ASSETS = OWNER’S EQUITY + REVENUE – EXPENSES +
LIABILITIES
 Profit and the Extended
Accounting Equation
Profit belongs to the owner and increases owner’s
equity.

ASSETS = LIABILITIES + OWNER’S EQUITY + PROFIT

OR
ASSETS = LIABILITIES + OWNER’S EQUITY +
REVENUE – EXPENSES
OR
ASSETS + EXPENSES = LIABILITIES + OWNER’S
EQUITY + REVENUE
 Assets Expenses Liabilities Equity Revenue

Abby invests + bank + capital

RM100,000 into 100,000 100,000
business bank
Issued RM10,000 - bank + salary
cheque for 10,000 10,000
employees’ salary
Issued RM15,000 to - bank 15,000 +
suppliers for purchases
purchased goods 15,000

Sell RM25,000 goods + receivables + sales

to customers on 25,000 25,000
credit