Recording of Business Transactions – Accounting Equation and Source Documents Week 2 UTAR/FBAF1023/Topic2
In Your Textbook... <ul><li>Roshayani Arshad, et al. (2007),  Financial Accounting An Introduction , 2 nd  Edition, Malays...
UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business
UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which repr...
UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners
UTAR/FBAF1023/Topic2 What is a business transaction? A  business transaction is an economic event that directly changes a ...
Business Transactions and the Accounting Equation <ul><li>When a transaction take place, at least two items in the account...
UTAR/FBAF1023/Topic2 On November 1, 2006, Chris  begins a business that will be known as  NetSolutions .
UTAR/FBAF1023/Topic2 a.  Chris brings in cash RM25,000 to start the business. Chris, Capital 25,000 Investment by Chris Ca...
UTAR/FBAF1023/Topic2 b.  NetSolutions paid RM20,000 for a land. Chris, Capital 25,000 Cash  +  Land 25,000  Bal. Assets Ow...
UTAR/FBAF1023/Topic2 Accounts  Chris, Cash  +  Supplies  +  Land  Payable  Capital Assets c.  During the month, NetSolutio...
UTAR/FBAF1023/Topic2 d.  NetSolutions provided services to customers, earning fees of RM7,500 and received the amount in c...
UTAR/FBAF1023/Topic2 Accounts  Chris, Cash  +  Supplies  +  Land  Payable  Capital Assets e.  NetSolutions paid the follow...
UTAR/FBAF1023/Topic2 Accounts  Chris, Cash  +  Supplies  +  Land  Payable  Capital Assets f.  NetSolutions paid RM950 to c...
UTAR/FBAF1023/Topic2 Accounts  Chris, Cash  +  Supplies  +  Land  Payable  Capital Assets g.  At the end of the month, Chr...
UTAR/FBAF1023/Topic2 Owner’s Equity Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses Decreased by In...
Review Question <ul><li>Sheila has the following assets and liabilities on 1 February 2006: </li></ul><ul><li>Cash RM4,500...
Lecture Exercise 1 Show the effect of below transactions on the accounting equation. <ul><li>June 1  Invested RM15,955 cas...
<ul><li>Aug 1 Paid office rent for August, RM470. </li></ul><ul><li>3 Purchased equipment on account, RM4,276. </li></ul><...
Lecture Exercise 3 Complete the table as in the example below. <ul><li>Owner took cash for personal use </li></ul><ul><li>...
Lecture Exercise 4 Show the effect of below transactions on the accounting equation. <ul><li>Fred brought in cash RM50,000...
Source Documents UTAR/FBAF1023/Topic2
Source Documents <ul><li>Written documents that provide details of a transaction and the evidence that the transaction has...
Features of Source Docs <ul><li>Most source docs contain the following information: </li></ul><ul><li>1. The date when the...
Importance of Source Docs <ul><li>They provide evidence or proof that a transaction has occurred. </li></ul><ul><li>They a...
List of Source Docs <ul><li>Invoice </li></ul><ul><li>Credit note </li></ul><ul><li>Debit note </li></ul><ul><li>Payment v...
Invoice <ul><li>Sent by the seller to the buyer to inform the latter how much to pay for the goods or services supplied. <...
Credit Note <ul><li>The seller sends a credit note to the buyer when goods have been overcharged, or when the buyer return...
Debit Note <ul><li>Sent by the seller to the buyer as an additional invoice when the latter has been undercharged. </li></...
Payment Voucher <ul><li>Prepared to record payment of money, of either cash or cheque, to a third party. </li></ul><ul><li...
Cheque Counterfoil <ul><li>Contains information such as cheque number, payee’s name and amount paid. </li></ul><ul><li>Rec...
Receipt <ul><li>A document to acknowledge a payment received. </li></ul><ul><li>The original copy is given to the customer...
Bank Statement <ul><li>A monthly report sent by the commercial bank to its customer who maintains a cheque (current) accou...
Review Question <ul><li>What documentation would you expect to change hands in the following circumstance? </li></ul><ul><...
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Acc week 2

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Acc week 2

  1. 1. Recording of Business Transactions – Accounting Equation and Source Documents Week 2 UTAR/FBAF1023/Topic2
  2. 2. In Your Textbook... <ul><li>Roshayani Arshad, et al. (2007), Financial Accounting An Introduction , 2 nd Edition, Malaysia, McGraw Hill. </li></ul><ul><li>Chapter 3: Accounting Equation and Double Entry System (pp.19 – 26) </li></ul><ul><li>Chapter 5: Business Transactions and Documentation (pp.73 – 79) </li></ul>UTAR/FBAF1023/Topic2
  3. 3. UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business
  4. 4. UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business
  5. 5. UTAR/FBAF1023/Topic2 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners
  6. 6. UTAR/FBAF1023/Topic2 What is a business transaction? A business transaction is an economic event that directly changes a company’s financial condition or directly affects its results of operations.
  7. 7. Business Transactions and the Accounting Equation <ul><li>When a transaction take place, at least two items in the accounting equation will change </li></ul><ul><li>The equality between the assets and the claims against these assets will ALWAYS be maintained. </li></ul>UTAR/FBAF1023/Topic2 Assets Liabilities Owner’s Equity = + Resources = Creditors’ & Owners’ claims against resources
  8. 8. UTAR/FBAF1023/Topic2 On November 1, 2006, Chris begins a business that will be known as NetSolutions .
  9. 9. UTAR/FBAF1023/Topic2 a. Chris brings in cash RM25,000 to start the business. Chris, Capital 25,000 Investment by Chris Cash 25,000 a. Assets Owner’s Equity = =
  10. 10. UTAR/FBAF1023/Topic2 b. NetSolutions paid RM20,000 for a land. Chris, Capital 25,000 Cash + Land 25,000 Bal. Assets Owner’s Equity = = b. – 20,000 +20,000 Bal. 5,000 20,000 25,000
  11. 11. UTAR/FBAF1023/Topic2 Accounts Chris, Cash + Supplies + Land Payable Capital Assets c. During the month, NetSolutions purchased supplies for RM1,350 and agreed to pay the supplier in the near future ( on account). Owner’s Liabilities + Equity = Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350 = Bal. 5,000 1,350 20,000 1,350 25,000
  12. 12. UTAR/FBAF1023/Topic2 d. NetSolutions provided services to customers, earning fees of RM7,500 and received the amount in cash. d. + 7,500 + 7,500 Accounts Chris, Cash + Supplies + Land Payable Capital Assets Owner’s Liabilities + Equity Bal. 5,000 1,350 20,000 1,350 25,000 Fees earned = = Bal. 12,500 1,350 20,000 1,350 32,500
  13. 13. UTAR/FBAF1023/Topic2 Accounts Chris, Cash + Supplies + Land Payable Capital Assets e. NetSolutions paid the following expenses: wages, RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275. Owner’s Liabilities + Equity = Bal. 12,500 1,350 20,000 1,350 32,500 = e. – 3,650 – 2,125 – 800 – 450 – 275 Wages Rent Util. Misc. <ul><ul><li>Bal. 8,850 1,350 20,000 1,350 28,850 </li></ul></ul>
  14. 14. UTAR/FBAF1023/Topic2 Accounts Chris, Cash + Supplies + Land Payable Capital Assets f. NetSolutions paid RM950 to creditors during the month. Owner’s Liabilities + Equity = Bal. 8,850 1,350 20,000 1,350 28,850 f. – 950 – 950 = Bal. 7,900 1,350 20,000 400 28,850
  15. 15. UTAR/FBAF1023/Topic2 Accounts Chris, Cash + Supplies + Land Payable Capital Assets g. At the end of the month, Chris withdrew RM2,000 in cash from the business for personal use. Owner’s Liabilities + Equity Bal. 7,900 1,350 20,000 400 28,850 h. – 2,000 – 2,000 With-drawal = = Bal. 5,900 1,350 20,000 400 26,850
  16. 16. UTAR/FBAF1023/Topic2 Owner’s Equity Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses Decreased by Increased by Owner’s investments Revenues Net income
  17. 17. Review Question <ul><li>Sheila has the following assets and liabilities on 1 February 2006: </li></ul><ul><li>Cash RM4,500; Building RM65,000; Shop equipment RM18,000; Bank loan RM25,000; Creditors RM3,700. </li></ul><ul><li>How much is Sheila’s equity in the business? </li></ul>UTAR/FBAF1023/Topic2
  18. 18. Lecture Exercise 1 Show the effect of below transactions on the accounting equation. <ul><li>June 1 Invested RM15,955 cash to start the business. </li></ul><ul><li>2 Hired a secretary at salary of RM1,800 per month. </li></ul><ul><li>3 Paid cash for a Dell computer, RM3,500. </li></ul><ul><li>7 Purchased office supplies on account, RM750. </li></ul><ul><li> 8 Sold goods worth RM125 in cash. </li></ul><ul><li>15 Paid utility expenses, RM170. </li></ul><ul><li> 28 Withdrew RM10 cash for personal use. </li></ul><ul><li> 29 Paid RM500 to supplier for account payable due. </li></ul><ul><li>30 Paid secretary’s salary in full for the month of June. </li></ul>UTAR/FBAF1023/Topic2
  19. 19. <ul><li>Aug 1 Paid office rent for August, RM470. </li></ul><ul><li>3 Purchased equipment on account, RM4,276. </li></ul><ul><li> 7 Received cash from clients, on account RM2,410. </li></ul><ul><li> 9 Purchased supplies on account, RM240 </li></ul><ul><li> 13 Paid cash to creditors on account, RM760. </li></ul><ul><li> 15 Purchased motor vehicle for RM24,000, paying RM2,470 cash and taking a loan for the balance. </li></ul><ul><li> 17 Paid cash from business bank account for personal expenses, RM1,760 </li></ul><ul><li> 26 Received cash for services given during August, RM2,470 </li></ul><ul><li> 30 Paid salaries for the month, RM2,400; utility expenses RM276. </li></ul>Lecture Exercise 2 Show the effect of below transactions on the accounting equation. UTAR/FBAF1023/Topic2 The opening balances for Company A are: Cash RM24,600; Accounts Receivable RM17,220; Accounts Payable RM14,270; Capital RM27,550.
  20. 20. Lecture Exercise 3 Complete the table as in the example below. <ul><li>Owner took cash for personal use </li></ul><ul><li>Bought machine from Syarikat BG on credit </li></ul><ul><li>Received fees in cash from clients </li></ul><ul><li>Sold goods on credit to Ahmad </li></ul><ul><li>Purchased supplies on credit from Alim Enterprise </li></ul><ul><li>Borrowed from Bumiputra Commerce </li></ul><ul><li>Paid wages by cheque </li></ul><ul><li>Received bank interest </li></ul><ul><li>Paid interest on loan </li></ul>UTAR/FBAF1023/Topic2 Transaction Classification (Asset, liability, owner’s equity) Increased / Decreased Name of account Paid traveling expenses by cash Asset Owner’s equity Decreased Decreased Cash Traveling Expense
  21. 21. Lecture Exercise 4 Show the effect of below transactions on the accounting equation. <ul><li>Fred brought in cash RM50,000 and a used van valued at RM25,000 for business purposes. </li></ul><ul><li>Opened a business current account at Citibank and banked in RM45,000 cash. </li></ul><ul><li>Paid rental RM1,000 by cheque. </li></ul><ul><li>Purchased office equipment from Greg Bhd for RM5,500, paying RM3,000 in cash. </li></ul><ul><li>Paid utility RM900 by cheque. </li></ul><ul><li>Paid RM1,000 cash for office equipment purchased in transaction d. </li></ul><ul><li>RM500 cash was paid for advertising. </li></ul><ul><li>Paid office salaries by cheque RM3,000 </li></ul><ul><li>Fred withdrew RM1,000 cash for family use. </li></ul><ul><li>Received commission RM750 by cheque. </li></ul>UTAR/FBAF1023/Topic2
  22. 22. Source Documents UTAR/FBAF1023/Topic2
  23. 23. Source Documents <ul><li>Written documents that provide details of a transaction and the evidence that the transaction has taken place. </li></ul><ul><li>All accounting entries are based on information derived from these source documents. </li></ul>UTAR/FBAF1023/Topic2
  24. 24. Features of Source Docs <ul><li>Most source docs contain the following information: </li></ul><ul><li>1. The date when the transaction took place. </li></ul><ul><li>2. The names & addresses of the parties </li></ul><ul><li> concerned. </li></ul><ul><li>3. The nature of the transaction. </li></ul><ul><li>4. The total amount of money involved. </li></ul><ul><li>5. Terms & conditions of the transaction. </li></ul><ul><li>6. An authorised signature. </li></ul>UTAR/FBAF1023/Topic2
  25. 25. Importance of Source Docs <ul><li>They provide evidence or proof that a transaction has occurred. </li></ul><ul><li>They are used as part of a process to record information into the books of original entry. </li></ul><ul><li>They are required for audit purposes. </li></ul>UTAR/FBAF1023/Topic2
  26. 26. List of Source Docs <ul><li>Invoice </li></ul><ul><li>Credit note </li></ul><ul><li>Debit note </li></ul><ul><li>Payment voucher </li></ul><ul><li>Cheque counterfoil </li></ul><ul><li>Receipt </li></ul><ul><li>Bank statement </li></ul>UTAR/FBAF1023/Topic2
  27. 27. Invoice <ul><li>Sent by the seller to the buyer to inform the latter how much to pay for the goods or services supplied. </li></ul><ul><li>When a trader sells on credit instead of by cash, he prepares an invoice, usually in duplicate and sends the original copy to the buyer to request payment. </li></ul>UTAR/FBAF1023/Topic2
  28. 28. Credit Note <ul><li>The seller sends a credit note to the buyer when goods have been overcharged, or when the buyer returns goods. </li></ul><ul><li>The seller prepares a credit note and sends the original copy to the buyer to inform the latter that he is crediting the buyer’s account. </li></ul><ul><li>Purpose: To correct an overcharge in the invoice. </li></ul>UTAR/FBAF1023/Topic2
  29. 29. Debit Note <ul><li>Sent by the seller to the buyer as an additional invoice when the latter has been undercharged. </li></ul><ul><li>The seller will prepare and send the original copy of a debit note to the buyer to debit the buyer’s account, thus increasing the amount of the buyer’s debt. </li></ul><ul><li>Purpose: To correct an undercharge in the invoice. </li></ul>UTAR/FBAF1023/Topic2
  30. 30. Payment Voucher <ul><li>Prepared to record payment of money, of either cash or cheque, to a third party. </li></ul><ul><li>The party receiving the payment will have to sign to acknowledge receipt of the said sum, endorsed by the officer authorising the payment. </li></ul>UTAR/FBAF1023/Topic2
  31. 31. Cheque Counterfoil <ul><li>Contains information such as cheque number, payee’s name and amount paid. </li></ul><ul><li>Records payment of money by cheque. </li></ul><ul><li>Accountants will use all the cheque stubs in the cheque book to record the Cash Book or Petty Cash Book. </li></ul>UTAR/FBAF1023/Topic2
  32. 32. Receipt <ul><li>A document to acknowledge a payment received. </li></ul><ul><li>The original copy is given to the customer or paying party while the duplicate copy is retained by the recipient. </li></ul>UTAR/FBAF1023/Topic2
  33. 33. Bank Statement <ul><li>A monthly report sent by the commercial bank to its customer who maintains a cheque (current) account. </li></ul><ul><li>It gives the details of the money drawn out and deposits made by the business during that particular month into this account. </li></ul>UTAR/FBAF1023/Topic2
  34. 34. Review Question <ul><li>What documentation would you expect to change hands in the following circumstance? </li></ul><ul><li>You bought a CD from Tower Records, paying cash for it. </li></ul><ul><li>You bought a Samsung TV using credit card. </li></ul><ul><li>You bought a Suzuki Swift, paying 10% by issuing a cheque, and applied bank loan for the remaining balance. </li></ul><ul><li>You returned damaged goods to the supplier, which were bought on credit. </li></ul><ul><li>You made an illegal U-turn and was caught by the traffic police. </li></ul>UTAR/FBAF1023/Topic2

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