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# Ch 3 accounting equation & classification

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• 1. ACC 106Chapter 3 Accounting Equation and Classification
• 2. Learning Objectives:After going through this chapter, you should be able to:&#xF0FC; Define &amp; explain the balance sheet, assets, liabilities and owner&#x2019;s equity.&#xF0FC; Define &amp; understand the use of the accounting equation in analyzing transactions&#xF0FC; Define revenue &amp; expenses&#xF0FC; Identify the relationship of profit to the to the accounting equation&#xF0FC; Show the effect of the transaction on the accounting equation&#xF0FC; Identify the movement of stock
• 3. IntroductionBusiness transaction- is an event or happening that affects the financial position of a business, &amp; requires recording- Usually involves: &#xF0D8; 2 @ more parties, such as a seller &amp; a buyer. &#xF0D8; Some exchange of goods @ services between the 2 parties &#xF0D8; 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&#x2019;s equity Recorded in the Balance c) Liabilities Sheet d) Revenues Recorded in the Trading e) Expenses Profit &amp; Loss
• 4. The Balance Sheet Presentation Sole ProprietorshipDr. Balance Sheet as at 31 December 20xx Cr.Assets: RM Owner&#x2019;s equity: RMFixed Assets: Opening Capital xxxLand &amp; Building xxx Add: Net Profit xxxMachinery xxx Less: Drawings (xxx) xxx xxxCurrent Asset: Liabilities:Stock xxx Long Term Liabilities xxxDebtors xxx Current Liabilities:Cash xxx Creditors xxx TOTAL LIABILITIESTOTAL ASSETS XXX &amp; OWNER&#x2019;S EQUITY XXX
• 5. BS (Assets = Owner&#x2019;s Equity+Liabilities) Assets Owner&#x2019;s Equity Liabilities- Economic resources which are of - It is represents owner- - It is financial obligation the value to the business supplied fund to the business of the business to the- are property own by the business for the acquisitions of assets external parties for the business- 2 types of assets: - it is financial obligation of - 2 types of liabilities:i) Fixed Assets/ Non Current Assets the business to the owner. i) Long term Liabilities- assets acquired / bought not for &#xF0D8; Owner&#x2019;s Equity - it is an amount owing byresale and it is to be used in the = Capital + Profit/ (-) the business that haverunning of the business. (Losses) - drawings repayment period &gt; 1 yr&#xF0D8;Tangible Fixed Assets - i.e - i.e Long term loanLand&amp;Building,Machinery ii) Current liabilities&#xF0D8;Intangible Fixed Assets- i .e - it is an amount owing byGoodwill,Trademark the business that is to be&#xF0D8;Investment &#x2013; i.e Fixed deposit paid in within 1 yrii)Current Assets &#x2013; assets that are - i.e Creditors, bankeither cash or those that can be overdraftconverted in to cash i.e debtors,stock. (See pg14 textbook)
• 6. Accounting Equation (A = OE + L )- 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: Assets = Owner&#x2019;s Equity + Liabilities A = OE + L OE = A &#x2013; L- 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 &amp; owner&#x2019;s equity of an organization at a particular time.
• 7. The Balance Sheet &amp; The Effects of Business Transaction2.5.1 The Introduction of CapitalOn 1st January 20XX, Beckham started business &amp; invested RM50,000 cash to thebusiness. i)The Balance sheet would appear as follows: Beckham EnterpriseDr. Balance Sheet as at 01 January 20XX Cr.Assets: RM Owner&#x2019;s equity: RMCash 50,000 Opening Capital 50,000ii)The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L) 2006 Cash increase by Capital increase by - 01/01 RM50,000 RM50,000 Effect: Increase A Effect:Increase OE Effect: NO
• 8. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d)2.5.2 The Transfer of Cash to a Bank AccountOn 2nd January 20XX, the business opens bank account &amp; deposit RM45,000 ofthe cash into the account. i)The Balance sheet would appear as follows: Beckham EnterpriseDr. Balance Sheet as at 02 January 20XX Cr.Assets: RM Owner&#x2019;s equity: RMCash 5,000 Capital 50,000Bank 45,000 50,000 50,000ii)The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L)2006 Cash decrease to 5,000 Capital still = 50,000 -02/01 Bank increase by 45,000 #Increase &amp; Decrease A(=) #OE still equal with A # NO effect
• 9. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d)2.5.3 The Borrowing from BankOn 3rd January 200XX, the business borrows from bank amount RM30,000 anddeposited the loan into bank. i)The Balance sheet would appear as follows: Beckham EnterpriseDr. Balance Sheet as at 03 January 20XX Cr.Assets: RM Owner&#x2019;s equity: RMCash 5,000 Capital 50,000Bank 75,000 Long Term Liability:Loan30,000 80,000 80,000ii)The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L)2006 Bank increase by 30,000 Capital still = 50,000 Loan increase03/01 #Increase A to 80,0000 &amp; by 30,000 Bank to 75,000 #No effect #Increase L
• 10. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d) 2.5.4 Purchase of Fixtures &amp; Fittings by cheque On 4th January 20XX, the business purchase Fixtures &amp; 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&#x2019;s equity: RM Fixtures&amp;Fittings 10,000 Capital 50,000 Cash 5,000 Long Term Liabilities: Bank 65,000 Long Term Loan 30,000 80,000 80,000ii)The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L) 2006 F&amp;F increase by 10,000 Capital still = 50,000 Loan still = 04/01 Bank decrease to 65,000 30,000 #Increase &amp; decrease A (=) #No effect #No effect
• 11. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d)2.5.5 Purchase of Stock of Goods on CreditOn 5th January 20XX, the business purchase Stock of Goods on credit amountRM18,000. i)The Balance sheet would appear as follows: Beckham EnterpriseDr. Balance Sheet as at 05 January 20XX Cr.Assets: RM Owner&#x2019;s equity: RMFixtures&amp;Fittings 10,000 Capital 50,000Cash 5,000 Long Term Liabilities:Bank 65,000 Long Term Loan 30,000Stock 18,000 Creditors 18,000 98,000 98,000
• 12. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d)ii)The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L)20XX Stock increase by Capital still = 50,000 Creditor increase by05/01 18,000 18,000 #Increase A to 98,000 #No effect #Increase L to 48,0002.5.6 Payment to suppliers by chequeOn 6th January 20XX, the business paid a cheque amount RM8,000 to its supplier.The effect on the accounting equation Date Assets(A) = Owner&#x2019;s Equity(OE) + Liabilities(L) 20XX Bank decrease by Capital still = 50,000 Creditor decrease by 06/01 8,000 8,000 #Decrease A to 90,000 #No effect #Decrease L to 40,000
• 13. The Balance Sheet &amp; The Effects of Business Transaction (Cont&#x2019;d)2.5.6 Payment to suppliers by chequeThe Balance sheet would appear as follows: Beckham EnterpriseDr. Balance Sheet as at 06 January 20XX Cr.Assets: RM Owner&#x2019;s equity: RMFixed Assets: Capital 50,000Fixtures&amp;Fittings 10,000 Liabilities:Current Assets: Long Term Liabilities:Cash 5,000 Long Term Loan 30,000Bank 57,000 Current Liabilities:Stock 18,000 Creditors 10,000 90,000 90,000
• 14. Trading Profit &amp; Loss Presentation Beckham Enterprise Trading and Profit and Loss Accounts for the year ended 31st December 20xxOpening Stock RM 14,000 Sales RM100,000Purchases 60,000 74,000Less: Closing Stock (14,000)Cost of Goods Sold 60,000Gross Profit c/d 40,000 100,000 100,000Telephone &amp; Electricity 200 Gross Profit b/d 40,000Salary 5,000 Rent received 800Stationery 100 Commission Received 500Net Profit 36,000 41,300 41,300
• 15. TPL(P) = Revenue(R) &#x2013; Expenses(E)- Profit is the differences between revenue &amp; 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 &#x2013; E + L, A + E = OE + R + L Revenue Expenses- is the gross increase in owner&#x2019;s - are the cost of assets consumed or equity resulting from business services used in the process of activities entered into for the earning revenue. purpose of earning income- i.e sales of goods, services, - i.e purchased of goods, salary, commission received interest interest expense, rent expense, received etc. discount allowed etc. See pg 54 textbook
• 16. Effect of transactions on the expanded accounting equation
• 17. Effect of transactions on the expanded accounting equationDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner&#x2019;s Equity Revenue LiabilitiesJan F&amp;F 10,000 Insurance 200 Capital 50,000 Loan 30,00006 Cash 4,800 Creditor 10,000 Bank 57,000 Stock 18,000Jan F&amp;F 10,000 Insurance 200 Capital 50,000 Commission 350 Loan 30,00007 Cash 4,800 Creditor 10,000 Bank 57,350 Stock 18,000Jan F&amp;F 10,000 Insurance 200 Capital 50,000 Commission 350 Loan 30,00008 Cash 4,700 Electricity 100 Creditor 10,000 Bank 57,350 Stock 18,000Jan F&amp;F 10,000 Insurance 200 Capital 50,000 Commission 350 Loan 30,00009 Cash 5,100 Electricity 100 Rent 400 Creditor 10,000 Bank 57,350 Stock 18,000
• 18. Accounting for stock
• 19. Accounting for stock
• 20. Movement of stock1. Increase in Stock Effect of Accounts transactionPurchase- goods bought by the business for the Purchase Expense Purchases A/cpurpose of resale increasePurchases Return (Return Inward) &#x2013; goods Sales revenue Return inwardreturn by buyer decrease A/c2. Decrease in Stock Effect of Accounts transactionSales &#x2013; sale of goods with prime intention of Sales revenue Sales A/cresale increaseSales Return (Return outward) &#x2013; goods return Purchase Expense Returnto supplier decrease outward A/c
• 21. Purchase &amp; Sales of GoodsPurchase and sales of goods can be divided into 2 categories: Transactions Accounts Involved a. Cash Purchase Cash Account &amp; Purchase Account b. Credit Purchase Creditors Account &amp; Purchases Account c. Cash Sales Cash Account &amp; Sales Account d. Credit Sales Debtors Account &amp; Sales Account
• 22. Purchase &amp; Sales of Goods
• 23. Example: Purchase &amp; Sales Return
• 24. Purchase &amp; Sales ReturnDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner&#x2019;s Equity Revenue LiabilitiesJan F&amp;F 10,000 Insurance 200 Capital 50,000 Commission 350 Loan 30,00010 Cash 5,100 Electricity 100 Rent 400 Creditor 13,000 Bank 57,350 Purchases 3,000 Stock 18,000Jan F&amp;F 10,000 Insurance 200 Capital 49,900 Commission 350 Loan 30,00011 Cash 5,100 Electricity 100 Rent 400 Creditor 13,000 Bank 57,350 Purchases 2,900 Stock 18,000Jan F&amp;F 10,000 Insurance 200 Capital 49,900 Commission 350 Loan 30,00012 Cash 5,100 Electricity 100 Rent 400 Creditor 13,000 Bank 57,350 Purchases 2,900 Sales 1,000 Stock 18,000 Debtor 1,000
• 25. Purchase &amp; Sales ReturnDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner&#x2019;s Equity Revenue LiabilitiesJan F&amp;F 10,000 Insurance 200 Capital 49,900 Commission 350 Loan 30,00013 Cash 5,100 Electricity 100 Rent 400 Creditor 12,800 Bank 57,350 Purchases Sales 1,000 Stock 18,000 2,700 Debtor 1,000Jan F&amp;F 10,000 Insurance 200 Capital 49,900 Commission 350 Loan 30,00014 Cash 5,100 Electricity 100 Rent 400 Creditor 12,800 Bank 57,350 Purchases Sales 900 Stock 18,000 2,700 Debtor 900