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Accounting basic equation

The document provides information on key accounting concepts and the accounting process. It discusses how accounting measures and reports on business transactions and activities in financial terms. The accounting process involves analyzing, recording, classifying, summarizing, and reporting transactions. It also covers the basic accounting equation of assets equaling liabilities plus equity. Several key accounting concepts are defined, including the business entity, realization, accrual, and matching concepts.

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Accounting Basic Definition and Basic Equation For Journal , Balance Sheet and
Accounting /Accounting Process is a system that measures the activities of a business in financial terms. It provides various reports and financial statements that show how the various transactions the business undertook (e.g., buying and selling goods) affected the business. This accounting process performs the following functions:  Analysing: Looking at what happened and how the business was affected.  Recording: Putting the information into the accounting system.  Classifying: Grouping all the same activities (e.g., all purchases) together.  Summarizing: Totaling the results.  Reporting: Issuing the statements that tell the results of the previous functions. DefinitDefinition of Accounting ion
Accounting Concept
This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting. Business entity concept
This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet; For example, a company purchases a plant and machinery of Rm100000.00 and its life span is 10 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an item which will be used in business for many years, it will not be proper to charge the amount from the revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an asset. GOING CONCERN CONCEPT
All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. This is necessary for different purposes like, calculation of profit, ascertaining financial position, tax computation etc. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which may be a calendar year or a financial year. Year that begins from 1 st of January and ends on 31 st of December, is known as Calendar Year. The year that begins from 1st of April and ends on 31 st of March of the following year, is known as financial year. As per accounting period concept, all the transactions are recorded in the books of accounts for a specified period of time. Hence, goods purchased and sold during the period, rent, salaries etc. paid for the period are accounted for and against that period only. ACCOUNTING PERIOD CONCEPT
Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them. For example, a machine was purchased by XYZ Limited for Rs.500000, for manufacturing shoes. An amount of Rs.1,000 were spent on transporting the machine to the factory site. In addition, Rs.2000 were spent on its installation. The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000. This cost is also known as historical cost. Suppose the market price of the same is now Rs 90000 it will not be shown at this value. Further, it may be clarified that cost means original or acquisition cost only for new assets and for the used ones, cost means original cost less depreciation. The cost concept is also known as historical cost concept. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price. ACCOUNTING COST CONCEPT
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation : Assets = Liabilities + Capital DUAL ASPECT CONCEPT
 The above accounting equation states that the assets of a business are always  equal to the claims of owner/owners and the outsiders. This claim is also  termed as capital or owners equity and that of outsiders, as liabilities or  creditors’ equity. DUAL ASPECT CONCEPT (Cont)
1. Capital brought in by the owner of the business The two aspects in this transaction are : (i) Receipt of cash (ii) Increase in Capital (owners equity) 2. Purchase of machinery by cheque The two aspects in the transaction are (i) Reduction in Bank Balance (ii) Owning of Machinery Let us analyse some more business transactions in terms of their dual aspect :
3. Goods sold for cash The two aspects are (i) Receipt of cash (ii) Delivery of goods to the customer 4. Rent paid in cash to the landlord The two aspects are (i) Payment of cash (ii) Rent (Expenses incurred). Let us analyse some more business transactions in terms of their dual aspect :
This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means creation of legal right to receive money. Selling goods is realisation, receiving order is not. In other words, it can be said that : Revenue is said to have been realised when cash has been received or right to receive cash on the sale of goods or services or both has been created. Let us study the following examples : (i) N.P. Jeweller received an order to supply gold ornaments worth RM500000. They supplied ornaments worth RM200000 up to the year ending 31 st December 2005 and rest of the ornaments were supplied in January 2006. (ii) Bansal sold goods for RM1,00,000 for cash in 2006 and the goods have been delivered during the same year. REALISATION CONCEPT
The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable. Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. ACCRUAL CONCEPT
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. Profit or Loss ? MATCHING CONCEPT
Accounting basic equation
DC ADE LER DACE CLER Remember
DEBIT CREDIT ASSET LIABILITY DRAW EQUITY EXPENSES REVENUE DC ADE LER / DADE CLER
DEBIT Explanation and Example ASSET Examples include cash, investments, accounts receivable, inventory, supplies land, buildings, equipment, and vehicles. Assets are reported on the balance sheet usually at cost or lower. Assets are also part of the accounting equation: Assets = Liabilities + Owner's (Stockholders') Equity. DRAW The withdrawal of business cash or other assets by the owner for the personal use of the owner. Withdrawals of cash by the owner are recorded with a debit to the owner's drawing account and a credit to the cash account. (Draw by owner for what ever purpose) EXPENSES An expense in accounting is the money spent or cost incurred in an entity's efforts to generate revenue. Expenses represent the cost of doing business where doing business is the sum total of the activities directed towards making a profit. DC ADE LER / DACE CLER
CREDIT Explanation and Example LIABILITY A liability is an obligation and it is reported on a company's balance sheet. A common example of a liability is accounts payable. Accounts payable arise when a company purchases goods or services on credit from a supplier. When the company pays the supplier, the company's accounts payable is reduced. EQUITY Equity is used to mean the combination of liabilities and owner's equity. For example, some restate the basic accounting equation Assets = Liabilities + Owner's Equity to become Assets = Equities. Equity is also used to indicate an owner's interest in a personal asset REVENUE Fees earned from providing services and the amounts of merchandise sold. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. Often the term income is used instead of revenues. DC ADE LER / DACE CLER
DEBIT (Positive in Cash) CREDIT ( Negative in Cash) ASSET (Cash, Account Receivable, inventory, equipment, Building) LIABILITY (Account Payable/ When you Owe Somebody) BalanceSheet DRAW (Distribution , Own Cheque, Dividend, reduced equity, withdrawal) EQUITY (Retain Earning/ how much you have in the business) EXPENSES (Rent, Utilities, Internet) REVENUE (Sales, Services) Income Statement DC ADE LER / DADE CLER Example
Step By Step Journal Entry - Basic
 RM 10 000 Loan From Bank  RM 5000 Buy Truck  RM 500 Pay Rent  RM 800 Paid for Services  RM 100 Goes to ATM/ Personal Account Item
DEBIT CREDIT CASH RM10 000 .00 (Because Receive from bank) LOAN RM 10 000.00 (It is a liability because you didn’t earn it but loan it/ it falls under account payable) RM 10 000.00 Loan From Bank
DEBIT CREDIT TRUCK RM 5 000.00 ( Become company asset to make more money) CASH RM 5 000.00 (Because it leaving from account, Negative in Cash, Negative in Cash) RM 5000 Buy Truck
DEBIT CREDIT RENT RM 5 00.00 ( Become company expenses to make more money) CASH RM 5 00.00 (Because it leaving from account, Negative in Cash) RM 500 Pay Rent
DEBIT CREDIT CASH RM 800.00 ( Because receive cash, Positive in Cash) Services Income RM 800.00 (Because it revenue, from work effort, income) RM 800 Paid for services
DEBIT CREDIT DRAW RM 100.00 ( Because reduce in cash) CASH RM 100.00 (Because reduce from company account / Negative in cash)) RM 100 Goes to ATM/ Personal Account
DEBIT CREDIT 1 CASH RM10 000 .00 LOAN RM 10 000.00 2 CASH RM 5 000.00 TRUCK RM 5 000.00 3 CASH RM 5 00.00 RENT RM 5 00.000 4 CASH RM 800.00 Services Income RM 800.00 5 CASH RM 100.00 DRAW RM 100.00 Journal Final Look
Income Statement – Step by Step (Net Income =Revenue – Expenses) NOTE: Income statement is only for that accounting year which was not bring forward to the next accounting year DEBIT CREDIT ASSET LIABILITY DRAW EQUITY EXPENSES REVENUE
DEBIT CREDIT 1 CASH RM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) The Journal
 Example of income statement from the journal Income statement * < > MEANS NEGATIVE IN CASH SERVICE INCOME RM 800 PAY RENT <RM 500> NET INCOME RM 300
The Balance Sheet Asset = Liability + Equity DEBIT CREDIT ASSET LIABILITY DRAW EQUITY EXPENSES REVENUE
DEBIT CREDIT 1 CASH RM 10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset) 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) The Journal
 Income statement RM 300 NET Income Step 1 Balance Sheet: Get/Calculate NET INCOME
Step 2 Balance Sheet: Calculate CASH ASSET DEBIT CREDIT 1 + CASH RM10 000 .00 2 - CASH RM 5 000.00 3 - CASH RM5 00.00 4 +CASH RM 800.00 5 -CASH RM 100.00 TOTAL + 10800.00 - 5600.00 RM 5200 in cash
Final Step Balance Sheet: Calculate Asset and liability + Equity Asset Liability + Equity 1 CASH RM5200 .00 Liability Loan : 10000.00 2 Truck RM5000.00 Equity <Draw> : <100.00> 3 Net Income 300.00 : 300.00 Total RM 10 200.00 RM10 200.00 RM 5200 in cash
 1. Gracie Loo Free Bush invests RM17,000 to begin a real estate office.  2. The real estate office buys $600 of computer equipment from Wal-Mart for cash.  3. The real estate company buys $800 of additional computer equipment on account  from Circuit City. Unrelated Example (Calculate Asset = liability + Equity)
Asset = Liability + Equity Cash RM17000 Gracie Loo RM 17000.00 - RM600.00 + RM600.00 (Asset) + RM800.00 Circuit City RM 800.00 16400.00 RM1400.00 RM 17800.00 RM17800.00 Solution
Asset in Balance Sheet
ASSET CASH RM 50 000.00 Total Asset RM 50 000.00 Liability + Equity Liability RM 10 000.00 Loan From Share holder Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income AIM 1: Buy Truck 3000 (Truck is an asset)
ASSET CASH RM 50 000.00 – 30000.00 = RM 20 000.00 TRUCK RM 30 000.00 Total Asset RM 50 000.00 Liability + Equity Liability RM 10 000.00 Loan From Share holder Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income Total RM 50 000.00 Option 1: Buy Truck 3000 CASH (Truck is an asset)
ASSET CASH RM 50 000.00 TRUCK RM 30 000.00 Total Asset RM 80 000.00 Liability + Equity Liability RM 10 000.00 + RM 30 000.00 = RM 40 000.00 Loan From Shareholder + Loan from bank for truck Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income Total RM 80 000.00 Option 2: Buy Truck 3000 Loan From Share holder (Truck is an asset)
EXECISE DO YOU GET IT RIGHT ?
 RM 5 000 Loan From Shareholder  RM 5 000 Buy Canning Machine  RM 700 Pay Streamyx  RM 1 200 Sales from canned product  RM 200 Write Check to A/P account manager Exercise 1 : Write a simple journal entry to the following statement
Do you get it right ? DEBIT CREDIT 1 CASH RM5 000 .00 LOAN RM 5 000.00 2 CASH RM 5 000.00 Canning Machine RM 5 000.00 3 CASH RM 7 00.00 Streamyx RM 7 00.000 4 CASH RM 1200.00 Sales Canned RM 1200.00 5 CASH RM 200.00 CHEQUE RM 200.00 TOTAL RM 12 100.00 RM 12 100.00
Do you get it right ? DEBIT CREDIT LOAN RM 5 000.00 Canning Machine RM 5 000.00 Streamyx RM 7 00.000 Sales Canned RM 1200.00 CHEQUE RM 200.00 TOTAL 5900 6200.00
Now calculate the Net Income
NET INCOME = REVENUE - EXPENSES 1. Sales from canned product RM 1 200.00 2. Pay Streamyx <RM 700.00> TOTAL RM 500.00 Net income: Do you get it right ?
Now calculate Asset = Liability + Equity
Asset = Liability + Equity Do you get it right? Asset Liability + Equity 1 CASH RM300 .00 Liability Loan : 5000.00 2 C. Machine RM5000.00 Equity <Draw> : <200.00> 3 Net Income : 500.00 Total RM 5300.00 RM 5300.00
Depreciation Asset Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes
Debit Credit Depreciation Expenses RM 5 000 Accumulate depreciation RM 5 000 Depreciation of the truck we bought earlier
ASSET CASH RM 50 000.00 TRUCK Depreciation Value RM 30 000.00 <RM 5 000.00> Total Asset RM 75000.00 Liability + Equity Liability RM 40 000.00 Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income <RM 5000.00> Truck Depreciation Total RM 75 000.00
Depreciation Expenses Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes
Formula for straight line depreciation 𝑥 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑌𝑒𝑎𝑟𝑠 𝑜𝑓 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑥 = (100 000−5000) 8 = 11875 Year of service Value Buy 100 000 Year 1 88 125 Year 2 76 250 Year 3 64 375 Year 4 52 500 Year 5 40 625
Each car has different rate. Actual values may vary between RM2,000 - RM5,000/year https://www.carbase.my/tool/car-market-value-guide
 Truck Price = 120000  Truck salvage price = 11 000  Year of service = 10  How what is the value of the truck at 3 year? Calculate :
Formula for straight line depreciation 𝑥 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑌𝑒𝑎𝑟𝑠 𝑜𝑓 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑥 = (120 000−11000) 10 = 10900 Year of service Value Buy 120 000 Year 1 109 100 Year 2 98 200 Year 3 87300
Account Receivable whereas A/R means "You get product now, you pay me later."
 Sell item for RM 15.00 ( in accounting it call as widget/any product)  The buyer will pay it later (in case of I Owe You / Delivery before payment)
DEBIT CREDIT A/c Receivable RM 10.00 ( ASSET) WIDGET RM 10.00 The journal entries for it (DC ADE LER/DADE CLER) Before Payment Debit Credit Cash $ 10 A/c Receivable $10 (REVENUE) After Payment
Account Payable Footnote : A/P means "I get product now, I pay you later"
 Receive Item without making payment  Will pay it later
DEBIT CREDIT Widget RM10.00 A/C Payable RM10.00 (Liability) The journal entries for it (DC ADE LER/DADE CLER) Before Payment Debit Credit A/C Payable RM10.00 (Expenses) Cash RM 10.00 After Payment
The cost of goods sold is reported on the income statement and can be considered as an expense of the accounting period. ... The second way to calculate the cost of goods sold is to use the following costs: beginning inventory + the cost of goods purchased or manufactured = cost of goods available – ending inventory. The basic calculation cost of goods sold is: Beginning Inventory Costs (at the beginning of the year) Plus Additional Inventory Cost (inventory purchased during the year) Minus Ending Inventory (at the end of the year) Equals Cost of Goods Sold. COST OF GOODS SOLD
FIFO and LIFO inventory FIFO - First In First out LIFO - Last in First out
Batches FIFO LIFO 1 10 10 2 20 20 3 30 30 Inventory overview First out /Cost of good sold Inventory
FIFO LIFO Low 10 10 Low high 20 20 Low high 30 30 High Net income UP DOWN Net income First out /Cost of good sold Inventory
Product Cost Unit Total cost 0.05 100 RM 5.00 0.15 100 RM 15.00 0.20 100 RM 20.00 Total Production cost RM 40.00 Production Calculation Example Sells 200 unit at 0.50/unit Total Revenue: RM 100.00 100 @ 0.05 RM 5.00 100 @ 0.15 RM 15.00 Total RM 20.00 Net Profit RM 80.00 100 @ 0.15 RM 15.00 100 @ 0.20 RM 20.00 Total RM 35.00 Net Profit RM 65.00 FIFO LIFO
Journal Entry with 2 Asset Example
DEBIT CREDIT RM500 Furniture (asset) RM 500 CASH 2 Asset journal example : buying furniture ( Gain Asset, Lost CASH asset)
Journal Entry with cash Expenses
DEBIT CREDIT RM180 Streamyx RM 180 CASH Spend RM180 for steamyx Note: 1. Remember what is the purpose of spending the money, will it generate asset, will it generate business 2. Will the cash enter the business account or leaving the account
Journal Entry with cash Revenue
DEBIT CREDIT RM 500 CASH RM 500 Services Receive payment for RM500 services performed Note: 1. Remember where do you get the money from, do you work for it. 2. 2. Will the cash enter the business account or leaving the account
T-account Debits Credits An account's assigned normal balance is on the side where increases go because the increases in anyaccount are usually greater than the decreases. Therefore, asset, expense, and owner's drawingaccounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances
Account Name Debit Credit T- Account Asset Debit (UP) Credit (Down) = Liability Debit (Down) Credit (UP) + Owner Equity Debit (Down) Credit (UP)
DEBIT CREDIT 1 CASH RM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) T-Account for the Journal
CASH 10 000 5000 800 500 100 5 200 LOAN 10 000 RENT 500 Service Income 800 DRAW 100 Truck 5000
Trial Balance (Unadjust) The unadjusted trial balance is the listing of general ledger account balances at the end of a reporting period, before any adjusting entries are made to the balances to create financial statements. The unadjusted trial balance is used as the starting point for analysing account balances and making adjusting entries Transfer from Journal to Trial Balance for Ledger
DEBIT CREDIT 1 CASH RM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) THE JOURNAL
THE CASH ASSET DEBIT CREDIT 1 + CASH RM10 000 .00 2 - CASH RM 5 000.00 3 - CASH RM5 00.00 4 +CASH RM 800.00 5 -CASH RM 100.00 TOTAL + 10800.00 - 5600.00 RM 5200 in cash
CASH 10 000 5000 800 500 100 5 200 LOAN 10 000 RENT 500 Service Income 800 DRAW 100 Truck 5000 THE T-ACCOUNT
ITEM DEBIT CREDIT CASH 5 200 LOAN 10 000 TRUCK 5000 RENT 500 SERVICE INCOME 800 DRAW 100 TOTAL 10 800 10 800 The Trial Balance of the journal
Exercise
1 Sept Purchase goods $3900 from Leader Co 5 Sept Sold goods $7800 to Yoyo Co 9 Sept Purchase good $5200 from Philips Co 15 Sept Sold goods $6500 to Hovid Co 25 Sept Purchase goods $3900 at 10% trade discount from Leader Co 30 Sept Sold goods $5200 at 5% trade discount to Yoyo co Prepare journal for Sept 2015 (From DIT T2Exam Question 2016)
Debit Credit 1 Sept Goods $3900 from Leader Co Cash $3900 5 Sept Cash $7800 Sold goods $7800 to Yoyo 9 Sept Purchase good $5200 from Philips Co Cash $5200 15 Sept Cash $6500 Sold goods $6500 to Hovid Co 25 Sept Purchase goods $3510 Leader Co Cash $3510 30 Sept Cash $4940 Sold goods $4940 to Yoyo .co Breaking down journal using DC ADE LER
Debit Credit 1 Sept Cash Leader Co, Expenses $3900 $3900 5 Sept Cash Yoyo Co , Revenue $7800 $7800 9 Sept Cash Philips Co, Expenses $5200 $5200 15 Sept Cash Hovid Co, Revenue $6500 $6500 25 Sept Cash Leader Co, Expenses $3510 $3510 30 Sept Cash Yoyo co, Revenue $4940 $4940 The Journal
Double Entry System The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. Double entry accounting, also called double entry bookkeeping, is the accounting system that requires every business transaction or event to be recorded in at least two accounts. This is the same concept behind the accounting equation. Every debit that is recorded must be matched with a credit.
Journalizing and Posting Transactions Step 1: Analyze transactions and source documents. Liabilities EquityAssets = + Step 2: Apply double-entry accounting (Left side) (Right side) Debit Credit T- Account ACCOUNT NAME: ACCOUNT No. Date Description PR Debit Credit Balance Step 4: Post entry to ledger GENERAL JOURNAL Page 123 Date Description Post. Ref. Debit Credit Step 3: Record journal entry
Ledger example 1:  4 Feb. 201 7 Office equipment was purchased for cash $500 Office Equipment accountDr Cr 2017 Feb. 4 Cash $500 Dr Cash account 2017 Feb. 4 Office Equipment $500 Cr
Example 2:  8 May. 2013 : A motor vehicle for company use was bought on credit from Acadis Motors for $29 000 Motor Vehicle AccountDr Cr 2017 May. 8 Acadis Motors $29000 Dr Acadis Motors 2017 May. Motors Vehicle $29000 Cr
Example 3:  30 June. 2013 : Paid cheque $800 to Quick Suppliers Co. for amount owing Quick SuppliersDr Cr 2017 June 30 Bank $800 Dr Bank Account 2013 June 30 Bank $800 Cr
Example 4:  3 July. 2017 : Proprietor brings in his private car valued at $39 700 for use in the business Motor Vehicle AccountDr Cr 2017 July 3 Capital $39 700 Dr Capital Account 2017 July 3 Motor Vehicle $39 700 Cr
Journal and Ledger posting Exercise Make and complete accounts using the following information. Jan 1 – Started Business with $30,000 in bank Jan 5 – Bought stock of goods paying $2,770 cheque Jan 7 – Bought a van, $4,800 cheque Jan 9 – Sold goods for $680 cash Jan 10 - Bought desk & chair for the office for $110 cash Jan 15 – Sold goods for $500 cheque Jan 22 - Paid $92 cash for motor expenses Jan 29 - Sold goods for $325 cash Jan 30 – Bought more goods, paid $1090 cheque
Jan 1 – Started Business with $30,000 in bank Bank accountDr Cr 2017 Jan 1 Capital/ Opening Blance $30 000 Dr Capital Account/ Opening Balance Account 2017 Jan 1 Bank Account $30 000 Cr Ledger Journal Date Debit Credit Jan1 Bank Account $30 000 Capital/Opening Balance $30 000
Jan 5 – Bought stock of goods paying $2,770 cheque StockDr Cr 2017 Jan 5 Bank account $2770 Dr Bank Account 2017 Jan 5 Stock $2 770 Cr Date Debit Credit Jan 05 Bank Account $2770 Stock $2770 Journal
Jan 7 – Bought a van, $4,800 cheque Motor Vehicle Account (Van)Dr Cr 2017 Jan 7 Bank account $4800 Dr Bank Account 2017 Jan 7 Motor Vehicle (Van) $4800 Cr Date Debit Credit Jan 07 Bank Account $4 800 Motor Vehicle 0 $4 800 Journal
Jan 9 – Sold goods for $680 cash Cash AccountDr Cr 2017 Jan 9 Revenue $680 Dr Revenue Account 2017 Jan 9 Cash-- Sold Goods $680 Cr Date Debit Credit Jan 09 Cash $680 Revenue $680
Jan 10 - Bought desk & chair for the office for $110 cash FurnitureDr Cr 2017 Jan 10 cash $110 Dr Cash Account 2017 Jan 10 Buy Furniture $110 Cr Date Debit Credit Jan 10 Cash $110 Furniture $110
Jan 15 – Sold goods for $500 cheque Bank AccountDr Cr 2017 Jan 15 Sold Goods $500 Dr Revenue 2017 Jan 15 Cheque $500 Cr Date Debit Credit Jan 1 5 Bank Account $500 Revenue $500
Jan 22 - Paid $92 cash for motor expenses Motor Expenses AccountDr Cr 2017 Jan 22 Cash $92 Dr Cash Account 2017 Jan 22 Motor Expenses $92 Cr Date Debit Credit Jan 22 Cash $92 Equity $92
Jan 29 – Sold Goods for $325 Cash Cash AccountDr Cr 2017 Jan 29 Revenue $325 Dr Revenue Account 2017 Jan 22 Motor Expenses $325 Cr Date Debit Credit Jan 29 Cash $325 Revenue $325
Jan 30 – Bought Goods for $1090 Cheque Goods Stock Account (Asset)Dr Cr 2017 Jan 30 Bank Account $1090 Dr Bank Account 2017 Jan 30 Goods stock Account $1090 Cr Date Debit Credit Jan 30 Bank Account $1090 Buy goods $1090
Final Ledger
Cash Account Dr Cr Jan 9 Revenue 680Jan 10 Furniture 110 Jan 29 Revenue 325Jan 22 Expenses 92 1005 202 Cash in hand 803 Bank Account Dr Cr Jan 1 Capital 30000Jan 5 Stock 2770 Jan 15 Revenue 500Jan 7 Vehicle 4800 Jan 30 Stock 1090 30500 8660 Cash in Bank 21840 Opening Balance to bring forward
Balance Account T-accounts need to be balanced at various times during the year: • At the end of each accounting period to summarise the situation. • Once a year to calculate profit. • To see what is happening with respect to a particular account.
How to balance where debtors have paid their accounts This is the account of Katty Perry in August 2016, She pay all services by cheque in the same month Katty Perry 2016 Aug 2016 Aug 1 Sales RM 144 22 Bank 144 19 SaLes Rm 300 28 Bank 300
How to balance where debtors have paid their accounts (Continued) This is the balanced account: Katty Perry 2016 Aug 2016 Aug 1 Sales RM 144 22 Bank 144 19 Sales Rm 300 28 Bank 300 444 444
How to balance where debtors still owe for goods This is the account of D. Alonsso D. Alonsso 2016 Aug 2016 Aug 1 Sales RM 158 15 Sales Rm 206 28 Bank 158 30 Sales RM 118
How to balance where debtors still owe for goods (Continued) To balance, we will use a five-step approach. 1. Add up both sides to find out their totals. Note: do not write anything in the account at this stage. 2. Deduct the smaller total from the larger total to find the balance. 3. Now enter the balance on the side with the smallest total. This now means the totals will be equal.
How to balance where debtors still owe for goods (Continued) 4. Enter totals level with each other. 5. Now enter the balance on the line below the totals on the opposite side to the balance shown above the totals.
How to balance where debtors still owe for goods (Continued) This is the balanced account: D. Alonsso 2016 Aug 2016 Aug 1 Sales RM 158 28 Bank 158 15 Sales Rm 206 31 Carried Down 324 30 Sales RM 118 482 482 2016 Sept 1 Brought down 324
 Mr. Mark Adam  Sept 1 Buys good for 450  Sept 16 Pays goods with cheque for 350  Sept 25 Buys Goods for 600  Sept 27 Pays goods with cheque for 650 Exercise
Balancing a creditor’s account This is the account of E. Batman in August 2016: E. Batman 2016 Aug 2016 Aug 21 Bank RM 100 2 248 18 116
Balancing a creditor’s account (Continued) This is the balanced account: E. Batman 2016 Aug 2016 Aug 21 Bank RM 100 2 RM 248 31 Balance carried down RM 264 18 RM 116 RM364 RM364 Sept Balance brought down 264 1
An example of a three-column account D. Alonsso 2016 Aug Debitt Credit Balance 1 Sales RM 158 158 Dr 15 Sales Rm 206 364 Dr 28 Bank 158 206 Dr 30 Sales RM 118 324 Dr
Three-column accounts  Three-column accounts do not use the format of the T- account.  There are three columns and the third column provides a running total of the balance.  Three-column accounts are very similar to the bank statement you will receive for a current account.
Key Term List
Accounting A system that measures the business’s activities in financial terms, provides written reports and financial statements about those activities, and communicates these reports to decision makers and others. Accounts payable Amounts owed to creditors that result from the purchase of goods or services on account: a liability. Accounts receivable An asset that indicates amounts owed by customers. Assets Properties (resources) of value owned by a business (cash, supplies, equipment, land). Balance sheet A statement, as of a particular date, that shows the amount of assets owned by a business as well as the amount of claims (liabilities and owner’s equity) against these assets. Basic accounting equation Assets = Liabilities + Owner’s Equity. Bookkeeping The recording function of the accounting process. Capital The owner’s investment of equity in the company. Corporation A type of business organization that is owned by stockholders. Stockholders usually are not personally liable for the corporation’s debts. Creditor Someone who has a claim to assets.
Ending capital Beginning Capital + Additional Investments + Net Income 2 Withdrawals = Ending Capital. Or: Beginning Capital + Additional Investments 2 Net Loss 2 Withdrawals = Ending Capital. Equities The interest or financial claim of creditors (liabilities) and owners (owner’s equity) who supply the assets to a firm. Expanded accounting equation Assets = Liabilities + Capital 2 Withdrawals + Revenue 2 Expenses. Expense A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity. Generally accepted accounting principles (GAAP)The procedures and guidelines that must be followed during the accounting process. Income statement An accounting statement that details the performance of a firm (revenue minus expenses) for a specific period of time. Liabilities Obligations that come due in the future. Liabilities result in increasing the financial rights or claims of creditors to assets. Manufacturer Business that makes a product and sells it to its customers.
Merchandise company Business that buys a product from a manufacturing company to sell to its customers. Net income When revenue totals more than expenses, the result is net income. Net loss When expenses total more than revenue, the result is net loss. Owner’s equity Rights or financial claims to the assets of a business (in the accounting equation, assets minus liabilities). Partnership A form of business organization that has at least two owners. The partners usually are personally liable for the partnership’s debts. Revenue An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash or accounts receivable. A subdivision of owner’s equity: As revenue increases, owner’s equity increases. Service company Business that provides a service. Shift in assets A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same.
Sole proprietorship A type of business ownership that has one owner. The owner is personally liable for paying the business’s debts. Statement of financial position Another name for a balance sheet. Statement of owner’s equity A financial statement that reveals the change in capital. The ending figure for capital is then placed on the balance sheet. Supplies One type of asset acquired by a firm; it has a much shorter life than equipment. Withdrawals A subdivision of owner’s equity that records money or other assets an owner withdraws from a business for personal use.

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Accounting basic equation

  • 1.
    Accounting Basic Definitionand Basic Equation For Journal , Balance Sheet and
  • 2.
    Accounting /Accounting Processis a system that measures the activities of a business in financial terms. It provides various reports and financial statements that show how the various transactions the business undertook (e.g., buying and selling goods) affected the business. This accounting process performs the following functions:  Analysing: Looking at what happened and how the business was affected.  Recording: Putting the information into the accounting system.  Classifying: Grouping all the same activities (e.g., all purchases) together.  Summarizing: Totaling the results.  Reporting: Issuing the statements that tell the results of the previous functions. DefinitDefinition of Accounting ion
  • 3.
  • 4.
    This concept assumesthat, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting. Business entity concept
  • 5.
    This concept statesthat a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet; For example, a company purchases a plant and machinery of Rm100000.00 and its life span is 10 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an item which will be used in business for many years, it will not be proper to charge the amount from the revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an asset. GOING CONCERN CONCEPT
  • 6.
    All the transactionsare recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. This is necessary for different purposes like, calculation of profit, ascertaining financial position, tax computation etc. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which may be a calendar year or a financial year. Year that begins from 1 st of January and ends on 31 st of December, is known as Calendar Year. The year that begins from 1st of April and ends on 31 st of March of the following year, is known as financial year. As per accounting period concept, all the transactions are recorded in the books of accounts for a specified period of time. Hence, goods purchased and sold during the period, rent, salaries etc. paid for the period are accounted for and against that period only. ACCOUNTING PERIOD CONCEPT
  • 7.
    Accounting cost conceptstates that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them. For example, a machine was purchased by XYZ Limited for Rs.500000, for manufacturing shoes. An amount of Rs.1,000 were spent on transporting the machine to the factory site. In addition, Rs.2000 were spent on its installation. The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000. This cost is also known as historical cost. Suppose the market price of the same is now Rs 90000 it will not be shown at this value. Further, it may be clarified that cost means original or acquisition cost only for new assets and for the used ones, cost means original cost less depreciation. The cost concept is also known as historical cost concept. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price. ACCOUNTING COST CONCEPT
  • 8.
    Dual aspect isthe foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation : Assets = Liabilities + Capital DUAL ASPECT CONCEPT
  • 9.
     The aboveaccounting equation states that the assets of a business are always  equal to the claims of owner/owners and the outsiders. This claim is also  termed as capital or owners equity and that of outsiders, as liabilities or  creditors’ equity. DUAL ASPECT CONCEPT (Cont)
  • 10.
    1. Capital broughtin by the owner of the business The two aspects in this transaction are : (i) Receipt of cash (ii) Increase in Capital (owners equity) 2. Purchase of machinery by cheque The two aspects in the transaction are (i) Reduction in Bank Balance (ii) Owning of Machinery Let us analyse some more business transactions in terms of their dual aspect :
  • 11.
    3. Goods soldfor cash The two aspects are (i) Receipt of cash (ii) Delivery of goods to the customer 4. Rent paid in cash to the landlord The two aspects are (i) Payment of cash (ii) Rent (Expenses incurred). Let us analyse some more business transactions in terms of their dual aspect :
  • 12.
    This concept statesthat revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means creation of legal right to receive money. Selling goods is realisation, receiving order is not. In other words, it can be said that : Revenue is said to have been realised when cash has been received or right to receive cash on the sale of goods or services or both has been created. Let us study the following examples : (i) N.P. Jeweller received an order to supply gold ornaments worth RM500000. They supplied ornaments worth RM200000 up to the year ending 31 st December 2005 and rest of the ornaments were supplied in January 2006. (ii) Bansal sold goods for RM1,00,000 for cash in 2006 and the goods have been delivered during the same year. REALISATION CONCEPT
  • 13.
    The meaning ofaccrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable. Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. ACCRUAL CONCEPT
  • 14.
    The matching conceptstates that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. Profit or Loss ? MATCHING CONCEPT
  • 15.
  • 16.
    DC ADE LERDACE CLER Remember
  • 17.
    DEBIT CREDIT ASSET LIABILITY DRAWEQUITY EXPENSES REVENUE DC ADE LER / DADE CLER
  • 18.
    DEBIT Explanation andExample ASSET Examples include cash, investments, accounts receivable, inventory, supplies land, buildings, equipment, and vehicles. Assets are reported on the balance sheet usually at cost or lower. Assets are also part of the accounting equation: Assets = Liabilities + Owner's (Stockholders') Equity. DRAW The withdrawal of business cash or other assets by the owner for the personal use of the owner. Withdrawals of cash by the owner are recorded with a debit to the owner's drawing account and a credit to the cash account. (Draw by owner for what ever purpose) EXPENSES An expense in accounting is the money spent or cost incurred in an entity's efforts to generate revenue. Expenses represent the cost of doing business where doing business is the sum total of the activities directed towards making a profit. DC ADE LER / DACE CLER
  • 19.
    CREDIT Explanation andExample LIABILITY A liability is an obligation and it is reported on a company's balance sheet. A common example of a liability is accounts payable. Accounts payable arise when a company purchases goods or services on credit from a supplier. When the company pays the supplier, the company's accounts payable is reduced. EQUITY Equity is used to mean the combination of liabilities and owner's equity. For example, some restate the basic accounting equation Assets = Liabilities + Owner's Equity to become Assets = Equities. Equity is also used to indicate an owner's interest in a personal asset REVENUE Fees earned from providing services and the amounts of merchandise sold. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. Often the term income is used instead of revenues. DC ADE LER / DACE CLER
  • 20.
    DEBIT (Positive in Cash) CREDIT (Negative in Cash) ASSET (Cash, Account Receivable, inventory, equipment, Building) LIABILITY (Account Payable/ When you Owe Somebody) BalanceSheet DRAW (Distribution , Own Cheque, Dividend, reduced equity, withdrawal) EQUITY (Retain Earning/ how much you have in the business) EXPENSES (Rent, Utilities, Internet) REVENUE (Sales, Services) Income Statement DC ADE LER / DADE CLER Example
  • 21.
    Step By Step JournalEntry - Basic
  • 22.
     RM 10000 Loan From Bank  RM 5000 Buy Truck  RM 500 Pay Rent  RM 800 Paid for Services  RM 100 Goes to ATM/ Personal Account Item
  • 23.
    DEBIT CREDIT CASH RM10000 .00 (Because Receive from bank) LOAN RM 10 000.00 (It is a liability because you didn’t earn it but loan it/ it falls under account payable) RM 10 000.00 Loan From Bank
  • 24.
    DEBIT CREDIT TRUCK RM5 000.00 ( Become company asset to make more money) CASH RM 5 000.00 (Because it leaving from account, Negative in Cash, Negative in Cash) RM 5000 Buy Truck
  • 25.
    DEBIT CREDIT RENT RM5 00.00 ( Become company expenses to make more money) CASH RM 5 00.00 (Because it leaving from account, Negative in Cash) RM 500 Pay Rent
  • 26.
    DEBIT CREDIT CASH RM800.00 ( Because receive cash, Positive in Cash) Services Income RM 800.00 (Because it revenue, from work effort, income) RM 800 Paid for services
  • 27.
    DEBIT CREDIT DRAW RM100.00 ( Because reduce in cash) CASH RM 100.00 (Because reduce from company account / Negative in cash)) RM 100 Goes to ATM/ Personal Account
  • 28.
    DEBIT CREDIT 1 CASHRM10 000 .00 LOAN RM 10 000.00 2 CASH RM 5 000.00 TRUCK RM 5 000.00 3 CASH RM 5 00.00 RENT RM 5 00.000 4 CASH RM 800.00 Services Income RM 800.00 5 CASH RM 100.00 DRAW RM 100.00 Journal Final Look
  • 29.
    Income Statement – Stepby Step (Net Income =Revenue – Expenses) NOTE: Income statement is only for that accounting year which was not bring forward to the next accounting year DEBIT CREDIT ASSET LIABILITY DRAW EQUITY EXPENSES REVENUE
  • 30.
    DEBIT CREDIT 1 CASHRM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) The Journal
  • 31.
     Example ofincome statement from the journal Income statement * < > MEANS NEGATIVE IN CASH SERVICE INCOME RM 800 PAY RENT <RM 500> NET INCOME RM 300
  • 32.
    The Balance Sheet Asset= Liability + Equity DEBIT CREDIT ASSET LIABILITY DRAW EQUITY EXPENSES REVENUE
  • 33.
    DEBIT CREDIT 1 CASHRM 10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset) 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) The Journal
  • 34.
     Income statementRM 300 NET Income Step 1 Balance Sheet: Get/Calculate NET INCOME
  • 35.
    Step 2 BalanceSheet: Calculate CASH ASSET DEBIT CREDIT 1 + CASH RM10 000 .00 2 - CASH RM 5 000.00 3 - CASH RM5 00.00 4 +CASH RM 800.00 5 -CASH RM 100.00 TOTAL + 10800.00 - 5600.00 RM 5200 in cash
  • 36.
    Final Step BalanceSheet: Calculate Asset and liability + Equity Asset Liability + Equity 1 CASH RM5200 .00 Liability Loan : 10000.00 2 Truck RM5000.00 Equity <Draw> : <100.00> 3 Net Income 300.00 : 300.00 Total RM 10 200.00 RM10 200.00 RM 5200 in cash
  • 37.
     1. GracieLoo Free Bush invests RM17,000 to begin a real estate office.  2. The real estate office buys $600 of computer equipment from Wal-Mart for cash.  3. The real estate company buys $800 of additional computer equipment on account  from Circuit City. Unrelated Example (Calculate Asset = liability + Equity)
  • 38.
    Asset = Liability+ Equity Cash RM17000 Gracie Loo RM 17000.00 - RM600.00 + RM600.00 (Asset) + RM800.00 Circuit City RM 800.00 16400.00 RM1400.00 RM 17800.00 RM17800.00 Solution
  • 39.
  • 40.
    ASSET CASH RM 50000.00 Total Asset RM 50 000.00 Liability + Equity Liability RM 10 000.00 Loan From Share holder Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income AIM 1: Buy Truck 3000 (Truck is an asset)
  • 41.
    ASSET CASH RM 50000.00 – 30000.00 = RM 20 000.00 TRUCK RM 30 000.00 Total Asset RM 50 000.00 Liability + Equity Liability RM 10 000.00 Loan From Share holder Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income Total RM 50 000.00 Option 1: Buy Truck 3000 CASH (Truck is an asset)
  • 42.
    ASSET CASH RM 50000.00 TRUCK RM 30 000.00 Total Asset RM 80 000.00 Liability + Equity Liability RM 10 000.00 + RM 30 000.00 = RM 40 000.00 Loan From Shareholder + Loan from bank for truck Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income Total RM 80 000.00 Option 2: Buy Truck 3000 Loan From Share holder (Truck is an asset)
  • 43.
  • 44.
     RM 5000 Loan From Shareholder  RM 5 000 Buy Canning Machine  RM 700 Pay Streamyx  RM 1 200 Sales from canned product  RM 200 Write Check to A/P account manager Exercise 1 : Write a simple journal entry to the following statement
  • 45.
    Do you getit right ? DEBIT CREDIT 1 CASH RM5 000 .00 LOAN RM 5 000.00 2 CASH RM 5 000.00 Canning Machine RM 5 000.00 3 CASH RM 7 00.00 Streamyx RM 7 00.000 4 CASH RM 1200.00 Sales Canned RM 1200.00 5 CASH RM 200.00 CHEQUE RM 200.00 TOTAL RM 12 100.00 RM 12 100.00
  • 46.
    Do you getit right ? DEBIT CREDIT LOAN RM 5 000.00 Canning Machine RM 5 000.00 Streamyx RM 7 00.000 Sales Canned RM 1200.00 CHEQUE RM 200.00 TOTAL 5900 6200.00
  • 47.
  • 48.
    NET INCOME =REVENUE - EXPENSES 1. Sales from canned product RM 1 200.00 2. Pay Streamyx <RM 700.00> TOTAL RM 500.00 Net income: Do you get it right ?
  • 49.
    Now calculate Asset =Liability + Equity
  • 50.
    Asset = Liability+ Equity Do you get it right? Asset Liability + Equity 1 CASH RM300 .00 Liability Loan : 5000.00 2 C. Machine RM5000.00 Equity <Draw> : <200.00> 3 Net Income : 500.00 Total RM 5300.00 RM 5300.00
  • 51.
    Depreciation Asset Depreciation isan accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes
  • 52.
    Debit Credit Depreciation ExpensesRM 5 000 Accumulate depreciation RM 5 000 Depreciation of the truck we bought earlier
  • 53.
    ASSET CASH RM 50000.00 TRUCK Depreciation Value RM 30 000.00 <RM 5 000.00> Total Asset RM 75000.00 Liability + Equity Liability RM 40 000.00 Equity RM 20 000.00 Retain Earning RM 20 000.00 Net Income <RM 5000.00> Truck Depreciation Total RM 75 000.00
  • 54.
    Depreciation Expenses Depreciation isan accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes
  • 55.
    Formula for straightline depreciation 𝑥 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑌𝑒𝑎𝑟𝑠 𝑜𝑓 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑥 = (100 000−5000) 8 = 11875 Year of service Value Buy 100 000 Year 1 88 125 Year 2 76 250 Year 3 64 375 Year 4 52 500 Year 5 40 625
  • 56.
    Each car hasdifferent rate. Actual values may vary between RM2,000 - RM5,000/year https://www.carbase.my/tool/car-market-value-guide
  • 57.
     Truck Price= 120000  Truck salvage price = 11 000  Year of service = 10  How what is the value of the truck at 3 year? Calculate :
  • 58.
    Formula for straightline depreciation 𝑥 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 𝑌𝑒𝑎𝑟𝑠 𝑜𝑓 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑥 = (120 000−11000) 10 = 10900 Year of service Value Buy 120 000 Year 1 109 100 Year 2 98 200 Year 3 87300
  • 59.
    Account Receivable whereas A/Rmeans "You get product now, you pay me later."
  • 60.
     Sell itemfor RM 15.00 ( in accounting it call as widget/any product)  The buyer will pay it later (in case of I Owe You / Delivery before payment)
  • 61.
    DEBIT CREDIT A/c ReceivableRM 10.00 ( ASSET) WIDGET RM 10.00 The journal entries for it (DC ADE LER/DADE CLER) Before Payment Debit Credit Cash $ 10 A/c Receivable $10 (REVENUE) After Payment
  • 62.
    Account Payable Footnote :A/P means "I get product now, I pay you later"
  • 63.
     Receive Itemwithout making payment  Will pay it later
  • 64.
    DEBIT CREDIT Widget RM10.00A/C Payable RM10.00 (Liability) The journal entries for it (DC ADE LER/DADE CLER) Before Payment Debit Credit A/C Payable RM10.00 (Expenses) Cash RM 10.00 After Payment
  • 65.
    The cost ofgoods sold is reported on the income statement and can be considered as an expense of the accounting period. ... The second way to calculate the cost of goods sold is to use the following costs: beginning inventory + the cost of goods purchased or manufactured = cost of goods available – ending inventory. The basic calculation cost of goods sold is: Beginning Inventory Costs (at the beginning of the year) Plus Additional Inventory Cost (inventory purchased during the year) Minus Ending Inventory (at the end of the year) Equals Cost of Goods Sold. COST OF GOODS SOLD
  • 66.
    FIFO and LIFOinventory FIFO - First In First out LIFO - Last in First out
  • 67.
    Batches FIFO LIFO 110 10 2 20 20 3 30 30 Inventory overview First out /Cost of good sold Inventory
  • 68.
    FIFO LIFO Low 10 10Low high 20 20 Low high 30 30 High Net income UP DOWN Net income First out /Cost of good sold Inventory
  • 69.
    Product Cost Unit Total cost 0.05100 RM 5.00 0.15 100 RM 15.00 0.20 100 RM 20.00 Total Production cost RM 40.00 Production Calculation Example Sells 200 unit at 0.50/unit Total Revenue: RM 100.00 100 @ 0.05 RM 5.00 100 @ 0.15 RM 15.00 Total RM 20.00 Net Profit RM 80.00 100 @ 0.15 RM 15.00 100 @ 0.20 RM 20.00 Total RM 35.00 Net Profit RM 65.00 FIFO LIFO
  • 70.
    Journal Entry with2 Asset Example
  • 71.
    DEBIT CREDIT RM500 Furniture(asset) RM 500 CASH 2 Asset journal example : buying furniture ( Gain Asset, Lost CASH asset)
  • 72.
    Journal Entry withcash Expenses
  • 73.
    DEBIT CREDIT RM180 StreamyxRM 180 CASH Spend RM180 for steamyx Note: 1. Remember what is the purpose of spending the money, will it generate asset, will it generate business 2. Will the cash enter the business account or leaving the account
  • 74.
    Journal Entry withcash Revenue
  • 75.
    DEBIT CREDIT RM 500CASH RM 500 Services Receive payment for RM500 services performed Note: 1. Remember where do you get the money from, do you work for it. 2. 2. Will the cash enter the business account or leaving the account
  • 76.
    T-account Debits Credits Anaccount's assigned normal balance is on the side where increases go because the increases in anyaccount are usually greater than the decreases. Therefore, asset, expense, and owner's drawingaccounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances
  • 77.
    Account Name Debit Credit T-Account Asset Debit (UP) Credit (Down) = Liability Debit (Down) Credit (UP) + Owner Equity Debit (Down) Credit (UP)
  • 78.
    DEBIT CREDIT 1 CASHRM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) T-Account for the Journal
  • 79.
    CASH 10 000 5000 800500 100 5 200 LOAN 10 000 RENT 500 Service Income 800 DRAW 100 Truck 5000
  • 80.
    Trial Balance (Unadjust) Theunadjusted trial balance is the listing of general ledger account balances at the end of a reporting period, before any adjusting entries are made to the balances to create financial statements. The unadjusted trial balance is used as the starting point for analysing account balances and making adjusting entries Transfer from Journal to Trial Balance for Ledger
  • 81.
    DEBIT CREDIT 1 CASHRM10 000 .00 LOAN RM 10 000.00 (Liability) 2 CASH RM 5 000.00 TRUCK RM 5 000.00 (Asset 3 CASH RM5 00.00 RENT RM 5 00.000 (Expenses) 4 CASH RM 800.00 Services Income RM 800.00 (Revenue) 5 CASH RM 100.00 DRAW RM 100.00 (Draw) THE JOURNAL
  • 82.
    THE CASH ASSET DEBITCREDIT 1 + CASH RM10 000 .00 2 - CASH RM 5 000.00 3 - CASH RM5 00.00 4 +CASH RM 800.00 5 -CASH RM 100.00 TOTAL + 10800.00 - 5600.00 RM 5200 in cash
  • 83.
    CASH 10 000 5000 800500 100 5 200 LOAN 10 000 RENT 500 Service Income 800 DRAW 100 Truck 5000 THE T-ACCOUNT
  • 84.
    ITEM DEBIT CREDIT CASH5 200 LOAN 10 000 TRUCK 5000 RENT 500 SERVICE INCOME 800 DRAW 100 TOTAL 10 800 10 800 The Trial Balance of the journal
  • 85.
  • 86.
    1 Sept Purchasegoods $3900 from Leader Co 5 Sept Sold goods $7800 to Yoyo Co 9 Sept Purchase good $5200 from Philips Co 15 Sept Sold goods $6500 to Hovid Co 25 Sept Purchase goods $3900 at 10% trade discount from Leader Co 30 Sept Sold goods $5200 at 5% trade discount to Yoyo co Prepare journal for Sept 2015 (From DIT T2Exam Question 2016)
  • 87.
    Debit Credit 1 SeptGoods $3900 from Leader Co Cash $3900 5 Sept Cash $7800 Sold goods $7800 to Yoyo 9 Sept Purchase good $5200 from Philips Co Cash $5200 15 Sept Cash $6500 Sold goods $6500 to Hovid Co 25 Sept Purchase goods $3510 Leader Co Cash $3510 30 Sept Cash $4940 Sold goods $4940 to Yoyo .co Breaking down journal using DC ADE LER
  • 88.
    Debit Credit 1 Sept Cash Leader Co,Expenses $3900 $3900 5 Sept Cash Yoyo Co , Revenue $7800 $7800 9 Sept Cash Philips Co, Expenses $5200 $5200 15 Sept Cash Hovid Co, Revenue $6500 $6500 25 Sept Cash Leader Co, Expenses $3510 $3510 30 Sept Cash Yoyo co, Revenue $4940 $4940 The Journal
  • 89.
    Double Entry System Thedouble entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. Double entry accounting, also called double entry bookkeeping, is the accounting system that requires every business transaction or event to be recorded in at least two accounts. This is the same concept behind the accounting equation. Every debit that is recorded must be matched with a credit.
  • 90.
    Journalizing and PostingTransactions Step 1: Analyze transactions and source documents. Liabilities EquityAssets = + Step 2: Apply double-entry accounting (Left side) (Right side) Debit Credit T- Account ACCOUNT NAME: ACCOUNT No. Date Description PR Debit Credit Balance Step 4: Post entry to ledger GENERAL JOURNAL Page 123 Date Description Post. Ref. Debit Credit Step 3: Record journal entry
  • 91.
    Ledger example 1: 4 Feb. 201 7 Office equipment was purchased for cash $500 Office Equipment accountDr Cr 2017 Feb. 4 Cash $500 Dr Cash account 2017 Feb. 4 Office Equipment $500 Cr
  • 92.
    Example 2:  8May. 2013 : A motor vehicle for company use was bought on credit from Acadis Motors for $29 000 Motor Vehicle AccountDr Cr 2017 May. 8 Acadis Motors $29000 Dr Acadis Motors 2017 May. Motors Vehicle $29000 Cr
  • 93.
    Example 3:  30June. 2013 : Paid cheque $800 to Quick Suppliers Co. for amount owing Quick SuppliersDr Cr 2017 June 30 Bank $800 Dr Bank Account 2013 June 30 Bank $800 Cr
  • 94.
    Example 4:  3July. 2017 : Proprietor brings in his private car valued at $39 700 for use in the business Motor Vehicle AccountDr Cr 2017 July 3 Capital $39 700 Dr Capital Account 2017 July 3 Motor Vehicle $39 700 Cr
  • 95.
    Journal and Ledgerposting Exercise Make and complete accounts using the following information. Jan 1 – Started Business with $30,000 in bank Jan 5 – Bought stock of goods paying $2,770 cheque Jan 7 – Bought a van, $4,800 cheque Jan 9 – Sold goods for $680 cash Jan 10 - Bought desk & chair for the office for $110 cash Jan 15 – Sold goods for $500 cheque Jan 22 - Paid $92 cash for motor expenses Jan 29 - Sold goods for $325 cash Jan 30 – Bought more goods, paid $1090 cheque
  • 96.
    Jan 1 –Started Business with $30,000 in bank Bank accountDr Cr 2017 Jan 1 Capital/ Opening Blance $30 000 Dr Capital Account/ Opening Balance Account 2017 Jan 1 Bank Account $30 000 Cr Ledger Journal Date Debit Credit Jan1 Bank Account $30 000 Capital/Opening Balance $30 000
  • 97.
    Jan 5 –Bought stock of goods paying $2,770 cheque StockDr Cr 2017 Jan 5 Bank account $2770 Dr Bank Account 2017 Jan 5 Stock $2 770 Cr Date Debit Credit Jan 05 Bank Account $2770 Stock $2770 Journal
  • 98.
    Jan 7 –Bought a van, $4,800 cheque Motor Vehicle Account (Van)Dr Cr 2017 Jan 7 Bank account $4800 Dr Bank Account 2017 Jan 7 Motor Vehicle (Van) $4800 Cr Date Debit Credit Jan 07 Bank Account $4 800 Motor Vehicle 0 $4 800 Journal
  • 99.
    Jan 9 –Sold goods for $680 cash Cash AccountDr Cr 2017 Jan 9 Revenue $680 Dr Revenue Account 2017 Jan 9 Cash-- Sold Goods $680 Cr Date Debit Credit Jan 09 Cash $680 Revenue $680
  • 100.
    Jan 10 -Bought desk & chair for the office for $110 cash FurnitureDr Cr 2017 Jan 10 cash $110 Dr Cash Account 2017 Jan 10 Buy Furniture $110 Cr Date Debit Credit Jan 10 Cash $110 Furniture $110
  • 101.
    Jan 15 –Sold goods for $500 cheque Bank AccountDr Cr 2017 Jan 15 Sold Goods $500 Dr Revenue 2017 Jan 15 Cheque $500 Cr Date Debit Credit Jan 1 5 Bank Account $500 Revenue $500
  • 102.
    Jan 22 -Paid $92 cash for motor expenses Motor Expenses AccountDr Cr 2017 Jan 22 Cash $92 Dr Cash Account 2017 Jan 22 Motor Expenses $92 Cr Date Debit Credit Jan 22 Cash $92 Equity $92
  • 103.
    Jan 29 –Sold Goods for $325 Cash Cash AccountDr Cr 2017 Jan 29 Revenue $325 Dr Revenue Account 2017 Jan 22 Motor Expenses $325 Cr Date Debit Credit Jan 29 Cash $325 Revenue $325
  • 104.
    Jan 30 –Bought Goods for $1090 Cheque Goods Stock Account (Asset)Dr Cr 2017 Jan 30 Bank Account $1090 Dr Bank Account 2017 Jan 30 Goods stock Account $1090 Cr Date Debit Credit Jan 30 Bank Account $1090 Buy goods $1090
  • 105.
  • 106.
    Cash Account Dr Cr Jan9 Revenue 680Jan 10 Furniture 110 Jan 29 Revenue 325Jan 22 Expenses 92 1005 202 Cash in hand 803 Bank Account Dr Cr Jan 1 Capital 30000Jan 5 Stock 2770 Jan 15 Revenue 500Jan 7 Vehicle 4800 Jan 30 Stock 1090 30500 8660 Cash in Bank 21840 Opening Balance to bring forward
  • 107.
    Balance Account T-accounts needto be balanced at various times during the year: • At the end of each accounting period to summarise the situation. • Once a year to calculate profit. • To see what is happening with respect to a particular account.
  • 108.
    How to balancewhere debtors have paid their accounts This is the account of Katty Perry in August 2016, She pay all services by cheque in the same month Katty Perry 2016 Aug 2016 Aug 1 Sales RM 144 22 Bank 144 19 SaLes Rm 300 28 Bank 300
  • 109.
    How to balancewhere debtors have paid their accounts (Continued) This is the balanced account: Katty Perry 2016 Aug 2016 Aug 1 Sales RM 144 22 Bank 144 19 Sales Rm 300 28 Bank 300 444 444
  • 110.
    How to balancewhere debtors still owe for goods This is the account of D. Alonsso D. Alonsso 2016 Aug 2016 Aug 1 Sales RM 158 15 Sales Rm 206 28 Bank 158 30 Sales RM 118
  • 111.
    How to balancewhere debtors still owe for goods (Continued) To balance, we will use a five-step approach. 1. Add up both sides to find out their totals. Note: do not write anything in the account at this stage. 2. Deduct the smaller total from the larger total to find the balance. 3. Now enter the balance on the side with the smallest total. This now means the totals will be equal.
  • 112.
    How to balancewhere debtors still owe for goods (Continued) 4. Enter totals level with each other. 5. Now enter the balance on the line below the totals on the opposite side to the balance shown above the totals.
  • 113.
    How to balancewhere debtors still owe for goods (Continued) This is the balanced account: D. Alonsso 2016 Aug 2016 Aug 1 Sales RM 158 28 Bank 158 15 Sales Rm 206 31 Carried Down 324 30 Sales RM 118 482 482 2016 Sept 1 Brought down 324
  • 114.
     Mr. MarkAdam  Sept 1 Buys good for 450  Sept 16 Pays goods with cheque for 350  Sept 25 Buys Goods for 600  Sept 27 Pays goods with cheque for 650 Exercise
  • 115.
    Balancing a creditor’saccount This is the account of E. Batman in August 2016: E. Batman 2016 Aug 2016 Aug 21 Bank RM 100 2 248 18 116
  • 116.
    Balancing a creditor’saccount (Continued) This is the balanced account: E. Batman 2016 Aug 2016 Aug 21 Bank RM 100 2 RM 248 31 Balance carried down RM 264 18 RM 116 RM364 RM364 Sept Balance brought down 264 1
  • 117.
    An example ofa three-column account D. Alonsso 2016 Aug Debitt Credit Balance 1 Sales RM 158 158 Dr 15 Sales Rm 206 364 Dr 28 Bank 158 206 Dr 30 Sales RM 118 324 Dr
  • 118.
    Three-column accounts  Three-columnaccounts do not use the format of the T- account.  There are three columns and the third column provides a running total of the balance.  Three-column accounts are very similar to the bank statement you will receive for a current account.
  • 119.
  • 120.
    Accounting A systemthat measures the business’s activities in financial terms, provides written reports and financial statements about those activities, and communicates these reports to decision makers and others. Accounts payable Amounts owed to creditors that result from the purchase of goods or services on account: a liability. Accounts receivable An asset that indicates amounts owed by customers. Assets Properties (resources) of value owned by a business (cash, supplies, equipment, land). Balance sheet A statement, as of a particular date, that shows the amount of assets owned by a business as well as the amount of claims (liabilities and owner’s equity) against these assets. Basic accounting equation Assets = Liabilities + Owner’s Equity. Bookkeeping The recording function of the accounting process. Capital The owner’s investment of equity in the company. Corporation A type of business organization that is owned by stockholders. Stockholders usually are not personally liable for the corporation’s debts. Creditor Someone who has a claim to assets.
  • 121.
    Ending capital Beginning Capital+ Additional Investments + Net Income 2 Withdrawals = Ending Capital. Or: Beginning Capital + Additional Investments 2 Net Loss 2 Withdrawals = Ending Capital. Equities The interest or financial claim of creditors (liabilities) and owners (owner’s equity) who supply the assets to a firm. Expanded accounting equation Assets = Liabilities + Capital 2 Withdrawals + Revenue 2 Expenses. Expense A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity. Generally accepted accounting principles (GAAP)The procedures and guidelines that must be followed during the accounting process. Income statement An accounting statement that details the performance of a firm (revenue minus expenses) for a specific period of time. Liabilities Obligations that come due in the future. Liabilities result in increasing the financial rights or claims of creditors to assets. Manufacturer Business that makes a product and sells it to its customers.
  • 122.
    Merchandise company Businessthat buys a product from a manufacturing company to sell to its customers. Net income When revenue totals more than expenses, the result is net income. Net loss When expenses total more than revenue, the result is net loss. Owner’s equity Rights or financial claims to the assets of a business (in the accounting equation, assets minus liabilities). Partnership A form of business organization that has at least two owners. The partners usually are personally liable for the partnership’s debts. Revenue An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash or accounts receivable. A subdivision of owner’s equity: As revenue increases, owner’s equity increases. Service company Business that provides a service. Shift in assets A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same.
  • 123.
    Sole proprietorship Atype of business ownership that has one owner. The owner is personally liable for paying the business’s debts. Statement of financial position Another name for a balance sheet. Statement of owner’s equity A financial statement that reveals the change in capital. The ending figure for capital is then placed on the balance sheet. Supplies One type of asset acquired by a firm; it has a much shorter life than equipment. Withdrawals A subdivision of owner’s equity that records money or other assets an owner withdraws from a business for personal use.

Editor's Notes

  • #70 People use LIFO in accounting to cheat on tax