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# Ch 3 accounting equation & classification

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### Ch 3 accounting equation & classification

1. 1. ACC 106Chapter 3 Accounting Equation and Classification
2. 2. Learning Objectives:After going through this chapter, you should be able to: Define & explain the balance sheet, assets, liabilities and owner’s equity. Define & understand the use of the accounting equation in analyzing transactions Define revenue & expenses Identify the relationship of profit to the to the accounting equation Show the effect of the transaction on the accounting equation Identify the movement of stock
3. 3. IntroductionBusiness transaction- is an event or happening that affects the financial position of a business, & requires recording- Usually involves:  2 @ more parties, such as a seller & a buyer.  Some exchange of goods @ services between the 2 parties  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’s equity Recorded in the Balance c) Liabilities Sheet d) Revenues Recorded in the Trading e) Expenses Profit & Loss
4. 4. The Balance Sheet Presentation Sole ProprietorshipDr. Balance Sheet as at 31 December 20xx Cr.Assets: RM Owner’s equity: RMFixed Assets: Opening Capital xxxLand & 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 & OWNER’S EQUITY XXX
5. 5. BS (Assets = Owner’s Equity+Liabilities) Assets Owner’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  Owner’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 > 1 yrTangible Fixed Assets - i.e - i.e Long term loanLand&Building,Machinery ii) Current liabilitiesIntangible Fixed Assets- i .e - it is an amount owing byGoodwill,Trademark the business that is to beInvestment – i.e Fixed deposit paid in within 1 yrii)Current Assets – 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. 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’s Equity + Liabilities A = OE + L OE = A – 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 & owner’s equity of an organization at a particular time.
7. 7. The Balance Sheet & The Effects of Business Transaction2.5.1 The Introduction of CapitalOn 1st January 20XX, Beckham started business & 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’s equity: RMCash 50,000 Opening Capital 50,000ii)The effect on the accounting equation Date Assets(A) = Owner’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. 8. The Balance Sheet & The Effects of Business Transaction (Cont’d)2.5.2 The Transfer of Cash to a Bank AccountOn 2nd January 20XX, the business opens bank account & 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’s equity: RMCash 5,000 Capital 50,000Bank 45,000 50,000 50,000ii)The effect on the accounting equation Date Assets(A) = Owner’s Equity(OE) + Liabilities(L)2006 Cash decrease to 5,000 Capital still = 50,000 -02/01 Bank increase by 45,000 #Increase & Decrease A(=) #OE still equal with A # NO effect
9. 9. The Balance Sheet & The Effects of Business Transaction (Cont’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’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’s Equity(OE) + Liabilities(L)2006 Bank increase by 30,000 Capital still = 50,000 Loan increase03/01 #Increase A to 80,0000 & by 30,000 Bank to 75,000 #No effect #Increase L
10. 10. The Balance Sheet & The Effects of Business Transaction (Cont’d) 2.5.4 Purchase of Fixtures & Fittings by cheque On 4th January 20XX, the business purchase Fixtures & 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’s equity: RM Fixtures&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’s Equity(OE) + Liabilities(L) 2006 F&F increase by 10,000 Capital still = 50,000 Loan still = 04/01 Bank decrease to 65,000 30,000 #Increase & decrease A (=) #No effect #No effect
11. 11. The Balance Sheet & The Effects of Business Transaction (Cont’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’s equity: RMFixtures&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. 12. The Balance Sheet & The Effects of Business Transaction (Cont’d)ii)The effect on the accounting equation Date Assets(A) = Owner’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’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. 13. The Balance Sheet & The Effects of Business Transaction (Cont’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’s equity: RMFixed Assets: Capital 50,000Fixtures&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. 14. Trading Profit & 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 & 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. 15. TPL(P) = Revenue(R) – Expenses(E)- Profit is the differences between revenue & 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 – E + L, A + E = OE + R + L Revenue Expenses- is the gross increase in owner’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. 16. Effect of transactions on the expanded accounting equation
17. 17. Effect of transactions on the expanded accounting equationDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner’s Equity Revenue LiabilitiesJan F&F 10,000 Insurance 200 Capital 50,000 Loan 30,00006 Cash 4,800 Creditor 10,000 Bank 57,000 Stock 18,000Jan F&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&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&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. 18. Accounting for stock
19. 19. Accounting for stock
20. 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) – goods Sales revenue Return inwardreturn by buyer decrease A/c2. Decrease in Stock Effect of Accounts transactionSales – sale of goods with prime intention of Sales revenue Sales A/cresale increaseSales Return (Return outward) – goods return Purchase Expense Returnto supplier decrease outward A/c
21. 21. Purchase & Sales of GoodsPurchase and sales of goods can be divided into 2 categories: Transactions Accounts Involved a. Cash Purchase Cash Account & Purchase Account b. Credit Purchase Creditors Account & Purchases Account c. Cash Sales Cash Account & Sales Account d. Credit Sales Debtors Account & Sales Account
22. 22. Purchase & Sales of Goods
23. 23. Example: Purchase & Sales Return
24. 24. Purchase & Sales ReturnDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner’s Equity Revenue LiabilitiesJan F&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&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&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. 25. Purchase & Sales ReturnDate (A) + (E) = (OE) + (R) + (L) Assets Expenses Owner’s Equity Revenue LiabilitiesJan F&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&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