accounting

1. TOPIC 3(i):
ACCOUNTING EQUATION AND
ACCOUNTING CLASSIFICATION

2. Lesson Outcome
At the end of the lesson, students should be able to:
1.Describe the basic accounting equation
2.Describe the expanded accounting equation
3.Identify the elements in the statement of financial
position (SOFP)
4.Relate the SOFP components to the accounting
equation

3. Basic Accounting Equation
– Forms a basis of whole double entry bookkeeping
system
– The equality is always maintained. Any change in the
ringgit amount of the total assets is always
accompanied by an equal change in the ringgit amount
of the total liabilities and/or the owners’ equity

4. Basic Accounting Equation
▪Resources of a business are equal to the sources of
those resources.
▪If the resources are provided by the owners, then
ASSETS = CAPITAL
▪If the resources are provided by both the owner
and outsiders, then
ASSETS = CAPITAL+ LIABILITIES

5. ACCOUNTING EQUATION
=
= +
= +
RESOURCES
IN BUSINESS
RESOURCES
IN BUSINESS
CONTRIBUTED BY OWNER
FROM OWNER FROM OTHER
PARTY
ASSETS CAPITAL LIABILITY

6. Exercise: Determine the missing figure

7. Expanded Accounting Equation
▪As business begins, goods are purchased and subsequently
sold, expenses are incurred and revenues are earned.
▪Profit belongs to the owner and increases owner’s equity.
▪While losses will decrease the capital and subsequently
reduce the owner’s equity
ASSETS = CAPITAL + PROFIT/ - LOSS + LIABILITIES
OR
ASSETS = CAPITAL + REVENUE – EXPENSES + LIABILITIES

8. Expanded Accounting Equation
▪At times, the owner will withdraw goods or cash from the business
for personal use.
▪These withdrawals or drawings will reduce capital and therefore
reduce the owner’s equity
ASSETS = CAPITAL + REVENUE – EXPENSES – DRAWINGS +
LIABILITIES
OR
ASSETS + DRAWINGS + EXPENSES = CAPITAL + LIABILITIES +
REVENUE

9. ACCOUNTING EQUATION
=
= +
= +
= + - +
= + - +
= + - - +
+ + = + +
RESOURCES
IN BUSINESS
RESOURCES
IN BUSINESS
CONTRIBUTED BY OWNER
FROM OWNER FROM OTHER
PARTY
ASSETS
ASSETS
ASSETS
ASSETS
ASSETS
CAPITAL
CAPITAL
CAPITAL
CAPITAL
CAPITAL
LIABILITY
LIABILITY
LIABILITY
LIABILITY
LIABILITY
REVENUE
REVENUE
REVENUE
PROFIT LOSS
DRAWINGS
EXPENSE
EXPENSE
EXPENSE
DRAWINGS

10. RESOURCES IN
BUSINESS
= CONTRIBUTED BY OWNER
RESOURCES IN
BUSINESS
= FROM OWNER +
FROM OTHER
PARTY
ASSETS = CAPITAL + LIABILITY
ASSETS = CAPITAL + PROFIT - LOSS + LIABILITY
ASSETS = CAPITAL + REVENUE - EXPENSE + LIABILITY
ASSETS = CAPITAL + REVENUE - EXPENSE - DRAWINGS + LIABILITY
ASSETS + DRAWINGS + EXPENSE = CAPITAL + LIABILITY + REVENUE
BASIC ACCOUNTING EQUATION EXPANDED ACCOUNTING EQUATION
ACCOUNTING EQUATION

11. – Assets are properties owned by a business. There are
2 types of assets:
Assets
Non-Current
Assets
Tangible non-
current assets
Intangible
non-current
assets
Investment
Current
Assets
ACCOUNTING CLASSIFICATION
ASSETS

12. NON-CURRENT ASSETS
– Assets acquired/bought not for resale but to be used in the
operations of the business with useful lives for more than one
year.
– Can be divided into 3 categories:
1) Tangible non-current Assets
- Assets that have physical existence.
- Example: Land, Building, Machinery, Office
Equipment, Motor Vehicle, Furniture & Fittings,etc

13. NON-CURRENT ASSETS
2) Intangible Non-current Assets
- Assets with no physical existence.
- Example: Franchise, Goodwill,
trademark, copyright, Patent, etc.
3) Investment
- sum of money placed in other organizations in the hope of
getting more money in the form of returns.
- Example: investment, fixed deposit.

14. CURRENT ASSETS
– Assets that can easily converted into cash within
one year.
– Example: *Cash in Hand
*Cash at Bank
*Debtors/Account Receivables
* Inventory/Stock
*Prepaid Expenses.

15. ▪Non current Liabilities
🢭 Amount owed by the business that are to be paid more
than 1 year
🢭 Long-term loans, Mortgages, Bonds, Debentures
▪Current Liabilities
🢭 Amount owed by the business that are to be paid
within 1 year
🢭 Creditors or Payables, Bank overdrafts, Short-term
Loans
LIABILITIES

16. – Owner’s Equity is the residual interest in the
entity’s assets after deducting all its liabilities
– Represents owner-supplied funds to the business
for the acquisition of assets for the business.
– It is the financial obligation of the business to the
owner
OWNER’S EQUITY

17. Owners’ equity
– Any profit made by the business will increase the
capital (therefore increasing the owner’s equity)
– Whereas losses and drawings will reduce the
capital (therefore decreasing the owner’s equity)
– Drawings occur when the owner uses whatever
assets of the business for personal use.

18. Owners’ equity
– Thus, owner’s equity is represented by capital that has
been adjusted, taking into account, profit or loss of the
business and any withdrawal made by the owner
Owner’s Equity = Capital + Revenue - Expense- Drawings

19. exercise
– Classify the following items into assets, liabilities and owner’s equity.
Furnitures and
fittings
Office equipment Term loan from
Maybank
Account receivable Cash in hand Land and buildings
Leasehold premises Bank overdraft Account payables
Inventory Motor vehicles Capital by owner
Cash at bank Short term loan Mortgage on land and
building

20. ▪Represent the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning
income.
🢭 Earned or recognized when goods are produced and
delivered or services are rendered
🢭 Inflows in the form of cash from cash sale or new accounts
receivable from a credit sale
▪Example: Sales, fees, rent received, dividend income,
commission received, discount received
REVENUES

21. Revenue - Examples
▪Sales revenue – revenue from sale of goods to
customers
▪Fees – revenue from rendering of services
▪Rent income – revenue from rental of land or building
▪Dividend income – revenue from investments in shares
▪Interest income – revenue from bank deposits or loans
to others
▪Discount received – amount by which the seller agrees
to reduce his or her price to the customer.

22. ▪Are the costs of assets consumed or services used in the process
of earning revenues.
▪Example:
🢭 Cost of sales – cost of goods sold
🢭 Selling and distribution – carriage outwards, advertizing
🢭 Administration – rent, insurance, salaries
🢭 Finance – loan interest
EXPENSES

23. ▪Cost of sales – cost of goods that have been sold to customers
▪Selling and distribution expenses – expenses incurred in selling
and distributing goods or services
🢭 Carriage outwards – delivery charges for goods sold,
🢭 advertising – cost of promoting the business
▪Administration expenses – expenses incurred in administering
the office
🢭 Rent, insurance, salaries
▪Finance expenses – expenses incurred from borrowings
🢭 Interest on loans
Expenses – Examples