Bdc 101 02

BDC 101
CHAPTER 2
FINANCIAL ACCOUNTING 1
ACCOUNTING EQUATION AND
DOUBLE ENTRY SYSTEM
SCHOOL OF ACCOUNTING & FINANCE
FACULTY OF BUSINESS AND MANAGEMENT
PREPARED BY:
NORAL HIDAYAH ALWI

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TOPIC
CHAPTER 2: ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM
LEARNING OUTCOMES
At the end of this chapter, students will be able to:
 Classify of assets, liabilities and owner’s equity
 Describe the accounting equation
 Identify the implication of business transaction on the accounting ledgers
 Illustrate the accounting entries for assets, liabilities and owner’s equity

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TOPIC OUTLINES
2.1 Accounting Cycle
2.2 Accounting Equation
2.3 Classification of Accounts
2.4 Double Entry System
2.5 Summary of Debit Credit
2.6 Class Activities
2.6.1 Question 1
2.6.2 Question 2
2.6.3 Question 3

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2.1 ACCOUNTING CYCLE
Recording double-
entries into journals.
(Journalizing)
Post the double-
entries from journals
into the ledgers.
(Posting)
Prepare pre-
adjusted trial
balance.
Record the
adjustments.
Prepare post-
adjusted trial
balance.
Prepare the financial
statements which
consist of Income
Statement and the
Balance Sheet.

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 Accounting equation can be explained by adding any
amount that belongs to a business and deducting any
amount that the business owes.
 Business transactions that can effect the accounting
equation are:
 Changes in assets
 Changes in liability
 Changes in owner’s equity
ASSETS = LIABILITIES + OWNER’S EQUITY
DR. CR.
2.2 ACCOUNTING EQUATION

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• If the equation is expanded then it becomes….
ASSETS = (OPENING CAPITAL + NET PROFIT-
DRAWINGS) + LIABILITIES
and…..
ASSETS = (OPENING CAPITAL
+[REVENUES –EXPENSES]-
DRAWINGS) + LIABILITIES
2.2 ACCOUNTING EQUATION

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Assets LiabilitiesCapital
ExpensesRevenues
2.3 CLASSIFICATION OF ACCOUNTS

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Assets LiabilitiesCapital
Expenses Revenues
DR. CR.

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The resources that owned by a business and has
‘value’.
They are used to run business operation.
Can be divided into 2 major group:
Non-Current Assets / Fixed
Assets
• Used for long-term.
• Not for sale but to run
business.
• For eg: Buildings, Motor
Vehicle, Furniture and
Fittings.
Current Assets
• Resources that have a
short life.
• Have high liquidity (can be
easily converted into cash)
• For eg: Cash in hand, cash
in bank, stock, debtors.
Assets (Dr)

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Capital invested by owner to a business.
Can be in term of non-current/current assets
Owner’s Equity components are:
• Capital invested in a business
• Net Profit from business
Owner’s Equity/Capital (Cr)

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If a business solely generated by its owner’s, then:
Example:
If owner brought in:
Premises RM60,000
Van RM15,000
Cash RM5,000
Answer:
So, the capital will be,
RM60,000 + RM15,000 + RM5,000
=RM80,000
Capital + Liabilities = Asset

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If a business started by loan or funds from relatives and
friends, then:
Example:
If owner brought in:
Premises RM60,000
Van RM15,000
Cash RM5,000
Bank Loan RM10,000
Answer:
So, the capital will be,
RM60,000 + RM15,000 + RM5,000 - RM10,000
=RM70,000
Capital = Asset - Liability

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Amount that is owed by the business
Can be divided into 2 major group:
Non-Current Liabilities
• Requires owner to
settle the amount
owed in long-term
period.
• Loan repayment is
normally from 1 years
– 30 years
• For eg: Loan from
banks, Mortgage loan.
Current Liabilities
• Requires owner to
settle the amount
owed within a year.
• For eg: Creditors,
Bank Overdraft
Liabilities (Cr)

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Revenues / Income is money that generated from business.
Can be divided into 2 :
Direct Income : Sales of goods
Indirect Income : Commission received and
discount received
Revenues (Cr)

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Expenses are a business spending in order
to produce output.
Can be divided into 2:
Direct Expenses: Purchases of goods
Indirect Expenses: Rental, salary, utilities
paid, discount allowed
Expenses (Dr)

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Double entry system is the process of recording each
business transactions into two different ledgers.
The amount will be same in that two different accounts but
one be debited and another one credited.
This system is the concept of:
When one party gives, another party will receive
When an amount is given, the same amount will be received
Therefore, double entry system in accounting principal (for
cash):
Receiving account – debited
Giving account - credited
2.4 DOUBLE ENTRY SYSTEM

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For example, sold goods to Edy RM300 on credit
Debit Credit
Edy (Debtor ) RM300
Sales Account RM300
Edy Account
Sales RM300
Sales Account
Edy RM300

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• From the accounting equation, ‘debit’ (Dr.) if..
Asset  (increase)
Capital  (decrease)
Liabilities  (decrease)
• From the accounting equation, ‘credit’ (Cr.) if..
Asset  (decrease)
Capital  (increase)
Liabilities  (increase)
Balance Sheet item

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• For income statement items..
Expenses = Debit (Dr.)
Income = Credit (Cr.)
Income Statement item

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Assets
Expenses
Capital Liabilities
Revenues
• DEBIT when 
• CREDIT when 
• CREDIT when 
• DEBIT when 
2.5 SUMMARY OF DEBIT AND CREDIT

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TRANSACTIONS
i. Bought goods on cash RM300
ii. Bought goods on credit RM760
iii. Paid Bills RM150 cash
iv. Receive cash commission RM55
v. Took RM90 for personal use
2.6 CLASS ACTIVITY
Question 1

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ASSETS +
expenses
LIABILITY +
revenue
OWNER’S
EQUITY
i. Stock (+ RM300)
Cash (-RM300)
ii. Stock (+760) Creditor (+760)
iii. Cash (-150)
Utilities (+150)
iv. Cash (+55) Commission (+55)
v. Cash (-90) Drawing (-90)
2.6 CLASS ACTIVITY
Answer

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Transactions
Debit
Account
Credit
Account
a)
Eg.: Bought machinery on credit from
Courts Machinery Courts
b) Paid creditor with cash
c) A debtor paid cash
d) Bought van for cash
e) Sold lorry for cash
f) Sold goods for credit to Chin
g) Started business with cash
h) Started business with a van
i) Loan received from Jery
j) Owner took goods for personal use
k) Sold machinery to Siti for credit
2.6 CLASS ACTIVITY
Question 2

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Transactions
Debit
Account
Credit
Account
a)
Eg.: Bought machinery on credit from
Courts Machinery Courts
b) Paid creditor with cash Creditor Cash
c) A debtor paid cash cash debtor
d) Bought van for cash van cash
e) Sold lorry for cash cash lorry
f) Sold goods for credit to Chin chin sale
g) Started business with cash cash capital
h) Started business with a van van capital
i) Loan received from Jery Bank/Cash Jery
j) Owner took goods for personal use Drawing Stock
k) Sold machinery to Siti for credit Siti Machinery
2.6 CLASS ACTIVITY
Answer

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ASSETS LIABILITIES CAPITAL INCOME (EXPENSES)
RM
a) 50,154 13,000 15,000 -3,000
b) 52,056 36,254 8,248 -2,656
c) 49,524 51,000 6,569 -14,545
d) 108,204 23,046 40,052 -14,545
e) 18,646 10,025 23,025 45,485
f) 28,981 2,500 4,598 -4,666
g) 23,147 18,765 3,544 -5,662
h) 31,700 12,256 9,522 -35,562
i) 56,134 7,544 46,421 7,825
j) 181,405 79,643 65,445 -5,235
Fill up the missing element:
2.6 CLASS ACTIVITY
Question 3

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ASSETS LIABILITIES CAPITAL INCOME EXPENSES
RM
a) 50,154 13,000 25,154 15,000 3,000
b) 52,056 10,210 36,254 8,248 2,656
c) 49,524 6,500 51,000 6,569 14,545
d) 108,204 23,046 40,052 59,651 14,545
e) 18,646 10,025 23,025 45,485 59,889
f) 28,981 2,500 26,549 4,598 4,666
g) 23,147 6,500 18,765 3,544 5,662
h) 31,700 12,256 45,484 9,522 35,562
i) 56,134 7,544 46,421 7,825 5,656
j) 181,405 41,552 79,643 65,445 5,235
Fill up the missing element:
2.6 CLASS ACTIVITY
Answer

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SUMMARY
 There are 5 categories in accounting, assets, liabilities, owner’s equity (Balance
Sheet), Revenue and Expenses (Income Statement)
 Accounting equation can be described as
Asset = Liability + Owners Equity
Asset + Expenses = Liability + Owners Equity + Income

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NEXT SESSION PREVIEW
 CHAPTER 3
DOCUMENTS USED IN BUSINESS TRANSACTIONS AND ACCOUNTING
CYCLE

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REFERENCES
 Business Accounting I, 11th Edition Frank Wood and Alan Sangster, ISBN 13:
978-0-273-71212-1, FT Prentice Hall, Harlow © 2008

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APPENDIX

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THE END

Bdc 101 02

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