PRINCIPLES OF ACCOUNTING (DAC1013)Chapter 3 : Business Transaction Recording Process (3rd week)

Topic Outlines3.1 Accounting Equation 3.1.1 Assets 3.1.2 Capital 3.1.3.Liabilities 3.2 Effect on Accounting Equation 3.3 Expansion of Accounting Equation 3.4 The Five(5) Main Classes of Accounts - Assets - Capital Has been explained in 3.1 - Liabilities 3.4.1 Revenues 3.4.2.Expenses 3.5 Double-Entry System for Statement of Financial Position items 3.6 Double-Entry System for Statement of Comprehensive Income items 3.7 Summary of Debit and Credit

3-1: Accounting Equation

ASSET = CAPITAL + LIABILITY

3-1: Accounting Equation (exercise)

Actually the equation started as ASSET = CAPITAL where owner contribute his own resources to run the business. As the business grow, the owner requires more capital but his own resources may not be enough and he has to borrow. When he borrows, the equation would then become ASSET = CAPITAL + LIABILITY

Exercise 1

Try to answer the question below..

AssetsRM15, 000 ? RM 23, 433

CapitalRM 7,800 RM 2, 403 ?

Liability? RM 10,670 RM 13,689

3-1-1: Assets

The resources that owned by a business and has value. They are used to run business operation. Can be divided into two (2) major group:Non-Current Assets / Fixed Assets Used for long-term. Not for sale but to run business. Categorized into tangible, intangible and investment. For eg: Buildings, Motor Vehicle, Trademark, Fixed Deposit. 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.

3-1-2: Capital/Owners Equity

Owners own resources or personal assets contributed to the business.

3-1-3: Liabilities

Amount owed by the business to other party. Can be divided into two (2) major group:Non-Current Liabilities Requires owner to settle the amount owed in long-term period. For eg: Loan from banks, Mortgage loan. Current Liabilities Requires owner to settle the amount owed within a year. For eg: Creditors

Exercise 2 For each of the items below, tick () into the right class of account. For eg... ASSETS Items Non Current Current LIABILITIES Non Current Current

Cash Loan from Bank Office Equipment Creditor Motor Van Bank Overdraft Goodwill Bank

Answer Q1, Q2 and Q3 in page 43 of the thick manual..

3-2: Effect on Accounting Equation

In business transactions.. ASSET can meet ASSET, ASSET can meet CAPITAL, ASSET can meet LIABILITY.

3-2: Effect on Accounting Equation (contd)

When Asset meet Asset, their arrows must be the opposite. ASSET o ASSET q When Asset meet Capital or Liability, their arrows must be similar. ASSET o = CAPITAL o + LIABILITY o ASSET q = CAPITAL q + LIABILITY q

Example

BUSINESS TRANSACTIONS

ASSETS

CAPITAL

LIABILITIES

1. Bought office equipment on credit 2. Debtors paid amount owed by cheque.

o o q

o

Answer Q4 in page 44 of the thick manual..

3-3: Expansion of Accounting Equation

ASSET = CAPITAL + LIABILITY(EXPAND...)

ASSET = *(OPENING STOCK + NET PROFIT CLOSING STOCK)+ LIABILITY* Look at Statement of Financial Position/Balance Sheet)

3-3: Expansion Accounting Equation (contd)

(EXPAND MORE...)

ASSET = *(OPENING STOCK + ^(REVENUES EXPENSES) CLOSING STOCK)+ LIABILITY

* Look at Statement of Financial Position/Balance Sheet ^ Look at Statement of Comprehensive Income/Income Statement

3-4: The Five (5) Main Classes of Accounts Therefore, from the expanded accounting equation, there are five (5) main classes of accounts:

Assets

Capital

Liabilities

Revenues

Expenses

3-4-1: Revenues

Also known as income. Can be business and non-business revenues. Example of business revenues is sales while non-business revenues is dividend. Following accrual concept, revenue is recognized in full in the accounting period when it is duly received, not when the cash is received.

3-4-2: Expenses

Cost involved to generate revenues in business. Can be business and non-business expenses. Example of business expenses are salaries utilities and rent while non-business expenses are loss on disposal and loss on stolen goods. Following accrual concept, expenses is recognized in full in the accounting period when it is incurred, not when the cash is paid.

3-5: Double-Entry System (for Statement of Financial Position items)

From the accounting equation, debit (Dr.) if.. Asset o (increase) Capital q (decrease) Liabilities q (decrease) From the accounting equation, credit (Cr.) if.. Asset q (decrease) Capital o (increase) Liabilities o (increase)

3-6: Double-Entry System (for Statement of Comprehensive Income items)

In business transactions, Expenses = always Debit (Dr.) when incur, Revenues = always Credit (Cr.) when recognized

3-7: Summary of Debit (Dr.) and Credit (Cr.)

Assets Expenses DEBIT when o CREDIT when q

Capital

Liabilities

Revenues CREDIT when o DEBIT when q

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