BUSINESS ACCOUNTING FOR NON-ACCOUNTING STUDENTS

ACCOUNTING
CLASSIFICATION
AND ACCOUNTING

EQUATION

Accounting
Classification

Accounting
Equation

44

ACCOUNTING
CLASSIFICATION

ASSETS Recorded in
OWNER’S EQUITY (CAPITAL) Statement of

LIABILITIES Financial
Position

REVENUE Recorded in
EXPENSES Statement of
Comprehensive

Income

45

ACCOUNTING
EQUATION

ASSETS = OWNER’S + LIABILITIES
EQUITY

(CAPITAL)

ASSETS = OWNERS EQUITY + LIABILITIES
(CAPITAL)

ASSETS = CAPITAL + LIABILITIES

46

ACCOUNTING
EQUATION

ASSETS = CAPITAL + LIABILITIES

- Expanded equation
-ASSETS = CAPITAL + LIABILITIES

DRAWINGS + REVENUES
EXPENSES

47

ACCOUNTING
EQUATION

CONCEPT
• Total assets must be equal to the total capital

and liabilities in the business
• imbalanced? – due to:

- Errors of recording
- Fraud/ misconduct
• Business need to find the reason for
imbalanced

48

DEFINITION OF
ASSETS, OWNER’S

EQUITY AND
LIABILITIES

• Basic
accounting
terminologies

- Assets
- Owner’s equity
- Liabilities
• Effect of

transaction on
the expanded
equation

49

ASSETS

• Definition: Properties owned by a business
• Used for business purposes
• TWO (2) categories of assets:

- Non-current assets

- Current assets

Non-current Current assets
assets
Short term asset
Known as fixed (< 1 financial year)
assets
Easy to
Long-term assets (> 1 converted to
financial year) cash
Example:
Purchased for Inventory, accounts
business operation receivable, cash in
(not for resale) hand, cash at bank

Example: 50
Premises, plant and
machinery, vehicles,
properties, furniture,
office equipment, land
and building.

OWNER’S
EQUITY

• Definition: The ownership claim on total assets

• The content of the owner’s equity section varies
with the form of business entity

INCREASE DECREASE

Investment by owner - Drawings - withdrawals
the assets the owner by the owner of cash or
puts into the business other assets for personal
use

Income - gross increase Expenses - the costs of
in OE resulting from
business activities assets consumed or
entered into the purpose
of earning profit services used in the
❑ Revenue arises in
process of earning
the course of
ordinary activities of income
the business ❑ Salaries expenses
❑ Gain arises from ❑ Utility expenses
events that are not ❑ Rent expenses
part of a businesses ❑ Depreciation
ordinary course of
activities expenses
❑ Interest Expense

51

OWNER’S EQUITY

• Profit = When revenue exceeds expenses
(Revenue > Expenses)

• Loss = When expenses exceed revenue
(Expenses > Revenue)

52

LIABILITIES

• Definition: Amount owed by the business to a bank, financial
institution or a supplier of goods and services from business activity

• Financial debt that payable according to the period of repayment
• Too many liabilities reflect poor financial performance of the business

Current liabilities Non-current liabilities

Expected to be Obligations
settled in the normal expected to be
operating cycle of the paid after 1 year or
business or are due after an operating
to be settled within cycle
12 months after the
end of the reporting Example:
Period. Bonds payable,
mortgages
Example: payable, notes
Accounts payable, payable, loan.
bank overdraft

53

EFFECTS OF
TRANSACTIONS

SOURCE OF ASSETS

• An asset account increases and a corresponding
claim (liabilities or owner’s equity) account
increases

❑ Investment of cash by the owner

❑ Purchase of supplies on account

ASSETS = OWNER’S + LIABILITIES
EQUITY

↑= ↑

↑= ↑

54

EFFECTS OF
TRANSACTIONS

EXCHANGE OF ASSETS
• One asset account increases and another asset

account decreases
❑ Equipment purchased on cash
❑ Collection of Accounts Receivable

Increase in ONE asset
=

Decrease in ANOTHER asset

55

EFFECTS OF
TRANSACTIONS

USE OF ASSETS

• An asset account decreases and a corresponding
claims (liabilities or equity) account decreases

❑ Withdrawal of cash by the owner
❑ Payments of Account Payable

ASSETS = OWNER’S + LIABILITIES
EQUITY

↓= ↓

↓= ↓

56

EFFECTS OF
TRANSACTIONS

EXCHANGE OF CLAIMS

• One claims (liabilities or OE) account increases
and another claims (liabilities or OE) account
decreases

❑ Received bill for utilities but the owner did not
pay yet

LIABILITIES = OWNER’S EQUITY
↑ =↓
↓ =↑

↑ in ONE liabilities ↑ in ONE OE

= =
↓ in ANOTHER ↓ in ANOTHER OE

liabilities

57

EFFECTS OF
TRANSACTIONS

TRANSACTIONS DEBIT CREDIT
Cash inflow
Cash/ bank Sales/
Cash outflow debtors/
revenue
Purchase of goods
- Cash purchase Purchase/ Capital/ cash/
- Credit purchase creditor/ bank
Return inwards expenses/
Return outwards drawings/ assets

Purchase of assets Purchase Cash/ bank
- Cash Creditor
- Credit Return inwards
Sales of used assets Creditors Debtors
- Cash
- Credit Return
outwards

Assets Cash/ bank
Creditors

Cash/ bank Assets
Debtors
58

EFFECTS OF
TRANSACTIONS

TRANSACTIONS DEBIT CREDIT
Capital
- Cash Cash Capital
- Bank Bank
- asset asset Cash/ bank/
Drawings Drawings purchase/

Payment of expenses Expenses assets
Cash/ bank

Income received Cash/ bank Revenue

Debtors Debtors Sales
- Credit sales Discount allowed Debtors
- Discount allowed Debtors
- Received cash/ Cash/ bank
Creditors
cheque Purchase Discount
Creditors received
Creditors Cash/ bank
- Credit purchase Creditors
- Discount received loan 59
- Payment by cash/ Cash/ bank

cheque

Bank loan

INVENTORIES
(FINISHED
GOODS)

61

ACCOUNTING
FOR

INVENTORY

PURPOSE
Determine the value of unsold or closing stock at
the end of accounting period
To calculate the cost of goods sold for the
reporting period.
Normally goods sol at price higher than cost price.
Sales include element of profit/loss.
Differences between goods purchased & goods
sold would not represent the stock of goods.
Goods purchased that are not sold at the end of the
accounting period are known as closing stock.
Closing stock at one accounting period will become
opening stock for next period

62

MOVEMENT OF
THE

INVENTORY

Purchases

Return MOVEMENT Sales
outwards OF

INVENTORIES

Return
inwards

63

Purchase and
Sales

Purchase
• Cost of buying inventory or other forms of

business assets (outflow resources from
business)
• Recorded in special account (Purchase account)
– Only for inventory
• Other asset purchase recorded in other
respective account

Sales
• Business activity of selling INVENTORY,

PRODUCTS or SERVICES (to generate inflow
of resource into business)
• Recorded in special account (SALES account)
• Selling of other asset recorded in other
respective account

64

Return Inwards
and

Return Outwards

Return Inwards
Also known as Sales Return.
Goods returned by the customer or buyer to
the business.
Goods were defective or did not match
the specifications requested

Return Outwards
Also known as Purchases Return.

Goods returned by the business to the
suppliers.
Goods were defective or did not carry the
specifications requested by business

65

Effect of The
Transaction

Extended Accounting Equation
• 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
business
• The extended equation can be shown as below:

Asset = Owner’s Equity + Liabilities + Revenue
– Expenses

Therefore;

Asset + Expenses = Owner’s Equity + Revenue
+ Liabilities

66

Movement of
Inventory

Increase in stock

1) Purchase - goods bought by the business for the
purpose of resale

• Effect on Accounting Equation
- Purchase Expense Increase

• Account Involved
- Purchase A/C

2) Return Inward - goods returned by buyer
• Effect on Accounting Equation

- Sales revenue Decrease
• Account Involve

- Return Inward A/C

67

Movement of
Inventory

Decrease in stock

1) Sales - sale of goods with prime intention of
resale

• Effect on Accounting Equation
- Sales revenue Increase

• Account Involved
- Sales A/C

2) Return Outward - goods returned to supplier
• Effect on Accounting Equation

- Purchase expense Decrease

• Account Involve
- Return Outward A/C

68

Movement of
Inventory

Purchase and Sales of Goods

• TWO (2) Categories:

TRANSACTIONS DEBIT CREDIT
Purchase of goods by
- Cash Purchase A/C Cash A/C
- Credit Creditors A/C

Sales of goods by Cash A/C Sales A/C
- Cash Debtors A/C
- Credit

69

EXERCISES

QUESTION 1

Question 1
Define the following:
a) Assets
b) Liabilities
c) Owner’s equity
d) Sales
e) Purchase
f) Return inwards
g) Return outwards

70

QUESTION 2

Question 2

Categories the following items according to the
accounting classification:

Items Accounting
classification
1 Fixtures and fittings
2 advertising
3 Account payables
4 Account receivables

5 Capital
6 Inventory
7 Drawings
8 Dividend received
9 Import duty
10 Bank loan

71

QUESTION 3

Question 3

Classify the following items as assets, liabilities &
owner’s equity

Items Accounting
classification
1 Furniture
2 Building
3 Debtors
4 creditors

5 Cash at bank
6 Stock
7 Drawings
8 Capital
9 Bank overdraft
10 Bank loan

72

QUESTION 4

Question 4
Differentiate the following:
a) Non-current assets and current assets
b) Non-current liabilities and current liabilities
c) Sales and purchases
d) Return inwards and return outwards

73

QUESTION 5

Question 5

a) Calculate the value of the missing items:

Assets ? Capital Liabilities
RM45, 000 ? RM12, 400
RM13, 333
? RM33, 000
RM21, 200 RM10, 000 ?
RM45, 687 RM34, 567
? RM43, 300
? RM85, 400 RM32, 688
RM67, 532
?

74

CHAPTER 3:
ACCOUNTING PROCESS
AND BOOKS OF
ACCOUNTS

3.1 Accounting process
3.2 Source documents
3.3 Journals
3.4 Ledgers

75

ACCOUNTING PROCESS
&

BOOKS OF ACCOUNTS

Describe the accounting process
• Highlight the importance source

documents used in the business.

Know the function of each
journals
Kn Know the function of ledgers

76

ACCOUNTING
CYCLE/PROCESS

SOURCE
DOCUMENTS

1

FINANCIAL BOOK OF
REPORT ORIGINAL

8 ENTRY

2

FINANCIAL ACCOUNTING LEDGERS
STATEMENTS CYCLE/PROCESS 3

7

ADJUSTED TRIAL
TRIAL BALANCE

BALANCE 4

6 77

ADJUSTMENTS
5

ACCOUNTING
CYCLE/PROCESS

1.Accounting cycle/process contain 8
steps

2. 1st step is to identify the transactions
through the original source documents.
Example: invoice, receipts, cash bills,
purchase order and etc

3. The transactions is recorded in the
books of original entry or daybook entries
consist of general journal, special journal
and cashbook. Then post it to ledger
accounts

78

ACCOUNTING
CYCLE/PROCESS

4. Trial Balance is prepared and adjustments are
made before an adjusted trial balance is
prepared to ensure debit and credit equal after
making the adjustments

5. The Financial Statements which consist
of statements of Comprehensive Income
and statement of Financial Position.

6. Finally financial statement would be
incorporated into the fir’s financial report

79

HIGHLIGHT THE
IMPORTANCE

SOURCE DOCUMENTS
USED IN THE BUSINESS.

Source Documents Usage

Invoices Used in credit transaction only
Cash bills Issued by sellers
Credit Notes
Used in cash transaction only
Debit Notes Issued by sellers

Used to inform the buyer that his
or her account has been credited
with the stated amount
This document is usually issued
when there is a sales return or
when a sales price is overstated

Used to inform the buyer that his
or her account has been debited
with the stated amount
This document is used when a
sales price is understated

80

HIGHLIGHT THE
IMPORTANCE

SOURCE DOCUMENTS
USED IN THE BUSINESS.

Source Documents Usage

Receipts A receipt is issued by a
Vouchers receiver of payment to the
Memos payer for payment made by
cash or cheque
Cheque butts Used when a payment has
been made but a receipt is
not given by the receiver of
payment (seller)
Used as a notice when
there is an increase in
capital, drawings or other
extraordinary event

Evidence that payment has
been made by cheque

81

HIGHLIGHT THE
IMPORTANCE

SOURCE DOCUMENTS
USED IN THE BUSINESS.

Source Documents Usage
Sales Orders
Used to Generate Sales Invoices.
Purchase Order Once the sales order has been
sent to the customer, accounting
teams can create a sales invoice
to send to the customer on
delivery of the product or
service

commercial document and first
official offer issued by a buyer to
a seller indicating types,
quantities, and agreed prices for
products or services. It is used to
control the purchasing of
products and services from
external suppliers

Cheque Document that orders a bank
to pay a specific amount of
money from a person's
account to the person in
whose name the cheque has

.been issued

82

HIGHLIGHT THE IMPORTANCE
SOURCE DOCUMENTS USED

IN THE BUSINESS

Source Documents Transaction Book Of Original
Entry
Invoices Received Credit purchase
Invoices issued Credit sales Purchase journal
Cash bill Received Cash purchase
Cash bill issued Cash sales Sales journal
Receipt Received Cash payment
Receipt Issued Cash received Cash book
(credit cash column)
Credit notes received
Cash book
Credit notes issued (Debit cash column)

Debit notes received Cash book
Debit notes issued (credit cash column)
Voucher
Cash book
Cheque butts (Debit cash column)
Memo
Return Outwards Return Outwards Journal
Overstated purchase General Journal
price
Return Inwards Journal
Return Inwards General Journal
Understated purchase
price General Journal

Understated purchase General Journal
price

Understated sales price

Payments made but no Cash book
receipt issued (credit cash column)

Payment by cheques Cash book
(credit bank’s column)
Additional capital
Drawing of assets General Journal
Drawing of goods
83

KNOW THE
FUNCTION OF
EACH JOURNALS

• JOURNALS / BOOK OF PRIME ENTRY
• The books of prime entry consist of 7 types

of journal.
• The 7 types of journals are as follows:

84

7 TYPES OF
JOURNALS

PURCHASE
JOURNAL

CASH PAYMENT SALES JOURNAL
JOURNAL

GENERAL JOURNAL

RETURN RETURN
OUTWARDS INWARDS
JOURNAL
JOURNAL

CASH RECEIPT
JOURNAL

85

JOURNALS

86

PURCHASE
JOURNAL

2020 Bought goods worth RM 200 on credit From Shahida, Invoice
April no 412
10

15 Bought goods worth RM 400 on credit From Zamani, Invoice
no 212

20 Bought goods worth RM 500 on credit From Azwan, Invoice no
312

Date Particulars Purchase Journal Folio Amount
April Invoice (RM)
10 Shahida no PL1 200
412 PL2 400
15 Zamani
212 500

20 Azwan 312 PL3 1100
GL5
30 Transfer to Purchase
Account

87

SALES
JOURNAL

2020 Sold goods worth RM 300 on credit From Azman, Invoice no
April 214
11

21 Sold goods worth RM 700 on credit From Ibrahim, Invoice no
218

28 Bought goods worth RM 600 on credit From Zainal, Invoice no
314

Date Particulars Sales Journal Folio Amount
April Invoice (RM)
11 Azman no SL1 300
214 SL2 700
21 Ibrahim
218 600

28 Zainal 314 SL3 1600
30 Transfer to Sales Account GL6

88

RETURN OUTWARD
JOURNAL

2020 Goods worth RM 100 return to Shahida, Credit mote No no
April 411
19

25 Goods worth RM 150 return to Azwan Credit mote No no 214

Date Particulars Return Outward Journal Amount
April Invoice Folio (RM)
19 Shahida no 100
411 PL1
25 Azwan 150
214 PL2

30 Transfer to Return Outward GL5 250
Journal Account

89

RETURN INWARD
JOURNAL

2020 Goods worth RM 200 Returned by Azman, Invoice no 310
April
16

22 Goods worth RM 250 Returned by Ibrahim, Invoice no 311

Date Particulars Return Inwards Journal Amount
April Invoice Folio (RM)
16 Azman no 200
310 SL1
22 Ibrahim 250
311 SL2

30 Transfer to Return Inwards GL8 550
Account

90

CASH PAYMENT
JOURNAL

2020 Paid RM 110 to Shahida, cheque no 111321
April 22 Paid RM250 to Zamani, cheque no 111322
Paid RM 300 to Azwan , cheque no 111323
28

29

Cash Payments Journal

Date Cheque Details Folio Bank (RM) Discount Account Purchases Other

no Received Payable (RM) Accounts

(RM) (RM) (RM)

2020 PL1 110 110
April
22 111321 Shahida 250 250
300 300
28 111322 Zamani PL2 660 660

29 111323 Azwan PL3

GL9

91

EXERCISE 1

92

ANSWER FOR
EXERCISE 1

2020
May 1 Credit sales: Azman RM600, Syima RM500 and

Zam RM1000

Sales Journal

Date Particulars Invoice Foli Amount
no o (RM)
2020 Azman
May 1 Syima 600
Zam 500
31 Transfer to Sales account 1000
2100

93

ANSWER FOR
EXERCISE 1

Purchase Journal

Date Particulars Invoice Folio Amount
no (RM)
2020
May 3 MakDonald Sdn Bhd 10000
Setia Alam Enterprise 25000

Astana vision Enterprise 15000

Transfer to Purchases account 50000

94