Accounting Classification and Accounting Equation

DPA10183 BUSINESS ACCOUNTING

Provide explanation of the accounting equation
1. Discuss the accounting classification and accounting equation
2. Elaborate the definition of assets, owner’s equity and liabilities
3. Elaborate the definition of revenues and expenses
4. Elaborate the definition of inventory (finished goods)

2.2 Elaborate the definition of assets,
owner’s equity and liabilities









Effect of business transactions
on the accounting equation

Transaction 1 : Transaction by owner

Ashraf decides to start a consultancy firm. He opens up a new company, Forever Excellent. He
invests RM20,000 cash as capital.

The effect of this transaction on the accounting equation :

1. Asset (cash) - increase

2. Capital - increase

Assets = Liabilities + Owner’s equity
Cash = +
1 + RM20,000 = Capital

+ RM20,000 Investment

Transaction 2 : Purchase office equipment for cash.

Forever Excellent purchases a machine which costs RM5,000 and pays by cash.

The effect of this transaction on the accounting equation :

1. Asset (equipment) – increase

2. Asset (cash) - decrease

Assets = Liabilities + Owner’s equity

Cash + Equipment + Capital

2 Old balance RM20,000 = RM20,000

- RM 5,000 + RM5,000 RM20,000

New balance RM15,000 + RM5,000 = + RM20,000

RM20,000

2.3 Elaborate the definition of revenues and expenses

Relationship between profit and the accounting equation

Profit = Revenue – Expenses = + RM Loss = Revenue – Expenses = - RM

Profit will increase the Loss will decrease the
value of Owner’s equity value of Owner’s equity

Expanded Assets = Liabilities + Capital + Revenue –
Accounting Expenses - Drawings
Equation





 Withdrawal of cash or other forms of asset from the business made by the business
owner for personal use.

Transaction 3 : Purchase of stationery on credit

Forever Excellent buys office stationery such as paper and files at RM2,000 on credit from
Ah Seng Enterprise. Stationery is an expense. Ah Seng allows payment to be made next
month.

Effect on the accounting equation :

1. Owner’s equity - decrease (because increase in expenses)

2. Liability (accounts payable) - increase

3 Old Assets = Liabilities + Owner’s equity
balance Cash + Equipment Capital
= Account +
New RM15,000 + RM5,000 payable RM20,000
balance
=+

= +2,000 + - RM2,000 Stationery expense
RM15,000 + RM5,000 = +2,000 + RM18,000

RM20,000 = RM20,000

Transaction 4 : Services rendered for cash

Forever Excellent has rendered its first consultancy service to its client
Bunga Seri Sdn Bhd. It received cash of RM3,500 for the service.

The effect of the transaction :

1. Asset (cash) = increase

2. Owner’s equity (revenue) = increase

Assets = Liabilities + Owner’s equity
Cash + Equipment Capital
= Account +
payable

4 Old RM15,000 + RM5,000 = +2,000 + RM18,000
balance
+ RM3,500 =+ + RM3,500 Service revenue
New RM18,500 + = RM2,000 + RM21,500
balance RM5,000

RM23,500 = RM23,500

Transaction 5 : Payment of salary by cash

At the end of the month, Forever Excellent pays RM2,500 salary to the staff by cash.

The effect of the transaction :

1. Asset (cash) - decrease

2. Owner’s equity (expense) - decrease

Assets = Liabilities + Owner’s equity
Cash + Equipment Capital
= Account +
payable

5 Old RM18,500 + RM5,000 = RM2,000 + RM21,500
balance
- RM2,500 =+ - RM2,500 Salary expense
New RM16,000 + = RM2,000 + RM19,000
balance RM5,000

RM21,000 = RM21,000

Transaction 6 : Services rendered for credit

Forever Excellent has rendered its services to another client Daisy Sdn Bhd. The client
will pay the bill of RM6,000 later in March.

The effect of the transaction :
1. Asset (Accounts receivable) - increase
2. Owner’s equity (Revenue) - increase

Cash Assets = Liabilities + Owner’s equity
+ Capital
+ Equipment + Accounts = Account
receivable payable

6 Old RM16,000 + RM5,000 = RM2,000 + RM19,000
balance RM16,000 + RM6,000 =
= + + RM6,000 Service revenue
New + RM5,000 + RM6,000 = + RM25,000
balance RM27,000 RM2,000

RM27,000

Transaction 7 : Drawings by owner

Due to urgent needs, Ashraf withdraws RM2,000 cash from Forever
Excellent for his personal use.

The effect of the transaction :

1. Asset (cash) - decrease

2. Owner’s equity (drawings) - decrease

Cash Assets = Liabilities + Owner’s equity
+ Capital
+ Equipment + Accounts = Account
receivable payable

7 Old RM16,000 + RM5,000 + RM6,000 = RM2,000 + RM25,000
balance RM6,000 =
- RM2,000 + RM5,000 + = + - RM2,000 Drawings
New RM14,000 RM25,000 = + RM23,000
balance RM2,000

RM25,000

2.4 Elaborate the definition of inventory

FRS102 defines inventory as assets owned by a business for the purpose of
selling to the customer.

Movement of inventory can be divided into two types that is an increase and
decrease in inventory.

Increases Purchases Returns Inwards

Movement of inventory

Decreases Sales Returns Outwards

Sales Purchases

Activity of selling inventory, products or Cost of buying inventory or other forms of
services to generate cash or inflow into a business assets that generate the outflow of
business. resources from the business.

Sales returns Purchases returns
Goods returned by the business to the supplier.
Goods returned by the customer or buyer to
the business.

INCREASE IN INVENTORY

It is caused either by :
a) Purchase of goods – when goods are purchased for resale to customers, the purchases

account is debited for the cost of goods. Purchases can be made on cash or credit.

Credit purchase (Debit Purchases, Credit Creditor)
Cash purchase (Debit Purchases, Credit Cash/ Bank)

b) Returns Inwards/ Sales Returns – the goods are returned when a customer is dissatisfied
with the goods because of defective, inferior quality or not in accordance with customer’s
satisfaction. Customer may return the goods if the sale was made on credit or received cash
refund if the sale is in cash.

Credit sale – (Debit Returns Inwards, Credit Debtor)
Cash sale - (Debit Returns Inwards, Credit Cash/ Bank)

It is caused by :

a) Sale of goods – sale of goods that have been previously bought for the purpose of resale.
Sales revenue is earned when goods are transferred from the seller to the buyer. Sales
may also be made in cash or credit basis.

Credit sales – (Debit Debtor, credit Sales)
Cash sales - (Debit Cash/ Bank, credit sales)

b) Returns outwards – purchaser returns goods to the seller due to defective, inferior
quality or not in accordance with customer’s satisfaction.

Credit purchase (Debit Creditor, Credit Returns Outwards)
Cash purchase (Debit Cash/ Bank, Credit Returns Outwards)

Effect of business transaction on accounting equation

Transaction 8 : Purchase goods on credit

Forever Excellent purchases goods on credit RM2,000 from XYZ Enterprise.

The effect of the transaction :

1. Liabilities (creditor) - increase

2. Owner’s equity (purchases) - decrease

Cash Assets = Liabilities + Owner’s equity
+ Capital
+ Equipment + Accounts = Account
receivable payable

8 Old RM14,000 + RM5,000 + RM6,000 = RM2,000 + RM23,000
balance

= + RM2,000 + - RM2,000 Purchases

New RM14,000 + RM5,000 + RM6,000 = RM4,000 + RM21,000
balance RM25,000

= RM25,000

Effect of business transaction on accounting equation

Transaction 9 : Purchase goods on cash

Forever Excellent purchases goods on cash RM3,000 from Samar Enterprise.

The effect of the transaction :

1. Asset (cash) - decrease

2. Owner’s equity (purchases) - decrease

Cash Assets = Liabilities + Owner’s equity
+ Capital
+ Equipment + Accounts = Account
receivable payable

9 Old RM14,000 + RM5,000 + RM6,000 = RM4,000 + RM21,000
balance RM6,000 =
- RM3,000 RM5,000 + = + - RM3,000 Purchases
New RM11,000 + RM22,000 = + RM18,000
balance RM4,000

RM22,000

Effect of business transaction on accounting equation

Transaction 10 : Sold of goods on cash

Forever Excellent sold goods on cash RM5,000 to Cemara Enterprise.

The effect of the transaction :

1. Asset (cash) - increase

2. Owner’s equity (sales) - increase

Assets = Liabilities + Owner’s equity

Cash + Equipment + Accounts = Account + Capital
receivable payable

10 Old balance RM11,000 + RM5,000 + RM6,000 = RM4,000 + RM18,000
+ RM5,000 RM6,000
RM5,000 + = + + RM5,000 Sales
New balance RM16,000 + RM27,000
= RM4,000 + RM23,000

= RM27,000

Effect of business transaction on accounting equation

Transaction 11 : Sold of goods on credit

Forever Excellent sold goods on credit RM10,500 to Majuria Enterprise.

The effect of the transaction :

1. Asset (Debtor) - increase

2. Owner’s equity (sales) - decrease

Assets = Liabilities + Owner’s equity

Cash + Equipment + Accounts = Account + Capital
receivable payable

11 Old balance RM16,000 + RM5,000 + RM6,000 = RM4,000 + RM23,000
New balance RM16,000 +
+ RM10,500 = + + RM10,500 Sales

RM5,000 + RM16,500 = RM4,000 + RM33,500

RM37,500 = RM37,500

Effect of business transaction on accounting equation

Transaction 12 : Purchases returns

Forever Excellent returns goods purchased on credit RM500 to XYZ Enterprise.

The effect of the transaction :

1. Liabilities (Creditor) - decrease

2. Owner’s equity (purchases returns) - increase

Assets = Liabilities + Owner’s equity

Cash + Equipment + Accounts = Account + Capital
receivable payable

12 Old balance RM16,000 + RM5,000 + RM16,500 = RM4,000 + RM33,500
RM16,500 = - RM500 + + RM500
Purchases
returns

New balance RM16,000 + RM5,000 + = RM3,500 + RM34,000

RM37,500 = RM37,500

Effect of business transaction on accounting equation

Transaction 13 : Sales returns

Majuria Enterprise returns goods RM150 to Forever Excellent.

The effect of the transaction : - decrease
1. Asset (Debtor) - decrease
2. Owner’s equity (sales returns)

Assets = Liabilities + Owner’s equity

Cash + Equipment + Accounts = Account + Capital
receivable payable

13 Old balance RM16,000 + RM5,000 + RM16,500 = RM4,000 + RM33,500
- RM500 =+ - RM500
Sales
RM16,000 returns

New balance RM16,000 + RM5,000 + = RM4,000 + RM33,000

RM37,000 = RM37,000



Transaction Assets Liabilities Equity Explanation
Number + 6,000 6,000
+ 10,000 + Issuing stocks for cash or other assets
1 + 10,000 600 Buying assets by borrowing money (taking a loan from a bank
2 − 900 700 or simply buying on credit)
− 900 200 Selling assets for cash to pay off liabilities: both assets and
3 + 1,000 100 liabilities are reduced
+ 700 + 400 + Buying assets by paying cash by shareholder's money (600) and
4 − 200 + 0 by borrowing money (400)
5 − Earning revenues
6 − 500 Paying expenses (e.g. rent or professional fees) or dividends
7 0 + 100 −
8 − 500 Recording expenses, but not paying them at the moment
Paying a debt that you owe
9 0 Receiving cash for sale of an asset: one asset is exchanged for
another; no change in assets or liabilities

Show the effect of the following transactions : Effect

Transactions
a Started business with cash in hand RM1,000, cash at bank RM100,000 and equipment RM50,000
b Bought furniture RM10,000 and payment was immediately made by cheque
c Bought stationery on credit RM500
d Transfer cash to company’s bank account RM1,000
e Paid rental of premises by cheque RM2,000
f Bought motor vehicles from Asia Motor Sdn Bhd RM70,000, payment made on installation basis
g Paid cash for administrative expenses RM200
h Borrowed money from Finance Bhd RM10,000
i Tenants paid rent due in cash RM1,200
j The owner took cash to pay for her personal expenses RM150
k Paid wages and salaries by cheque RM12,000
l Paid loan in cash
m Hannan Ent returned defective goods worth RM250 and reimbursement was settled by cash
n Receivable paid the amount due in cash RM3,000
o Paid insurance on motor vehicle by cheque RM450