ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION

ACCOUNTING
CLASSIFICATION
AND
ACCOUNTING
EQUATION

Here is where your journey begins

About the Author

Haszlina Binti Hashim
Lecturer
Commerce Department
Politeknik Ungku Omar

Jawariah Binti Mamat
Lecturer
Commerce Department
Politeknik Ungku Omar

Table of Contents

ITEM PAGE
1.0 About the authors
2.0 Table of contents
3.0 Introduction

4.0 Accounting classification
5.0 Accounting Equation

6.0

WHOA!

ACCOUNTING
CLASSIFICATION AND
ACCOUNTING EQUATION

TABLE OF CONTENTS

1234

INTRODUCTION ONLINE LESSONS ACTIVITIES RESOURCES

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INTRODUCTION

After completing this chapter, students
should be able to:
1.0 Discuss the accounting classification
and accounting equation.
2.0 Elaborate the definition of assets,
owner’s equity and liabilities.
3.0 Elaborate the definition of revenues
and expenses.
4.0 Elaborate the effects of transaction
on the accounting equation.

1.1

ACCOUNTING
CLASSIFICATION

Business transactions are involved with
five categories of accounts:

ASSETS OWNER’S EXPENSES
EQUITY REVENUES

LIABILITIES

ASSETS

Assets are properties owned by
an entity in order to run a
business activity. There are two
types of assets:

i. Non-current Assets

ii. Current Assets

VENUS

ASSETS NON-
CURRENT
ASSETS

CURRENT
ASSETS

NON-CURRENT ASSETS Tangible •Land and building
non-current •Machinery
 Non-current assets are assets •Office equipment
purchased not for resale but to be assets •Furniture and fittings
used in the operations of the •Motor vehicles
business with useful lives of more
than one year. Intangible •Franchise
non-current •Goodwill
 Non-current assets can be use •Patent
repeatedly. assets •Trademark

 Non-current assets are divided into Investment •Fixed deposit
three categories: •Quoted and unquoted
investment
i. Tangible non-current assets.
ii. Intangible non-current assets.
iii. Investment.

CURRENT ASSETS Accrued Cash in Cash at
Revenue hand bank
● Assets that are either cash or
can be easily converted into Prepaid Current Inventory
cash within a year or an expenses Assets
accounting period.
Account
● These assets constantly change receivables/
their form during an accounting
period. Debtors

LIABILITIES

Liabilities are funds supplied by
external parties to the business
for the acquisition of assets that
needs to be settled in money,
goods or services. There are two
types of liabilities :

i. Non-current Liabilities

ii. Current Liabilities

LIABILITIES NON-
CURRENT
LIABILITIES

CURRENT
LIABILITIES

NON-CURRENT LIABILITIES

 Non-current Long-term
liabilities are loans
obligations
expected to be paid Mortgages
after one year or payable
after an operating
cycle. Debentures

Bond payable

Long-term notes
payable

CURRENT LIABILITIES

● Current liabilities are amount Account
owed by the business that payable
should be paid in the one
accounting period or one year. Prepaid Bank
revenue overdrafs
● These assets constantly change
their form during an accounting Current
period. Liabilities

Short- Accrued
term expenses
loans

OWNER’S EQUITY

Owner’s equity is the business’s debts to the owner
based on the amount invested.

CAPITAL DRAWINGS

 Cash or assets brought into  Cash, goods or other assets
the business by the owner taken by the owner for
or owner’s investment in personal use.
the business.
 Drawings decrease the
REVENUE total owner’s equity.

 Revenues are income EXPENSES
earned from business
activities entered into for  Expenses are the costs of
the purpose of earning assets or services incurred in
income. the process of earning
revenue.

REVENUE

 Revenues are income earned from business activities
entered into for the purpose of earning income.

SALES FEES SERVICES
RENDERED
ROYALTIES
RENTAL
INCOME

COMMISSIONS INTEREST DIVIDENDS
RECEIVED INCOME RECEIVED

Salaries
and Wages

Income Tax Utilities

Maintenance Rent and
and Repairs Rates

Advertisement Depreciations
Interest
Discount
allowed

BASIC ACCOUNTING EQUATION

A = L + OE

ASSETS = LIABILITIES + OWNER’S EQUITY

Capital Drawings

Owner’s
Equity

Revenue Expenses

ANALYSIS OF
TRANSACTIONS

Based on example given.

EXAMPLE: HAPPY ENTERPRISE

The following information are balances of account for Happy Enterprise at the 1 Mac
2021:

Cash in hand RM
Cash at bank 10,000
Inventory 500
Account payable 2,000
Capital 10,000
2,500

Transaction 1: Investment by owner

Mac 1 The owner of Happy Enterprise brought in RM 50,000 cash to the
DATE company’s bank account as additional capital.

Mac 1 ASSETS = LIABILITIES + OWNER’S
EQUITY

Cash at = + Capital
bank

+RM50,000 +RM50,000

Assets and liabilities increased by the same amount.

Transaction 2: Purchase of office furniture by
cash.

Mac 2 Happy Enterprise purchases an office furniture RM 4,000 by cash.

DATE ASSETS = LIABILITIES + OWNER’S
Mac 2 EQUITY
Cash in Office
hand Furniture =

- RM +RM 4,000
4,000

One asset increases while another asset decreases.

Transaction 3: Payment for account payable.

Mac 4 Happy Enterprise paid the amount owed RM 5,000 to Megah
DATE Holding, one of the company’s creditor by cheque.

Mac 4 ASSETS = LIABILITIES + OWNER’S
Cash at Bank EQUITY
- RM 5,000
= Account
payable

- RM 5,000

Assets and liabilities are decreased by the same amount.

Transaction 4: Purchase of vehicle on credit.

Mac 8 Happy Enterprise purchases a delivery van which costs RM 50,000
from Smile Auto Bhd. on credit.

DATE ASSETS = LIABILITIES + OWNER’S
EQUITY
Vehicles
= Creditors- Smile
Mac 8 + RM 50,000 Auto Bhd

+ RM 50,000

Assets and liabilities are increased by the same amount.

Transaction 5: Drawings by owner.

Mac 15 Harris, the owner of Happy Enterprise withdraws RM 3,000 cash from
the company for personal use.

DATE ASSETS = LIABILITIES + OWNER’S
EQUITY
Cash
Mac 15 - RM 3,000 = Capital

- RM 3,000

Assets and owner’s equity are decreased by the same amount.

Transaction 6: Paid an account payable with
bank loan.

Mac Happy Enterprise received cheque for RM 5,000 from Rimau Bank
20 (bank loan) and used it to pay an account payable.

DATE ASSETS = LIABILITIES + OWNER’S
= Loan EQUITY
Mac + RM 5,000
20 Account
payable

- RM 5,000

One liability is increased while another liability is decreased.

Transaction 7: Revenue received by cheque.

Mac Happy Enterprise received cheque for commission received RM 2,000.
25
ASSETS = LIABILITIES + OWNER’S
DATE EQUITY

Cash at bank = Capital

Mac + RM 2,000 + RM 2,000
25

Revenue increases capital and assets.

Transaction 8: Payment of salary by cash.

Mac Happy Enterprise pays RM 1,500 for staff’s salary by cash.
28
ASSETS = LIABILITIES + OWNER’S
DATE EQUITY

Cash in hand = Capital

Mac - RM 1,500 - RM 1,500
28

Expenses reduce capital and assets.

ACTIVITY 1

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brightest object in the night sky

THANKS!

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