ACCOUNTING EQUATION & ACCOUNTING CLASSIFICATION

LEARNING OUTCOMES
At the end of session, students are able to: Identify purpose and items in balance sheet, Prepare the balance sheet, Understand the equality of accounting equation, and Identify effects of transactions on the accounting equation.

BALANCE SHEET
Definition
A Balance Sheet is a statement listing what is owned by a business (assets) and a list of those who have claims (liabilities and owners equity) over those assets.
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BALANCE SHEET
Purpose
It shows the financial position of the business at a particular date. Financial position of:
How much total assets own as at date; How much total liabilities owe as at date; and How much total owners equity as at date.
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BALANCE SHEET
Format
Budget Restaurant Balance Sheet as at 31 December 2010 Assets RM Kitchen Equipment Motor Vehicles Furniture Cash 50,000 Capital: Aminah 50,000 Liabilities 17,000 Bank Loan 3,000 Creditors 35,000 15,000 Owners Equity RM 70,000

120,000

120,000
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BALANCE SHEET
Classification of items 1. Assets Resources owned or controlled by business; Use by the business to provide future services or benefit in order to earn profit.
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BALANCE SHEET
2. Liabilities Debts amount owed by a business to external parties; Represent external claims to the assets of the business.

BALANCE SHEET
3. Owners Equity Consists of capital amount invested by the owner in the business; It shows how much the business owes its owner; Underlying entity concept.
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ACCOUNTING EQUATION
ASSETS = LIABILITIES + CAPITAL
(RESOURCES OWNED = SUPPLIER OF RESOURCES)

Also known as Balance Sheet Equation. Both sides of the Balance Sheet must always be equal since it represent two views of the same business.

BUSINESS TRANSACTIONS
Events or activities that affects the financial position of a business, and requires recording. Transaction usually involves two or more parties, such as a seller and a buyer. It involves some exchange of goods or services between the parties. It also involves some kind of payment, could be in the form of cash or things of value, immediately or at some future 10 date.

EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

2010 BersihMurni Services (owned by Murni) 1 July Murni commenced business by investing RM35,000 cash in BersihMurni Services. Analysis; i. Its first asset (cash) of RM35,000 ii. The initial owners equity 11

EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

BersihMurni Services (owned by Murni) 4 July BersihMurni Services purchased cleaning equipment for RM16,000 cash. Analysis; i. A new asset (cleaning equipment) of 2010

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EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

BersihMurni Services (owned by Murni) 8 July BersihMurni Services borrowed RM30,000 from the bank to purchase a motor van. Analysis; i. Another new asset 13 (motor van) of RM30,000 2010

EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

2010 BersihMurni Services (owned by Murni) 13 July BersihMurni Services purchased more cleaning equipment costing RM10,000 from Cuci Enterprise and paid a cash down payment of RM3,000. The balance is to be settled within 30 days. Analysis; i. An increase of RM10,000 to asset (cleaning equipment) ii. A decrease of RM3,000 to asset (cash) iii. A new liability (Creditor - Cuci Ent.) of RM7,000 14

EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

BersihMurni Services (owned by Murni) 20 July BersihMurni Services paid Cuci Enterprise another RM5,000 cash for the amount owed.
Analysis; i. A decrease of RM5,000 to asset (cash) ii. A decrease of RM5,000 to liability (Creditor Cuci Ent.)
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2010

EXERCISES
Shiras Ent. has the following assets and liabilities on 1 Feb 2010: Cash RM4,500; Building RM65,000; Shop Equipment RM18,000; Bank Loan RM25,000 and Creditors RM3,700. What is Shirass equity in the business?
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EXERCISES
Draw up a new Balance Sheet and accounting equation after each of the following transaction:
Date Transaction

1 July Melani borrowed RM30,000 from BCB Bhd to start Cerdik. 3 July Purchased furniture for RM5,000 by cheque. 4 July Purchased computers for RM20,000 from Rysus 5 July Purchased photocopying machine for RM5,000 by
10 July

Paid RM5,000 by cheque to Rysus Digital.

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