Acc week 2

UTAR/FBAF1023/Topic2UTAR/FBAF1023/Topic2

Recording of Business Recording of Business Transactions – Accounting Transactions – Accounting

Equation and Source Equation and Source DocumentsDocuments

Week 2Week 2


In Your Textbook...In Your Textbook...

Roshayani Arshad, et al. (2007), Roshayani Arshad, et al. (2007), Financial Financial Accounting An IntroductionAccounting An Introduction, 2, 2ndnd Edition, Edition, Malaysia, McGraw Hill.Malaysia, McGraw Hill.

Chapter 3: Accounting Equation and Chapter 3: Accounting Equation and Double Entry System (pp.19 – 26)Double Entry System (pp.19 – 26)

Chapter 5: Business Transactions and Chapter 5: Business Transactions and Documentation (pp.73 – 79)Documentation (pp.73 – 79)


The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The resources owned by a owned by a

businessbusiness

The resources The resources owned by a owned by a

businessbusiness




The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business

The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business




The rights of the The rights of the ownersowners

The rights of the The rights of the ownersowners


What is a business transaction?

A business transaction is an economic event that directly changes a company’s financial condition or

directly affects its results of operations.


Business Transactions and the Business Transactions and the Accounting EquationAccounting Equation

When a transaction take place, at least When a transaction take place, at least two items in the accounting equation will two items in the accounting equation will changechange

The equality between the assets and the The equality between the assets and the claims against these assets will ALWAYS claims against these assets will ALWAYS be maintained.be maintained.

Assets Liabilities Owner’s Equity= +

Resources = Creditors’ & Owners’ claims against resources


On November 1, 2006, Chris

begins a business that will be known as

NetSolutions.


a. Chris brings in cash RM25,000 to start a. Chris brings in cash RM25,000 to start the business.the business.

a. Chris brings in cash RM25,000 to start a. Chris brings in cash RM25,000 to start the business.the business.

Chris, Capital25,000 Investment

by Chris

Cash25,000 a.

Assets Owner’s Equity=

=


b. NetSolutions paid RM20,000 for a land.b. NetSolutions paid RM20,000 for a land.b. NetSolutions paid RM20,000 for a land.b. NetSolutions paid RM20,000 for a land.

Chris, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000


Accounts Chris,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for RM1,350 and agreed to pay the supplies for RM1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for RM1,350 and agreed to pay the supplies for RM1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=


d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of RM7,500 customers, earning fees of RM7,500 and received the amount in cash.and received the amount in cash.

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of RM7,500 customers, earning fees of RM7,500 and received the amount in cash.and received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500


Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=


e. – 3,650 –2,125– 800– 450

– 275

Wages

Rent

Util.

Misc.


Assets

e. NetSolutions paid the following expenses: e. NetSolutions paid the following expenses: wages, RM2,125; rent, RM800; utilities, wages, RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275.RM450; and miscellaneous, RM275.

e. NetSolutions paid the following expenses: e. NetSolutions paid the following expenses: wages, RM2,125; rent, RM800; utilities, wages, RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275.RM450; and miscellaneous, RM275.


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850



Assets

f. NetSolutions paid RM950 to f. NetSolutions paid RM950 to creditors during the month.creditors during the month.

f. NetSolutions paid RM950 to f. NetSolutions paid RM950 to creditors during the month.creditors during the month.


Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850



Assets

g. At the end of the month, Chris g. At the end of the month, Chris withdrew RM2,000 in cash from withdrew RM2,000 in cash from the business for personal use.the business for personal use.

g. At the end of the month, Chris g. At the end of the month, Chris withdrew RM2,000 in cash from withdrew RM2,000 in cash from the business for personal use.the business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 1,350 20,000 400 28,850h. –2,000 –2,000Bal. 5,900 1,350 20,000 400 26,850

With-drawal

=

=


Owner’s withdrawals

Expenses

Decreased byDecreased by

Owner’s Equity

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Increased byIncreased by

Owner’s investments

Revenues

Net income


Review QuestionReview Question

Sheila has the following assets and Sheila has the following assets and liabilities on 1 February 2006:liabilities on 1 February 2006:

Cash RM4,500; Building RM65,000; Cash RM4,500; Building RM65,000; Shop equipment RM18,000; Bank Shop equipment RM18,000; Bank

loan RM25,000; Creditors RM3,700.loan RM25,000; Creditors RM3,700.

How much is Sheila’s equity in the How much is Sheila’s equity in the business?business?


Lecture Exercise 1Lecture Exercise 1Show the effect of below transactions on the accounting equation.Show the effect of below transactions on the accounting equation.

June 1 Invested RM15,955 cash to start the business.June 1 Invested RM15,955 cash to start the business.

22 Hired a secretary at salary of RM1,800 per month. Hired a secretary at salary of RM1,800 per month.

33 Paid cash for a Dell computer, RM3,500. Paid cash for a Dell computer, RM3,500.

77 Purchased office supplies on account, RM750. Purchased office supplies on account, RM750.

88 Sold goods worth RM125 in cash. Sold goods worth RM125 in cash.

1515 Paid utility expenses, RM170. Paid utility expenses, RM170.

2828 Withdrew RM10 cash for personal use. Withdrew RM10 cash for personal use.

2929 Paid RM500 to supplier for account payable due. Paid RM500 to supplier for account payable due.

3030 Paid secretary’s salary in full for the month of June. Paid secretary’s salary in full for the month of June.


Aug 1Aug 1 Paid office rent for August, RM470.Paid office rent for August, RM470.

33 Purchased equipment on account, RM4,276.Purchased equipment on account, RM4,276.

77 Received cash from clients, on account RM2,410.Received cash from clients, on account RM2,410.

99 Purchased supplies on account, RM240Purchased supplies on account, RM240

1313 Paid cash to creditors on account, RM760.Paid cash to creditors on account, RM760.

1515 Purchased motor vehicle for RM24,000, paying RM2,470 Purchased motor vehicle for RM24,000, paying RM2,470 cash cash and taking a loan for the balance.and taking a loan for the balance.

1717 Paid cash from business bank account for personal Paid cash from business bank account for personal expenses, RM1,760expenses, RM1,760

2626 Received cash for services given during August, RM2,470Received cash for services given during August, RM2,470

3030 Paid salaries for the month, RM2,400; utility expenses Paid salaries for the month, RM2,400; utility expenses RM276. RM276.


The opening balances for Company A are: Cash RM24,600; Accounts The opening balances for Company A are: Cash RM24,600; Accounts Receivable RM17,220; Accounts Payable RM14,270; Capital RM27,550.Receivable RM17,220; Accounts Payable RM14,270; Capital RM27,550.


Lecture Exercise 3Lecture Exercise 3Complete the table as in the example below.Complete the table as in the example below.

a.a. Owner took cash for personal useOwner took cash for personal useb.b. Bought machine from Syarikat BG on creditBought machine from Syarikat BG on creditc.c. Received fees in cash from clientsReceived fees in cash from clientsd.d. Sold goods on credit to AhmadSold goods on credit to Ahmade.e. Purchased supplies on credit from Alim EnterprisePurchased supplies on credit from Alim Enterprisef.f. Borrowed from Bumiputra CommerceBorrowed from Bumiputra Commerceg.g. Paid wages by chequePaid wages by chequeh.h. Received bank interestReceived bank interesti.i. Paid interest on loanPaid interest on loan

TransactionTransaction Classification Classification (Asset, liability, (Asset, liability, owner’s equity)owner’s equity)

Increased / Increased / DecreasedDecreased

Name of Name of accountaccount

Paid traveling Paid traveling expenses by expenses by cashcash

AssetAsset

Owner’s equityOwner’s equity

DecreasedDecreased

DecreasedDecreased

CashCash

Traveling Traveling ExpenseExpense



a.a. Fred brought in cash RM50,000 and a used van valued at Fred brought in cash RM50,000 and a used van valued at RM25,000 for business purposes.RM25,000 for business purposes.

b.b. Opened a business current account at Citibank and banked in Opened a business current account at Citibank and banked in RM45,000 cash.RM45,000 cash.

c.c. Paid rental RM1,000 by cheque.Paid rental RM1,000 by cheque.d.d. Purchased office equipment from Greg Bhd for RM5,500, Purchased office equipment from Greg Bhd for RM5,500,

paying RM3,000 in cash.paying RM3,000 in cash.e.e. Paid utility RM900 by cheque.Paid utility RM900 by cheque.f.f. Paid RM1,000 cash for office equipment purchased in Paid RM1,000 cash for office equipment purchased in

transaction d.transaction d.g.g. RM500 cash was paid for advertising.RM500 cash was paid for advertising.h.h. Paid office salaries by cheque RM3,000Paid office salaries by cheque RM3,000i.i. Fred withdrew RM1,000 cash for family use.Fred withdrew RM1,000 cash for family use.j.j. Received commission RM750 by cheque.Received commission RM750 by cheque.


Source DocumentsSource Documents


Source DocumentsSource Documents

Written documents that provide Written documents that provide details of a transaction and the details of a transaction and the evidence that the transaction has evidence that the transaction has taken place.taken place.

All accounting entries are based on All accounting entries are based on information derived from these source information derived from these source documents.documents.


Features of Source DocsFeatures of Source Docs

Most source docs contain the following Most source docs contain the following information:information:1. The date when the transaction took place.1. The date when the transaction took place.2. The names & addresses of the parties 2. The names & addresses of the parties concerned.concerned.3. The nature of the transaction.3. The nature of the transaction.4. The total amount of money involved.4. The total amount of money involved.5. Terms & conditions of the transaction.5. Terms & conditions of the transaction.6. An authorised signature.6. An authorised signature.


Importance of Source DocsImportance of Source Docs

They provide evidence or proof that a They provide evidence or proof that a transaction has occurred.transaction has occurred.

They are used as part of a process to They are used as part of a process to record information into the books of record information into the books of original entry.original entry.

They are required for audit purposes.They are required for audit purposes.


List of Source DocsList of Source Docs

InvoiceInvoice Credit noteCredit note Debit noteDebit note Payment voucherPayment voucher Cheque counterfoilCheque counterfoil ReceiptReceipt Bank statementBank statement


InvoiceInvoice

Sent by the seller to the buyer to inform Sent by the seller to the buyer to inform the latter how much to pay for the goods the latter how much to pay for the goods or services supplied.or services supplied.

When a trader sells on credit instead of by When a trader sells on credit instead of by cash, he prepares an invoice, usually in cash, he prepares an invoice, usually in duplicate and sends the original copy to duplicate and sends the original copy to the buyer to request payment.the buyer to request payment.


Credit NoteCredit Note

The seller sends a credit note to the buyer The seller sends a credit note to the buyer when goods have been overcharged, or when goods have been overcharged, or when the buyer returns goods.when the buyer returns goods.

The seller prepares a credit note and The seller prepares a credit note and sends the original copy to the buyer to sends the original copy to the buyer to inform the latter that he is crediting the inform the latter that he is crediting the buyer’s account.buyer’s account.

Purpose: To correct an overcharge in the Purpose: To correct an overcharge in the invoice.invoice.


Debit NoteDebit Note

Sent by the seller to the buyer as an Sent by the seller to the buyer as an additional invoice when the latter has been additional invoice when the latter has been undercharged.undercharged.

The seller will prepare and send the The seller will prepare and send the original copy of a debit note to the buyer to original copy of a debit note to the buyer to debit the buyer’s account, thus increasing debit the buyer’s account, thus increasing the amount of the buyer’s debt.the amount of the buyer’s debt.

Purpose: To correct an undercharge in the Purpose: To correct an undercharge in the invoice.invoice.


Payment VoucherPayment Voucher

Prepared to record payment of money, of Prepared to record payment of money, of either cash or cheque, to a third party.either cash or cheque, to a third party.

The party receiving the payment will have The party receiving the payment will have to sign to acknowledge receipt of the said to sign to acknowledge receipt of the said sum, endorsed by the officer authorising sum, endorsed by the officer authorising the payment.the payment.


Cheque CounterfoilCheque Counterfoil

Contains information such as cheque Contains information such as cheque number, payee’s name and amount paid.number, payee’s name and amount paid.

Records payment of money by cheque.Records payment of money by cheque. Accountants will use all the cheque stubs Accountants will use all the cheque stubs

in the cheque book to record the Cash in the cheque book to record the Cash Book or Petty Cash Book.Book or Petty Cash Book.


ReceiptReceipt

A document to acknowledge a payment A document to acknowledge a payment received.received.

The original copy is given to the customer The original copy is given to the customer or paying party while the duplicate copy is or paying party while the duplicate copy is retained by the recipient.retained by the recipient.


Bank StatementBank Statement

A monthly report sent by the commercial A monthly report sent by the commercial bank to its customer who maintains a bank to its customer who maintains a cheque (current) account.cheque (current) account.

It gives the details of the money drawn out It gives the details of the money drawn out and deposits made by the business during and deposits made by the business during that particular month into this account.that particular month into this account.


Review QuestionReview QuestionWhat documentation would you expect to change What documentation would you expect to change

hands in the following circumstance?hands in the following circumstance?

a.a. You bought a CD from Tower Records, paying You bought a CD from Tower Records, paying cash for it.cash for it.

b.b. You bought a Samsung TV using credit card.You bought a Samsung TV using credit card.c.c. You bought a Suzuki Swift, paying 10% by You bought a Suzuki Swift, paying 10% by

issuing a cheque, and applied bank loan for issuing a cheque, and applied bank loan for the remaining balance.the remaining balance.

d.d. You returned damaged goods to the supplier, You returned damaged goods to the supplier, which were bought on credit.which were bought on credit.

e.e. You made an illegal U-turn and was caught by You made an illegal U-turn and was caught by the traffic police.the traffic police.