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BDC 101

CHAPTER 2

FINANCIAL ACCOUNTING 1

ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM

SCHOOL OF ACCOUNTING & FINANCEFACULTY OF BUSINESS AND MANAGEMENT

PREPARED BY:NORAL HIDAYAH ALWI

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CHAPTER 2: ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM

LEARNING OUTCOMES

At the end of this chapter, students will be able to:

Classify of assets, liabilities and owner’s equity

Describe the accounting equation

Identify the implication of business transaction on the accounting ledgers

Illustrate the accounting entries for assets, liabilities and owner’s equity

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TOPIC OUTLINES

2.1 Accounting Cycle

2.2 Accounting Equation

2.3 Classification of Accounts

2.4 Double Entry System

2.5 Summary of Debit Credit

2.6 Class Activities2.6.1Question 12.6.2Question 22.6.3Question 3

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2.1 ACCOUNTING CYCLE

Recording double-entries into journals.

(Journalizing)

Post the double-entries from journals

into the ledgers. (Posting)

Prepare pre-adjusted trial

balance.

Record the adjustments.

Prepare post-adjusted trial

balance.

Prepare the financial statements which consist of Income Statement and the

Balance Sheet.

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Accounting equation can be explained by adding any amount that belongs to a business and deducting any amount that the business owes.

Business transactions that can effect the accounting equation are:

Changes in assets Changes in liability Changes in owner’s equity

ASSETS = LIABILITIES + OWNER’S EQUITY

DR. CR.

2.2 ACCOUNTING EQUATION

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• If the equation is expanded then it becomes….

ASSETS = (OPENING CAPITAL + NET PROFIT-DRAWINGS) + LIABILITIES

and…..

ASSETS = (OPENING CAPITAL +[REVENUES –EXPENSES]-DRAWINGS) + LIABILITIES

2.2 ACCOUNTING EQUATION

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Assets LiabilitiesCapital

ExpensesRevenues

2.3 CLASSIFICATION OF ACCOUNTS

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Assets LiabilitiesCapital

Expenses Revenues

DR. CR.


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The resources that owned by a business and has ‘value’.

They are used to run business operation. Can be divided into 2 major group:

Non-Current Assets / Fixed Assets

• Used for long-term.• Not for sale but to run

business.• For eg: Buildings, Motor

Vehicle, Furniture and Fittings.

Current Assets

• Resources that have a short life.

• Have high liquidity (can be easily converted into cash)

• For eg: Cash in hand, cash in bank, stock, debtors.


Assets (Dr)

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Capital invested by owner to a business.Can be in term of non-current/current assetsOwner’s Equity components are:

• Capital invested in a business • Net Profit from business


Owner’s Equity/Capital (Cr)

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If a business solely generated by its owner’s, then:Example:

If owner brought in:

Premises RM60,000

Van RM15,000

Cash RM5,000

Answer:

So, the capital will be,

RM60,000 + RM15,000 + RM5,000

=RM80,000

Capital + Liabilities = Asset



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If a business started by loan or funds from relatives and friends, then:

Example:

If owner brought in:

Premises RM60,000

Van RM15,000

Cash RM5,000

Bank Loan RM10,000

Answer:

So, the capital will be,

RM60,000 + RM15,000 + RM5,000 - RM10,000

=RM70,000Capital = Asset - Liability



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Amount that is owed by the businessCan be divided into 2 major group:

Non-Current Liabilities

• Requires owner to settle the amount owed in long-term period.

• Loan repayment is normally from 1 years – 30 years

• For eg: Loan from banks, Mortgage loan.

Current Liabilities

• Requires owner to settle the amount owed within a year.

• For eg: Creditors, Bank Overdraft


Liabilities (Cr)

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Revenues / Income is money that generated from business.Can be divided into 2 :

Direct Income : Sales of goods Indirect Income : Commission received and

discount received


Revenues (Cr)

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Expenses are a business spending in order to produce output.

Can be divided into 2:Direct Expenses: Purchases of goodsIndirect Expenses: Rental, salary, utilities

paid, discount allowed


Expenses (Dr)

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Double entry system is the process of recording each business transactions into two different ledgers.

The amount will be same in that two different accounts but one be debited and another one credited.

This system is the concept of: When one party gives, another party will receiveWhen an amount is given, the same amount will be received

Therefore, double entry system in accounting principal (for cash):Receiving account – debitedGiving account - credited

2.4 DOUBLE ENTRY SYSTEM

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For example, sold goods to Edy RM300 on credit Debit Credit

Edy (Debtor ) RM300

Sales Account RM300

Edy Account

Sales RM300

Sales Account

Edy RM300


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• From the accounting equation, ‘debit’ (Dr.) if..

Asset (increase)

Capital (decrease)

Liabilities (decrease)

• From the accounting equation, ‘credit’ (Cr.) if..

Asset (decrease)

Capital (increase)

Liabilities (increase)

Balance Sheet item


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• For income statement items..

Expenses = Debit (Dr.)

Income = Credit (Cr.)

Income Statement item


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Assets

Expenses

Capital Liabilities

Revenues

• DEBIT when • CREDIT when

• CREDIT when • DEBIT when

2.5 SUMMARY OF DEBIT AND CREDIT

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TRANSACTIONSi. Bought goods on cash RM300ii. Bought goods on credit RM760iii. Paid Bills RM150 cashiv. Receive cash commission RM55v. Took RM90 for personal use

2.6 CLASS ACTIVITY

Question 1

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ASSETS + expenses

LIABILITY + revenue

OWNER’S EQUITY

i. Stock (+ RM300)Cash (-RM300)

ii. Stock (+760) Creditor (+760)

iii. Cash (-150)Utilities (+150)

iv. Cash (+55) Commission (+55)

v. Cash (-90) Drawing (-90)

2.6 CLASS ACTIVITY

Answer

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TransactionsDebit

AccountCredit

Account

a)Eg.: Bought machinery on credit from Courts Machinery Courts

b) Paid creditor with cash

c) A debtor paid cash

d) Bought van for cash

e) Sold lorry for cash

f) Sold goods for credit to Chin

g) Started business with cash

h) Started business with a van

i) Loan received from Jery

j) Owner took goods for personal use

k) Sold machinery to Siti for credit

2.6 CLASS ACTIVITY

Question 2

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TransactionsDebit

AccountCredit

Account

a)Eg.: Bought machinery on credit from Courts Machinery Courts

b) Paid creditor with cash Creditor Cash

c) A debtor paid cash cash debtor

d) Bought van for cash van cash

e) Sold lorry for cash cash lorry

f) Sold goods for credit to Chin chin sale

g) Started business with cash cash capital

h) Started business with a van van capital

i) Loan received from Jery Bank/Cash Jery

j) Owner took goods for personal use Drawing Stock

k) Sold machinery to Siti for credit Siti Machinery

2.6 CLASS ACTIVITY

Answer

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ASSETS LIABILITIES CAPITAL INCOME (EXPENSES)

RM

a) 50,154 13,000 15,000 -3,000

b) 52,056 36,254 8,248 -2,656

c) 49,524 51,000 6,569 -14,545

d) 108,204 23,046 40,052 -14,545

e) 18,646 10,025 23,025 45,485

f) 28,981 2,500 4,598 -4,666

g) 23,147 18,765 3,544 -5,662

h) 31,700 12,256 9,522 -35,562

i) 56,134 7,544 46,421 7,825

j) 181,405 79,643 65,445 -5,235

Fill up the missing element:

2.6 CLASS ACTIVITY

Question 3

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ASSETS LIABILITIES CAPITAL INCOME EXPENSES

RM

a) 50,154 13,000 25,154 15,000 3,000

b) 52,056 10,210 36,254 8,248 2,656

c) 49,524 6,500 51,000 6,569 14,545

d) 108,204 23,046 40,052 59,651 14,545

e) 18,646 10,025 23,025 45,485 59,889

f) 28,981 2,500 26,549 4,598 4,666

g) 23,147 6,500 18,765 3,544 5,662

h) 31,700 12,256 45,484 9,522 35,562

i) 56,134 7,544 46,421 7,825 5,656

j) 181,405 41,552 79,643 65,445 5,235

Fill up the missing element:

2.6 CLASS ACTIVITY

Answer

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SUMMARY

There are 5 categories in accounting, assets, liabilities, owner’s equity (Balance Sheet), Revenue and Expenses (Income Statement)

Accounting equation can be described as Asset = Liability + Owners Equity Asset + Expenses = Liability + Owners Equity + Income

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NEXT SESSION PREVIEW

CHAPTER 3DOCUMENTS USED IN BUSINESS TRANSACTIONS AND ACCOUNTING CYCLE

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REFERENCES

Business Accounting I, 11th Edition Frank Wood and Alan Sangster, ISBN 13: 978-0-273-71212-1, FT Prentice Hall, Harlow © 2008

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APPENDIX

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THE END

Economy & Finance

Bdc 101 02