BBFA1103

INTRODUCTORY ACCOUNTING
TOPIC 3 ACCOUNTING CYCLE
 LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the steps involved in the accounting
cycle;
2. Explain the basic accounting equation;
3. Analyse transactions; and
4. Demonstrate the effects of transactions on
the accounting equation.
 3.1 Accounting Cycle
1.Source
Documents
9. Closing
entries 2. Transactions
Analysis

3.
8. Financial
Statements Journalising

7. Preparation of Adjusted 4. Posting to

Trial Balance ledgers

6. Adjusting 5. Preparation of
entries Trial Balance
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 3.2 Accounting Equation

Assets = Liabilities + Equity

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 Assets
Cash

Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled
Land
by a
company

Store Buildings
Supplies
Equipment
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 Liabilities

Accounts
Notes Payable
Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable

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 Equity

Owner Owner
Investments Withdrawals

Owner’s
claims
on
assets

Revenues Expenses

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 Expanded Accounting Equation

Assets = Liabilities + Equity

_ Owner _
Owner Capital
Withdrawals + Revenues Expenses

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3.3 Transaction Analysis Equation
The accounting equation must remain in balance
after each transaction.

Assets = Liabilities + Equity

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 Transaction Analysis
Tizzy, the owner, contributed RM20,000
cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) Tizzy, Capital (equity)

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 Transaction Analysis
Tizzy, the owner, contributed RM20,000
cash to start the business.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
(1) 20000 20000

20000 0 0 0 0 20000

20000 = 20000
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 Transaction Analysis
Purchased supplies for RM1,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

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 Transaction Analysis
Purchased supplies paying RM1,000
cash.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
(1) 20000 20000
(2) (1000) 1000

19000 1000 0 0 0 20000

20000 = 20000

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 Transaction Analysis
Purchased equipment for RM15,000
cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

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 Transaction Analysis
Purchased equipment for RM15,000
cash.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
(1) 20000 20000
(2) (1000) 1000
(3) (15000) 15000

4000 1000 15000 0 0 20000

20000 = 20000

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 Transaction Analysis
Purchased Supplies of RM200 and
Equipment of RM1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

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 Transaction Analysis
Purchased Supplies of RM200 and
Equipment of RM1,000 on account.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
(1) 20000 20000
(2) (1000) 1000
(3) (15000) 15000
(4) 200 1000 1200

4000 1200 16000 1200 0 20000

21200 = 21200

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 Transaction Analysis
Borrowed RM4,000 from CIMB Bank.

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

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 Transaction Analysis
Borrowed RM4,000 from CIMB Bank.

Assets = Liabilities + Equity

Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
(1) 20000 20000
(2) (1000) 1000
(3) (15000) 15000
(4) 200 1000 1200
(5) 4000 4000
8000 1200 16000 1200 4000 20000

25200 = 25200

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 Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation
is still in balance.

Assets = Liabilities + Equity

Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital
Bal. 8000 1200 16000 1200 4000 20000

8000 1200 16000 1200 4000 20000

25200 = 25200

Now let’s look at transactions involving revenue,

expenses and withdrawals. 20
 Transaction Analysis
Rendered consulting services
receiving RM3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

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 Transaction Analysis
Rendered consulting services
receiving RM3,000 cash.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Capital Revenue
Bal. 8000 1200 16000 1200 4000 20000
(6) 3000 3000

11000 1200 16000 1200 4000 20000 3000

28200 = 28200

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 Transaction Analysis
Paid salaries of RM800 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries expense account
actually increases.
But, equity actually decreases because expenses reduce equity.

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 Transaction Analysis
Paid salaries of RM800 to employees.
Assets = Liabilities + Equity
Accounts Notes
Cash Supplies Equipment Payable Payable Tizzy, Capital Revenue Expenses
Bal. 8000 1200 16000 1200 4000 20000
(6) 3000 3000
(7) (800) (800)

10200 1200 16000 1200 4000 20000 3000 (800)

27400 = 27400

Remember that expenses decrease equity.

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 Transaction Analysis
Tizzy withdrew RM500 from the
business for personal use.
The accounts involved are:
(1) Cash (asset)
(2) Tizzy, Withdrawals (equity)
Remember that the balance in the Tizzy, Withdrawals account
actually increases.
But, equity actually decreases because withdrawals reduce
equity.

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 Transaction Analysis
Tizzy withdrew RM500 from the
business for personal use.
Assets = Liabilities + Equity
Accounts Notes Tizzy,
Cash Supplies Equipment Payable Payable Tizzy, Capital Withdrawal Revenue Expenses
Bal. 8000 1200 16000 1200 4000 20000
(6) 3000 3000
(7) (800) (800)
(8) (500) (500)
9700 1200 16000 1200 4000 20000 (500) 3000 (800)

26900 = 26900

Remember that withdrawals decrease equity.

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 3.4 Debits and Credits
A T-account represents a ledger account and is a tool
used to understand the effects of one or more
transactions.
T- Account
(Left side) (Right side)
Debit Credit

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 Rules of Debits and Credits

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

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 Rules of Debits and Credits

Equity
Owner’s Capital _ Owner’s _
Withdrawals + Revenues Expenses

Capital Withdrawals Revenues Expenses

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
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 3.5 Normal Balance

Type of Account Normal Balance

Asset Debit

Liability Credit

Capital Credit

Revenue Credit

Expense Debit
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