CHAPTER 3

ACCOUNTING
CLASSIFICATION AND
ACCOUNTING EQUATION
INTRODUCTION

Business transaction can be

classified into five categories,
assets, owner’s equity, liabilities,
revenues and expenses. Assets,
owner’s equity and liabilities are
recorded into statement of
financial position whereas
revenue and expenses recorded in
the statement of profit or loss.
 THE STATEMENT OF FINANCIAL POSITION

Sole Proprietorship: Statement of Financial Position as at 31 December 20X2

RM RM
Non-Current Assets 15,000Owner's Equity
Current Asets 2,700Opening Capital 10,000
  Add: Net profit 2,000
  12,000
  Less: Drawing -500
  11,500
  Non-Current Liabilities 5,000
  Current Liabilities 1,200
17,700 17,700
Partnership: Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets 20,000Capital accounts
Current Assets 14,000 A 5,000
  B 10,000  
  15,000
 
  Current Accounts
  A 3,000
  B 2,000  
  5,000
 
  Non-Current Liabilities 10,000
  Current Liabilities 4,000
 
34,000 34,000
 Limited Companies :Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets 250,000Authorised Capital
200,000 ordinary shares of RM 1
Current Assets 120,000 each 200,000
100,000 preference shares of RM1
  each 100,000
  300,000
 
  Issued and Paid Up Capital
150,000 ordinary shares of RM1
  each 150,000
80,000 preference shares of RM1
  each 80,000
  230,000
  Capital reserves 50,000
  Revenues Reserves 30,000
  Shareholder fund 310,000
  Non-Current Liabilities 50,000
  Current Liabilities 10,000
   
370,000 370,000
 ASSETS

Non- current assets

• Assets are acquired/bought not for resale but to be used in the operation with the
useful lives more than one year

•Three categories of NCA:

 tangible non-current assets
 NCA that have physical substances
 ex: land and building, machinery, office equipment etc.
intangible non-current assets
 NCA with no physical substances
 ex: Franchise, goodwill, patent, trademark etc.
 investment
 sum of the money placed in other organistion in the hope of getting
more money in the form of returns.
 ex: fixed deposit (more than 1 year)
 ASSETS

CURRENT ASSETS

Assets that is either cash or

those that can be converted
into cash within one year.

for ex: Inventory or

stock, acc receivable or
debtors, cash at bank or
cash in hand.
 OWNER’S EQUITY

 Represents owner-supplied fund for the business for the

acquisition of the assets for the business
 Financial obligation of the business to the owner.
Profit will increase the capital of the business at it will increase
the owner’s equity of the business
Drawing and the losses will reduce the capital of the business and
it will decrease the owners equity of the business.
All the personal uses of the assets from owner we call as a
drawing

Owner’s Equity = Capital +/(-) Profit (losses) - Drawing

 LIABILITIES

NON- CURRENT LIABILITIES

Amounts owed by the business that are not repaid within one year
For ex: long term loan, Mortgage on Premise and Debenture

CURRENT LIABLITIES
 Amounts owing by the business that are to be paid within one year
 Ex: Short term loan, Bank overdraft, creditor or acc payable
 THE ACCOUNTING EQUATION

Assets = Equities

Assets = Capital + Liabilities

A = C + L

C = A - L

L = A - C
 THE STATEMENT OF FINANCIAL POSITION AND
THE EFFECTS OF BUSINESS TRANSACTION

The accounting equation A= C+ L is expressed in the

financial statement known as the statement of financial
position
 A statement of financial position is an accounting
report that shows all assets, liabilities and owner’s equity
at a particular point of time.

Note: Refer to example 2.4 pages 14

 EFFECTS OF TRANSACTIONS ON THE
ACCOUNTING EQUATION

 Every transaction will have double effects on the accounting

equation.

The effect might be:

 Increase or decrease in assets,
 Increase or decrease in liabilities
Increase or decrease in capital

Note: please refer to example 2.5 pages 16

 REVENUES

 The gross increase in owner’s equity from business activities

entered into the purpose of earning income.

Trading business main income comes from sale of goods

Service business main income is from the performance of service

For ex: Sales of goods or service, commission received and

interest received
 EXPENSES

The costs of assets consumed or service used in the process of

earning revenue.

A business must incur expenses items which are necessary for

the continuing operation of the business, but for which no long
term benefit will be obtained.

Ex: purchase of goods, salary, interest expenses, rent expenses

and discount allowed.
 STATEMENT OF PROFIT OR LOSS
PRESENTATION

oWill show the trading results of a business

oThe purpose is to show either the gross profit or loss and the net
profit or loss.

oCan be presented in the horizontal format or vertical format just

like the statement of the financial position

Note: refer to example 2.5 page 18 example of the horizontal format

 RELATIONSHIP OF PROFIT TO THE
ACCOUNTING EQUATION

Profit is the difference between revenues and expenses.

Profit belongs to the owner and should be added to the capital of
the business.
Basic accounting equation A = C + L can be further expended as
follows:
A =C + P + L
If  profit (P) = Revenues (R) - Expenses (E)

Thus, A =C + R-E + L

The expended accounting equation:

Assets + Expenses = Capital + Revenues + Liabilities
 EFFECTS OF TRANSACTIONS ON THE
EXPENDED ACCOUNTING EQUATION
Transactions involving the
expenses and the revenues affect
the expended accounting equation.

There will be either an increase

or decrease in assets, expenses,
capital, revenues or liabilities,

Note: refer to example 2.7 page 19