CHAPTER 3:

ACCOUNTING EQUATIN
& CLASSIFICATION
ACC117: INTRODUCTION TO
FINANCIAL ACCOUNTING & REPORTING
Topic Coverage
• Balance sheet (Statement of Financial Position)
format and the classification of items in it.
• Purpose of SOFP.
• Accounting equation.
• Effects of transactions on the accounting
equation.
• By the end of this topic,
students should be able to :
• identify the components
in the balance sheet
• Relates it with the
accounting equation
Balance sheet format and the
classification of items in it.
Statement of Financial Position
(Balance Sheet)
• Represents the financial position of a business at one point of
time, showing the assets, liabilities and owner’s equity
• Total assets will be equal to the total liabilities and owner’s
equity:

A (Asset) = L (Liability) + OE
(Owner Equity)
Presentation of Statement of Financial
Position (SOFP) (Vertical Form)
Chocó Puff Trading
Statement of Financial Position as at 31 December 2010
RM RM
Non-current Assets
Land and building 250,000
Machinery 90,000 340,000

Current Assets
Inventory 16,000
Trade receivables 15,000
Bank 9,000
Prepaid expenses 800 40,800
380,800
Financed by
Owner’s Equity
Capital 330,000

Non-Current Liabilities
Long-term loan 40,000

Current Liabilities
Trade payables 9.900
Accrued expenses 900 10,800
380,800
Items of SOFP (Balance Sheet)

Items of Balance Sheet

Owner’s
Asset Liability
Equity

Non-Current Current Non-Current Current

Asset Asset Liability Liability
Asset
• Property owned by a business
• Non-current asset – asset that has a useful life of more than one year
and to be used to run the business in the long term for making profit
(Example: land and building, furniture and fittings, machinery, motor
vehicles)
• Current asset – Cash or asset that is expected to be converted into
cash within a year (Example: inventory, trade receivables, bank,
prepaid expense, accrued income)
Liability
• Fund supplied by external parties to the business for the acquisition
of assets.
• Non-current liability – long-term financial obligation of a business
that is expected to be paid for more that one year (Example: long-
term loan, hire purchase creditor)
• Current liability – short-term financial obligation of a business that is
expected to be paid within one year (Example: trade payables, short-
term loan, bank overdraft, prepaid income and accrued expense)
Owner’s Equity
• Capital invested by the owner into the business, as it
is the amount owed by the business to the owner
• Profit – excess economic inflow created from the
business operation will be a part of the owner’s
equity if it is not being withdrawn by the owner
• Drawings – withdrawal made by the owner from the
business for his personal use
Purpose of Balance Sheet
• A balance sheet is a snapshot of the assets a company owns,
the debts it owes, and how much it is worth.
• It is one of the tools management, lenders and investors use to
assess a company's overall situation.
Accounting Equation
• Business transaction is an event that affects the financial position of a
business:
o Involves 2 or more parties (a seller and a buyer)
o Involves some exchange of goods and services
o Involves some payment in the form of cash or valuable things

• The accounting equation is the basis of the double entry system

A (Asset) = L (Liability) + OE (Owner’s Equity)

Effect of Business Transactions on the Accounting
Equation and Balance Sheet
• Transaction 1 – Introduction of Capital
o Rosevia commenced business on 1 Apr 2021 by
investing cash of RM50,000 in Mayflower Trading

DATE ASSETS = LIABILITIES + OWNER’S EQUITY

2021 Cash Capital

RM RM

1 Apr + 50,000 = + + 50,000

Asset increase

OE increase
• Transaction 2 – Transfer of Cash to a Bank
o On 2 Apr 2021, the business opens a current account with a bank
and deposits RM45,000 into the bank account

DATE ASSETS = LIABILITIES + OWNER’S EQUITY

2021 Cash Bank

RM RM
2 Apr -45,000 +45,000 =

Asset increase

Asset decrease
• Transaction 3 – Borrowing from Bank
o On 5 Apr 2021, the business borrows RM30,000 from a bank and it is
to be repaid at the end of 3 years. The loan is received in the form of
cheque

DATE ASSETS = LIABILITIES + OWNER’S EQUITY

2021 Bank Loan

RM RM

5 Apr + 30,000 = +30,000

Asset increase

Liability increase
• Transaction 4 – Purchase of Assets
o On 6 Apr 2021, Mayflower purchases furniture of RM10,000
by cheque

DATE ASSETS = LIABILITIES + OWNER’S EQUITY

2021 Bank Furniture

RM RM

6 Apr -10,000 +10,000 = +

Asset decrease

Asset increase
• Transaction 6 – Payment to Suppliers by Cheque
o On 19 Apr 2021, the business paid a cheque for RM9,000 to its suppliers

DATE ASSETS = LIABILITIES + OWNER’S EQUITY

2021 Bank Creditor

RM RM

19 Apr -9,000 = - 9,000

Asset decrease

Liability decrease
Statement of Profit
& Loss
 Trading Profit & Loss Presentation
Beckham Enterprise
Statement of Profit and Loss Accounts for the year ended 31st December 20xx
RM RM
Sales 100, 000
Cost of Goods Sold:
Opening stock 14, 000
Purchase 60, 000
74, 000
Less : Closing stock (14, 000) (60, 000)
Gross Profit 40, 000
Revenue :
Rent received 800
Commission received 500 1, 300
Expenses :
Telephone & electricity (200)
Salary (5, 000)
Stationary (100) (5, 300)
Net Profit 36, 000
Expanded Accounting Equation
• Profit(P) = Revenue(R) – Expenses(E)
• Profit is the differences between revenue & expenses
- the relationship of profit to the accounting equation is that profit
belongs to owner of the business, so it should be added to the capital
of the business.
• A = OE + P + L ,
A = OE + R – E + L, A + E = OE + R + L
Expanded Accounting Equation
Revenue Expenses

is the gross increase in owner’s are the cost of goods consumed or

equity resulting from business services used in the process of earning
activities entered into for the revenue.
purpose of earning income

i.e sales of goods, services, i.e purchased of goods, salary, interest

commission received interest expense, rent expense, discount
received etc. allowed etc.
Effect of transactions on the expanded
accounting equation
On 6th of May, the business paid
• Effect: insurance expense increase, Cash
their insurance by cash amount
RM200. decrease

On 7th of May , the business

• Effect: Bank increase and commission
received commission by cheque
amounting RM350 Received increase

On 8th of May, the business paid • Effect: Electricity bill increase, cash
electricity bill by cash RM100 decrease

On 9th of May, the business

received rent by cash RM400.
• Effect: rent received increase, cash increase.
Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities
May Cash Insurance
06 - 200 + 200

May Bank Commission

07 +350 + 350

May Cash Electricity

08 - 100 + 100

May Cash Rent

09 +400 + 400
Accounting for stock
Stock or • Held for sale in the ordinary
course of business in the
inventories process of production for such
are sale
• To be consumed in the
tangible production of goods or
assets: services for sale
 Movement of stock
1. Increase in Stock Effect of Accounts
transaction
In the book of a Purchase- goods bought by the Purchase Purchases
buyer business for the purpose of resale Expense A/c
increase
In the book of a Sales Return (Return Inward) – Sales Return
seller goods return by buyer revenue inward A/c
decrease
 Movement of stock

2. Decrease in Stock Effect of Accounts

transaction
In the book of a Sales – sale of goods with prime Sales revenue Sales A/c
seller intention of resale increase
In the book of a Purchase Return (Return outward) Purchase Return
buyer – goods return to supplier Expense outward
decrease A/c
 Purchase & Sales of Goods
Purchase and sales of goods can be divided into 2 categories:

Transactions Accounts Involved

a. Cash Purchase Cash Account & Purchase Account
b. Credit Purchase Creditors Account & Purchases Account
c. Cash Sales Cash Account & Sales Account
d. Credit Sales Debtors Account & Sales Account
Purchase & Sales of Goods
Sales Return or Return Purchase Return or Return
Inward Outward
• Goods purchased • Businesses returned the
previously may be goods to the supplier.
returned by the • Debit Note will be sent
buyer/customer to the supplier.
• Credit Note will be
sent to the buyer
Example: Purchase & Sales Return
On 10th of June, the business purchased
• Effect: (Creditor) Mosalah increase, purchases expense
goods on credit from Mosalah Trading
amount RM3,000. increase

On 11th of June, the owner took goods

worth RM100 for his own use
• Effect: Purchase expense decrease, and drawings increase

On 12th of June, the business sold goods on

credit to Messy amount RM 1,000
• Effect: Sales revenue increase, debtor increase

On 13th of June, the business returns goods

to Mosalah Trading amount RM200
• Effect: Purchase return increase, creditors decrease

On 14th of June, Goods return by Messy

amount RM100
• Effect: Sales return increase, debtor decrease.
Date (A) + (E) = (OE) + (R) + (L)

Assets Expenses Owner’s Equity Revenue Liabilities

June Purchases Creditor
10 +3,000 +3,000

June Purchases Drawings

11 - 100 +100**

June Debtor Sales

12 + 1,000 +1, 000

** drawings increase will reduce OE

 Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities

June Purchases Creditor

13 return -200
+ 200

June Debtor Sales return

14 -100 +100
THE END OF
CHAPTER
 CHECK LIST
<50% >50%

1. SOFP FORMAT & COMPONENTS

2. SOP FORMAT & COMPONENT

3. ACCOUNTING CLASSIFICATION

4. ACCOUNTING EQUATION

5. ACCOUNTING EFFECTS