C HAPTER 3:

BASIC OF ACCOUNTING
 FINANCING THE BUSINESS C
HAPTER 3:

Learning Outcomes:

At the end of this lesson, students should

be able to:

Produce the financial statements such as:

a. profit and loss account
b. balance sheet
c. cash flow statement
 ELEMENTS OF ACCOUNTING

Assets Liability

Owner’s
Equity

Expenses Revenues
 ELEMENTS OF ACCOUNTING
Assets are economic resources
owned by the business. It can be
divided into two main groups,
Assets Liability
namely fixed asset and current asset.

Fixed Assets
-assets used to run the business. It is
Owner’s acquired or purchased not for resale. Its
Equity life use is more than one year. These
assets have physical existence, such as
land, building, office equipment,
machinery and motor vehicle.
Expenses Revenues
Current Asset
-these assets are either cash-in-hand,
deposits in the bank or the items that are
expected to be converted into cash
within one year, e.g. stocks and debtor
(i.e. outstanding payments due to
customers or debtors)
 ELEMENTS OF ACCOUNTING
Liabilities are amounts owed by the business
to external parties, such as banks, creditors
or other financial institutions.
Assets Liability
The obligations of a business to pay its
creditors

Owner’s
Long-term Liabilities
Equity
-refer to amount owing by the business on
a long-term basis, which is more than one
year. The settlement of debt is not
expected to be made within one year,
Expenses Revenues such as loan and mortgage.

Current Liabilities
-amount owing by the business for a
short-term basis and are expected to be
repaid within one year, such as bank
overdraft and creditors.
 ELEMENTS OF ACCOUNTING
Owner’s equity is the residual
amount after deducting all business
assets with all business liabilities. It
Assets Liability
represents the owner’s claim against
net assets of a business.

Owner’s Capital
Equity -capital refers to resources supplied by
the owner to the business, such as
money, motor vehicle and building.

Expenses Revenues Drawings

-drawings can be defined as any business
resource that is taken out by the owner
from the business for personal purposes or
use. It can be in monetary or non-
monetary form, e.g. the goods that he is
selling to his customers.
 ELEMENTS OF ACCOUNTING
Revenues are related to the income
earned by a business, which results in
Assets Liability an inflow of assets such as money or
debtors. In general, the business
gains revenues mainly from providing
goods or services to its customers.
Owner’s
Equity Commission earned
Interest received
Rent received
Discount received
Expenses Revenues

Revenues
 ELEMENTS OF ACCOUNTING
Expenses are cost incurred to
operate a business, e.g.
administrative expenses, finance
Assets Liability
expenses and selling and distribution
expenses.

Salaries and wages

Owner’s
Water and electricity
Equity
Rates and rent
Stationary
Interest on loan
Carriage outwards
Expenses Revenues Insurance

Expenses
ASSET LIABILITIES OWNER EQUITY REVENUE EXPENSES

Stationaries 10% Loan-MBF :3 Capital Commission Carriage Outwards

Earned
Motor Expenses Account Payable Drawings Gross Profit Sundry Expenses

Machinery Sundry Creditors Revenue Tel & Electricity

Cash at bank Discount Allowed Rent Expense

Commission Rent Received Insurance

Received
Motor Vehicles Carriage Inwards Expenses

Stock Interest On Loan Wages & Salaries

Bad Debts Discount Received

Fixtures & Fitting

Account
Receivable
Cash in Hand
Plant & Machinery
 ELEMENTS OF ACCOUNTING
Owner’s
NO. Particulars Asset Liabilities Expenses Revenues
Equity
1. Bonus for workers
2. Commission
payment EARNED
RECEIVED
3. Commission
received
4. Drawings
5. Hire purchase loan
6. Inventory
7. Bank loan
8. Land & building
9. General expenses
10. EPF & SOCSO
11. Dividend
12. Salaries and wages
13. Income tax
14. Capital
15. Lorry
16. Short term loan
17. Cash at bank
18. Cash in hand
19. Indah Water bills
20. Carriage outwards
 ACCOUNTING EQUATION
Businesses need resources to ensure that their operations run
smoothly. Initially, the resources will be supplied by the
entrepreneurs. This can be expressed in the accounting equation
depicted below:

Assets = Capital (Resources supplied by the entrepreneur)

Businessman

Capital
 ACCOUNTING EQUATION
However, if the entrepreneur is unable to supply sufficient capital to
business, he/she will get additional capital from outsiders, such as
banks, relatives, friends or other financial institutions. Then, the
accounting equation will be expressed as shown below:

Assets = Capital + Liabilities (Resources supplied by outsiders)

Businessman
Capital Liabilities

SME
Bank
 ACCOUNTING EQUATION
In the following period, since the business has started its operation
and made a profit, the accounting equation will be expanded as
depicted below, showing the financial position of the business:

Assets = Owner’s equity + Liabilities

Businessman
Capital Liabilities
Profit

SME
Bank
 The concept……

Fixed
Asset
Current

Balance
Equity sheet
Financial Terms
Long-Term
Liability
Current

Expenses
Profit &
Loss
Revenue
The concept……

Trading Account
Gross profit / loss

Profit Loss Account

Net profit/loss

Balance Sheet Account

Cash Flow Account

 The concept……

Trading Account
Gross profit / loss

Profit Loss Account

Net profit/loss

Balance Sheet Account

Cash Flow Account

 The concept……

Trading Account
Gross profit / loss

Profit Loss Account

Net profit/loss

Balance Sheet Account

Assets = Liabilities + Equity
Cash Flow Account
 PROFIT AND LOSS ACCOUNT
Profit and loss account is prepared to calculate the net profit of a
business for a particular accounting period. The formula used to
determine net profit is as follows.

Net Profit = Gross Profit + Revenue - Expenses

 PROFIT AND LOSS ACCOUNT
Business Name
Profit & Loss Account for the year ended …
RM RM
Operating Expenses
Gross Loss b/f x Gross Profit b/f xx
Rent Expenses x
Wages & Salaries x Revenue
Telephone & Electricity x
Insurance x Discount Received x
Carriage outwards x Commission Received x
Motor Expenses x
Stationaries x
Discount Allowed x
Bad Debts x
Interest On Loan x

xx
Net Profit xx
xx xx

Net Profit = Gross Profit + Revenue - Expenses

 PROFIT AND LOSS ACCOUNT
The following accounts informations are obtained from
Salahuddeen Enterprise as at 31 December 2013.

Particulars RM

Rent expense /Belanja sewa 5,500

Wages and salaries / Upah dan gaji 4,000
Telephone and electricity / Telefon dan elektrik 600
Insurance / Insurans 900
Carriage outwards / Angkutan keluar 2,000
Motor expenses / Belanja kenderaan 700
Stationaries / Alat tulis 300
Discount allowed / Diskaun dibenarkan 700
Bad debts / Hutang lapuk 500
Interest on loan / Faedah pinjaman 300
Discount received / Diskaun diterima 600
Commission received / Komisyen diterima 400
Gross profit / Untung kasar 207,500
 PROFIT AND LOSS ACCOUNT
Salahuddeen Enterprise
Profit and Loss Account for the year ended 31 December 2012

RM RM
Operating expenses Gross Profit 207,500

Rent expense 5500 Revenue

Wages and salaries 4000 Discount received 600
Telephone and electricity 600 Commission received 400
Insurance 900
Carriage outwards 2000
Motor expenses 700
Stationaries 300
Discount allowed 700
Bad debts 500
Interest on loan 300
xxxxx 15500

208500-15500 = 193000
Net Profit xxxxx
208,500 208,500
 PROFIT AND LOSS ACCOUNT
Salahuddeen Enterprise
Profit and Loss Account for the year ended 31 December 2012

RM RM
Operating expenses Gross Profit 207,500

Rent expense 5500 Revenue

Wages and salaries 4000 Discount received 600
Telephone and electricity 600 Commission received 400
Insurance 900
Carriage outwards 2000
Motor expenses 700
Stationaries 300
Discount allowed 700
Bad debts 500
Interest on loan 300
15500

Net Profit 193,000

208,500 208,500
 REFERENCES
• http://wps.pearsoned.co.uk/ema_uk_he_black_introaccfin_1
/32/8245/2110777.cw/-/2110779/index.html

• http://www.thestudentroom.co.uk/wiki/Revision:A_Level_Acc
ounts_Module_1_-_Trading_and_profit_and_loss_accounts

• https://malaysia.answers.yahoo.com/question/index?qid=201
00125013511AA8nSvs