BHT 1333 HOSPITALITY ACCOUNTING 1 DEGREE (HOSPITALITY)

Lecture 1: The Accounting Equation Learning objectives:

Important Textbook Reading:
 Chapters 1, 2 & 4: Frank Wood & Alan Sangster “Business Accounting 1”
 Additional reference per approved unit plan
After you have studied this chapter, you should be able to:
 Explain the meaning of equity, assets and liabilities
 Understand the accounting equation
 Explain the meaning of profit, revenue and expenses
 Understand the profit determination equation

THE ACCOUNTING EQUATION

Assets

minus

Liabilities

Equity

Profit

Expenses

minus

Revenue

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 2 DEGREE (HOSPITALITY)

1. Accounting vs. Bookkeeping Source Documents

Accounting is a process of: Source documents are written documents that contain details of the
i) Collecting source documents as evidence of transactions and as the business transactions. They provide evidence that the transactions have
source for recording business transactions. taken place. They are used as the source information for recording in the
ii) Recording relevant details from source documents in the respective appropriate books of prime entry.
books of prime entry.
iii) Summarising from the books of prime entry and transferring Source Documents Explanation
(posting) these summaries to the respective ledgers. Invoice To inform customer the amount to be paid,
iv) Communicating the accounting information to users, by preparing amount of discount given, whether cash term or
the financial statements. credit term and interest charges for late
payment.
Bookkeeping is an initial part of the accounting process that emphasise
on – collecting and recording business transactions from the source Credit Note To deduct an amount overcharged in the
documents to the respective books of prime entry, using the double Invoice, e.g. returns of goods from customers.
entry system. Debit Note To add to the amount of Invoice for any
additional charges, e.g. transport fee, interest
2. The Accounting Cycle charges and any amount undercharged.

Cash bill This is the same as Invoice, but is used only

when transaction is on cash terms (by cash or
Source by cheque) customer only.
Documents The 7 Books of
Prime Entry Payment voucher To record the payment by cash or cheque.
Closing entries
Official receipt To acknowledge money has been collected.
The 3 Ledgers Cheque counterfoil To record the amount paid on a particular
The
Accounting numbered cheque (the counterfoil is the portion
Cycle left after tearing out the particular cheque).
Adjusted Trial
Balance & Financial Memo A written message/note from the
Statements Draft Trial Balance management/boss to inform about decision on
& Financial certain transactions.
Adjustments Statements

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BHT 1333 HOSPITALITY ACCOUNTING 3 DEGREE (HOSPITALITY)

The 7 Books of Prime Entry The 3 Ledgers

i) Record the daily business transactions in chronological order based The 3 Ledgers are the final sets of accounts containing the summarised
on the source documents. accounting information that have been transferred/posted from the
ii) The purpose is to record similar transactions into one book and books of prime entry, using double entry system.
reduce the detail in the ledgers, as only the total amounts are posted
to ledgers. The 3 Ledgers Explanation
General Ledger This is the main ledger that contains all the
The 7 Books of Explanation accounts (the complete double entries) that
Prime Entry summarise all the business transactions that
Cash Book Cash / cheque transactions occurred. Therefore, the Trial Balance and
Financial Statements are prepared using the
Petty Cash Book Small amounts of daily payments, such as General Ledger.
postage and stamps, stationery, wages for
cleaning and minor repairs, Subsidiary ledgers:
general/miscellaneous expenses, etc. Sales Ledger Contains all the individual trade receivables
accounts (customers on credit terms). It forms
Specialised journals: only half of the double entry bookkeeping. An
Sales Journal Sales of goods on credit terms account inside the General Ledger controls this
entire ledger.
Purchases Journal Purchases of goods on credit terms
Purchases Ledger Contains all the individual trade payables
Sales Returns / Returns of goods that were sold on credit terms accounts (suppliers on credit terms). It forms
Returns Inwards (defective/damaged goods) only half of the double entry bookkeeping. An
account inside the General Leder controls this
Purchase Returns / Returns of goods that were purchased on credit entire ledger.
Returns Outwards terms (defective/damaged goods)

General Journal All other business transactions (that are not

involving cash/ cheque payments, sales and
purchases of goods)

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 4 DEGREE (HOSPITALITY)

3. Users of accounting information 4. Types of business activities

Below is the list of the main users of accounting information (i.e. i) Retail/trading – buy goods and re-sell at a higher price to customers,
financial statements) and the reasons for their interest and usage: e.g. supermarkets and grocery shops.

i) Management – decision making, planning, control and co-
ordination of business activities
ii) Shareholders/investors – company’s future plans and dividends
iii) Customers – long-term supply of goods to ensure supply is secured
iv) Suppliers – ability of the company to pay its debts within the credit
period given
v) Finance providers (i.e. banks and financial institutions who lend
money to a business) – ensure its financial stability and ability to
repay the amount borrowed (principal sum) and pay interests
ii) Wholesale - buy goods in bulk (large quantities) from
manufacturers/importers and re-sell to retailers in smaller quantities,
e.g. distributors.
iii) Manufacturing – manufacture products from raw materials/
components to convert into finished goods and sell to wholesaler or
retailers.
iv) Service industry – provide services to clients (not selling goods),
e.g. accounting firms and law firms.

vi) Employees – payment of salary, other benefits, career growth,

secured employment

vii) Government (government agencies) – assess tax payable, compile

statistical data for economic analysis

viii) Public (the local community) – protection of the environment, fair

trade, responsible business, community service, provision of job
opportunities, researchers, etc.

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 5 DEGREE (HOSPITALITY)

5. Modes of business ownership

i) Sole proprietorship – the business is owned by only one individual;

the business is run (managed) by the sole proprietor (assisted by
family members and/or staff); the sole proprietor and the business
are considered as one entity, therefore, if the business fails, the sole
proprietor is required to personally settle all the debts/loans on
behalf of the business.

ii) Partnership – the business is owned by at least 2 individuals but not

more than 20 individuals; the business is jointly run (managed) by
the partners (assisted by staff); the partners and the business are
considered as one entity, therefore, the partners are required to
comply with relevant Partnership Act to jointly settle all the
debts/loans, if the partnership business fails.

iii) Company – the business is owned by at least 2 persons to any

number and it can be either a private limited company (Sdn. Bhd.)
or public limited company (Berhad); the business is professionally
run (managed) by directors; under the law, the shareholders are
separate entities from the company, therefore, shareholders are not
required under the law to settle the business debts/loans, if the
business fails.

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 6 DEGREE (HOSPITALITY)

Business Owner
$$ Cash $$ increases
Other resources increase
Assets

minus

Capital increases
$$ Cash $$
Other resources
Equity

Capital

minus

Assets = Equity

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 7 DEGREE (HOSPITALITY)

6. Equity

Equity represents the resources that are provided by the owner into the There are 2 categories of assets:
business, for use in the business. i) Non-current assets – assets acquired for continuing use over a long
period of time (more than 1 year), e.g. building, machinery, fixture
The business receives these resources, with the understanding that they and fittings, furniture, office equipment, motor vehicles, etc.
actually belong to the owner. However, if the owner makes ii) Current assets – assets owned by the business and likely to change
withdrawals (also called as “Drawings”), equity will reduce. When the in the short term (within a year), e.g. inventories (oil, spare parts,
business makes a profit, equity will increase, and vice-versa. etc), receivables (trade and others), deposits, bank and cash
balances.
Example:
Mr. Lee decided to start a business in repairing and servicing vehicles, Example:
trading under the name of “Lee Workshop”. His father gave him The following are some example of the assets that Lee Workshop needs
RM300,000 cash as injection of capital into the business. Mr. Lee in order to run the business:
brought a computer (valued at RM3,000) and some furniture (valued at Types of assets What are assets used for?
RM1,000) from his home to be used in his business. Due to urgent Cash  To purchase tools and equipment for
needs, Mr. Lee withdrew RM2,000 cash for personal use. <current assets> repairing vehicles
 To purchase spare parts for repairing
Business Owner customers’ vehicles
Lee Workshop Mr. Lee  To pay rental for the workshop
 To pay salaries for the workers
Receive cash RM300,000 Injects capital RM300,000
Computer  To keep record of all customers’
Receive computer RM3,000 Injects capital RM3,000
Receive furniture RM1,000 Injects capital RM1,000 <non-current assets> information
 To issue invoices to customers
Less: Pay cash RM2,000 Less: Withdraw cash RM2,000
 To keep record of all business transactions
Furniture  To be used in the office
Total assets = RM302,000 Total capital = RM302,000
<non-current assets>  To be used for entertaining customers in the
workshop
7. Assets Tools and equipment  To be used for repairing vehicles
<non-current assets>
Assets are the resources that are inside the business, to be used for Inventories  Spare parts, oils etc for repairing or
running the business activities. It is an advantage if the business has <current assets> servicing customers’ vehicles
more assets because it will have the ability to run more business Receivables  Customers who have not yet paid (due to
activities. Therefore, the more assets a business has, the bigger and <current assets> credit term of say, 15 days or 30 days)
stronger is the business, compared to competitors who have fewer
assets.
Prepared by: NG KEAN WAI
BHT 1333 HOSPITALITY ACCOUNTING 8 DEGREE (HOSPITALITY)

Business Bank / Suppliers

$$ Cash $$ increases
Other resources increase
Assets

minus
Amount owing increases

Liabilities
$$ Cash $$
Other resources
Amount owing

minus

Assets = Liabilities

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 9 DEGREE (HOSPITALITY)

8. Liabilities

Liabilities represent the supply of resources by outsiders: Liabilities will be reduced when the business repays the loan or settles
i) Bank – gives loan (cash) to the business, if there is insufficient the amount owing to suppliers (payables).
capital from the owner. The business must repay the loan to the
Bank, according to the terms and conditions of the loan agreement. Example:
Therefore, this is an amount owing to the Bank. Lee Workshop settles the following amounts owing to suppliers:
ii) Suppliers – supply other resources for use in the business, such as,
the tools and equipment, spare parts for repairing customers’ Business Outsiders
vehicles, etc. The business must pay these suppliers for the Lee Workshop Payables
resources supplied, according to the payment terms (e.g. credit term
of 30 days or 60 days, etc.). Therefore, this is an amount owing to Pay RM500 for tools Receive cash RM500
the suppliers, also called as payables (or trade payables). Pay RM90,000 for equipment Receive cash RM90,000
Pay RM5,000 for spart parts Receive cash RM5,000
There are 2 categories of liabilities:
i) Non-current liabilities - amount payable for more than 1 year, e.g.
mortgage loan, bank loan, etc. Assets reduce by RM95,500 Liabilities reduce by RM95,500
ii) Current liabilities – amount payable within one year, e.g. short-term
loan, bank overdraft, payables (trade or others), etc. It is a disadvantage if the business has a lot of liabilities because it will
be burdened with the pressure to find the assets (resources) to settle
Example: them.
The following are some example of the resources that Lee Workshop
needs to obtain from outsiders in order to run the business: 9. The accounting equation

Business Outsiders ASSETS = LIABILITIES + EQUITY .

Lee Workshop
Receive cash RM50,000
Receive tools RM500
Receive equipment RM90,000
Receive spart parts RM5,000
Bank / Suppliers
All the assets (resources) available in the business are either provided by
Loan RM50,000
Supply tools RM500 the owner (equity) or supplied by outsiders (liabilities).
Supply equipment RM90,000
Supply spart parts RM5,000

Total assets = RM145,500 Total liabilities = RM145,500

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 10 DEGREE (HOSPITALITY)

Illustration 1:

Elaine Tan started business on 1 May 2010, operating a shop “Sweet Bun” Prepare a listing based on the Accounting Equation as at 31 May 2010.
selling various types of buns, with her own cash of RM30,000 and a 2-year Types Amount (RM)
loan from RHB Bank of RM20,000. She opened a current account with Assets Cash 10,000
RHB Bank and deposited RM40,000 into it. During the month, she paid the Bank 17,000
following by cheques: Fixture and fittings 8,000
Furniture 7,000
 Fixture and fittings RM8,000 Office equipment 5,000
 Furniture RM7,000 Inventories 3,000
 Office equipment RM5,000 50,000
 Inventories RM3,000
Liabilities Loan 20,000
Calculate the cash and bank balances at the end of May 2010.
Equity Capital 30,000
Increase Decrease Balance
50,000
(RM) (RM) (RM)
Cash:
 Capital injection by Elaine Tan 30,000
 Loan from RHB Bank 20,000
 Deposited into the bank account (40,000) 10,000
Bank account:
 Deposited into the bank account 40,000
 Paid for fixture & fittings (8,000)
 Paid for furniture (7,000)
 Paid for office equipment (5,000)
 Paid for inventories (3,000) 17,000

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 11 DEGREE (HOSPITALITY)

Business Customers
$$ Cash $$ increases
minus
Assets Inventories decrease

minus

Profit increases equity

$$ Cash $$
Equity
Payment

Revenue
Revenue minus cost of inventories sold Profit Sale of inventories

Cost of inventories sold Expenses

minus

$$ Cash $$ received Revenue

Assets (increase) = Equity (increase)

Profit = Revenue - Expenses

Prepared by: NG KEAN WAI
BHT 1333 HOSPITALITY ACCOUNTING 12 DEGREE (HOSPITALITY)

10. Profit 11. Revenue

Business makes a profit when the selling price charged to the customer Revenue is the income earned by the business from undertaking
is higher than the cost of the inventories. business activities, which results in an increase of assets, such as cash.
Types of revenue are:
As the owner of the business (who injected capital into the business), all i) Sales – income earned from selling goods and services. Goods refer
profits made by the business belong to the owner. Therefore, all profits to inventories that the business purchased for the purpose of selling
made will increase equity. Conversely, when the business makes a loss, at a higher price to customers, e.g. selling spare parts to customers.
it will reduce equity. Services refer to the value of work done by the business that
customers will pay a price, e.g. repairing vehicles.
Example: ii) Other income – other sources of income earned that are not directly
Lee Workshop sells 10 boxes of spare parts to a walk-in customer at a related to the main business activities, e.g. rent received, discount
total selling price of RM500. Lee Workshop had purchased these spare received, interest received, commission received, etc.
parts from the supplier at a price of RM20 per box (total = RM200):
12. Expenses
Business Outsiders
Lee Workshop Customers Expenses are all the resources that have been used up to enable the sale
of goods and services to customers. Types of expenses are:
Sell inventories costing RM200 Inventories selling price RM500 i) Cost of goods sold – cost of inventories sold to customers. These
Receive cash RM500 Pay RM500 inventories had earlier been purchased from suppliers.
ii) Expenses – other forms of resources that had to be spent in order to
Assets increase by RM300 Amount owing = Nil run the business, e.g. salaries to workers, rental, electricity,
telephone, water, insurance, etc.

Cost of inventories RM200 13. The Profit Determination Equation

Selling price RM500
PROFIT = REVENUE - EXPENSES .
Profit increase by RM300
Profit is the net amount after adding up all the revenue and deducting all
the expenses. If expenses exceed revenue, then the business makes a
loss.

Prepared by: NG KEAN WAI

BHT 1333 HOSPITALITY ACCOUNTING 13 DEGREE (HOSPITALITY)

Illustration 2:

Continuing from Illustration 1 above, Elaine Tan’s “Sweet Bun” business Prepare a listing based on the Profit Determination Equation for the month
transactions during the month of June 2010 are as follows: of June 2010.
Types Amount (RM)
 Sales totalling RM20,000, all deposited into the bank account Revenue Sales 20,000
(inventories sold were costing RM7,000) Discount received 200
 Received a cheque RM200 being discount received from supplier 20,200
 Purchases of inventories by cheque totalling RM5,000
 Paid staff salaries by cash RM2,000 Cost of inventories sold 7,000
Expenses
 Paid shop rental by cheque RM3,000 Staff salaries 2,000
 Paid electricity by cash RM500 Shop rental 3,000
 Withdrew RM2,000 cash for personal use (drawings) Electricity 500
12,500
Calculate the cash, bank and inventories balances at the end of June 2010.
Increase Decrease Balance
(RM) (RM) (RM) Profit Revenue - Expenses 7,700
Cash:
 Balance from last month 10,000 Prepare a listing based on the Accounting Equation as at 30 June 2010.
 Paid staff salaries (2,000) Types Amount (RM)
 Paid electricity (500) Assets Cash 5,500
 Drawings (2,000) 5,500 Bank 29,200
Bank: Fixture and fittings 8,000
 Balance from last month 17,000 Furniture 7,000
 Sales 20,000 Office equipment 5,000
 Discount received 200 Inventories 1,000
 Paid for inventories (5,000) 55,700
 Paid shop rental (3,000) 29,200
Inventories: Liabilities Loan 20,000
 Balance from last month 3,000 Equity Capital 30,000
 Sales (7,000) Drawings (2,000)
 Purchases 5,000 1,000 Profit 7,700
55,700

Prepared by: NG KEAN WAI