ACCOUNTING CLASSIFICATION

&
ACCOUNTING EQUATION
 LEARNING OUTCOMES

Students should be able to:

❑ Identify components in the SOFP (Assets, Owner’s Equity &
Liabilities) and relate with basic accounting equation
❑ Identify components in the SOPL (Revenues & Expenses)
❑ Identify the relationship between Profit and the accounting
equation
❑ Show the effect of transaction on the accounting equation
 CATEGORIES OF BUSINESS
TRANSACTIONS

❑ Assets
❑ Owner’s Equity
❑ Liabilities
❑ Revenues
❑ Expenses
 Assets
=
Properties owned by a business
ASSETS
 ASSETS

CURRENT ASSETS
Cash and those that can be converted
NON-CURRENT ASSETS into cash within 1 year
To be used on long-term basis (<12 months)
/ Useful life = >12 months E.g.: Inventories, accounts
receivables/debtors, cash at bank, cash
in hand

TANGIBLE NCA
INTANGIBLE NCA
Assets that have physical INVESTMENT
Assets that have no
substance Sum of money placed in other
physical substance
E.g.: Land, building, organisation to get returns
E.g.: Goodwill, trademarks,
equipment, motor E. G.: Fixed deposit, ASB
franchise, patent
vehicles, machinery
 Owner’s Equity
=
Fund supplied by the owner to the business
 Owner’s equity
✓ Capital : amounts contributed by the owner to the business (in
the form of cash or other assets)
✓ Profit = Increase the capital
✓ Losses = Reduce the capital
✓ Drawings : cash or goods taken by the owner for personal use.

Owner’s Equity = Capital +/(-) Profit/(Loss) - Drawings

 LIABILITIES
=
1. The obligations of an entity to other entities.
2. External parties’ claim to the business assets.
3. Amounts owed by a business to outside
parties.
LIABILITIES
 Current Liabilities
* Debts which are repayable within a
Non-Current Liabilities year
* Debts Repayable in more than a year ( ( < 12 months )
> 12 months) E.g.; Short term loan, Accounts
E.g.; Long term loan, Mortgage on payables/creditors, Bank overdraft
premises, Debentures
 WHAT IS
FINANCIAL STATEMENTS?

❑ Consist of SOFP & SOPL

❑ Structured reports of a business’s financial activities.
❑ Prepared on a regular basis-monthly/quarterly/yearly.
❑ Provide overall picture of a business’ “health” and “wealth”
 1.

Statement of
Financial Position
(SOFP)
* Shows the financial position of a
business at a particular point of time.

* Records Assets, Owner’s Equity &

Liabilities.
Elements of SOFP

1) ASSETS
2) LIABILITIES
3) OWNER’S EQUITY
 Revenues
=
Income generated by the business,
either from trading or service
businesses.
E.g.: Sales, commission received, interest
received
 REVENUES

SALES OF GOODS RENDERING OF OTHER REVENUES

E.g.: KFC - Sales of SERVICES • Rental income
fried chicken E.g.: Fees from • Interest income (cash deposit in
tuition centre a bank)
• Royalties (copyright)
• Dividend income (investment)
 Expenses
=
Cost incurred in the normal course of
business to generate revenues.
E.g.: Purchase of goods, salary, rental
expenses
 EXPENSES

COST OF SALES SELLING AND DISTRIBUTION

Purchases of goods (stocks) E.g. -Salesman’s salaries and
E.g. - Freight, insurance, import duty and commissions
transportation cost (carriage inwards)

ADMINISTRATIVE
E.g. - Electricity and water,
FINANCE COSTS
E.g. - Interest on loans
rental expense
 2.

Statement of
Profit or loss
(SOPL)
* Shows the financial performance
(Profit/Loss) of a business during a
period.

* Records Revenues & Expenses.

Elements of SOPL

1) REVENUES
2) EXPENSES
 Accounting equation
Basic Accounting Equation:

ASSETS = OWNER’S EQUITY + LIABILITIES

Extended Accounting Equation:

ASSETS + DRAWINGS + EXPENSES

=
CAPITAL + REVENUES + LIABILITIES
EFFECTS OF TRANSACTIONS ON THE ACCOUNTING
EQUATION

Every Transactions
=

DUAL EFFECTS 1) ↑/↓ Assets

2) ↑/↓ Liabilities
3) ↑/↓ Owner’s Equity
4) ↑/↓ Revenues
5) ↑/↓ Expenses
 Thanks!

Any questions?