CHAPTER 2

ACCOUNTING EQUATION

Thus means that all financial information relating to the business is recorded and reported separately from the owner’s personal financial information. . the business is regarded as an entity or a unit by itself. It exists separately from its owners.The Entity Concept • Each business is a separate entity from its owner • For accounting purposes.

Example Hamidah (individual) Separate accounting entity (record of personal transaction) Hamidah (sole trader of book store) Separate accounting entity (record of transaction relating business transaction) .

.Accounting equation • Accounting equation is an equality that must be prepared at any point of time in accounting period. • Basic accounting equation: ASSET = EQUITIES The equation shows the resources owned by the business And the claims against these resources.

Plant and Machinery. cash in hand .Elements in the accounting equation • Assets – resources owned by the business Assets Fixed Assets Assets that have a useful life > 1 year Used in business operations to generate profit Example : Land and building. debtor. Vehicles Current Assets Assets that can be converted into Cash within 1 year Example : stock.

accrued expenses .Elements in the accounting equation • Liabilities – Amount owed by the business to external parties (creditors) Liabilities Long term liabilities Current liabilities Debts which are not expected to be paid within a year Example : Bank loans Debts which are expected to be Paid within a year Example : Creditors.

Elements in the accounting equation • Owner’ equity – the total of resources or funds provided for by its owner Owner’s equity Capital Drawing Revenue Expenses The amount of money Invested by the owner In the business Withdrawals of Assets by the owner Inflow of cash or Assets from the sales Of goods or services Cost of assets consumed or services rendered to earn revenue .

.THUS…. .

expenses .ACCOUNTING EQUATION Owner’s equity = capital – drawing + revenue .

The expanded accounting equation ASSETS = EQUITIES ASSETS = LIABILITY + OWNER’S EQUITY ASSETS = LIABILITY + CAPITAL – DRAWING + REVENUE .EXPENSES ASSETS = LIABILITY + CAPITAL – DRAWING + NET PROFIT OR ASSETS + EXPENSES + DRAWING = LIABILITY + CAPITAL + REVENUE LCR (Credit balance in nature) AED (Debit balance in nature) (DOUBLE ENTRY SYSTEM) .

• INCREASES (+) TRANSACTIONS THAT INCREASE OR DECREASE OWNER’S EQUITY DECREASES (-) Owner’s investment in the business Owner’s withdrawal from the business OWNER”S EQUITY Revenue received Expenses incurred .

Drawings and Expenses – the entry will be debited Decreases in Assets. Drawings and Expenses – the entry will be credited .The Double Entry System Increases in Assets.

The Double Entry System Increases in Liabilities. capital and Revenue – the entry will be debited . capital and Revenue – the entry will be credited Decreases in Liabilities.

000 RM 20.• Fatin starts business with RM 30.000 RM 30.000 cash from personal savings and RM 20.000 cash from a bank loan • The business OWNS the following: • Asset • CASH • The business OWES the following: • Owner’s equity • CAPITAL • Liabilities • LOAN FROM BANK TOTAL EXAMPLE RM 50.000 .000 RM 50.

000 OWNER’S EQUITY RM 30.000 LIABILITIES RM 20.000 = OWNER”S EQUITY Capital RM 30.000 OR ASSETS RM 50.EXAMPLE ( From previous information) • Derive the fundamental accounting equation ASSET Cash RM 50.000 + LIABILITIES Loan RM 20.000 .

Transactions-on credit terms • Owner of the business Sales goods or services to Buyer Becomes our DEBTOR Purchase goods or services from Seller Becomes our CREDITOR .