Topic 2

Accounting Equation
and
The Statement of Financial Position
Chapter Learning Outcomes
After you have been guided through the chapter, you
should be able to:
Differentiate the components of the accounting
equation.
Explain the nature of assets, liabilities, owners equity,
expenses and revenues.
Classify business transactions according to assets,
liabilities and equities as presented in the statement of
financial position
Analyse the effect of business transactions on
accounting equation and statement of financial
position.



Business Financial Statements
Company Act 1965 requires all companies to prepare
and issue annual financial statement
MFRS101 (MASB1): Presentation of Financial
Statements
provides guidelines on how to prepare financial
statements
Company financial statement should consist of:
Statement of Financial Position
Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flow; and
Notes to account and accounting policies
Statement of Financial Position
Statement of Financial Position is a
statement listing what is owned by a
business (assets) and.
a list of those who have claims over those
assets (liabilities and owners equity).
It shows the financial position of a
business at a particular date
Accounting Equation
(as in the statement of financial position)

Assets
Liabilities

Owners
equity
Resources owned
or controlled by a
business to provide
current and future
economic benefits
Amount owed by a
business to the
external parties
Owners interest or
claims against the
net assets of a
business
Classification of Items in Statement of
Financial Position

Assets
Non-current Assets
Bought or build for long-term use.
Used in business operations and to generate revenue.
No intention of immediate resale in ordinary course of the
business
Tangible or intangible
Examples: plant and machinery, land and buildings,
office equipment, motor vehicles, trade marks, long-term
investment etc.
Current Assets
Cash or assets which are expected to be converted into
cash within a short period (a year)
Examples : Stocks, debtors, cash and bank balances,
short term investment etc.
Liabilities
Current Liabilities
debts due for payment within one year
creditors, accrued expenses, overdrafts
etc.
Non-current Liabilities
Debts due for payment over more than one
year
Long-term loan
Debentures
Bonds

Classification of Items in Statement of
Financial Position

Equity

Investment by Owners
Initial investment
additional investment

Earned Equity
Profit retained in the business


Classification of Items in Statement of
Financial Position

Statement of Financial Poitiion
Format


Assets
Non-current Assets
Current Assets

Equity
Capital
Profit

Liabilities
Current Liabilities
Non-current Liabilities

Name of Business
Statement of Financial Position
As at .
Horizontal Format
Non-current Assets xxx
Current Assets xx
Less : Current Liabilities x
Working Capital xx

Total Net Assets xxx

Financed by:
Capital xxx
Profit xxx
Non-current Liabilities xxx
Total xxx
Vertical Format
Name of Business
Statement of Financial Position
As at ..
Statement of Financial Poitiion
Format

Effects of Business Transactions
on Accounting Equation
Every economic events in a business that have been identified to be
recorded will affect the accounting equation in the balance sheet.
It will affect the accounting equation in such a way that:

Assets Liabilities Equity
Increase/Decrease Increase/Decrease
Increase/Decrease Increase/Decrease
One asset increase, one
asset decrease
One liability increase,
one liability decrease
One equity increase,
one equity decrease
Effects of Business Transactions
on Accounting Equation
On 1
st
January 2014, Mr Ong started his business, named Quickpower
Trading, which deals in electrical goods. He invested RM50,000 cash in the
business.
On 2
nd
January 2014, the business open a current account with a bank and
deposited RM45,000 of the cash into the bank account.
On 3
rd
January 2014, the business borrows RM30,000 from SME Bank,
which is to be repaid in three years. The loan has been deposited directly
into the business bank account.
On 6h January 2014, the business acquired fixtures and fittings worth
RM10,000, paid by cheque.
On 9
th
January 2014, the business purchased electrical goods worth
RM18,000 from a supplier on credit.
On 11
th
January 2014, the business sales electrical goods of RM3,000 on
credit to a customer. Cost of the electrical goods being sold is RM2,000.
On 12
th
January 2014, the business paid the supplier RM9,000 by cheque
On 15
th
January 2014, the business paid rental of RM2,000 by cash.