PRINCIPLES OF ACCOUNTING

(DAC1013)

Chapter 3 : Business Transaction Recording

Process
(3rd week)
Topic Outlines
3.1 Accounting Equation
3.1.1 Assets
3.1.2 Capital
3.1.3.Liabilities
3.2 Effect on Accounting Equation
3.3 Expansion of Accounting Equation
3.4 The Five(5) Main Classes of Accounts
- Assets
- Capital Has been explained in 3.1
- Liabilities
3.4.1 Revenues
3.4.2.Expenses
3.5 Double-Entry System for Statement of Financial Position
items
3.6 Double-Entry System for Statement of Comprehensive
Income items
3.7 Summary of Debit and Credit
3-1: Accounting Equation

ASSET = CAPITAL + LIABILITY

3-1: Accounting Equation (exercise)

• Actually the equation started as ASSET = CAPITAL

where owner contribute his own resources to run
the business.
• As the business grow, the owner requires more
capital but his own resources may not be enough
and he has to borrow.
• When he borrows, the equation would then become
ASSET = CAPITAL + LIABILITY
Exercise 1

Try to answer the question below..

Assets Capital Liability

RM15, 000 RM 7,800 ?
? RM 2, 403 RM 10,670
RM 23, 433 ? RM 13,689
3-1-1: Assets

• The resources that owned by a business and

has ‘value’.
• They are used to run business operation.
• Can be divided into two (2) major group:
Non-Current Assets /
Current Assets
Fixed Assets
• Used for long-term. • Resources that have a
• Not for sale but to run short life.
business. • Have high liquidity (can be
• Categorized into tangible, easily converted into
intangible and investment. cash)
• For eg: Buildings, Motor • For eg: Cash in hand,
Vehicle, Trademark, Fixed cash in bank, stock,
Deposit. debtors.
3-1-2: Capital/Owner’s Equity

• Owner’s own resources or personal assets

contributed to the business.
3-1-3: Liabilities

• Amount owed by the business to other party.

• Can be divided into two (2) major group:

Non-Current Current
Liabilities Liabilities
●
Requires owner to settle the ●
Requires owner to settle the
amount owed in long-term period.
●
For eg: Loan from banks,
amount owed within a year.
Mortgage loan.
●
For eg: Creditors
Exercise 2

• For each of the items below, tick () into the right class of account. For eg...

ASSETS LIABILITIES
Items
Non Current Non Current
Current Current
Cash 
Loan from Bank
Office Equipment
Creditor
Motor Van
Bank Overdraft
Goodwill
Bank

• Answer Q1, Q2 and Q3 in page 43 of the thick manual..

3-2: Effect on Accounting Equation

In business transactions..

• ASSET can meet ASSET,

• ASSET can meet CAPITAL,

• ASSET can meet LIABILITY.

3-2: Effect on Accounting Equation (cont’d)

• When Asset meet Asset, their arrows must be the

opposite.
ASSET 
ASSET 

• When Asset meet Capital or Liability, their arrows

must be similar.
ASSET  = CAPITAL  + LIABILITY 
ASSET  = CAPITAL  + LIABILITY 
 Example

BUSINESS TRANSACTIONS ASSETS CAPITAL LIABILITIES

1. Bought office equipment on 

credit 

2. Debtors paid amount owed by 

cheque. 

• Answer Q4 in page 44 of the thick manual..

3-3: Expansion of Accounting Equation

ASSET = CAPITAL + LIABILITY

(EXPAND...)

ASSET = *(OPENING STOCK +

NET PROFIT – CLOSING STOCK)
+ LIABILITY
* Look at Statement of Financial Position/Balance Sheet)
3-3: Expansion Accounting Equation (cont’d)

(EXPAND MORE...)

ASSET = *(OPENING STOCK +

^(REVENUES –EXPENSES) –
CLOSING STOCK)+ LIABILITY

* Look at Statement of Financial Position/Balance Sheet

^ Look at Statement of Comprehensive Income/Income Statement
3-4: The Five (5) Main Classes of Accounts

• Therefore, from the expanded accounting equation, there are five (5) main
classes of accounts:

Liabilitie
Assets s

Expense
Capital s
3-4-1: Revenues

• Also known as ‘income’.

• Can be business and non-business revenues.
• Example of business revenues is ‘sales’ while
non-business revenues is ‘dividend’.
• Following accrual concept, revenue is
recognized in full in the accounting period when
it is duly received, not when the cash is
received.
3-4-2: Expenses

• Cost involved to generate revenues in business.

• Can be business and non-business expenses.
• Example of business expenses are ‘salaries’
‘utilities’ and ‘rent’ while non-business expenses
are ‘loss on disposal’ and ‘loss on stolen goods’.
• Following accrual concept, expenses is
recognized in full in the accounting period when
it is incurred, not when the cash is paid.
3-5: Double-Entry System (for Statement of
Financial Position items)

• From the accounting equation, ‘debit’ (Dr.) if..

Asset  (increase)
Capital  (decrease)
Liabilities  (decrease)

• From the accounting equation, ‘credit’ (Cr.) if..

Asset  (decrease)
Capital  (increase)
Liabilities  (increase)
3-6: Double-Entry System (for Statement of
Comprehensive Income items)

In business transactions,

Expenses = always Debit (Dr.) when incur,

Revenues = always Credit (Cr.) when recognized

3-7: Summary of Debit (Dr.) and Credit (Cr.)

Assets
Expenses
Capital Liabilities

Revenue
s

• DEBIT when  • CREDIT when 

• CREDIT when  • DEBIT when 
THE END