TOPIC 3(i):

ACCOUNTING EQUATION AND

ACCOUNTING CLASSIFICATION
 Lesson Outcome
At the end of the lesson, students should be able
to:

1.Describe the basic accounting equation

2.Describe the expanded accounting equation
3.Identify the elements in the statement of financial
position (SOFP)
4.Relate the SOFP components to the accounting
equation
 Basic Accounting Equation
– Forms a basis of whole double entry bookkeeping
system

– The equality is always maintained. Any change in the

ringgit amount of the total assets is always
accompanied by an equal change in the ringgit amount
of the total liabilities and/or the owners’ equity
Basic Accounting Equation
ACCOUNTING EQUATION
RESOURCES
IN BUSINESS = CONTRIBUTED BY OWNER

RESOURCES FROM OWNER FROM OTHER

= +
IN BUSINESS PARTY

ASSETS = CAPITAL + LIABILITY

Exercise: Determine the missing figure
Expanded Accounting Equation

 As business begins, goods are purchased and subsequently

sold, expenses are incurred and revenues are earned.
 Profit belongs to the owner and increases owner’s equity.
 While losses will decrease the capital and subsequently
reduce the owner’s equity

ASSETS = CAPITAL + PROFIT/ - LOSS + LIABILITIES

OR
ASSETS = CAPITAL + REVENUE – EXPENSES + LIABILITIES
Expanded Accounting Equation
 At times, the owner will withdraw goods or cash from the business
for personal use.
 These withdrawals or drawings will reduce capital and therefore
reduce the owner’s equity

ASSETS = CAPITAL + REVENUE – EXPENSES – DRAWINGS +

LIABILITIES
OR
ASSETS + DRAWINGS + EXPENSES = CAPITAL + LIABILITIES +
REVENUE
ACCOUNTING EQUATION
RESOURCES
IN BUSINESS = CONTRIBUTED BY OWNER

RESOURCES FROM OWNER FROM OTHER

= +
IN BUSINESS PARTY

ASSETS = CAPITAL + LIABILITY

ASSETS = CAPITAL + PROFIT - LOSS + LIABILITY

ASSETS = CAPITAL + REVENUE - EXPENSE + LIABILITY

ASSETS = CAPITAL + REVENUE - EXPENSE - DRAWINGS + LIABILITY

ASSETS + DRAWINGS + EXPENSE = CAPITAL + LIABILITY + REVENUE

ACCOUNTING EQUATION

RESOURCES IN
= CONTRIBUTED BY OWNER
BUSINESS

RESOURCES IN FROM OTHER

= FROM OWNER +
BUSINESS PARTY

ASSETS = CAPITAL + LIABILITY

ASSETS = CAPITAL + PROFIT - LOSS + LIABILITY

ASSETS = CAPITAL + REVENUE - EXPENSE + LIABILITY

ASSETS = CAPITAL + REVENUE - EXPENSE - DRAWINGS + LIABILITY

ASSETS + DRAWINGS + EXPENSE = CAPITAL + LIABILITY + REVENUE

BASIC ACCOUNTING EQUATION EXPANDED ACCOUNTING EQUATION

 ACCOUNTING CLASSIFICATION
ASSETS
– Assets are properties owned by a business. There are
2 types of assets:
Assets

Non-Current Current
Assets Assets

Intangible
Tangible non-
non-current Investment
current assets
assets
NON-CURRENT ASSETS
– Assets acquired/bought not for resale but to be used in the
operations of the business with useful lives for more than one
year.
– Can be divided into 3 categories:
1) Tangible non-current Assets
- Assets that have physical existence.
- Example: Land, Building, Machinery, Office Equipment,
Motor Vehicle, Furniture & Fittings,etc
 NON-CURRENT ASSETS

2) Intangible Non-current Assets

- Assets with no physical existence.
- Example: Franchise, Goodwill,
trademark, copyright, Patent, etc.

3) Investment
- sum of money placed in other organizations in the hope of
getting more money in the form of returns.
- Example: investment, fixed deposit.
 CURRENT ASSETS
– Assets that can easily converted into cash within
one year.
– Example: *Cash in Hand
*Cash at Bank
*Debtors/Account Receivables
* Inventory/Stock
*Prepaid Expenses.
LIABILITIES
 Non current Liabilities
 Amount owed by the business that are to be paid more
than 1 year
 Long-term loans, Mortgages, Bonds, Debentures

 Current Liabilities
 Amount owed by the business that are to be paid within
1 year
 Creditors or Payables, Bank overdrafts, Short-term Loans
OWNER’S EQUITY

– Owner’s Equity is the residual interest in the

entity’s assets after deducting all its liabilities
– Represents owner-supplied funds to the business
for the acquisition of assets for the business.
– It is the financial obligation of the business to the
owner
Owners’ equity
– Any profit made by the business will increase the
capital (therefore increasing the owner’s equity)
– Whereas losses and drawings will reduce the
capital (therefore decreasing the owner’s equity)
– Drawings occur when the owner uses whatever
assets of the business for personal use.
 Owners’ equity

– Thus, owner’s equity is represented by capital that has

been adjusted, taking into account, profit or loss of the
business and any withdrawal made by the owner

Owner’s Equity = Capital + Revenue - Expense- Drawings

 exercise
– Classify the following items into assets, liabilities and owner’s
equity.
Furnitures and fittings Office equipment Term loan from Maybank

Account receivable Cash in hand Land and buildings

Leasehold premises Bank overdraft Account payables

Inventory Motor vehicles Capital by owner

Cash at bank Short term loan Mortgage on land and

building
REVENUES

 Represent the gross increase in owner’s equity resulting from

business activities entered into for the purpose of earning
income.
 Earned or recognized when goods are produced and
delivered or services are rendered
 Inflows in the form of cash from cash sale or new accounts
receivable from a credit sale

 Example: Sales, fees, rent received, dividend income,

commission received, discount received
 Revenue - Examples
 Sales revenue – revenue from sale of goods to
customers
 Fees – revenue from rendering of services
 Rent income – revenue from rental of land or building
 Dividend income – revenue from investments in shares
 Interest income – revenue from bank deposits or loans
to others
 Discount received – amount by which the seller agrees
to reduce his or her price to the customer.
EXPENSES
 Are the costs of assets consumed or services used in the process
of earning revenues.
 Example:
 Cost of sales – cost of goods sold
 Selling and distribution – carriage outwards, advertizing
 Administration – rent, insurance, salaries
 Finance – loan interest
Expenses – Examples
 Cost of sales – cost of goods that have been sold to customers
 Selling and distribution expenses – expenses incurred in selling
and distributing goods or services
 Carriage outwards – delivery charges for goods sold,
 advertising – cost of promoting the business
 Administration expenses – expenses incurred in administering
the office
 Rent, insurance, salaries
 Finance expenses – expenses incurred from borrowings
 Interest on loans