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Chapter 2

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9 views

Chapter 2

Uploaded by

Siti Nur Aida
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2

ACCOUNTING
CLASSIFICATION AND
ACCOUNTING EQUATION
DEFINITION OF
ASSETS, LIABILITIES,
OWNER’S EQUITIES,
REVENUE AND
EXPENSES
O 5 major groups or classes of accounts;
assets, liabilities, owner’s equity,
revenue and expenses.

O These groups of accounts are reported


accordingly in financial statements
O Assets Items
O Liability in
O Owner’s equity balance sheet

O Expenses Items
O Revenue in
income statement
ASSETS
O Economic resources owned by an entity
that are expected to benefit future time
periods
O Assist in the earning of revenues to the
business
O The assets can be classified into three:-
i. Fixed Assets
ii. Investment
iii. Current assets
Fixed Assets
O Useful life more than one year or twelve
months

O Purchased or bought not for resale

O Normally will be depreciated during its


useful life
O Divided into two natures
i. Tangible fixed asset
Have physical characteristics that
are it can be seen, touched and used
in the current and future operation.
The example: land, building,
machinery, office equipment,
furniture & fitting ect.
ii. Intangible fixed asset
No physical or tangible characteristics (cannot
been touched or seen but have monetary value)
The example: goodwill, patents and trademarks
Current assets
O Either in term of cash or those assets which
are easily converted into cash within a year

O The example: cash in hand, cash at bank,


stock, account receivable and prepayments
Investment
O Invest money in some other company
O Only long term investment which is more
than one year shall be recorded in this
category
O The example: quoted and unquoted
investment, share, fixed deposit
LIABILITIES
O Liabilities are financial obligation or amount
owned by business from the outsiders

O Liabilities are commonly divided into;


i. Long term liabilities
ii. Current liabilities
Long term liabilities
O Debt of the business that is not expected to be
repaid in a year period

O Usually arise from major expenditures and


often involve large amount

Example: long-term loan, mortgage on


premises, debenture
Current Liabilities
O Financial obligations that are expected to
repay within a year

O The example: amount due to creditors, bank


overdraft and short-term loan
OWNER’S EQUITY or
CAPITAL
O Amount invested by owner to the business

O It can be in term of cash or other nature of


assets

O The capital is increased when the owner of the


business invest assets or make additional
investment in the firm and when the firm
making profit
O Capital is decreased when the firm
distributes cash or other assets to its
owners and when the firm conducting
unprofitable business operations.

Owner’s equity = Capital +/(-) Profit (Losses)


-Drawing
Exercises
Classify the following items into Assets, Liability, Equity, Revenue and Expenses

Accounts Payable
Postage Expense
Land
Owner Capital
Accounts Receivable
Owner Withdrawals
Cash
Equipment
Fees Earned
Wages Expense
Trademark
Notes payable
1.Equipment 10,000
2. Cash 8,000
3. Service revenue 36,000
4. Rent expense 11,000
5. Accounts payable 2,000
6. Utilities expense 4,000
7. Account receivable 9,000
8. Salaries and wages expense 4,000
9. Notes payable 16,500

a)Determine the total assets of the company


b)Determine the net income of the company
c)Determine the owner’s equity of the company ======
ACCOUNTING
EQUATION
ASSET = LIABILITY + CAPITAL
EFFECT OF
TRANSACTIONS
O Show the increase and decrease
of account component

( assets, liabilities and capital)


ASSETS = CAPITAL / LIABILITIES

INCREASE INCREASE
DECREASE DECREASE
INCREASE -
DECREASE

- INCREASE
DECREASE
LET TRY SOME EXERCISES
EXPANDED OF
ACCOUNTING
EQUATION
ASSETS + EXPENSES = CAPITAL +
LIABILITIES + REVENUES

O Expenses and revenue are the items in Trading


and Profit and Loss account
REVENUE
O Increase in owner’s equity resulting from
business activities entered into for the purpose
of earning income

O The example: sales or turnover, rental


received, interest received, discount received
EXPENSES
O Incurred in using up the assets to earn
income or revenues

O The example: Wages, electricity, legal fees,


discount allowed.
EFFECT OF TRANSACTIONS
O Show the increase and decrease of
account component ( assets, liabilities and
capital + expenses and revenue)
EFFECT OF TRANSACTIONS
ASSETS / EXPENSES = EQUITY / LIABILITIES /
REVENUE

INCREASE INCREASE

DECREASE DECREASE

INCREASE -

DECREASE

- INCREASE

DECREASE
Prepare tabular analysis based on
the information given

1.Paid employees' salary by cash


RM 300
2.Received commission from
customer by cheque RM 250
3.Paid electricity bill by cheque RM
400
4.Received rental from customer RM
500 by cash
EXERCISE
O Transactions made by Virmari & Co. for August is
shown below. Prepare a tabular analysis which shows the
effect of these transactions.
O 1. The owner invested RM 25 ,000 in cash
O 2. The company purchased RM 7,000 of office
equipment on credit.
O 3. The company received RM 8,000 cash in exchange of
services performed.
O 4. The company paid RM850 for this month’s rent by
cash
O 5. The owner withdrew RM1,000 cash for personal use.
O The following are the assets, liabilities, equity, revenue and expense for
May 2017 of Laburlah Company.. Cash collected from customers is RM
5,000.How much is the net income of the company?
O Total revenue-Total expenses
O (5000+ 8100) –(600+1.200+400 +400+2,500) = RM 8,000

Item Amount (RM) Item Amount (RM)

Cash 3, 400 Notes payable 30,000

Acct. receivable 4,900 Rent expense 1, 200

Equipment 64, 000 Maintenance and 400


repair
Service revenue 8, 100 Insurance 400

Advertising 600 Gasoline 2, 500


expense
Account payable 800
LET TRY SOME EXERCISES

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