ANALYSIS OF TRANSACTIONS USING THE ACCOUNTING EQUATION

Example 1:
Show the effect of the following transactions on the accounting equation.
1. Investment by owner / introduction of capital
On the 1st January 2011, Qayyum started a business by putting
RM35,000 into the business bank account. He also transfers his own
car (valued at RM 24,000) to the business.
Assets

Liabilities

+ Owner Equity

2. The purchase of asset and incurring liability

a) A shop premise costing RM100,000 were acquired for the
business. The money was borrowed from CIMB bank and is due
for repayment in 10 years' time.
b) A stock of goods for resale was acquired at a cost of RM10,000
on credit from a supplier BS Store.
Assets

Liabilities

+ Owner Equity

3. The purchase of asset by cash

The business purchase a computer set costing RM5,000 for cash
(using the business cheque)
Assets

Liabilities

+ Owner Equity

4.Payment of liability
A business cheque for RM3,000 was sent to BS Store .
Assets

Liabilities

+ Owner Equity

Statement of Financial Position (or Balance Sheet)

RM
Assets
Shop Premise
Motor Vehicle
Computer
Stock
Cash at bank
TOTAL ASSETS
Liability
Loan
Creditor
TOTAL LIABILITY
Owner's Equity - Capital
TOTAL LIABILITY & OE

2.5a.

The Effect of Profit or Loss on Capital

The accounting equation:

A = L + OE; If the business makes profit:
A = L + (OE + Profit)
A = L + OE + (Revenue - Expenses)
Example 2:
Continuing from Example 1;
*Ignore the effect on stock for the time being since periodic
inventory system will be used.
5. Sale of an asset for cash payment
Stock costing RM1,300 is sold to Mr. Lee for RM2,100 cash.
Assets

= Liabilities

+ Owner Equity

6. Sale of an asset on credit

Stock costing RM2,000 is sold on credit to Gemilang Store for RM3,200.
Assets

= Liabilities

+ Owner Equity

7. Pay expenses
Qayyum pays RM100 cash for the shop's electricity bill.

Assets

= Liabilities

+ Owner Equity

8. Drawing by the owner

a) Qayyum pays a holiday package for his family with a RM1,200
business cheque.
b) Qayyum also has taken goods costing RM300 for his own personal
use. Normally the goods can be sold for RM500.
Assets

= Liabilities

+ Owner Equity

Statement of Comprehensive Income

RM
Sales Revenue
(-) Cost of goods sold
Gross profit
Electricity expenses
Profit/(loss)

Statement of Financial Position

RM
Assets
Shop Premise
Motor Vehicle
Computer
Stock
Cash at bank
TOTAL ASSETS
Liability
Loan
Creditor

TOTAL LIABILITY
Owner's Equity
Capital
Profit/(loss)
(-)Drawing
TOTAL OE
TOTAL LIABILITY & OE
Note: Profit increases owners equity while loss reduces owners
equity
Rules of debit and credit
The use of double-entry bookkeeping will ensure a more systematic and
efficient recording of transactions and determination of profit.
The rules of double-entry involve the 5 types of transactions - assets,
expenses, owner's equity, revenue and liabilities.
They are shown on a T-shape ledger format with the debit place on the
left-hand side and credit on the right-hand side.
The rules:
TYPE OF
DEBIT (Dr)
CREDIT (Cr)
TRANSACTION
Assets
Increase
Decrease
Owner's equity
Decrease
Increase
Liabilities
Decrease
Increase
Revenue
Decrease
Increase
Expenses
Increase
Decrease
CLASS EXERCISE
Question 1
Deala Sofia establishes an insurance agency on June 2014 and completed
the following transactions during June:
Jun Opened a business bank account in the name of DS Agency with
e deposit RM50,000 as capital
01
02 Borrowed RM15,000 by issuing a note payable; due in 2 years
04 Received cash from fees earned RM9,200
08 Paid automobile expenses RM1,000 by cheque
10 Purchase office equipment RM5,500 cash
16 Paid rental RM3,500
17 Performed service on credit RM10,760
20 Paid RM2,500 on notes signed on June 02
23 Purchased supplies for RM3,450 on credit
27 Received RM5,000 from customers on amount owed on June 17
30 Paid salaries for RM1,500 to employees

30 Paid utilities bill for RM350

Required:
Indicate the effect of each transaction using the following format;
Dat
Assets
=
+ Owners
+ Revenue
- Expense
e
Liabilities
Equity
s
E.g Equipm EngLi
0
0
0
.
ent
RM15,00
RM15,00
0
0

Question 2
Chendana runs a boutique shop in Desa Semarak Muadzam. She started
business on 1 July 2014 by paying RM45,000 into newly opened bank
account. Below are related transactions for the first month operation:
July
02
04
07
08
11

Bought goods for resale on credit from Arfa Butik RM3,330

Bought Furniture and Fittings by cash RM4,800
Purchased goods for resale for cash RM3,500
Bought van on credit from TopMarks Sdn Bhd for RM22,000
Bought goods for resale on credit from Jakel for RM12,000
Borrowed RM10,000 from MARA and made first payment to
TopMarks RM6,000.
14 Sold all the goods she bought on 4 July for cash RM5,000
15 Paid staff wages by cheque RM880
16 Sold half of the goods bought on 8 July to Optime on credit

17
18
25
28

RM8,000
Chendana allow her cousin, Donna to join the business and she
brought RM7,000 of her own money into the business, which is
used to pay part of the amount owed to TopMarks.
Due to Donna carelessness, a potential client, Datin Lyza fell and
broke her arm. Datin Lyza threatened to sue the boutique and
Chendana promised to pay RM3,000 for medical treatment.
Paid rent by cash RM1,200
Paid office maintenance by cheque RM550

Required:
Show how each of the above transaction affects the accounting equation and
how the balance sheet identity would appear after each transaction.

Effect On Accounting Equation

Dat
Assets
Liabilities Owners
e
Equity
E.g.

Building
RM150,00
0

BIMB
loan
RM150,00
0

Balance Sheet Position

Assets
Liabilities Owners
Equity
RM150,000

RM150,000