FINANCIAL

ACCOUNTING FOR
NON-ACCOUNTING
STUDENTS
(6TH EDITION)

Copyright © 2020 by McGraw-Hill Education (Malaysia) Sdn Bhd All rights reserved.
 CHAPTER 2:
ACCOUNTING
CLASSIFICATION
AND ACCOUNTING
EQUATION
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 HIGHLIGHTS OF THE CHAPTER

✔ Assets, owner’s equity and liabilities

✔ Basic accounting equations
✔ Income and expenses
✔ Relationship between profit and accounting equation
✔ Effect of transactions on accounting equation

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INTRODUCTION
Business transaction can be classified into five
categories
◎ Assets
Recorded into statement of
◎ Owner’s equity financial position

◎ Liabilities
Recorded into statement of profit
◎ Income or loss

◎ Expenses

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 THE STATEMENT OF FINANCIAL POSITION
Sole Proprietorship: Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets 15,000Owner's Equity
Current Assets 2,700Opening Capital 10,000
Add: Net profit 2,000
12,000
Less: Drawing 500
11,500
Non-Current Liabilities 5,000
Current Liabilities 1,200
17,700 17,700
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 Partnership: Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets 20,000Capital accounts
Current Assets 14,000 A 5,000
B 10,000
15,000

Current Accounts
A 3,000
B 2,000
5,000

Non-Current Liabilities 10,000

Current Liabilities 4,000

34,000 34,000
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 Limited Companies: Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets 250,000Issued and Paid Up Capital
Current Assets 120,000150,000 ordinary shares 150,000
80,000 preference shares 80,000
230,000
Capital reserves 50,000
Revenue Reserves 30,000

Shareholder fund 310,000

Non-Current Liabilities 50,000

Current Liabilities 10,000

370,000 370,000

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 ASSETS: NON-CURRENT ASSETS (NCA)

✔ Assets are acquired/bought not for resale but to be used in

the operation with useful lives of more than one year.
✔ 3 categories of NCA:

1. Tangible non-current 2. Intangible 3. Investment

assets non-current assets
◎ Sum of money placed in
◎ NCA that has ◎ NCA with no other organisation in the
physical substances physical substances hope of getting more
money in the form of
◎ Land and building, ◎ Franchise, goodwill, returns
machinery, office patent, trademark
equipment ◎ Fixed deposit (more than
1 year)
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 ASSETS: CURRENT ASSETS
✔ Assets that are either cash or those that can be converted into cash
within one year.
✔ Example: Inventory or stock, accounts receivable or debtors, cash
at bank or cash in hand.

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 OWNER’S EQUITY
✔ Capital: represents owner-supplied fund for the business for the acquisition
of the assets for the business.
: financial obligation of the business to the owner.
✔ Profit: excess of income over expenses
: increases the capital of the business (thus it will increase the owner’s
equity).
✔ Losses: excess of expenses over income
✔ Drawings: owner uses whatever assets of the business for personal means
✔ Drawing and losses will reduce the capital of the business (thus it will decrease the
owners equity)

Owner’s Equity = Capital +/(-) Profit (losses) - Drawing

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 LIABILITIES
NON-CURRENT LIABILITIES CURRENT LIABILITIES
✔ Amounts owed by the business that ✔ Amounts owing by the business that
are not repaid within one year are to be paid within one year
✔ Example: Long term loan, Mortgage ✔ Example: Short term loan, Bank
on Premise and Debenture overdraft, creditor or accounts
payable

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 THE ACCOUNTING EQUATION

(i) Assets = Equities/Capital

(ii) Assets = Capital + Liabilities

A = C+ L

Thus:
C = A - L
L = A - C

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THE STATEMENT OF FINANCIAL POSITION AND
THE EFFECTS OF BUSINESS TRANSACTION
✔ The accounting equation A= C+ L is expressed in the financial statement known as the
statement of financial position.
✔ A statement of financial position is an accounting report that shows all assets, liabilities
and owner’s equity at a particular point of time.

Note: refer to Example 2.4

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 EFFECTS OF TRANSACTIONS ON THE
ACCOUNTING EQUATION
✔ Every transaction will have double effects on the accounting equation
✔ The effect might be:
Increase or decrease in assets
Increase or decrease in liabilities
Increase or decrease in capital

Note: refer to Example 2.5

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 INCOME
✔ The gross increase in owner’s equity from business activities entered into for the purpose
of earning income.

✔ Trading business main income comes from sale of goods or sales revenue.

✔ Service business main income is from the performance of services.

✔ Example: Sales of goods or service, commission received and interest received.

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 EXPENSES
✔ The costs of assets consumed or services used in the process of earning income.

✔ A business must incur expenses items which are necessary for the continuing operation of
the business, but for which no long term benefit will be obtained.

✔ Example: purchase of goods, salary, interest expenses, rent expenses and discount
allowed.

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 STATEMENT OF PROFIT OR LOSS
PRESENTATION
✔ Will show the trading results of a business.

✔ The purpose is to show either the gross profit or loss and the net profit or loss.

✔ Can be presented in the horizontal format or vertical format just like the statement of
financial position.

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 RELATIONSHIP OF PROFIT TO THE
ACCOUNTING EQUATION
✔ Profit is the difference between income and expenses.
✔ Profit belongs to the owner and should be added to the capital of the business.
✔ Basic accounting equation A = C + L can be further expended as follows:
A = C + P + L
If Profit (P) = Income (I) - Expenses (E)
Thus, A = C + (I - E) + L

The expended accounting equation:

Assets + Expenses = Capital + Income + Liabilities

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 EFFECTS OF TRANSACTIONS ON THE
EXPANDED ACCOUNTING EQUATION
✔ Transactions involving expenses and income affect the expanded accounting equation.
✔ There will be either an increase or decrease in assets, expenses, capital, income or
liabilities

Note: refer to example 2.7.

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