Learning Objective

After going through this chapter, you should be able to:

✓ Identify the components of FINANCIAL STATEMENTS.

✓ Define & explain the term of assets, liabilities and owner’s equity.

✓ Understand the use of the accounting equation in analyzing transactions.

✓ Define revenue & expenses.

✓ Identify the relationship of profit to the accounting equation.

✓ Show the effect of the transaction on the accounting equation.

WHAT IS FINANCIAL STATEMENTS?

❑ Structured reports of a business’s financial

activities.
❑ Prepared on a regular basis-
monthly/quarterly/half-yearly/yearly.
❑ Provide overall picture of a business’ “health” and
“wealth”
 ELEMENTS OF FINANCIAL STATEMENTS

There are FIVE ELEMENTS of complete set of financial

statements:

❑ Statement of Financial Position

❑ Statement of Comprehensive Income
❑ Statement of Changes in Equity
❑ Statement of Cash Flows
❑ Notes to the accounts
EXAMPLES OF ANNUAL REPORT
 Financial
statement

Statement of Financial Statement of Profit

Position (Balance and Loss (Income
Sheet) Statement)

*Assets
*Expenses
*Owner’s Equity
*Revenue
*Liabilities
 Statement of Financial Position
• Shows the financial position of the business at the particular point in
time.
• Financial position means disclosing or showing the total amount of
anything of value (Assets) that owned by the business and the
amount of contributions from the owner or owners (Owner’s Equity)
and borrowings (Liabilities) from outside parties, as summarised
below:-
Name of the business
Statement of Financial Position as at………………(date)
RM
Assets XX
XX

Owner’s Equity XX
Liabilities XX
XX
Assets = Liabilities + Owner’s Equities
 Statement of Profit and Loss
• To show the financial performance of the business during a certain
period.
• A business is said to perform well if its total revenues > total
expenses = Profit.
• On the other hand, poor performance if its total revenues < total
expenses = Loss.
Total Net profit (Loss) = Revenue - Expenses
Name of the business
Statement of Profit and Loss for the year ended………………(date)
RM RM
Sales XX
-) Cost of goods sold (XX)
Gross Profit XX
+)Other revenues XX
-) Other Expenses XX
Net Profit (Loss) XX
Assets
 ASSETS
➢ Resources or items of value that the business owns and
expected to generate economic benefit in the future.

CURRENT ASSETS FIXED ASSETS/ NON-CURRENT ASSETS

Assets acquired/ bought not for

Assets that are either cash or those
can be converted in to cash during a
12 months period.
Examples:
Stocks (Inventories), Debtors/Account
receivables (Sold goods on credit), Cash
in hand, Cash at bank.
resale and it is to be used in the
running of the business for a long
term basis (> 12 months)
Fixed or non-current assets can be
classified into 3 categories namely
Tangible asset, Intangible asset and Long
term investments
 ASSETS
Fixed Assets/
Non-Current Assets

Intangible Fixed Assets Long term Investments

Tangible Fixed Assets
Assets which are non- Assets bought for the
Assets that is physical in
physical existence, purpose of earning
existence which is can
cannot be seen or interest or dividend
be seen and touched
touched revenues

Examples:
Examples;
Computer, Furniture & Example:
Patented software,
Fittings, Motor Vehicles,
trademarks, brand, Fixed Deposit, Asb
Plant & Machinery,
goodwill
Office equipment
Liabilities
 Liabilities
Liabilities
Amounts owed by the
business to outside parties
(Bankers or Creditors)

Current Liabilities Non-Current Liabilities/ Long-

It is an amount owing by the business term Liabilities
that is to be paid in within 1 year It is an amount owing by the business
that have repayment period > 1 year

Examples:
Examples:
Creditors/ Account payable( Amounts
Long-term loans, Mortgage on
owed to suppliers of goods), Short-
property, Debentures
term loans, bank overdrafts.
Owner’s Equities
 Owner’s Equities
➢ It is represents owner-supplied fund to the business or the
owner’s claim on the business assets

➢ OE = Capital + Profit - Drawings

Capital
Accumulated Drawings
Amounts Profits Cash or goods taken
contributed by the
The profits earned by the owner from
owner to the
(Minus if losses the business for
business (either in
incurred) by the personal use( effect
form of cash or
business. decrease in equity).
other assets)
Revenues
 Revenues
REVENUES
Revenues are income generated by the business from the
course of ordinary activities, which are the trading or normal
operating activities.

FROM THE USE OF THE BUSINESS’

SALES OF GOODS ASSETS BY OTHERS
RENDERING OF
Ex: KFC - Sales of • Rental income
SERVICES
fried chicken, • Interest income (cash deposit in
Bata- Sales of Ex: Fees from
a bank)
tuition fees
shoes. • Royalties (patent, trademark,
copyright)
• Dividend income (investment in
share)
Expenses
 Expenses
EXPENSES
Expenses are costs incurred in the normal course of business to
generate revenues.

COST OF SALES
SELLING AND DISTRIBUTION
e.g.-Purchases of stock
e.g.-Salesman’s salaries and
- Freight, insurance and transport cost
commissions, delivery charges for a
(carriage inwards) for bringing the
goods sold (Carriage outwards),
goods to the business premise,
depreciation of delivery vehicles
discount allowed

ADMINISTRATIVE
FINANCE COSTS
e.g.- Electricity and water, rental
e.g.- Interests on loans, Bank service
expense, stationery, deprecation of
charges.
the car used by the manager, salaries.
 Accounting Equation

Assets = Liabilities + Owner’s Equities

 Accounting Equation
Assets = Liabilities + Owner’s Equities
• The above equation is known as basic accounting equation.
• The equation that is the foundation of double
entry accounting. A change in one aspect will have a
corresponding change in another aspect.
• The accounting equation displays that all assets are either
financed by borrowing money to outside parties or supplied
by the owner.
• The total of assets must be equal with the total of owner’s
equities plus liabilities.
 Accounting for Business Transactions
Illustration 1
1.Owner investing cash into the business

On 1st Jan 2010, Beckham started business & invested

RM50,000 cash to begin his business, Beckham Trading.

Date Assets (A) = Liabilities (L) + Owner’s Equities (OE)

2010/01/01
+50,000 Cash No effect +50,000 capital
Balance
50,000 = 0 + 50,000
 Accounting for Business Transactions
Illustration 2
2.The transfer of cash into the Bank account.

On 2nd Jan 2010, the business opens bank account &

deposited RM45,000 of the cash into the account.

Date Assets (A) = Liabilities (L) + Owner’s Equities (OE)

2010/01/01 +50,000 cash No effect +50,000 capital
2010/01/02
(50,000-45,000) cash No effect No effect
+ 45,000 Bank
Balance 50,000 = 0 + 50,000
 Accounting for Business Transactions
Illustration 3
3. The borrowing from bank

On 6th Jan 2010, the business borrows from bank

amount RM30,000 and deposited the loan into bank.

Date Assets (A) = Liabilities (L) + Owner’s Equities (OE)

2010/01/01 +50,000 cash No effect +50,000 capital
2010/01/02 (50,000-45,000) cash No effect No effect
+ 45,000 Bank
2010/01/06
5,000 cash +30,000 No effect
(45,000+30,000) Bank
Balance 80,000 = 30,000 + 50,000
 Accounting for Business Transactions
Illustration 4
4. Buying of fixed assets by cheque

On 10st Jan 2010, the business purchase Fixtures &

fitting by cheque amounted RM10,000

Date Assets (A) = Liabilities (L) + Owner’s Equities (OE)

2010/01/01 +50,000 cash No effect +50,000 capital

2010/01/02 (50,000-45,000) cash No effect No effect

+ 45,000 Bank

2010/01/06 5,000 cash +30,000 No effect

(45,000+30,000) Bank
2010/01/10
5,000 Cash No effect No effect
(75,000-10,000) Bank
+10,000 Fixtures &
Fitting
Balance 80,000 = 30,000 + 50,000
 Accounting for Business Transactions
Illustration 6
6.Owner took cash from the business
On 16th Jan 2010, Beckham took RM200 from the
business for his personal used.
Date Assets (A) = Liabilities (L) + Owner’s Equities (OE)
2010/01/01 +50,000 cash No effect +50,000 capital

2010/01/02 (50,000-45,000) cash No effect No effect

+ 45,000 Bank

2010/01/06 5,000 cash +30,000 No effect

(45,000+30,000) Bank

2010/01/10 5,000 Cash No effect No effect

(75,000-10,000) Bank
+10,000 Fixtures & Fitting

2016/01/16
(5,000-200) Cash No effect (50,000-200) drawing
65,000 Bank
10,000 Fixtures &
Fitting
Balance 79,800 = 30,000 + 49,800
 The Expanded Accounting Equation
Assets = Liabilities + Capital + Revenue - Expenses
• The expanded accounting equation is derived from the
basic accounting equation.
• Whereby, the equity section is expanded
Revenues are increases in capital from delivering goods or
services to customers.

Expenses are decreases in capital that result from

operations.

• The expanded accounting equation also demonstrates the

relationship between the Statement of Financial Position and
the Statement of Profit and Loss by seeing how revenues and
expenses flow through into the equity of the company.
 Accounting for Business Transactions
e.g. (Expanded Accounting Equation)
Effects of business transaction
On 17th of January 2010, the • Expenses Increase (Insurance),
business paid their insurance by
cash amount RM200 • Asset Decrease (Cash)

On 19th of January 2010, the • Expenses Increase (Purchases),

business purchase stock of goods
on credit amount RM18,000 • Liability Increase (Creditor)

On 21st of January 2010, the • Revenues Increase (Commission received),

business received commission by
cheque amounting RM350 • Asset Increase (Bank)

On 23rd of January 2010, the • Expenses Increase (Electricity),

business paid electricity bill by
cash RM150 • Asset decrease (Cash)

On 28th of January 2010, the • Revenue Increase (Rent received)

business received rent by cash
RM400 • Asset Increase (Cash)
 Accounting for Business Transactions
(Expanded Accounting Equation)
Date Assets (A) = Liabilities (L) + Owner’s Equities + Revenues - Expenses
(OE)
Balance 4,800 Cash 30,000 49,800 -
65,000 Bank
10,000 Fixtures & Fitting

2010/0 (4,800-200) Cash - - - + 200 Insurance

1/17 65,000 Bank
10,000 Fixtures & Fitting

2010/0 4,600 Cash 30,000+18,000 - - + 18,000 Purchases

1/19 65,000 Bank creditor
10,000 Fix. & Fit.
2010/0 4,600 Cash - - + 350 commission -
1/21 (65,000+350) Bank received
10,000 Fix. & Fit.
2010/0 (4,600-150) Cash - - - + 150 Electricity
1/23 65,350 Bank
10,000 Fix. & Fit.
2010/0 (4,450 + 400)Cash + 400 Rental received
1/28 65,350 bank
10,000 Fix. & Fit.

Balance 80,200 48,000 49,800 750 18,350

 Accounting for Business Transactions
(Accounting for stock)
• Stock/ inventories are tangible assets which
are:-
➢ Held for sale in the ordinary course of business
➢ To be consumed in the production of goods or services for sale
❑ The purpose of accounting for stock is to determine the cost of goods sold
and to determine the value of unsold stock or closing stock at the end of
the accounting period.
❑ Goods are normally sold at the price higher than the cost price, therefore,
the sales figure would include elements of profit or loss.
❑ Goods purchased that are not sold at the end of the accounting period are
known as closing stock.
❑ Closing stock for one accounting period will become the opening stock for
the next accounting period.
 Accounting for Business Transactions
(Accounting for movement of stock)
Increase in Decrease in
stock stock
Purchase Sales return Sales Purchase return
goods (Return inwards) (return outwards)
-Goods return to -The business return
the buyer the goods to
supplier
Effect of Expense Revenue decrease Revenue Expense decrease
transaction increase increase
Accounts Purchases A/c Sales return / Sales A/c Purchases return /
return inwards A/c Return outwards A/c
 Accounting for Business Transactions
(Accounting for purchases and sales of goods)

Purchases Sales

Cash purchase Credit purchase Cash sales Credit sales

Take the goods Take the goods Sales the goods Sales the goods
today, pay it today. today, but pay it today and get the today, but get the
later. payment today. payment later.
Effect • Asset • Liability • Revenue • Revenue
(Cash/bank) ↓ (Creditor) ↑ (Sales) ↑ (Sales) ↑
• Expense • Expense • Asset • Asset
(Purchases) ↑ (Purchases) ↑ (Cash/bank) ↑ (Debtor) ↑
Accounts Purchases A/c, Purchases A/c, Sales A/c, Sales A/c,
involved Cash/bank A/c Creditor A/c Cash/bank A/c Debtor A/c
 Accounting for Business Transactions
(Accounting for purchases and sales of goods)
e.g. Effects of business transaction
On 13th of January, the business
purchased goods on credit from • Expenses Increase (Purchases),
zila Enterprise amount RM3,000. • Liability increase (Zila Enterprise (creditor))
On 14th of January, the owner took
goods worth RM100 for his own • Expenses decrease (Purchases),
use. • Capital decrease (Drawing )
On 21st of January, the business
sold goods on credit to Giggs • Revenues Increase (Sales),
amount RM1,000. • Asset Increase (Giggs (debtor))

On 23rd of January, the business • Expenses decrease (purchases),

returns goods to zila Enterprise • Liability decrease ( Zila enterprise
amount RM200 . (creditor/Account receivable))

• Revenue decrease (Sales)

On 28thof January, Goods return by • Asset decrease (Giggs (debtor/Account
Giggs amount RM100. receivable))