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1. Define assets, owner’s equity, liabilities,

At the end of revenue and expenses
ACCOUNTING this chapter, the 2. Explain the basic and expanded accounting
CLASSIFICATION students should equation
be able to:
& 3. Identify the effect of business transactions
on the accounting equation
ACCOUNTING
Differentiate between capital expenditure
EQUATION
4.

and revenue expenditure

5. Differentiate between carriage inwards
and carriage outwards

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1.
Business transactions are involved with five
Accounting categories of accounts; asset accounts, liability
classification accounts, capital or owner’s equity accounts,
revenue accounts and expense accounts
Let’s start with the first set of slides

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5 ASSET 6

Definition Non-current assets Current assets

ASSET Assets are things or Non-current assets Current assets are
property owned by a
ACCOUNTS
NON- CURRENT
are assets bought not either cash or items CURRENT ASSETS
business. for resale but to be that can be converted ASSETS
It is presented in the used in business into cash within one
statement of financial operation with useful year. It constantly
lives of more than • E.g.: inventory/stock,
position. change their form
Accounts
one year. during an accounting receivable/debtors, cash at
It usually divided into
period. bank, cash in hand
non-current assets and TANGIBLE INTANGIBLE INVESTMENT

current assets
• Have physical substance • No physical substance • Money placed in other
• E.g.: land, building, • E.g.: franchise, patent, organisations with the goal
machinery, office trademark, goodwill of getting return or
equipment, motor vehicles appreciation

Let’s refer to the next diagram for details • Fixed assets • E.g.: fixed deposit with > 1
year maturity period,

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LIABILITIES

Definition

Funds supplied by
Non-current liabilities Current liabilities
LIABILITIES external parties to the
business. Thus, it is a Refer to amounts Refer to amount owed
financial obligation of owed by the business by the business that
business to external that are repaid more are to be paid within NON-CURRENT
CURRENT
LIABILITIES
parties. than one year period. one year. LIABILITIES

It is presented in the
statement of financial
position.
Include 2 (two) types of
liabilities:
• E.g.: Bank loan, long-term • E.g.: bank overdraft, short-
loan, mortgages on term loan, accounts
premises, debentures payables/creditors

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Definition
Owner’s equity is the financial obligation of business to the owner.

The owner’s equity account increases with the introduction of new

Definition
OWNER’S capital (the owner-supplied fund to the business) and profits Revenue Other income
earned by the business. On the other hand, it may decrease
REVENUE is gross increase in
EQUITY because of losses sustained by the business and drawings occur.
Profit and losses is derived from the difference between revenue
owner’s equity or the Revenue of trading
business derive from
Revenue that classified
as other income include
inflow of cash as a result
and expenses. Drawings is when the owner uses whatever assets of primary activities such the sale of goods. interest income, rent
of business for personal uses. It is presented in the statement of as provision of services income and
financial position. or sale of goods. Whereas service commission income.
. business obtain
OWNER’S EQUITY It can be divided into through the
revenue and other performance of
income and to be services.
CAPITAL: Revenue: Expenses: DRAWINGS: presented in the
what the owner + What the business - What the business
-
what the owner takes statement of profit or
put into business earns pays out from business for
personal
loss.

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Let’s try to create a chart to explain the ideas

about the components of account, it types as well as the examples
Definition

EXPENSES Costs of assets consume, or

services used in the process
Example
Non-current intangible
to generate revenue. Examples of expenses include Cash at liability
Patent, Non-current Salary
purchase of goods, salaries bank
expense, rent expense, wages copyright asset expense
Are necessary for the expense, electricity expense,
continuing operation of the Owner’s Current asset
depreciation expense and Land and
business, but for which no Bank overdraft equity Fixed deposit
miscellaneous expense. building
long-term benefit will be
obtained. tangible
investment Revenue
Current
It is presented in the liability Asset
statement of profit or loss. Expenses Motor
Liability
vehicles commission
received

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2.
Accounting
Equation
Let’s take a
Let’s continue with the next set of slides
BREAK!

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Basic Accounting Equation
Effects of transaction on Accounting Equation
A business needs resources to operate. The resources is called as assets. The
assets for business are usually contributed by the owner (capital) and supplied
by external parties (liabilities). Thus, the relationship can be expressed as
follows:
ASSETS = OWNER’S EQUITY + LIABILITIES

Duality concept state that every business transactions will have double
effects on the accounting equation. The effects might be an increase
ASSETS = OWNER’S EQUITY + LIABILITIES or decrease on asset, owner’s equity or liabilities. Thus, it forms the
basis of the whole double entry system. The equality of the accounting
Resources owned
by a business Include Fund Fund supplied by equation is always maintained regardless of the volume of business
contributed by owner external parties
transactions.

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Effect of transaction on the Basic Accounting Equation 17 18

The basic accounting equation can be expanded as to show all the equity components.
ASSETS = OWNER’S EQUITY + LIABILITIES The equation is called as Expanded Accounting Equation

Transactions ASSETS = OWNER’S EQUITY + LIABILITIES ASSETS = OWNER’S EQUITY + LIABILITIES

Zaqwan started a business ASSET cash ↑ to = Capital ↑ to RM50,000
with RM50,000 cash in hand RM50,000 CAPITAL + REVENUE – EXPENSES – DRAWINGS
The business deposited ASSET bank ↑ to = OWNER’S EQUITY
RM20,000 of the cash into RM20,000 RM50,000
bank account ASSET cash ↓ to
RM30,000
Received RM15,000 loan by ASSET bank ↑ to = OWNER’S EQUITY + LIABILITY loan ↑ ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE+ LIABILITIES
cheque RM35,000 RM50,000 to RM15,000
ASSET cash RM30,000
Zaqwan withdrew RM300 ASSET cash ↓ to = Capital ↓ to RM49,700 + LIABILITY loan The transactions involving revenue and expenses can be depicted in the expanded
cash for his personal use RM29,700 RM15,000
ASSET bank RM35,000
accounting equation. Now, there will be either an increase or decrease in assets, expenses,
owner’s equity, revenue or liabilities.
RM64,700 = RM64,700

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Effect of transaction on the Basic Accounting Equation

ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES

Transactions ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE

+ LIABILITIES
Paid rent by cash RM1,000 ASSET cash ↓ to RM28,700 = OWNER’S EQUITY RM49,700
EXPENSES rent ↑ to RM1,000 LIABILITY loan RM15,000
ASSET bank RM35,000
Received commission by cheque ASSET bank ↑ to RM37,500 = REVENUE commission ↑ to
RM2,500 EXPENSES rent RM1,000
ASSET cash RM28,700
RM2,500
OWNER’S EQUITY RM49,700 Let’s take a
BREAK!
LIABILITY loan RM15,000

RM67,200 = RM67,200

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• Goods bought by business form supplier

PURCHASE for resale
• Increase in purchase expense

2a. SALES
• Goods sold to customer
• Increase in sales revenue

Accounting for
PURCHASE RETURN/
inventory
• Goods return to supplier due to defect, etc.
RETURN OUTWARDS • Decrease in purchase expense

Let’s continue with the next set of slides SALES RETURN/ • Goods returned by customer due to
defect, etc.
RETURN INWARDS • Decrease in sales revenue

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(2)
Purchase of Sales of good (3) (4)
goods by by cash/credit Purchase return/ Sales return/
cash/credit return outward return inward
The supplier Zaqwan the owner The supplier
of business The customers Zaqwan the owner The customers
of business
Transactions ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES

Transactions ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES

Purchase of goods by ASSET bank ↓ to RM34,500 = OWNER’S EQUITY RM49,700
cheques RM3,000 from EXPENSES purchase ↑ to RM3,000 LIABILITY loan RM15,000
Supplier A ASSET cash RM28,700 REVENUE commission RM2,500 Return goods worth RM500 to ASSET bank ↑ to RM35,000 = REVENUE sales RM3,000
EXPENSES rent RM1,000 Supplier A and received cheque EXPENSES purchase ↓ to RM7,500 LIABILITY a/c payable (Nain Ent.) RM5,000
ASSET a/c receivable (Humaira) RM2,000 OWNER’S EQUITY RM49,700
Purchase of goods from Nain EXPENSES purchase ↑ to RM8,000 = LIABILITY a/c payable (Nain Ent.) ↑ to RM5,000 ASSET cash RM29,700 LIABILITY loan RM15,000
Enterprise by credit ASSET bank RM34,500 OWNER’S EQUITY RM49,700 EXPENSES rent RM1,000 REVENUE commission RM2,500
amounted RM5,000 ASSET cash RM28,700 LIABILITY loan RM15,000
EXPENSES rent RM1,000 REVENUE commission RM2,500 Return goods worth RM300 to EXPENSES purchase ↓ to RM7,200 = LIABILITY a/c payable (Nain Ent.) ↓ RM4,700
Nain Enterprise ASSET bank RM35,000 REVENUE sales RM3,000
Sale of goods to customer A ASSET cash ↑ to RM29,700 = REVENUE sales ↑ to RM1,000 ASSET a/c receivable (Humaira) RM2,000 OWNER’S EQUITY RM49,700
RM1,000 by cash ASSET bank RM34,500 LIABILITY a/c payable (Nain Ent.) RM5,000 ASSET cash RM29,700 LIABILITY loan RM15,000
EXPENSES purchase RM8,000 OWNER’S EQUITY RM49,700 EXPENSES rent RM1,000 REVENUE commission RM2,500
EXPENSES rent RM1,000 LIABILITY loan RM15,000
REVENUE commission RM2,500 RM200 worth of goods returned ASSET a/c receivable (Humaira) ↓ to = REVENUE sales ↓ to RM2,800
by Humaira RM1,800 LIABILITY a/c payable (Nain Ent.) RM4,700
Sale of goods to Humaira ASSET a/c receivable (Humaira) ↑ to RM2,000 = REVENUE sales ↑ to RM3,000 ASSET cash RM29,700 OWNER’S EQUITY RM49,700
RM2,000 on credit ASSET cash RM29,700 LIABILITY a/c payable (Nain Ent.) RM5,000 EXPENSES purchase RM7,200 LIABILITY loan RM15,000
ASSET bank RM34,500 OWNER’S EQUITY RM49,700 ASSET bank RM35,000 REVENUE commission RM2,500
EXPENSES purchase RM8,000 LIABILITY loan RM15,000 EXPENSES rent RM1,000
EXPENSES rent RM1,000 REVENUE commission RM2,500

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Discount on Discount on
purchase/
Discount received Discount received
sales/ Discount
allowed
(Discount given by supplier, The supplier
Zaqwan the owner The customers
decrease in purchase expense, of business
CASH
deducted from purchase)
DISCOUNT
( allowance given by Transactions ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES
supplier/creditor to customer to
encourage prompt payment) Discount allowed
Nain Enterprise allowed cash EXPENSES purchase ↓ to RM6,500 = REVENUE sales RM2,800
(discount given to customer, discount of RM700 for full ASSET bank ↓ to RM31,000 LIABILITY a/c payable (Nain Ent.) ↓ to zero

DISCOUNT
decrease in sales revenue, settlement of amount owed by ASSET a/c receivable (Humaira) RM1,800 OWNER’S EQUITY RM49,700
deducted from sales) cheques ASSET cash RM29,700 LIABILITY loan RM15,000
EXPENSES rent RM1,000 REVENUE commission RM2,500
Humaira settled amount owed by ASSET a/c receivable (Humaira) ↓ to zero = REVENUE sales ↓ to RM2,440
TRADE This discount is deducted
cash after being allowed cash ASSET cash ↑ to RM31,140 LIABILITY a/c payable (Nain Ent.) ↓ to zero
discount of 20% EXPENSES purchase RM6,500 OWNER’S EQUITY RM49,700
DISCOUNT directly from the total selling
ASSET bank RM31,000 LIABILITY loan RM15,000
price and will not be recorded in
(allowance given by seller to EXPENSES rent RM1,000 REVENUE commission RM2,500
the accounts
buyer to encourage bulk buying)
RM69,640 = RM69,640

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2b.
Capital &
Revenue
Expenditure
Let’s take a
BREAK!

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Distinction between capital expenditure and revenue

expenditure:
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Let’s try the following: 30

Transactions Capital Revenue

expenditure expenditure
Bought a Motor Vehicle by cash √

Paid for replacing a broken number plat for motor vehicle √

Depreciation of Motor Vehicle

Replace a major part of machinery to increase its current production capacity

Purchase of goods for resale

Paid for electricity

Purchase for office equipment

Renovation of shophouse

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ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES

Transactions ASSETS + EXPENSES = OWNER’S EQUITY + REVENUE + LIABILITIES

Purchase Office equipment ASSET Office equipment ↑ to RM1,000 = REVENUE sales RM2,440
3.
Carriage inwards
RM1,000 by cheque ASSET cash RM31,140 OWNER’S EQUITY RM49,700
EXPENSES purchase RM6,500 LIABILITY loan RM15,000
ASSET bank ↓to RM30,000 REVENUE commission RM2,500

vs
EXPENSES rent RM1,000

carriage outwards

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Carriage inwards: 34

✔ Carriage inwards refers to transportation cost incurred by a business in

receiving goods/inventory from a supplier. Example: shipping cost and
delivery charges pay to supplier.

✔ Carriage inwards is added to the cost of the goods sold held by the
business in the Statement of Profit or loss to which the purchase
transaction relates.

✔ Carriage inwards is also known as freight in.

Source:https://www.double-entry-bookkeeping.com/

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Carriage outwards: 35 36

✔ Carriage outwards refers to transportation cost incurred by a business

Thank you
in delivering goods/inventory to customer.

✔ The cost of carriage outwards is recorded as operating expense and Any questions?
appear in Statement of Profit or loss in the same reporting period as the
sale transaction to which it relates. You can find me at the WhatsApp chatting room
✔ Carriage outwards is also known as freight out.

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 ACCOUNTING ELEMENTS/CLASSIFICATIONS
OWNER’S EQUITY LIABILITIES
ASSETS (Debit) EXPENSES (Debit) REVENUE (Credit)
(Credit) (Credit)
NON-CURRENT ASSETS Purchases Capital Sales NON-CURRENT
a) Tangible Assets Carriage inwards Net profit Rent received LIABILITIES
Land and Building Freight inwards Commission received Long-term Loan
Freehold Premises Custom duty on purchases Dividend received Mortgage on
Plants Insurance on purchase Interest received/ interest Premises
Motor Vehicles Salary and wages on fixed deposit/interest on
Office Equipment Insurance expenses unit trust CURRENT
Machinery Commission expenses Bad debt recovered LIABILITIES
Furniture and Fittings Postage & Stationery Decrease in doubtful debts Short-term loan
Fixtures and Fittings Rent and rate expenses Bank overdraft
b) Intangible Assets Interest expenses/interest on Accounts Payable/
Goodwill loan/interest on mortgage Trade Payable/
Patent Carriage outwards Creditors
Trademark Advertising Accrued expenses
Franchise Utilities (Water, Electricity, Prepaid revenues
Copyright Telephone, Internet)
c) Investments/Fixed Petrol
Deposit/Unit Trust Sundry expenses
Travelling expenses
CURRENT ASSETS Office expenses
Closing inventory/ Stock Repair and maintenance
Accounts Receivable/ Trade Depreciation expenses
Receivable/ Debtors Increase in Doubtful debts
Cash at Bank / Bank A/C
Cash in Hand / Cash A/C
Prepaid expenses
Accrued revenues
ITEMS THAT REDUCE ITEMS THAT REDUCE EXPENSES ITEMS THAT ITEMS THAT REDUCE
ASSETS (Credit) (Credit) REDUCE OWNER’S REVENUES (debit)
Accumulated Depreciation Purchase returns/ Return outwards EQUITY (Debit) Sales returns/Return inwards
Allowance for doubtful Purchase discounts/ Discount Net loss Sales discount/Discount
debts received Drawing allowed