STATEMENT OF FINANCIAL

POSITION/
Balance sheet

Lesson Outcome
At the end of the lesson, students should

be able to:

1. Identify the elements in the balance

sheet (SoFP)
2. Describe the basic accounting equation
3. Relate the balance sheet components to
the accounting equation
4. Describe
the
extended
accounting
equation
5. Relate
the
income
statement
components to the accounting equation

Financial statements
There

are three (3) major financial

statements :
1. Statement of Comprehensive Income
(SOCI)/ Income Statement

Measures
the
financial
performance
profitability over a specific period of time

or

2. Statement of Financial Position (SOFP)/

Balance Sheet

3.

Summarizes the business assets, liabilities and

equity at a specific point of time

Cash Flow Statement

Shows the flow of cash in and cash out of the
business.

Classification of
business transactions
Assets
Owners
equity
Liabilities

Statement of Financial
Position
Statement of Financial
Position

Revenues

Statement of Financial
Position
Income Statement

Expenses

Income Statement

Statement of Financial Position

(SOFP)
Discloses the financial position of a

business on a given date, showing

the assets, liabilities and owners
equity.
Statement of Financial Position may

be represented in two ways:

1. Traditional or horizontal form
2. Vertical form

RM
ASSETS
Land and building

RM
EQUITY

120,000 Capital

230,000

Vehicles

60,000

Inventories

65,000 LIABILITIES

Account
receivables

40,000 Bank loan

50,000

Cash and bank

35,000 Account
payables

40,000

320,000

AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2015

320,000

AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2015
RM

ASSETS
Land and
building

120,000

Vehicles

60,000

Inventories

65,000

Account
receivables

40,000

Cash and bank

35,000
320,000

EQUITY
Capital

230,000

LIABILITIES
Bank loan

50,000

Account

40,000

Assets
An asset is a resource controlled by the

enterprise as a result of past events and

from which future economic benefits are
expected to flow to the enterprise.

Economic resources which are of value to

the business.
Provide either present or future benefits to
the business
Used to assist in the production of goods
and services to generate income and
revenues to the business

Assets
Non current Assets
Assets acquired not for purpose of resale to be

held for more than one accounting period.

Land, Building, Vehicles, Investments, Patents

Current Assets
Cash and assets acquired for resale and are

expected to be convertible into cash within

one year of balance sheet date
Inventories, Debtors or Receivables, Cash and
Bank balances

Non-current Assets
Tangible Assets
Assets that have physical existence
Land, Building, Vehicles

Non-current Assets
Intangible Assets
Assets that have no physical existence
Patents, Goodwill, Trademarks, Franchise

rights

Non-current Assets
Investment
Quoted and unquoted investment, fixed

deposit

Liabilities
A liability is the present obligation of an

entity arising from past events, the

settlement of which is expected to result in
an outflow of resources embodying
economic benefits.
Represent what the business owes to outsiders.
Financial obligations of the business to

outsiders
Liabilities represent outsiders (non-owner)
supplied funds which are used by the business
to acquire assets.

Liabilities
Non current Liabilities
Obligations which are expected to be settled

after 1 year from the balance sheet date

Term loans, Mortgages, Bonds, Debentures

Current Liabilities
Obligations which are expected to be settled

within 1 year from the balance sheet date

Creditors or Payables, Bank overdrafts, Shortterm Loans

Owners equity
Equity is the residual interest in the

entitys assets after deducting all its

liabilities
Represents

the contribution of assets,

usually in the form of cash, into the
business, by the owners
Any profit made by the business and not
taken out by the owner, becomes part of the
owners equity
Other terms
are capital, net worth,
shareholders fund and shareholders equity

exercise
Classify the following items into assets, liabilities

and capital.
Fixtures and
fittings

Office equipment

Term loan from

Maybank

Account
receivable

Cash in hand

Land and buildings

Leasehold
premises

Bank overdraft

Account payables

Inventory

Motor vehicles

Capital by owner

Cash at bank

Short term loan

Mortgage on land
and building

Basic Accounting Equation

Forms a basis of whole double entry

bookkeeping system
The equality is always maintained.

Any change in the ringgit amount of

the
total
assets
is
always
accompanied by an equal change in
the ringgit amount of the total
liabilities and/or the owners equity

Basic Accounting Equation

Exercise: Determine the

missing
figureLIABILITIES OWNERS EQUITY
ASSETS
1.

RM 130,000

2.

RM 890,000

3.

RM 70,000
RM 500,000
RM 50,000

4.

RM 111,000

5.

RM 330,000

RM 550,000
RM 50,000

RM 110,000

Business Transaction

Effects Of Transactions on the Accounting

Equation
Transaction

Effect Upon
Assets

Kassim
introduces
RM10,000 into
business

Cash increases
+ RM10,000

Sell goods
RM1,200 to
Ramly

Inventory
decreases
RM1,200
Debtor increases
+ RM1,200

Buy furniture
RM10,000 from
AhSeng, paid by
cheque RM8,000

Furniture
increases
+ RM10,000
Bank decreases
- RM8,000

Liabilities

Owners
Equity
Capital
increases
+ RM10,000

Creditor
increases
+ RM2,000

Effects Of Transactions on the Accounting

Transaction
Effect Upon
Equation
Assets
Azizi invested cash of
RM50,000 into business
Azizi deposited RM40,000
into business bank account
Business borrows RM10,000
from bank. Cheque of
RM10,000 received and
deposited into bank.
Furniture of RM5,000
acquired and paid by
cheque
Purchased goods of
RM15,000 from suppliers
Paid suppliers RM10,000 by
cheque

Liabilities Owners
Equity

Exercise
1. When a business receives payment

from an account receivable, the

effect on the balance sheet of the
firm is ________
a. An increase in assets
b. A decrease in liabilities
c. An increase in liabilities
d. No change in amount of assets

Exercise
2. Syafinaz Hotel sold some of its equipment at

cost of RM30,000, receiving RM10,000 cash

and furniture worth RM15,000. The RM5,000
remainder was to be paid in cash at a later
date. The effect of this transaction on the
balance sheet of Syafinaz Hotel would be
________?

a. An increase and in total assets and total liabilities

b. A decrease in total assets and total liabilities
c. No change in total assets and no change in total

liabilities
d. An increase in total assets but not in total
liabilities

Revenue
A flow in economic benefits during the accounting

period arising in firms ordinary activities, in the form

of inflow or enhancement of assets or decrease in
liabilities,

Earned or recognized when goods are produced and

delivered or services are rendered
Inflows in the form of cash from cash sale or new accounts
receivable from a credit sale
Enhancement of assets when existing facilities are upgraded
Decrease in liabilities when the firm sells to an existing
creditor and arranges to reduce the debt against the
amount owing

Sales,

fees, rent received, dividend

commission received, discount received

income,

Revenue - Examples
Sales revenue revenue from sale of

goods to customers
Fees revenue from rendering of services
Rent income revenue from rental of land
or building
Dividend
income

revenue
from
investments in shares
Interest income revenue from bank
deposits or loans to others
Discount received amount by which the
seller agrees to reduce his or her price to
the customer.

Expenses
Decreases

in economic benefits
during the accounting period in the
form of
outflows or depletion of
assets or incurrence of liabilities
Outflows of assets occur when cash is

paid for wages, rent or interest

Assets are depleted when they are
used up as in depreciation of
noncurrent assets or when prepaid
insurance expires
Liabilities are incurred when wages
are owing to employees

Expenses
Expenses are classified into
Cost of sales cost of goods sold
Selling and distribution carriage

outwards, advertizing
Administration rent, insurance,
salaries
Finance loan interest

Expenses Examples
Cost of sales cost of goods that have

been sold to customers

Selling and distribution expenses
expenses incurred in selling and
distributing goods or services
Carriage outwards delivery charges for

goods sold, advertizing

promoting the business

cost

of

Administration expenses expenses

incurred in administering the office

Rent, insurance, salaries

Finance expenses expenses incurred

from borrowings

Interest on loans

Statement of
Comprehensive Income
Safi Trading
Vertical
FormIncome for the year ended 31
Statement of Comprehensive
December 2012

Sales revenue

RM 100,000

Cost of sales

(40,000)

Gross profit
Add: Other revenue:

60,000
Interest income

8,000

Dividend income

2,000
70,000

Less: Expenses

Rent
Salaries

Net profit

(6,000)
(10,000)

Motor expenses

(4,000)

Depreciation

(5,000)
45,000

Drawings and the Extended

Accounting Equation

At times, the owner will withdraw goods or

cash from the business.

These withdrawals or drawings will reduce
owners equity
ASSETS = OWNERS EQUITY + PROFIT +
LIABILITIES - DRAWINGS
OR
ASSETS = OWNERS EQUITY + REVENUE
EXPENSES DRAWINGS + LIABILITIES
OR
ASSETS + EXPENSES + DRAWINGS = OWNERS
EQUITY + REVENUE + LIABILITIES

Profit and the Extended Accounting

Equation

As business begins, goods are purchased

and subsequently sold, expenses are

incurred and revenues are earned.
Profit belongs to the owner and increases
owners equity.
Profit is the excess of revenue over
expenses.
ASSETS = OWNERS EQUITY + PROFIT +
LIABILITIES
OR
ASSETS = OWNERS EQUITY + REVENUE
EXPENSES + LIABILITIES

Profit and the Extended

Accounting Equation
Profit belongs to the owner and increases

owners equity.

ASSETS = LIABILITIES + OWNERS

EQUITY + PROFIT
OR
ASSETS = LIABILITIES + OWNERS
EQUITY + REVENUE EXPENSES
OR
ASSETS + EXPENSES = LIABILITIES +
OWNERS EQUITY + REVENUE

Assets
Abby invests
RM100,000 into
business bank

Expenses Liabilitie Equity

s

+ bank
100,000

Revenu
e

+
capital
100,00
0

Issued RM10,000 - bank

cheque for
10,000
employees salary

+ salary
10,000

Issued RM15,000
to suppliers for
purchased goods

- bank
15,000

+
purchase
s 15,000

Sell RM25,000
goods to
customers on
credit

+
receivable
s 25,000

+ sales
25,000

Example: Effects of
Transactions

Razi invests RM50,000 cash into the business

Bought a motor van on credit RM5,000
Bought goods for RM150 paying by cheque.
Bought goods on credit RM2,000
Bought shop premises paying RM5,000 by cheque
and loan from bank RM25,000
Bought fixtures RM200 paying by cheque
Repaid by cash a loan owed to Raman RM1,000
Razi introduces another RM500 cash into the firm
Razi takes out RM1,000 cash for personal use
Business paid creditor RM190 by cheque
Cash sales of RM5,000
Sold goods on credit RM20,000