Topic 2 - Acc - Concept and Prac..

Topic
Accounting in
Business
100 Shares
ACCOUNTING CONCEPT AND

PRACTICE
RM1 par value
2.0 ACCOUNTING CONCEPT AND PRACTICE

Types of financial statements
- Statement of Comprehensive Income
- Statement of Financial Position
- Statement of owners equity
- Statement of cash flows
Business transactions and the accounting equation
Assets = Liabilities + Owners Equity
The Accounting Equation
o
o
o
The resources owned by a business are its

assets.
The rights of creditors are the debts of the
business and are called liabilities.
The rights of the owners are called
shareholders equity for a corporation and
owners equity for a proprietorship,
partnership, or limited liability company.
The equation Assets = Liabilities + Equity
is called the accounting equation.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Assets = Liabilities + Equity
The resources
owned by a
business
The rights of
creditors are the
debts of the
business

The rights of the
owners
Example Exercise 1-2

Accounting Equation
Youre A Star is a motivational consulting business.
At the end of its accounting period, December 31,
2013, Youre A Star has assets of RM800,000 and
liabilities of RM350,000. Using the accounting
equation, determine the following amounts:
a.Equity as of December 31, 2013.
b.Equity as of December 31, 2014, assuming that
assets increased by RM130,000 and liabilities
decreased by RM25,000 during 2014.
Follow My Example 1-2

a. Assets = Liabilities + Equity
RM800,000 = RM350,000 + Equity
Equity = RM450,000
b. First, determine the change in equity during
2014 as follows:
RM130,000 = RM25,000 + Equity
Equity = RM155,000
Next, add the change in equity during 2014 to the
equity on December 31, 2013 to arrive at equity
on December 31, 2014, as shown below.
Equity on December 31, 2014 = RM450,000 +
RM155,000 = RM605,000
Business Transaction
A business transaction is an economic

event or condition that directly changes
an entitys financial condition or its results
of operations.
TRANSACTION
A
On November 1, 2013, Chris Clark deposited

RM25,000 in a bank account in the name of
NetSolutions.
Assets
Cash
a.
25,000
=
=
Equity
Share Capital
25,000
TRANSACTION
B
On November 5, 2013, NetSolutions paid

RM20,000 for the purchase of land as a
future building site.
Assets
Cash
Bal. 25,000
b. 20,000
Bal.
5,000
Land
=
=
Equity
Share Capital
25,000
+20,000
20,000
25,000
TRANSACTION
C
On November 10, 2013, NetSolutions

purchased supplies for RM1,350 and agreed
to pay the supplier in the near future.
Assets
c.
Cash + Supplies + Land

5,000
20,000
+1,350
Bal. 5,000
1,350
20,000
Liabilities +
Equity
Accounts
Payable +
Share
Capital
25,000
+1,350
1,350
25,000
Transaction C
The liability created by a purchase on

account is called an account payable.
Items such as supplies that will be used in

the business in the future are called
prepaid expenses, which are assets.
TRANSACTION
D
On November 18, 2013, NetSolutions received cash of
RM7,500 for providing services to customers. A
business earns money by selling goods or services to
its customers. This amount is called revenue.
Assets
Cash
Bal. 5,000
+ Supplies + Land
1,350
20,000
Liabilities +
Accounts
Payable
1,350
Equity
Share
+ Capital
25,000
d. +7,500
Bal. 12,500
Fees
+ Earned
+7,500
1.350
20,000
1,350
25,000
7,500
Transaction D
o Revenue from providing services is recorded

as fees earned.
o Revenue from the sale of merchandise is

recorded as sales.
o Other examples of revenue include rent,

which is recorded as rent revenue, and
interest, which is recorded as interest
revenue.
o An account receivable is a claim against a

customer, which is an asset.
TRANSACTION
E
During the month, NetSolutions spent cash or

used up other assets in earning revenue.
Assets used in this process of earning revenue
are called expenses.
TRANSACTION
E
On November 30, 2013, NetSolutions paid the

following expenses: wages, RM2,125; rent,
RM800; utilities, RM450; and miscellaneous,
RM275.
Assets
Bal.
e.
Cash +
12,500
3,650
Supplies
1,350
Bal.
8,850
1.350
Land
20,000
20,000
TRANSACTION
E
(CONTINUED)
On November 30, 2013, NetSolutions paid the

following expenses: wages, RM2,125; rent,
RM800; utilities, RM450; and miscellaneous,
RM275.
Liabilities +
Equity
Accounts
Payable +
Share
Capital
Bal.
e.
1,350
25,000
Bal.
1,350
25,000
Fees
Wages
Rent
Util.
Misc.
+ Earned Exp. Exp. Exp. Exp.
7,500
7,500
2,125
800
450
275
2,125
800
450
275
TRANSACTION
F

creditors on account, RM950.
Assets
Bal.
f.
Cash
8,850
950
Bal.
7,900
Supplies +
1,350
1.350
Land
20,000
20,000
TRANSACTION
F
(CONTINUED)

creditors on account, RM950.
Liabilities +
Accounts
Payable +
Equity
Share
Fees
Wages
Capital + Earned
Exp.
Bal.
f.
1,350
950
25,000
7,500
Bal.
400
25,000
7,500
2,125
Rent
Exp.
800
Util.
Misc.
Exp. Exp.
450
275
TRANSACTION
G
On November 30, 2013, Chris Clark

determined that the cost of supplies on
hand at the end of the period was RM550.
Assets
Bal.
g.
Bal.
Cash
7,900
7,900
Supplies
1,350
800
550
Land
20,000
20,000
TRANSACTION
G
(CONTINUED)
On November 30, 2013, Chris Clark

determined that the cost of supplies on hand
at the end of the period was RM550.
Liabilities
Equity
Accounts
Share
Payable + Capital
Bal.
g.
Bal.
400
25,000
Fees
Wages
Rent
Sup.
Util.
+ Earned Exp. Exp. Exp. Exp.
7,500
2,125
800
450
Misc.
Exp.
275
800
400
25,000
7,500
2,125
800
800
450
275
TRANSACTION
H

RM2,000 to shareholders (Chris Clark) as
dividends.
Assets
Bal.
h.
Cash +
7,900
2,000
Supplies
550
Bal.
5,900
550
Land
20,000
20,000
TRANSACTION
H
(CONTINUED)

RM2,000 to shareholders (Chris Clark) as
dividends.
Liabilities +
Equity
Accts. Share
DiviFees
Wages
Pay. + Capital Dends + Earned Exp.
Bal.
h.
400
Bal. 400
25,000
7,500
2,125
Rent
Sup.
Util.
Misc.
Exp. Exp. Exp. Exp.
800 800 450
275
2,000
25,000
2,000
7,500
2,125
800 800 450
275
SUMMARY
RETAINED EARNINGS
You Should Note the Following:
o The effect of every transactions is an
increase or a decrease in one or more of

the accounting equation elements.
o The two sides of the accounting equation

are always equal.
o The equity (owners equity) is increased by

amounts invested by shareholders (share
capital).
You Should Note the Following:
o The equity (owners equity) is increased by

revenues and decreased by expenses.
o The equity (owners equity) is decreased

by dividends paid to shareholders.
o Retained earnings is the equity created
from business operations through revenue

and expense transactions.
TYPES OF TRANSACTIONS AFFECTING

OWNERS EQUITY
Example Exercise 1-3 Transactions

Salvo Delivery Service is owned and operated by
Joel Salvo. The following selected transactions were
completed by Salvo Delivery Service during
February:
1.Received cash from owner as additional
investment in exchange for share capitalordinary,
RM35,000.
2.Paid creditors on account, RM1,800.
3.Billed customers for delivery services on account,
RM11,250.
4.Received cash from customers on account,
RM6,740.
5.Paid dividends, RM1,000.
Indicate the effect of each transaction on the

accounting equation elements (Assets, Liabilities,
Equity Share Capital, Dividends, Revenue, and
Expense). Also indicate the specific item within the
accounting equation element that is affected. To
illustrate, the answer to (1) is shown below.
1)Asset (Cash) increases by RM35,000; Equity
(Share CapitalOrdinary) increases by RM35,000.

2) Asset (Cash) decreases by RM1,800; Liability
(Accounts Payable) decreases by RM1,800.
3) Asset (Accounts Receivable) increases by
RM11,250; Revenue (Delivery Service Fees)
increases by RM11,250.
4) Asset (Cash) increases by RM6,740; Asset
(Accounts Receivable) decreases by RM6,740.
5) Asset (Cash) decreases by RM1,000; Dividends
increases by RM1,000.
Financial Statements
After transactions have been recorded

and summarized, reports are prepared for
users. The accounting reports providing
this information are called financial
statements.
FINANCIAL STATEMENTS
Statement of Comprehensive
Income
o The statement of comprehensive income
reports the revenues and expenses for a period

of time, based on the matching concept.
o The matching concept is applied by matching

the expenses incurred during a period with the
revenue that those expenses generated.
o The excess of the revenue over the expenses is

called net profit (net income), or earnings. If
expenses exceed revenue, the excess is a net
loss.

Statement of Comprehensive Income
The revenues and expenses of Chickadee Travel
Service for the year ended April 30, 2014, are listed
below.
Fees earned
Miscellaneous expense
Office expense
Wages expense
RM263,200
12,950
63,000
131,700
Prepare a statement of comprehensive income for

the current year ended April 30, 2014.

Chickadee Travel Service
Statement of Comprehensive Income
For the Year Ended April 30, 2014
Fees earned . . . . . . . . . . . . . . . . .
RM263,200
Expenses:
Wages expense . . . . . . . . . . . . RM131,700
Office expense . . . . . . . . . . . . .
63,000
Miscellaneous expense . . . . .
12,950
Total expenses . . . . . . . . . . .
207,650
Net profit . . . . . . . . . . . . . . . . . . . .
RM
55,550
Retained Earnings Statement
The retained earnings statement reports

the changes in the retained earnings for a
period of time.
It is prepared after the statement of

comprehensive income because the net
profit or net loss for the period must be
reported in this statement.
o To illustrate, assume that NetSolutions earned net

profit of RM4,155 and paid dividends of RM2,000
during December. The following statement would
be prepared.

Using the statement of comprehensive income for
Chickadee Travel Service shown in Example
Exercise 1-4, prepare a retained earnings statement
for the year ended April 30, 2014. Adam Cellini, the
owner, invested an additional RM50,000 in the
business in exchange for share capitalordinary,
and dividends of RM30,000 were paid during the
year. Retained earnings were RM30,000 on May 1,
2013, the beginning of the current year.

For the Year Ended April 30, 2014
Retained earnings, May 1, 2013 . . . . . . . . . . .
RM30,000
Net profit for the year . . . . . . . . . . . . . . . . . . . .
RM55,550
Less dividends . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,000
Increase in retained earnings . . . . . . . . . . . . .
25,550
Retained earnings, April 30, 2014 . . . . . . . . .
RM55,550
STATEMENT OF COMPREHENSIVE INCOME
Net profit is carried to the

retained earnings statement
RETAINED EARNINGS STATEMENT

From the statement of
comprehensive income
To the statement of
financial position
Statement of Financial Position
A statement of financial position is a list

of the assets, liabilities, and equity as of a
specific date.
Account Form
The account form of a statement of

financial position lists the assets on the
left and the liabilities and equity on the
right. It resembles the basic format of the
accounting equation.
STATEMENT OF FINANCIAL
POSITION
This amount is compared

to the net cash flow on the
statement of cash flows.
From the retained

earnings statement
Statement of Cash Flows
A statement of cash flows is a summary of

the cash receipts and cash payments for a
specific period of time.
It consists of three sections:

1. operating activities
2. investing activities
3. financing activities
STATEMENT OF
CASH FLOWS
This amount should match

Cash on the statement of
financial position.

Using the following data for Chickadee Travel Service as
well as the retained earnings statement shown in
Example Exercise 1-5, prepare a statement of financial
position as of April 30, 2014.
Accounts payable
RM 12,200
Accounts receivable
31,350
Share capitalordinary
100,000
Cash
53,050
Land
80,000
Supplies
3,350

April 30, 2014
Assets
Land. . . . . . . . . . . . . . . . . . .
RM 80,000
Supplies. . . . . . . . . . . . . . .
3,350
Accounts receivable . . .
31,350
Cash. . . . . . . . . . . . . . . . . . .
53,050
Total assets. . . . . . . . . . . . . .
RM167,750

Equity
Share capitalordinary. . . . . . . . . . . . . . . .
RM100,000
Retained earnings . . . . . . . . . . . . . . . . . . . .
55,550
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . .
155,550
Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . .
12,200
Total equity and liabilities. . . . . . . . . . . . . .
RM167,750
RM
Cash Flows from Operating

Activities
The cash flows from operating activities

section reports a summary of cash
receipts and cash payments from
operations.
Cash Flows from Investing

Activities
The cash flows from investing activities

section reports the cash transactions for
the acquisition and sale of relatively
permanent assets.
Cash Flows from Financing

Activities
The cash flows from financing activities

section reports the cash transactions
related to cash investments by
shareholders, borrowings, and cash
dividends.

A summary of cash flows for Chickadee Travel Service for the year
ended April 30, 2014, is shown below.
Cash receipts:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . RM251,000
Cash received from issuing share capitalordinary . . 50,000
Cash payments:
Cash paid for expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000
Cash paid for land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,000
Cash paid for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
The cash balance as of May 1, 2013, was RM72,050. Prepare a

statement of cash flows for Chickadee Travel Service for the
year ended April 30, 2014.

theExample
Year Ended1-7
April 30, 2014
FollowFor
My
Cash flows from operating activities:
Cash received from customers . . . . . . . RM251,000
Deduct cash payments for expenses . . (210,000)
Net cash flows from operating activities . . . . . . .
RM 41,000
Cash flows used for investing activities:
Cash payments for purchase of land . . . . . . . . .
(80,000)
Cash flows from financing activities:
Cash received issuing share capitalordinary.. RM 50,000
Deduct cash dividends . . . . . . . . . . . . . . . . .
(30,000)
Net cash flows from financing activities. .
20,000
Net decrease in cash during year . . . . . . . . . .
RM(19,000)
Cash as of May 1, 2013 . . . . . . . . . . . . . . . .
INTERRELATIONSHIPS AMONG
FINANCIAL STATEMENTS
Interrelationships Among Financial

Statements
o In Exhibit 6, NetSolutions net profit of RM3,050

for November is added to the beginning retained
earnings on November 1, 2013, in the retained
earnings statement.
INTERRELATIONS
HIPS AMONG
FINANCIAL
STATEMENTS

Statements
o In Exhibit 6, NetSolutions retained earnings of

RM1,050 as of November 30, 2013, on the retained
earnings statement also appears on the November 30,
20l3, statement of financial position as retained
earnings.
INTERRELATIONS
HIPS AMONG
FINANCIAL
STATEMENTS

Statements
o In Exhibit 6, cash of RM5,900 reported on the

statement of financial position as of November 30,
2013, is also reported on the November statement
of cash flows as the end-of-period cash.
End of Topic 2
63
Wan N -2008

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ACCOUNTING CONCEPT AND

2.0 ACCOUNTING CONCEPT AND PRACTICE

The Accounting Equation

The resources owned by a business are its

The Accounting Equation

Assets = Liabilities + Equity

The Accounting Equation

Assets = Liabilities + Equity

The Accounting Equation

Assets = Liabilities + Equity

Example Exercise 1-2

Follow My Example 1-2

A business transaction is an economic

On November 1, 2013, Chris Clark deposited

On November 5, 2013, NetSolutions paid

On November 10, 2013, NetSolutions

Cash + Supplies + Land

The liability created by a purchase on

Items such as supplies that will be used in

o Revenue from providing services is recorded

o Revenue from the sale of merchandise is

o Other examples of revenue include rent,

o An account receivable is a claim against a

During the month, NetSolutions spent cash or

On November 30, 2013, NetSolutions paid the

On November 30, 2013, NetSolutions paid the

On November 30, 2013, NetSolutions paid

On November 30, 2013, NetSolutions paid

On November 30, 2013, Chris Clark

On November 30, 2013, Chris Clark

On November 30, 2013, NetSolutions paid

On November 30, 2013, NetSolutions paid

800 800 450

800 800 450

You Should Note the Following:

o The effect of every transactions is an

increase or a decrease in one or more of

o The two sides of the accounting equation

o The equity (owners equity) is increased by

You Should Note the Following:

o The equity (owners equity) is increased by

o The equity (owners equity) is decreased

o Retained earnings is the equity created

from business operations through revenue

TYPES OF TRANSACTIONS AFFECTING

Example Exercise 1-3 Transactions

Follow My Example 1-3

Indicate the effect of each transaction on the

Follow My Example 1-3

After transactions have been recorded

reports the revenues and expenses for a period

o The matching concept is applied by matching

o The excess of the revenue over the expenses is

Example Exercise 1-4

Prepare a statement of comprehensive income for

Follow My Example 1-4

Retained Earnings Statement

The retained earnings statement reports

It is prepared after the statement of

Retained Earnings Statement

o To illustrate, assume that NetSolutions earned net

Example Exercise 1-5