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CHAPTER 3
Accounting Equation and
Accounting Classification
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Chapters Outlines
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Accounting Classification
Assets
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Non-Current Assets
Assets bought/purchased not for resale.
Used in the running of the business to get profit
Has useful life of more than 1 year
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Non-Current Assets
Tangible non-current assets
Those assets which have physical existence
e.g: land, motor car, building and plant
Investment
e.g.: quoted and unquoted investment and fixed
deposit (>1 year)
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Current Assets
Cash or Cash equivalent
Those assets which are expected to be converted
into cash within a year
e.g.: stocks and account receivable (debtors)
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Owners Equity
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Liabilities
Financial obligations of the business to external
parties.
Non-current liabilities:
Amount owing by the business that is not repaid
in within 1 year
e.g.: Long term loan, mortgage on premises,
debenture.
Current liabilities:
An amount owing by business that is to be paid
within 1 year
e.g: short term loan, bank overdraft, account
payable (creditors)
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Example 1
Fill in the following based on the accounting
equation:
1
.
Assets
Owners
Equity
45,000
12,400
13,333
33,000
10,000
2
.
3
.
21,200
45,678
34,567
Liabilities
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Revenue
Increase in owners equity resulting from
activities entered into for the purpose of
earning income
Trading business- sale of goods
Service business- performance of services
e.g.: interest received, commission received,
rent received, discount received
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Expenses
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Income Statement:
Profit or Loss
Net profit = Revenue > Expenses
Net loss = Revenue < Expenses
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Effects of Transactions
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Transactions
Effect
Accounts
Cash purchase
(+) E
(-) A
Purchases
Cash/bank
Credit purchase
(+) E
(+) L
Purchases
Creditors
Cash Sales
(+) A
(+) R
Cash/Bank
Sales
Credit Sales
(+) A
(+) R
Debtors
Sales
Purchase return/Return
outwards
(-) E
(-) L
Purchase Return
Creditors
(-) R
(-) A
Sales Return
Debtors
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Movement of stock
Purchase
Goods bought by business for the purpose of resale
Sales
Sale of goods which the business bought with the
prime intention of resale
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Discounts
Trade discounts
It is given when business
bought goods in large
quantity
no need to record i.e. NO
double entry
Shown as deduction from
total selling price in the
invoice
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Cash discounts
Encourage early payment
need to record where the
amount of discount is
deducted from sales or
purchased
Sales discounts allowed
Purchases discounts
received
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Cash Discounts
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Effects
Accounts
(+) E
(-) A
Discount Allowed
Debtors
(+) R
(-) L
Discount received
Creditors
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Carriage/freight
Transportation cost
Expenses to the business
Two types:
Carriage Inwards
Transportation cost relates to the purchase of
goods
Will be shown in trading a/c as increment to the
purchase cost
Carriage Outwards
Transportation cost related to the selling of goods
Will be shown in profit and loss a/c as an
expenses
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BUSINESS
ABC
Return outwards
Sold goods
CUSTOMER
(DEBTOR)
Return inwards
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Continued
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STOCKS/GOODS
INCREASE (+)
Purchase of goods
Recorded in the
purchases a/c
Return inwards
DECREASE (-)
Recorded in the
Recorded in the Recorded in the
Return inwards a/c
Sales a/c
Return outwards a/c
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