FHBM1214 Week 2 S

Recording of Business
Transactions – Accounting
Equation and Source
Documents
Week 2
UTAR/FHBM1214/Topic2
In Your Textbook...
Roshayani Arshad, et al. (2009), Financial

Accounting An Introduction, 2nd Edition,
Malaysia, McGraw Hill.
 Chapter 3: Accounting Equation and
Double Entry System (pg 22-28)
 Chapter 5: Business Transactions and
Documentation
Learning Objectives
1.Describe the accounting equation and
explain its components.
2.Explain the nature of assets, liabilities and
owner’s equity.
3.Explain the effects of revenue, expenses,
and owner’s withdrawals on owner’s
equity.
4.Identify the main types of business
documentations.
What is a business
transaction?
A business transaction is an economic event that

directly changes a company’s financial condition or
directly affects its results of operations.
Using The Basic Accounting
Equation
Transactions are a business’s economic events

recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the

accounting equation.
Transactions (Question?)
Are the following events recorded in the accounting
records? Owner withdraws
RM500 supplies An employee RM1,000 cash for
Event are purchased is hired. personal use.
on account.
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record
The Basic Accounting Equation
Owners’
Assets = Liabilities +
Equity
Provides the underlying framework for recording and

summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership

claims.
LO 6 State the accounting equation, and define

assets, liabilities, and owner’s equity.
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by

a business
Definition
• Resources a business owns.
• Provide future services or benefits.
• Cash, Supplies, Equipment, etc.
The rights of the creditors, which

represent debts of the business
Definition
• Claims against assets (debts and obligations).
• Creditors - party to whom money is owed.
• Accounts payable, Notes payable, etc.
The rights of the owners

Definition
• Ownership claim on total assets.
• Referred to as residual equity.
• Capital, Drawings, etc. (Proprietorship or
Partnership).
Business Transactions and the
Accounting Equation
 When a transaction take place, at least
two items in the accounting equation will
change
 The equality between the assets and the
claims against these assets will ALWAYS
be maintained.
Resources = Creditors’ & Owners’ claims against

resources
Owners’ Equity
Revenues result from business activities entered into for

the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Owners’ Equity
Expenses are the cost of assets consumed or services

used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Effects of Transactions on Owner’s Equity
Owner’s Equity
Decreased by Increased by
Owner’s Owner’s
withdrawals investments
Expenses Revenues
Net
income
On November 1,
20x6, Chris
begins a business
that will be
known as
Net Solutions.
Example : Net Solutions
a. Chris brings in cash RM25,000 to start
the business.
Assets = Liability + Owner’s Equity
Date Cash Land Office Creditor

Supplies
a) capital +25,000
+25,000
b. Net Solutions paid RM20,000 for a land.
Supplies
b)
-20,000 +20,000
c. During the month, Net Solutions purchased office
supplies for RM1,350 and agreed to pay the creditor in the
near future (on account).
Cash Land Office Creditor

Supplies
c) +1,350 +1,350
d. Net Solutions provided services to customers,
earning fees of RM7,500 and received the
amount in cash.

Supplies
d) +7,500 Service +7,500
revenue
e. Net Solutions paid the following expenses:
wages, RM2,125; rent, RM800; utilities,
RM450; and miscellaneous, RM275.

Supplies
e)
-2,125 Wages -2,125
-800 Rent -800
-450 Utilities -450
-275 Miscell -275
f. NetSolutions paid RM950 to creditors during
the month.

Supplies
f)
-950 -950
g. At the end of the month, Chris withdrew
RM2,000 in cash from the business for
personal use.

Supplies
g)
-2,000 Drawing -2,000
Supplies
a) +25,000 capital +25,000
b) -20,000 +20,000
c) +1,350 +1,350
d) +7,500 Service +7,500
revenue
e) -2,125 Wages -2,125
-800 Rent -800
-450 Utilities -450
-275 Miscell -275
f) -950 -950
g) -2,000 Drawing -2,000
5,900 20,000 1,350 400 26,850

27,250 27,250
Review Question
Sheila has the following assets and
liabilities on 1 February 20x6:
Cash RM4,500; Building RM65,000;

Shop equipment RM18,000; Bank
loan RM25,000; Creditors RM3,700.
How much is Sheila’s equity in the

business?
Lecture Exercise 1
Show the effect of below transactions on the accounting equation.
June 1 Invested RM15,955 cash to start the business.

2 Hired a secretary at salary of RM1,800 per month.
3 Paid cash for a Dell computer, RM3,500.
7 Purchased office supplies on account, RM750.
8 Sold goods worth RM125 in cash.
15 Paid utility expenses, RM170.
28 Withdrew RM10 cash for personal use.
29 Paid RM500 to supplier for account payable due.
30 Paid secretary’s salary in full for the month of June.
Self Exercise 1
The opening balances for Company A are: Cash RM24,600; Accounts
Receivable RM17,220; Accounts Payable RM14,270; Capital RM27,550.
Aug 1 Paid office rent for August, RM470.
3 Purchased equipment on account, RM4,276.
7 Received cash from clients, on account RM2,410.
9 Purchased office supplies on account, RM240
13 Paid cash to creditors on account, RM760.
15 Purchased motor vehicle for RM24,000, paying RM2,470 cash
and taking a loan for the balance.
17 Paid cash from business bank account for personal
expenses, RM1,760
26 Received cash for services given during August, RM2,470
30 Paid salaries for the month, RM2,400; utility expenses RM276.
Self Exercise 2
a. Fred brought in cash RM50,000 and a used van valued at
RM25,000 for business purposes.
b. Used his own money to opened a business current account at
Citibank and banked in RM45,000 cash.
c. Paid rental RM1,000 by cheque.
d. Purchased office equipment from Greg Bhd for RM5,500,
paying RM3,000 in cash.
e. Paid utility RM900 by cheque.
f. Paid RM1,000 cash for office equipment purchased in
transaction d.
g. RM500 cash was paid for advertising.
h. Paid office salaries by cheque RM3,000
i. Fred withdrew RM1,000 cash for family use.
j. Received commission RM750 by cheque.
Source Documents
Source Documents
 Written documents
 that provide details of a transaction
 the evidence that the transaction has taken
place.
 All accounting entries are based on
information derived from these source
documents.
Features of Source Docs
 Most source docs contain the following
information:
1. The date when the transaction took place.
2. The names & addresses of the parties
concerned.
3. The nature of the transaction.
4. The total amount of money involved.
5. Terms & conditions of the transaction.
6. An authorised signature.
Importance of Source Docs
 They provide evidence or proof that a
transaction has occurred.
 They are used as part of a process to
record information into the books of
original entry.
 They are required for audit purposes.
List of Source Docs
 Invoice
 Credit note
 Debit note
 Payment voucher
 Cheque counterfoil
 Receipt
 Bank statement
Invoice
 Sent by the seller
 to the buyer to inform the latter how much
to pay for the goods or services supplied.
 When a trader sells on credit instead of by
cash, he prepares an invoice
 duplicate invoice kept by the seller and
sends the original copy to the buyer to
request payment.
Example for Invoice
Invoice: 1222
PENANG HEONG HEONG
FOOD ENTERPRISE
Mr/ Ms JOO JOO Minimarket Kampar. Date : 3 March 2007
Unit Price
Quantity Particulars (RM) RM
30 Bean Curd Biscuit 1.20 36.00
12 Golden Dragon Ball 7.50 90.00
20 Green Bean Biscuit 6.30 126.00
5 Hong Kong Lou Poh Pheah 3.20 16.00
50 Nuts Buscuits 4.00 200.00
80 Pineapple Biscuit 8.50 680.00
20 Red Sugar Biscuit 3.00 60.00
100 Tambun Biscuit 6.50 650.00
120 Tambun Biscuit (Pandan) 6.90 828.00
Total 2686.00
17 MAY 2007
Received By PBB 20076
Credit Note
 The seller sends a credit note to the buyer
when goods have been overcharged, or
when the buyer returns goods.
 The seller prepares a credit note and
sends the original copy to the buyer to
inform the latter that he is crediting the
buyer’s account.
 Purpose: To correct an overcharge in the
invoice.
Example for Credit note
Credit Note: CN 205568

PENANG HEONG HEONG
FOOD ENTERPRISE
INV: 1222
Mr/ Ms JOO JOO Minimarket Kampar. Date : 15 MAY 2007
Unit Price
Quantity Particulars (RM) RM
10 Bean Curd Biscuit 1.20 12.00
2 Green Bean Biscuit 6.30 12.60
3 Nuts Buscuits 4.00 12.00
12 Tambun Biscuit (Pandan) 6.90 82.80
Total 119.40
Debit Note
 Sent by the seller to the buyer as an
additional invoice when the latter has been
undercharged.
 The seller will prepare and send the
original copy of a debit note to the buyer to
debit the buyer’s account, thus increasing
the amount of the buyer’s debt.
 Purpose: To correct an undercharge in the
invoice.
Example for Debit note
HUP HENG AGENCY SDN BHD

100-103, Jalan Industry Kampar, 31900 Kampar.
Tel: 05-4653323
DEBIT NOTE
Date: 16-Jun-07
To: JOO JOO Minimarket Kampar. Debit Note ID: DN 3788650
Invoice ID : 310033858
Unit Price
No. Qty Description Undercharge Amount
1 5 100 + Regular C+ 500MLPET 0.70 3.50
2 1 COKE 500MLPET 0.70 0.70
3 1 100+ Regular C+ 1.5LPET 0.40 0.40
Total 4.60
Being undercharged of RINGGIT MALAYSIA FOUR AND CENTS SIXTY ONLY
18 JUNE 2007
CASH
This is eletronic generated note, no signature is required
Payment Voucher
 Prepared to record payment of money, of
either cash or cheque, to a third party.
 The party receiving the payment will have
to sign to acknowledge receipt of the said
sum, endorsed by the officer authorising
the payment.
Example for Payment voucher
JOJO MINI MARKET KAMPAR

PV 15/08
PAYMENT VOUCHER Date : 30-Aug-07

PARTICULAR AMOUNT (RM)
Salaries 1500.00
Donation 100.00
Water and electricity expenses 39.00
Total 1639.00
Cash/ Cheque: PBB 20102
Prepared by, Authorised by, Received by,
Cheque Counterfoil
 Contains information such as cheque
number, payee’s name and amount paid.
 Records payment of money by cheque.
 Accountants will use all the cheque stubs
in the cheque book to record the Cash
Book or Petty Cash Book.
Example for cheque
counterfoil
cheque
counterfoil
Receipt
A document to acknowledge a payment
received.
 The original copy is given to the customer
or paying party while the duplicate copy is
retained by the recipient.
Example for Receipt
KAMPAR HOMES CAFÉ SDN BHD OR: 7788
Tel: 605- 4666666 Fax: 605-4666667

E-Mail: khc@streamyx.com Website: www.khc.com.my
Receipt Date : 7 April 2007
Received from Mr/

: Ms JOO JOO Minimarket Kampar.
The sum of Ringgit: One hundred seventy two and cents eighty only
Being payment of : IN 16690
RM 172.80
Bank Checque no Amount

CASH 172.80
Collector
Bank Statement
A monthly report sent by the commercial
bank to its customer who maintains a
cheque (current) account.
 It gives the details of the money drawn out
and deposits made by the business during
that particular month into this account.
Example for Bank Statement
MONEY BANK
Kampar, Perak
A/c No: 888-688-998-8
Date Transaction Debit Credit Balance
June 11 Beginning balance 817.02

13 Cheque No. 3500 68.79 748.23
13 Cheque No. 3500 148 600.23
15 Cheque deposit 440.02 1040.25
20 Cheque No. 3500 100 940.25
25 Withdrawal 60 880.25
30 Ending balance 880.25
Review Question
What documentation would you expect to change
hands in the following circumstance?
a. You bought a CD from Tower Records, paying
cash for it.
b. You bought a Samsung TV using credit card.
c. You bought a Suzuki Swift, paying 10% by
issuing a cheque, and applied bank loan for
the remaining balance.
d. You returned damaged goods to the supplier,
which were bought on credit.

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Recording of Business

Roshayani Arshad, et al. (2009), Financial

A business transaction is an economic event that

Transactions are a business’s economic events

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

Criterion Is the financial position (assets, liabilities, or

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

LO 6 State the accounting equation, and define

The resources owned by

Assets = Liabilities + Owner’s Equity

The rights of the creditors, which

Assets = Liabilities + Owner’s Equity

The rights of the owners

Resources = Creditors’ & Owners’ claims against

Revenues result from business activities entered into for

Expenses are the cost of assets consumed or services

Assets = Liability + Owner’s Equity

Date Cash Land Office Creditor

Assets = Liability + Owner’s Equity

Cash Land Office Creditor

Cash Land Office Creditor

Cash Land Office Creditor

Assets = Liability + Owner’s Equity

Cash Land Office Creditor

Cash Land Office Creditor

5,900 20,000 1,350 400 26,850

Cash RM4,500; Building RM65,000;

How much is Sheila’s equity in the

June 1 Invested RM15,955 cash to start the business.

 the evidence that the transaction has taken

Mr/ Ms JOO JOO Minimarket Kampar. Date : 3 March 2007

Credit Note: CN 205568

HUP HENG AGENCY SDN BHD

Being undercharged of RINGGIT MALAYSIA FOUR AND CENTS SIXTY ONLY

JOJO MINI MARKET KAMPAR

PAYMENT VOUCHER Date : 30-Aug-07

Cash/ Cheque: PBB 20102

Prepared by, Authorised by, Received by,

KAMPAR HOMES CAFÉ SDN BHD OR: 7788

Tel: 605- 4666666 Fax: 605-4666667

Receipt Date : 7 April 2007

Received from Mr/

Being payment of : IN 16690

Bank Checque no Amount

Date Transaction Debit Credit Balance

June 11 Beginning balance 817.02

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