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
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
(SOFP)/ Income Statement
 Measures the financial performance or
profitability over a specific period of time
2. Statement of Financial Position (SOFP)/
Balance Sheet
 Summarizes the business’s assets, liabilities
and equity at a specific point of time
3. Cash Flow Statement
 Shows the flow of cash in and cash out of the
business.
Classification of
business transactions
Assets Statement of Financial
Position
Owner’s Statement of Financial
equity Position
Liabilities Statement of Financial
Position
Revenues 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 RM
ASSETS EQUITY
Land and building 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
320,000 320,000

AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2012
AZIZI ENTERPRISE
Statement of Financial Position as at 31
December 2012
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 payables 40,000
320,000
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,
Short-term Loans
Owners’ equity
 Equity is the residual interest in the
entity’s 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 owner’s equity
 Other terms are capital, net worth,
shareholders’ fund and shareholders’ equity
exercise
 Classify the following items into assets, liabilities
and capital.
Fixtures and Office equipment Term loan from
fittings Maybank

Account Cash in hand Land and buildings

receivable

Leasehold Bank overdraft Account payables

premises

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 OWNER’S EQUITY
ASSETS

1. RM 130,000 RM 70,000

2. RM 890,000 RM 500,000

3. RM 50,000 RM 550,000

4. RM 111,000 RM 50,000

5. RM 330,000 RM 110,000
Business Transaction
 Effects Of Transactions on the Accounting
Equation
Transaction Effect Upon
Assets Liabilities Owner’s
Equity
Kassim Cash increases Capital
introduces + RM10,000 increases
RM10,000 into + RM10,000
business
Sell goods Inventory
RM1,200 to decreases
Ramly – RM1,200
Debtor increases
+ RM1,200
Buy furniture Furniture Creditor
RM10,000 from increases increases
AhSeng, paid by + RM10,000 + RM2,000
cheque RM8,000 Bank decreases
- RM8,000
 Effects Of Transactions on the Accounting
Equation
Transaction Effect Upon
Assets Liabilities Owner’s
Equity
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
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 firm’s 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 income,

commission received, discount received
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 – cost of
promoting the business
 Administration expenses – expenses
incurred in administering the office
 Rent, insurance, salaries
 Finance expenses – expenses
incurred from borrowings
 Interest on loans
Statement of
Comprehensive Income –
Vertical FormIncome for the year ended 31
Safi Trading
Statement of Comprehensive
December 2012
Sales revenue RM 100,000
Cost of sales (40,000)
Gross profit 60,000
Add: Other revenue: Interest income 8,000
Dividend income 2,000
70,000
Less: Expenses Rent (6,000)
Salaries (10,000)
Motor expenses (4,000)
Depreciation (5,000)
Net profit 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
owner’s equity

ASSETS = OWNER’S EQUITY + PROFIT +

LIABILITIES - DRAWINGS
OR
ASSETS = OWNER’S EQUITY + REVENUE –
EXPENSES – DRAWINGS + LIABILITIES
OR
ASSETS + EXPENSES + DRAWINGS = OWNER’S
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
owner’s equity.
 Profit is the excess of revenue over
expenses.

ASSETS = OWNER’S EQUITY + PROFIT +

LIABILITIES
OR
ASSETS = OWNER’S EQUITY + REVENUE –
EXPENSES + LIABILITIES
Profit and the Extended
Accounting Equation
 Profit belongs to the owner and increases
owner’s equity.

ASSETS = LIABILITIES + OWNER’S

EQUITY + PROFIT
OR
ASSETS = LIABILITIES + OWNER’S
EQUITY + REVENUE – EXPENSES
OR
ASSETS + EXPENSES = LIABILITIES +
OWNER’S EQUITY + REVENUE
 Assets Expenses Liabilitie Equity Revenu
s e
Abby invests + bank +
RM100,000 into 100,000 capital
business bank 100,00
0
Issued RM10,000 - bank + salary
cheque for 10,000 10,000
employees’ salary
Issued RM15,000 - bank +
to suppliers for 15,000 purchase
purchased goods s 15,000
Sell RM25,000 + + sales
goods to receivable 25,000
customers on s 25,000
credit
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