Accounting Equation With Revenue and Expense

1. Basic accounting equations can be extended by incorporating the equity component of the owner, ie capital, revenue, and expenses as follows:

Asset = Liability + Owner’s Equity

Asset = Liability + [Capital + Net Profit]

Asset = Liability + [Capital + (Revenue-Expense)


Asset = Liability + Capital + Revenue – Expense

2. When a transaction involves revenue and expense, profit or loss will be available:
Revenue > Expense → Net Profit → Owner’s Equity increase

Revenue < Expense → Net Loss → Owner’s Equity decrease

3. From the accounting equation, the resulting revenue resulted in the accounting, resulting in an increase in assets or a reduction of liability. When merchandise is sold in cash, assets are increased in cash. If the merchandise is sold on a credit basis, assets are increased in the form of debtors. If the proceeds are used to pay the creditor, the liability will be reduced in the form of creditors.

4. Expenses result in asset diminution or increase in liabilities. When an item is paid in cash, the asset is reduced in cash. If an expense is still unpaid, the liability increases in the form of accrued expenses.

Example 1

Business TransactionEffect on
AssetLiabilityOwner’s Equity
I. Buy goods worth RM300 in cash
  • Stock (+RM300)
  • Cash (-RM300)
II. Buy goods worth RM760 on creditStock (+RM760)Creditors (+RM760)
III. Sell items worth RM80 with cash at RM95
  • Stock (-RM80)
  • Cash (+RM95)
Capital (+RM15)(Profit)
IV. Sell items for RM360 on credit at RM400
  • Stock (-RM360)
  • Debtors (+RM400)
Capital (+Rm40)(Profit)
V. Pay a fee of RM150 in cashCash (-RM150)Capital (-RM150)(Loss)
VI. Pay the loan interest of RM95 in cashCash (-RM95)Capital (-RM95)
VII. Receive a commission of RM55 in cashCash (+RM55)Capital (+RM55)(Profit)
VIII. Pay creditors with checks of RM420 and receive a RM80 discount.Bank (-RM420)Creditors (-RM500)Capital (+RM80)(Profit)
IX. The receivables pay with a check worth RM810, giving him a RM90 discount
  • Bank (+RM810)
  • Debtors (-RM900)
Capital (-RM90)(Loss)
X. Take Rm90 worth of goods for your own useStock (-RM900)Capital (-RM90)(Drawing)
XI. Get a loan from a bank of RM6000Cash (+RM6000)Loan (+RM6000)
XII. Business owners bring in a table from his home worth RM75 for business useFurniture (+RM75)Capital (+RM75)
XIII. Checks from debtors of RM350 are not entertained by banks.
  • Debtors (+RM350)
  • Bank (-RM350)

Example 2
Mahani operates a photostat service center. The following is a business transaction during June 1998.

June 1 Mahani brings in cash Rm10000 to start his business.
         3 Purchase two photocopiers on credit at RM4000 per unit.
         4 Purchase a supply of RM680 in cash.
         5 Obtained a bank loan of Rm6000 to settle the debts to creditors of photocopier machines.
         10 Received RM360 from photostat service.
         15 Paying for general expenses of RM60 with cash
         16 Purchase shop equipment worth RM3200. Half of them are paid in cash and the balance will be paid next month
         19 Pay your own retail expenses with business cash of RM110.
         23 Accepts an RM260 bill to repair and maintain a photostat machine.
         25 Paying a phone bill of RM58 for cash.
         27 Received electricity and water bills of RM130 for June.
         28 Paid a shop assistant’s salary of RM380 with cash.
         29 Received RM3100 from photostat service.
         30 Pay rent in cash RM800

(a) Record the transaction using the format of the column showing the types of assets, liabilities, and owner equity. Summarize those items on June 30, 1998.
(b) Prepare Income Statement for the month ended 30 June 1998.

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