Accounting

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8/2/2012

Objective of Lecture 2
CLASSIFICATION OF ACCOUNTS
&
ACCOUNTING EQUATION

• By end of lecture 2, all students should be able
to:(a) Understand the five categories of
accounts and able to classify them into the
respective categories
(b) Understand the accounting equation and
the relationship between assets, liabilities and
owner’s equity.

Classifications of accounts


1.
2.
3.
4.
5.

An account is used to record all information
regarding an item.
The five major categories of account
Revenues
Expenses
Assets
Liabilities
Owner’s Equity

Revenue Account



Revenues are income earned by a business
Examples of revenue accounts

1.
2.
3.
4.
5.

Sales
Discount revenue
Commission revenue
Interest revenue
Rent Revenue

Asset Account

Expense Account




Expenses are costs incurred in the earning
of revenue
Examples of expense account

1.
2.
3.
4.
5.
6.

Purchases
Cartage inwards
Customs duty
Delivery vehicle/ motor vehicle expenses
Discount expense
Salaries and wages



Assets are something a business owns
which has future economic value



Examples of asset accounts

1.
2.
3.
4.
5.
6.
7.
8.
9.

Cash at bank
Accounts receivable
Inventories
Furniture
Motor vehicle
Equipments
Buildings
Land
Shares (investment)

1

8/2/2012

Liability Account

Owners Equity




Liabilities are items which a business owes
to other people or organization
Examples of liability accounts

1.
2.
3.

Accounts payable
Loan
Mortgage

1. Capital
2. Drawings
3. Profit/Loss



The Accounting Equation

Assets = Liabilities + Owners’ Equity

Economic
Resources

Claims to the
Economic Resources



Owner’s equity is the value of any
investment the owner has in the business
Example of owner’s equity accounts

Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY

(+Revenue – Expense)

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