1. College of Business Administration, Al-Kharj
UNIT-2 Acct - 103
College of Business Administration, Al-Kharj
Salman Bin Abdulaziz University
KINGDOM OF SAUDI ARABIA

2. Unit – II (Acct-103) Accounting System:
Classifications of accounts, Double Entry system, Accounting Equations.
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3. AFTER THIS CHAPTER, YOU WOULD BE ABLE TO KNOW:
Understand Classification of Accounts
Analyze the effect of business transactions on the basic double entry system .
State the basic accounting equation and explain the meaning of assets, liabilities, and owner’s equity.
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4. CLASSIFICATION OF ACCOUNTS
Identify steps in classifications of account:
An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Therefore, it is necessary to classify the transactions in to their respective accounts.
Accounts
Real Account
(Permanent)
Nominal Accounts
(Temporary)

5. A systematic arrangement that shows the effect of transactions
Accounts:
A systematic arrangement that shows the effect of transactions
and other event on a specific element, i.e., assets, liabilities and so
The companies keep a separate account for each assets, liabilities,
revenue, and expenses, and for capital (owners, equity).
Real Account:
Real accounts or permanent Accounts are assets, liability an d equity accounts; They appear on the balance sheet.
Nominal Accounts:
Nominal account or temporary accounts are revenue, expenses, and the dividend account; except for the dividends they appears on the income statement.
Difference Real / Nominal
Nominal; Companies periodically close nominal account.
Real; While, Companies do not close real accounts.
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6. Double Entry system
Meaning:
Every business transaction causes at least two changes in the financial position of a business concern at the same time - hence, both the changes must be recorded in the books of accounts. Otherwise, the books of accounts will remain incomplete and the result ascertained therefore will be inaccurate.
For Example; If we buy / purchase machinery for $1,000,000. Obviously, it is a business transaction. It has brought two changes - machinery increases by $1,000,000 and cash decreases by an equal amount.
In accounting language these two changes are termed as "a debit change" and "a credit change“
Other words: each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a DEBIT and the other a CREDIT.
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7. Debits and Credits
An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and crediting another.
DEBITS must equal CREDITS.

8. Debits and Credits
An arrangement that shows the effect of transactions on an account.
Debit = “Left”
Credit = “Right”
Account
An Account can be illustrated in a T-Account form.

9. Debits and Credits Account Name SR.10,000 SR.3,000 8,000 Balance
If Debit entries are greater than Credit entries, the account will have a debit balance.
Account Name
Debit / Dr.
Credit / Cr.
SR.10,000
SR.3,000
8,000
Balance
SR.15,000

10. Debits and Credits SR.10,000 SR.3,000 8,000 Balance SR.1,000
If Credit entries are greater than Debit entries, the account will have a credit balance.
SR.10,000
SR.3,000
8,000
Balance
SR.1,000

11. Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit

12. Double-Entry System Exercise
1. Invested SR 32,000 cash and equipment valued at SR 14,000 in the business.
Assets
Liabilities
Stockholders’ Equity = +
+ 32,000
+ 46,000
+ 14,000

13. Double-Entry System Exercise
2. Paid office rent of SR 600 for the month.
Assets
Liabilities
Stockholders’ Equity = +
- 600
- 600 (expense)

14. Double-Entry System Exercise
3. Wages paid SR 3,200 to labor.
Assets
Liabilities
Stockholders’ Equity = +
- 3,200
- 3,200

15. Double-Entry System Exercise
4. Received cash of SR 2,300 for services completed for Shuler Co.
Assets
Liabilities
Stockholders’ Equity = +
+ 2,300
+ 2,300 (revenue)

16. Double-Entry System Exercise
5. Purchased a computer for SR 6,100.
Assets
Liabilities
Stockholders’ Equity = +
+ 6,100
- 6,100

17. Solution Exercise Questions.
Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases owner’s equity:
(1) Rent Expense, (2) Service Revenue,
Drawings, (4) Salaries Expense.
Solution
1. Rent Expense is an expense (E); it decreases owner’s equity.
2. Service Revenue is revenue (R); it increases owner’s equity.
3. Drawings is owner’s drawings (D); it decreases owner’s equity.
4. Salaries Expense is an expense (E); it decreases owner’s equity.
Answers: 1-a 2-b 3- c 4- d 5-d

18. BASIC ACCOUNTING EQUATION
Owner’s Equity /
Capital =
Liabilities +
Assets
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19. ASSETS FOR A BUILDING BLOCK
Assets are resources owned by a business.
They are used in carrying out such activities as production, consumption and exchange.
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20. LIABILITIES FOR A BUILDING BLOCK
are creditor claims against assets
are existing debts and obligations
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21. OWNER’S EQUITY FOR A BUILDING BLOCK
Owner’s Equity = total assets minus total liabilities. (A - L = O.E.)
Owner’s Equity represents the ownership claim to total assets.
Subdivisions of Owner’s Equity:
1 Capital or Investments by Owner (+)
2 Drawing (-)
3 Revenues (+)
4 Expenses (-)
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22. INVESTMENTS BY OWNERS FOR A BUILDING BLOCK
are the assets the owner puts in the business
increase owner’s equity
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23. DRAWINGS FOR A BUILDING BLOCK
are withdrawals of cash or other assets by the owner for personal use
decrease owner’s equity
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24. REVENUES FOR A BUILDING BLOCK
gross increases in owner’s equity from business activities entered into for the purpose of earning income
may result from sale of merchandise, services, rental of property, or lending money
usually result in an increase in an asset
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25. EXPENSES FOR A BUILDING BLOCK
decreases in owner’s equity that result from operating the business
cost of assets consumed or services used in the process of earning revenue
examples: utility expense, rent expense, supplies expense, and tax expense
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26. INCREASES AND DECREASES IN OWNER’S EQUITY
INCREASES DECREASES
Investments by Owner
Withdrawals by Owner
Owner’s Equity
Revenues
Expenses
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27. Mr.Ray decides to open a computer programming service.
TRANSACTION ANALYSIS
TRANSACTION 1
Mr.Ray decides to open a computer programming service.
On September 1, he invests SR.15,000 cash in the business, which he names Soft touch.
Soft touch
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28. TRANSACTION ANALYSIS TRANSACTION 1 SOLUTION
Assets = Liabilities Owner’s Equity
Cash R. Neal, Capital
+ 15, Investment ,000
SR.15, = SR.15,000
There is an increase in the asset Cash, SR.15,000, and an equal increase in the owner’s equity, R. Neal, Capital, SR.15,000.
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29. TRANSACTION ANALYSIS TRANSACTION 2
Soft touch purchases computer equipment for SR.7,000 cash.
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30. TRANSACTION ANALYSIS TRANSACTION 2 SOLUTION
Assets = Liabilities Owner’s Equity
Cash Equipment = R. Neal, Capital
Old
SR.15, = SR.15,000
(2) , ,000______________________________
New
SR. 8, SR.7, = SR.15,000
Cash is decreased by SR.7,000 and the asset Equipment is increased by SR. 7,000.
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31. TRANSACTION ANALYSIS TRANSACTION 3
Softtouch purchases supplies expected to last for several months for SR.1,600 from Acme Supply Company.
Acme agrees to allow Softtouch to pay this bill next month, in October.
This transaction is referred to as a purchase on account or a credit purchase.
Softtouch
Acme Supply Company
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32. TRANSACTION ANALYSIS TRANSACTION 3 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
Old SR.8, SR.7, = SR.15,000
(3) _____ + SR.1, _______ SR.1, ________
New SR.8, SR.1, SR.7, = +SR. 1, SR.15,000
SR.16, SR.16,600
The asset Supplies is increased by SR.1,600, and the liability Accounts Payable is increased by the same amount.
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33. TRANSACTION ANALYSIS TRANSACTION 4
Softbyte receives SR.1,200 cash from customers for programming services it has provided.
This transaction represents the Softtouch’s principal revenue-producing activity.
Softtouch
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34. TRANSACTION ANALYSIS TRANSACTION 4 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
Old SR.8, SR.1, SR.7, = SR.1, SR.15,000
(4) , _____ _____ _______________ + 1,200
New SR.9,200 + SR.1, SR.7, = SR.1, SR.16,200
SR.17, SR.17,800
Cash is increased by SR.1,200 and Ray, Capital is increased by SR.1,200.
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35. TRANSACTION ANALYSIS TRANSACTION 5 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
Old SR.9, SR.1, SR.7,000 = SR.1, SR.16,200
(5) ___Advertising Expense__ _
New SR.9,200 +SR.1, SR.7,000 = SR.1, SR.15,950
SR.17, SR.17,800
Accounts Payable is increased by SR.250 and R. Neal, Capital is decreased by SR.250.
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36. TRANSACTION ANALYSIS TRANSACTION 6
Softbyte provides SR.3,500 of programming services for customers.
Cash of SR.1,500 is received from customers, and the balance of SR.2,000 is billed on account.
Softtouch
Bill
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37. TRANSACTION ANALYSIS TRANSACTION 6 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay R. Neal, Capital
Old
SR.9, SR.1,600 +SR.7, = SR.1, SR.15,950
(6)
+ 1, , ,500
New
SR.10, SR.2, SR.1, SR.7, = SR.1, SR.19,450
SR.21, SR.21,300
Cash is increased by SR.1,500; Accounts Receivable is increased by SR.2,000, and R. Neal, Capital is increased by SR.3,500.
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38. TRANSACTION ANALYSIS TRANSACTION 7
Expenses paid in cash for September are store rent, SR.600; employees’ salaries, SR.900; and utilities, SR.200.
Softtouch
SR.600
SR.900
SR.200
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39. TRANSACTION ANALYSIS TRANSACTION 7 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay R. Neal, Capital
Old
SR.10, SR.2,000 + SR.1,600 + SR.7, = SR.1, SR.19,450
(7)
- 1, Rent Expense
Salaries Expense
Utilities Expense
New
SR. 9, SR.2,000 + SR.1,600 +SR.7, = SR.1, SR.17,750
SR.19, SR.19,600
Cash is decreased by SR.1,700 and R. Neal, Capital is decreased by the same amount.
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40. TRANSACTION ANALYSIS TRANSACTION 8
Softtouch pays its SR.250 Daily News advertising bill in cash.
Softtouch
Daily
News
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41. TRANSACTION ANALYSIS TRANSACTION 8 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay R. Neal, Capital
Old
SR.9, SR.2,000 +SR.1, SR.7,000 = SR.1, SR.17,750
(8)
New
SR.8,750 +SR.2,000 + SR.1,600 +SR. 7, = SR.1, SR.17,750
SR.19, SR.19,350
Both Cash and Accounts Payable are decreased by SR Since the expense was previously recorded, it is not recorded now.
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42. TRANSACTION ANALYSIS
TRANSACTION 9
The sum of SR.600 in cash is received from customers who have previously been billed for services (in Transaction 6).
Softtouch
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43. TRANSACTION ANALYSIS TRANSACTION 9 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay R. Neal, Capital
Old
SR.8, SR.2, SR.1, SR.7, = SR.1, SR.17,750
(9)
New
SR.9, SR.1, SR.1, SR.7, = SR.1, SR.17,750
SR.19, SR.19,350
Cash is increased by SR.600 and Accounts Receivable is decreased by the same amount. R. Neal, Capital is not increased because the revenue was already recorded.
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44. TRANSACTION ANALYSIS TRANSACTION 10
Ray Neal withdraws SR.1,300 in cash from the business for his personal use.
SR.1,300
Softbyte
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45. TRANSACTION ANALYSIS TRANSACTION 10 SOLUTION
Assets = Liabilities Owner’s Equity
Cash + Accts. Rec. + Supplies + Equip = Accts. Pay R. Neal, Capital
Old
SR.9,350 + SR.1, SR.1, SR.7,000 = SR.1, SR.17,750
(10)
- 1, Drawing ,300
New
SR.8, SR.1, SR.1, SR.7, = SR.1, SR.16,450
SR.18, SR.18,050
Cash is decreased by SR.1,300 and R. Neal, Capital is decreased by the same amount. This is not an expense, but rather a withdrawal of owner’s equity.
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