Lesson Plan: Classification of Accounts &

Accounting Equations
Objective:

● Understand the classification of accounts.

● Explore the accounting equation and its significance.
● Provide practical examples and engage students in interactive activities.

Duration: 90 minutes

Structure:

1. Introduction to Accounting Basics

1. Briefly introduce accounting as the language of business.
▪ Universal Communication: Accounting principles and standards are
generally accepted worldwide, making financial statements
understandable and comparable across different countries and industries.
▪ Financial Reporting: Through financial statements such as the balance
sheet, income statement, and cash flow statement, accounting
communicates a business's financial performance and position to
stakeholders.
▪ Decision Making: Managers use accounting information to make informed
decisions about operations, investments, and financing. Investors and
creditors also rely on accounting information to assess the financial health
of a business before investing or lending money.
▪ Regulatory Compliance: Businesses are required to follow accounting
standards and regulations when preparing financial statements. This
ensures transparency and accountability in financial reporting.
▪ Performance Evaluation: Accounting helps in evaluating the performance
of a business over time by providing historical financial data for
comparison and analysis.
▪ Planning and Control: Accounting information is used in budgeting,
forecasting, and monitoring actual performance against planned targets,
helping businesses to plan and control their operations effectively.

2. Explain the importance of classifying accounts for accurate financial reporting.

▪ Organized Financial Data: Classifying accounts helps in organizing
financial data into different categories such as assets, liabilities, equity,
revenue, and expenses. This organization makes it easier to understand
and analyze financial information.
 ▪ Preparation of Financial Statements: Proper classification of accounts is
essential for preparing financial statements like the balance sheet, income
statement, and cash flow statement. These statements provide a snapshot
of a company's financial position and performance.
▪ Comparative Analysis: Classifying accounts enables businesses to
compare their financial performance over different periods. This
comparison helps in identifying trends, making informed decisions, and
setting financial goals for the future.
▪ Compliance with Accounting Standards: Following standard accounting
practices for classifying accounts ensures compliance with accounting
standards. This compliance is necessary for maintaining transparency and
credibility in financial reporting.
▪ Facilitates Decision Making: Accurate classification provides
stakeholders, such as investors, creditors, and management, with reliable
information for making informed decisions about the company's financial
health and future prospects.
▪ Legal and Regulatory Requirements: Proper classification of accounts is
often a legal requirement for businesses. It ensures that financial reporting
complies with regulatory standards and helps prevent fraud and financial
mismanagement.
▪ In conclusion, understanding the importance of classifying accounts is
essential for BBA students studying accounting. It helps in organizing
financial data, preparing financial statements, facilitating decision-making,
ensuring compliance with standards, and enabling comparative analysis
over time.

2. Modern Approach to Classification

1. Components of accounting equation.
▪ The accounting equation forms the foundation of double-entry accounting.
It is expressed as:
▪ Assets = Liabilities + Shareholder’s Equity.
▪ Here's a breakdown of each component with reference to accounting
standards:
▪ Assets: These are economic resources owned or controlled by a business
that result from past transactions and from which future economic benefits
are expected to flow to the entity. Examples include cash, accounts
receivable, inventory, property, plant, and equipment. Assets are typically
recorded at historical cost under accounting standards like IFRS
(International Financial Reporting Standards) or GAAP (Generally
Accepted Accounting Principles) but may be revalued under certain
circumstances (e.g., IAS 16 for property, plant, and equipment).
▪ Liabilities : These are obligations of the business that arise from past
transactions, which will result in an outflow of economic benefits in the
future. Examples include accounts payable, loans, and bonds payable.
 Liabilities are typically recorded at their current value under IFRS and
GAAP.
▪ Equity : Also known as "owner's equity," this represents the residual
interest in the assets of the entity after deducting liabilities. It reflects the
owners' claims on the assets of the business. Equity includes share capital,
retained earnings, and other reserves. Equity is subject to various
accounting standards depending on the jurisdiction and entity type, such as
IAS 1 for presentation of financial statements under IFRS.
▪ Revenue : Revenue is the income that a business earns from its normal
business activities, such as sales of goods or services. It is recorded when
it is earned, not necessarily when the cash is received. Revenue
recognition is governed by various standards, such as IFRS 15 and ASC
606 (Revenue from Contracts with Customers).
▪ Expenses : Expenses are the costs incurred by a business in order to
generate revenue. They are incurred to produce goods or services.
Expenses are recognized in the period they are incurred, following the
matching principle. Various standards govern expense recognition, such as
IAS 1 for presentation of financial statements under IFRS.
▪ Understanding these components is crucial for preparing financial
statements in accordance with accounting standards, as they provide a
framework for recording and reporting the financial position and
performance of a business.
2. Introduce the modern approach, emphasizing the Accounting Equation:
▪ Assets = Liabilities + Shareholder’s Equity.
▪ Discuss how this equation forms the basis for double-entry bookkeeping.
3. Explain the expanded form of the equation: Assets = Liabilities + Capital +
Revenues – Expenses.
4. Examples of Components:
▪ Assets:
Cash
Accounts Receivable
Inventory
Supplies
Prepaid Expenses
Marketable Securities
Land
Buildings
Machinery
Vehicles
Equipment
Furniture and Fixtures
Goodwill
Intangible Assets
Land Improvements
Investments
▪ Liabilities:
Accounts Payable
Notes Payable
Loans Payable
Accrued Liabilities
Taxes Payable
Unearned Revenue
Deferred Revenue
Bonds Payable
Mortgage Payable
Lease Obligations
Warranty Liabilities
Contingent Liabilities
▪ Equity:
Common Stock
Preferred Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income
Capital Surplus
Shareholder's Equity
▪ Expenses:
Rent Expense
Salaries and Wages Expense
Utilities Expense
Insurance Expense
Supplies Expense
Depreciation Expense
Amortization Expense
Repairs and Maintenance Expense
Advertising Expense
Bad Debt Expense
Interest Expense
Taxes Expense
Research and Development Expense
Travel and Entertainment Expense
Legal and Professional Fees
▪ Revenue:
Sales Revenue
Service Revenue
Rental Revenue
Interest Revenue
Dividend Revenue
Royalty Revenue
Subscription Revenue
Licensing Revenue
 Consulting Revenue
Freight Revenue
Commission Revenue
Gain on Sale of Assets
Other Operating Revenue

3. Rule of Debit & Credit:

In accounting, every transaction affects at least two accounts, and each transaction
involves either a debit or a credit (or both). Here's a basic rule to understand how debits
and credits work:

● Assets and Expenses:

Increase in assets: Debit

Decrease in assets: Credit

Increase in expenses: Debit

Decrease in expenses: Credit

● Liabilities, Equity, and Revenues:

Increase in liabilities: Credit

Decrease in liabilities: Debit

Increase in equity: Credit

Decrease in equity: Debit

Increase in revenues: Credit

Decrease in revenues: Debit

● Example Transactions:

If a business receives cash (an asset), it would debit the Cash account (increase) and
credit the relevant account (e.g., Revenue or Sales) to record the source of the cash.

If a business pays rent (an expense), it would debit the Rent Expense account (increase)
and credit the Cash account (decrease) to record the cash outflow.

● Sum of Debits and Credits:

 In every transaction, the total debits must equal the total credits, ensuring that the
accounting equation (Assets = Liabilities + Equity) remains balanced.

4. Analyze and identify the difference in the accounting equation:

1. Purchased office supplies on account for $500.

2. Received cash from clients for services rendered, $1,000.
3. Paid rent for the month, $800.
4. Purchased equipment for cash, $2,000.
5. Received a bill for utilities, to be paid next month, $300.
6. Withdrew cash from the business for personal use, $500.

For each transaction, identify the accounts affected, determine whether each account is an
asset, liability, equity, revenue, or expense, and then analyze how each transaction
impacts the accounting equation (Assets = Liabilities + Equity). Pay attention to how
each transaction affects the balance sheet equation and how debits and credits are used in
each case.

5. Interactive Activity: Account Classification Game

1. Divide students into groups.
2. Provide scenarios (e.g., purchase of inventory, payment of rent) and ask them to
classify the related accounts.
3. Discuss their answers and reinforce understanding.
6. Study Support Materials
1. Share resources:
▪ Online Courses: Explore free accounting courses (e.g., CFI).
▪ Reading Financial Statements: Understand balance sheets and financial
statements.
▪ Modern Accounting Books: Recommend relevant textbooks.
7. Recap and Conclusion
1. Summarize key points.
2. Encourage further exploration and self-study.

Assessment:

● Participation in the account classification game.

● Understanding demonstrated during discussions.

Remember, accounting principles and concepts are the foundation for informed financial
decision-making!