Sem5 akuan nota
Transcript of Sem5 akuan nota
Terms and conditions:
Test 1 = 15% Test 2 = 20% Exercises = 15% Final exam = 50% Attendance < 80% = ban from taking final exam, Contribution from main text = up to 80%Contribution from lectures = up to 50%Contribution from student effort = 100%Appointment for meetings
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Learning Objectives
Explain the definition of accounting
Explain various groups of users and their information need.
Explain basic accounting concepts.
Explain various forms of business categories and its relation to accounting.
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Introduction
What is accounting?
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Introduction
What is accounting?
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Importance of Accounting to
business
“language of business”
Identify the performance
of a business
(profit/loss, loans, properties)
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Development of Accounting Accounting records exist as early as 3500 BC in
Babylon.
Luco Pacilio in 1494 – author of the Book “Summa de Arithmetica, Geometrica er Proportionalita”
Method and rules to identify and record business activities – bookkeeping.
Industrial Revolution – more specialised methods of accounting developed.
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Definition of Accounting
The process of identifying, recording and presenting the business activities to the various group of users.
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Examples of the accounting process
Identificationidentify type of activities e.g. paying salaries to employee, buying a computer to sell to customer, received payment from customer etc.
RecordingThe above activities will be recorded on continuous basis, manually or computerised.
PresentationThe information recorded will be summarised after a certain period of time.
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Users of Accounting information
Accounting information is prepared to provide useful information to a variety of different decision makers.
It can be individuals or enterprises.
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Users of Accounting information
These decision makers include:
Investors
Creditors
Financial Analysts / Advisor
Business Contact Group
Government Agencies
Public
Employee
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Basic Accounting concepts
The preparation of the financial statements involved the application of various accounting concepts.
It is important to understand the concepts as the foundation to the study of accounting.
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Basic Accounting concepts
These basic accounting concepts include:
Business Entity concept
Going Concern concept
Objectivity concept
Money Measurement concept
Time Period concept
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Types and various forms of
business
There are three forms of business:
Sole proprietorship / sole trader
Partnership
Company
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Types and various forms of
business
Sole proprietorship / sole trader:
Owned by one individual.
Low cost of organizing.
The owner has to bear all the risks associated with the business.
The business would cease if the owner deceased.
Tax is charged on the owner.
Unlimited liabilities
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Types and various forms of
business
Partnership
Owned by at least 2 individuals but not more than 20.
Example: Professional organisations.
Every partner are bound to the partnership agreement (oral or written).
Tax is charged on the partners individually.
Unlimited liabilities.
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Types and various forms of
business
Companies Owned by many owners called
shareholders and formed by statute. Can issue shares to public. At least two shareholders
(max 50) for private limitedcompanies, but no limitation on number of shareholders forpublic companies.
Tax is charged on the company. The company has the rights to own assets, sued and being
sued, and other rights as being specified by the law.
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BASIC FRAMEWORK
OF
ACCOUNTING
SHAC 1023
Dr. Noriza Mohd Jamal
LEARNING OBJECTIVES
Describe the regulatory and conceptual
framework.
Explain and apply selected accounting concepts.
Explain the qualities of useful financial
information.
INTRODUCTION
Why there is a need for
accounting regulation?
to avoid less meaningful
information reported – because
it may biased to the owner,
inaccurate, incomplete,
incomparable.
REGULATORY AND CONCEPTUAL
FRAMEWORK
Sources of
accounting
regulations
in Malaysia
Companies Act
Other regulatory
bodies e.g.
Bank Negara,
Securities Commission
Bursa Malaysia
FRF and MASB
-Accounting standard
-Statement of principles
-Guidelines and
pronouncements
REGULATORY AND CONCEPTUAL
FRAMEWORK
Malaysian Accounting Standard Board (MASB)
responsible for issuance of new accounting
standards, statement of principles, guidelines
and pronouncement.
Financial Reporting Foundation (FRF)
monitor those activities by MASB.
ACCOUNTING CONCEPTS
Historical cost concept
Prudence concept
Consistency concept
Matching concept
Accrual concept
Materiality concept
QUALITATIVE CHARACTERISTICS
OF ACCOUNTING INFORMATION
Understandability
Relevance
Reliability
Comparability
THE END
SHAC 1023
Dr. Noriza Mohd Jamal
1
Differentiate the components of the accounting equation.
Explain the nature of assets, liabilities, owner’s equity.
Classify business transactions according to assets, liabilities and equities as presented in the Statement of Financial Position.
Analyse the effect of business transactions on accounting equation and Statement of Financial Position.
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The users of accounting information need to know the financial position of the business and its profitability. But how these information be communicated to the users?
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The information been communicated through……..
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
STATEMENT OF FINANCIAL POSITION (SOFP)
SOFP is a statement listing what is owned by a business (assets) and….a list of those who have claims over those assets (liabilities and owner’s equity).
It shows the financial position of a business at a particular date.
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CleanShine
Statement of Financial Position as at 31 December 20X6
ASSETS
Equipment
Motor vehicles
Fixtures and fittings
Cash
RM
38 000
32 000
9 000
6 000
OWNER’S EQUITY
Capital
LIABILITIES
Bank loan
RM
48 000
37 000
85 000 85 000
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ASSETS
Resources that are owned or controlled by a business.
Used to provide future services or benefits.
Examples:
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MOTOR VEHICLES, furnitures, cash in hand, cash in bank, buildings, debtors. stock, equipment
LIABILITIES
Debts
Amount owed by a business to external parties.
External claims to the assets of a business.
Examples:
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BANK LOANS, creditors, overdraft
OWNER’S EQUITY
Capital
Amount invested by the owner in the business.
Shows how much the owner owns the business.
Represent the internal claims.
The owner are entitled to assets that are left after all external claims have been settled.
Thus, owner’s equity is determined by deducting total liabilities from total assets of the business.
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OWNER'S EQUITY = TOTAL ASSETS - TOTAL LIABILITIES
ASSETS = liabiltities + owner's equity
ASSETS =
Resources
that are
owned by
a business
OWNER’S
EQUITY
+Internal
claims to the
assets of a
business
External
claims to the
assets of a
business
LIABILITIES
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CleanShine
Statement of Financial Position as at 31 December 20X6
ASSETS
Equipment
Motor vehicles
Fixtures and fittings
Cash
RM
38 000
32 000
9 000
6 000
OWNER’S EQUITY
Capital
LIABILITIES
Bank loan
RM
48 000
37 000
85 000 85 000
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ASSETS = RM38000+32000+9000+6000=85000
OWNER'S EQUITY + LIABILITIES=48000+37000=85000
Statement of Financial Position summaries the results of past business transactions over a given period of time.
But how does this
Statement of Financial
Position come about
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ILLUSTRATION
Once upon a time….
Mr Danny wants to open
new cleaning service business
called CleanShine.
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Transaction 1: Mr Danny commenced business on 1 April 20x6 by investing RM35 000 cash in CleanShine.
CleanShine
Statement of Financial Position as at 1 April 20X6
ASSETS
Cash
RM
35 000
OWNER’S EQUITY
Capital
RM
35 000
35 000 35 000
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Transaction 2: CleanShine purchased cleaning equipment for RM16 000 cash on 4 April 20x6.
CleanShine
Statement of Financial Position at 4 April 20X6
ASSETS
Cash (35 000 – 16 000)
Cleaning Equipment
RM
19 000
16 000
OWNER’S EQUITY
Capital
RM
35 000
35 000 35 000
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Transaction 3: CleanShine borrowed RM30 000 from Bank to purchase a motor van on 8 April 20x6.
CleanShine
Statement of Financial Position at 8 April 20X6
ASSETS
Cash
Cleaning Equipment
Motor Van
RM
19 000
16 000
30 000
OWNER’S EQUITY
Capital
LIABILITY
Bank loan
RM
35 000
30 000
65 000 65 000
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Transaction 4: On 13 April 20x6, CleanShine purchased more cleaning equipment costing RM10 000 from Teguh Enterprise and paid a cash down payment of RM3 000. The balance is to be settled within 30 days.
CleanShine
Statement of Financial Position at 13 April 20X6
ASSETS
Cash (19 000 – 3 000)
Cleaning Equipment
(16 000 + 10 000)
Motor Van
RM
16 000
26 000
30 000
OWNER’S EQUITY
Capital
LIABILITIES
Bank loan
Creditors -Teguh Enterprise
RM
35 000
30 000
7 000
72 000 72 000
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Transaction 5: On 20 April 20x6, CleanShine paid Teguh Enterprise another RM5 000 cash for the amount owed.
CleanShine
Statement of financial position at 20 April 20X6
ASSETS
Cash (16 000 – 5 000)
Cleaning Equipment
(16 000 + 10 000)
Motor Van
RM
11 000
26 000
30 000
OWNER’S EQUITY
Capital
LIABILITIES
Bank loan
Creditors -Teguh Enterprise
(7 000 – 5 000)
RM
35 000
30 000
2 000
67 000 67 000
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In each transaction, at least two items in Statement of Financial Position were affected.
Statement of Financial Position must stay balance at all times regardless of any transactions and…the equation remain in equality.
In actual practice, however, businesses do not prepare a new Statement of Financial Position after every transaction (voluminous transactions occur everyday).
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Thus, there must be an accounting system where the effects of business transactions can be systematically accumulated and be summarised at the end of the period.
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Double Entry System
SHAC 1023
Dr. Noriza Mohd Jamal
1
• Explain the double entry system and the rules of double entry.
• Show how the business transactions are recorded in the accounts.
• Explain the nature of revenue and expenses.
• Explain the effect of revenue, expenses and owner’s withdrawals on owner’s equity.
• Explain the expansion of accounting equation
• Classification af accounts
Learning Objectives
2
• Accounting system needs a separate record to maintain for each item that appear in the Statement of Financial Position.
For example:
Introduction
3
CashCleaning equipmentMotor van
Capital
Bank loan
Ledger account
• Each records is used to keep track the changes caused by transactions to each of the Statement of Financial Position items.
• Such record is known as ACCOUNT.
• All of the accounts are kept in a book called LEDGER.
• That’s why, the account is also known as Ledger Account.
• So, every item in the Statement of Financial Position can be traced back to its account.
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Ledger account
Debit (Dt) Name of Account Credit (Ct)
• An account has a name and two sides known as Debit and Credit.
• Debit is on the left and credit is on the right. It is merely an accounting custom but applies to all accounts.
• Also called as T Account because it resembles the letter T.
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Rules of debit and credit
Increases in accounts Record at credit side for increase in owner’s equity or
liability.
Record at debit side for an increase in
asset.
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Record at debit sidefor decrease in
owner’s equity or liability.
Rules of debit and credit
Decrease in accounts
Record at credit side for a
decrease in asset.
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Rules of debit and credit
DEBIT CREDIT
Assets Increase Decrease
Liabilities Decrease Increase
Owner’s equity Decrease Increase
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Recording of business transactions
in ledger accounts
Examples of business transactions:
1) On 1st April, Mathew invested RM35 000 cash into the business.
2) On 4th April, CleanShine purchased cleaning equipment for RM16 000 cash.
3) On 8th April, CleanShine borrowed RM30 000 from bank to purchase a motor van.
4) On 13th April, CleanShine purchased more cleaning equipment costing RM10 000 from Teguh Enterprise and paid a cash down payment of RM3 000.
5) On 29th April, CleanShine paid Teguh Enterprise RM5 000 cash.
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Statement of Comprehensive
Income, revenue and expenses
• Beside Statement of Financial Position, Statement of Comprehensive Income (SOCI) also part of financial statement that shows the profitability of a business for a specified period of time. (also called as profit and loss account)
• Statement of Comprehensive Income constants two elements, i.e. revenue and expenses.
• Business is profitable when revenue is more than expenses, and vice versa.
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Format of Statement of
Comprehensive Income
Clean Enterprise
Statement of Comprehensive Income for the year ended 31 December 20x6
Expenses: RM
Laundry supplies 4 400
Salaries 36 000
Water and electricity 8 000
Rent 10 000
Telephone 1 200
Insurance 2 400
Revenue: RM
Laundry service revenue 72 000
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Format of Statement of
Comprehensive Income
Clean Enterprise
Statement of Comprehensive Income for the year 31 December 20x6
Expenses: RM
Laundry supplies 4 400
Salaries 36 000
Water and electricity 8 000
Rent 10 000
Telephone 1 200
Insurance 2 400
Profit 10 00072 000
Revenue: RM
Laundry service revenue 72 000
______
72 000
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Statement of Comprehensive Income,
revenue and expenses
• Revenue
Revenue is an income of a business. (Service business Vs. trading business)
* involve revenues accounts
• Expenses
Costs of goods and services consumed in the process of earning revenue. (Service business Vs. trading business)
* involve expenses accounts
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Double Entry System
for Revenues and Expenses
Revenues
Expenses
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Drawings
• DrawingsThe owner withdraw some cash or assets belonging to the business for his personal use.* involve drawings account
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Expansion of accounting equation
Assets = Liabilities + Owner’s equity
Owner’s capital - Owner’s drawings + Revenue - Expenses
Credit
Since
increase
owner’s
equity
Debit
Since
decrease
owner’s
equity
Credit
Since
increase
owner’s
equity
Debit
Since
decrease
owner’s
equity
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Recording of drawings, revenue and expenses in
ledger accounts (services business)
Examples of business transactions:
6. On 21st April. CleanShine purchased cleaning supplies (such as cleaning shampoo, cleaning chemical, floor polish, etc) for RM2 200 cash.
7. On 23rd April, CleanShine received RM6 450 cash for cleaning Andy’s new office.
8. On 24th April, Mathew withdrew RM2 400 cash from the business bank account for his personal use.
9. On 30th April, CleanShine paid all employees’ salaries amounting to RM3 200 by cash.
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Rules of debit and credit
DEBIT CREDIT
Assets Increase
Liabilities Increase
Owner’s equity Increase
Revenue Increase
Expenses Increase
Drawings Increase
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Recording of revenue and expenses
in ledger accounts (trading business)
Examples of business transactions:
Jaya Furniture, which buys furniture's for resale.
1. On 20th June, Jaya Furniture purchased 20 units of study tables on credit from Modern Furniture Bhd costing RM3 000.
2. On 25th June, Jaya Furniture sold 10 units of study tables for cash RM2 200.
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Recording of revenue and expenses in
ledger accounts (trading business)
For trading business……
their main expense is purchases of goods and
this expense is recorded in purchase account.
their source of income merely the sale of goods and this revenue is recorded in sales account.
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Classification of accounts
Accounts
Impersonal
Real
Nominal
personal
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CLASSIFICATION OF ACCOUNTS
PERSONAL/
SUBSIDIARY
IMPERSONAL/
GENERAL
CASH BOOK
DEBTORS
A/C
CREDITORS
A/C
NOMINAL
A/C
REAL/TANGIBLE
A/C
REVENUE AND
EXPENSES
A/C
ASSET, LIABILITY
AND EQUITY
A/C
CASH A/C
BANK A/C
A
C
C
O
U
N
T
S
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THE END
23
SHAC 1023Dr Noriza Mohd Jamal
Describe basic steps in the accounting cycle.
Show how business transactions are recorded in the journal.
Show how journal entries are posted to the ledger accounts.
How the ledger accounts are balanced.
Explain a trial balance and show how it is prepared.
Discuss the limitations of trial balance.
Prepare Statement of Comprehensive Income and Statement of Financial Position.
Statement of Comprehensive Income (SOCI)
Statement of Financial position
Transactions
Adjustments
Financial
Statements
Journal
LedgerTrial
Balance
Journals are the books in which transactions being first recorded. before the entries are made in the double entry accounts.
The journal is also known as the book of prime/original entry.
Transactions need to be classified and recorded in separate journals.
In the journal, all transactions are recorded systematically and chronologically in accordance with the double entry system.
Process of recording business transactions in the journal is known journalising.
Journal Purpose
General Journal To record transactions which do not fall under
any of other specific journals.
Sales Journal To record credit sales.
Purchases Journal To record credit purchases.
Returns Inwards Journal To record returns inwards.
Returns Outward Journal To record returns outwards.
Cash Book To record receipts and payments of cash and
cheques.
Petty Cash Book To record petty cash transactions.
Journal Purpose
General Journal Invoice, memo etc.
Sales Journal Sales invoice and debit note issued to
customers.
Purchases Journal Purchases invoice and debit note received
from suppliers.
Returns Inwards Journal Credit note issued to customers.
Returns Outward Journal Credit note received from suppliers.
Cash Book Receipt, cheque butt, bank slip and payment
vouchers.
Petty Cash Book Petty cash vouchers.
(refer chapter 5)
Business
Transactions
Occurs
Source
Documents
Prepared
Transaction
Analysis
Takes Place
Transaction
Entered in
The Journal
Amounts
Posted to
the Ledger
(refer page 48 of text book)
(refer 1st and 2nd transactions in the previous chapter)
General Journal
Date Accounts and Explanation F Debit Credit
1/4 Cash 35 000
Capital 35 000
(Owner invested cash into business)
4/4 Cleaning equipment 16 000
Cash 16 000
(Purchased cleaning equipment for business use)
To aid analysis by keeping similar items together (shows in one place
the complete effect for every transaction)
As a control feature to decrease the possibility of doing mistakes and
fraud (easy for checking/tracking mistakes)
The use of journals can support audit trail which facilitates in
detection of errors.
Posting refers to the procedure of transferring information from the journal to the ledger account.
In the ledger, open the accounts (to be debited/credited). Write the date, detail, journal page and amount for both accounts).
In the journal, write in the folio column (F), the account number to which amount was posted.
General Journal J1
Date Accounts and Explanation F Debit Credit
1/4 Cash N12 35 000
Capital N24 35 000
(Owner invested cash into business)
Cash Account N12
1/4 Capital JI 35 000
Capital Account N42
1/4 Cash JI 35 000
General Ledger
Steps in balancing off accounts:
1. Add up both sides to find out their totals.
2. Deduct the smaller total from the larger total to find the balance.
3. Enter the balance on the side with the smallest total.
4. Enter totals on a level with each other.
5. Enter the balance on the line below the totals (opposite side of the balance shown above the totals).
Cash Account Ref: N01
Date Particulars F (RM) Date Particulars F (RM)
2006
1/4
10/4
Capital
CS revenue35 000
6 450
2006
4/4
14/4
20/4
21/4
24/4
30/4
Clean. Equp.
Clean.Equip
Cred – Teguh
Cleaning
supp
Crawings
Salaries
16 000
3 000
5 000
2 200
2 400
3 200
9 650
Cash Account Ref: N01
Date Particulars F (RM) Date Particulars F (RM)
2006
1/4
10/4
1/5
Capital
CS revenue
Balance b/d
35 000
6 450
41 450
9 650
2006
4/4
14/4
20/4
21/4
24/4
30/4
Clean. Equip.
Clean.Equip
Cred – Teguh
Cleaning supp
Crawings
Salaries
Balance c/d
16 000
3 000
5 000
2 200
2 400
3 200
9 650
41 450
Step 5: finally enter
balance to start off
entries for following
month.
Step 4: now enter
totals level with
each other.
Step 3: enter balance
here so that totals will
be equal.
Cash Account Ref: N01
Date Particulars F (RM) Date Particulars F (RM)
2006
1/4
10/4
1/5
Capital
CS revenue
Balance b/d
35 000
6 450
41 450
9 650
2006
4/4
14/4
20/4
21/4
24/4
30/4
Clean. Equip.
Clean.Equip
Cred – Teguh
Cleaning supp
Crawings
Salaries
Balance c/d
16 000
3 000
5 000
2 200
2 400
3 200
9 650
41 450
This amount will
be transferred to
Trial Balance
Trial balance is a list of account titles and their balances in the
books, on a specific date, shown in debit and credit columns.
Based on the double entry concept, the total of debit entry for all transactions must equal to the total of credit entry.
PURPOSES OF TRIAL BALANCE
Trial balance is a list of account titles and their balances in the books,
on a specific date, shown in debit and credit columns.
Based on the double entry concept, the total of debit entry
for all transactions must equal to the total of credit entry.
To check if the two totals are equal, the trial balance will be
prepared at the end of a period.
It acts as a test of the equality of the debit and credit
balances in the ledger.
It helps to localize errors within a given time period.
It helps to facilitate the preparation of the financial
statements.
CleanShine
Trial Balance as at 30 April 20 x6
Details Debit (RM) Credit (RM)
Cash
Cleaning equipment
Motor vehicles
Bank loans
Teguh Enterprise
Capital
Drawings
Cleaning supplies
Salaries
Cleaning service revenue
9 650
26 000
30 000
2 400
2 200
3 200
___________
73 450
==========
30 000
2 000
35 000
6 450
__________
73 450
==========
Financial Statement can be prepared directly
from the Trial Balance since a Trial Balance
contents both the Statement of Comprehensive
Income accounts (revenue and expenses) as
well as Statement of Financial Position accounts
(assets, liabilities and owner’s equity).
CleanShine
Trial Balance as at 30 April 20 x6
Accounts title Debit (RM) Credit (RM)
Cash
Cleaning equipment
Motor vehicles
Bank loans
Jonny Enterprise
Capital
Drawings
Cleaning supplies
Salaries
Cle. Serv. revenue
9 650
26 000
30 000
2 400
2 200
3 200
________
73 450
=======
30 000
2 000
35 000
6 450
_________
73 450
========
CleanShine
Statement of Comprehensive Income for the
month ended 30 Apr 20 x6
(RM) (RM)
Revenue:
Cle. Serv. Revenue
Expenses:
Cleaning supplies
Salaries
Total expenses
Net profit
2 200
3 200
6 450
(5 400)
_________
1 050
========Will be added to the owner’s
equity in the Statement of
Financial Position to increase
the owner’s equity.
Transfer all revenues and expenses accounts to Income Statement to determine net profit.
The amount of net profit will be then transferred to Statement of Financial Position .
Transfer Assets, liabilities and Owner’s equity accounts to Balance Sheet.
CleanShine
Trial Balance as at 30 April 20 x6
Accounts title Debit (RM) Credit (RM)
Cash
Cleaning equipment
Motor vehicles
Bank loans
Jonny Enterprise
Capital
Drawings
Cleaning supplies
Salaries
Cle. Serv. revenue
9 650
26 000
30 000
2 400
2 200
3 200
________
73 450
=======
30 000
2 000
35 000
6 450
_________
73 450
========
CleanShine
Statement of Financial Position as at 30 Apr 20 x6
(RM) (RM)
Assets:
Motor vehicles
Cleaning equipment
Cash
Liabilities:
Bank loan
Creditors
Owner’s equity:
Capital
(+) Net profit
(-) Drawings
35 000
1 050
(2 400)_________________________________________________________
30 000
26 000
9 650_____________________________
65 650
========
30 000
2 000
33 650____________________________________________________________________
65 650
========
Amount from
Income Statement
Accounting Cycle 2
SHAC 1023
Dr Noriza Mohd Jamal
1
Learning Objectives
• Explain the classification of assets, liabilities and expenses.
• Prepare the classified Statement of Financial Position and Statement of Comprehensive Income using vertical format.
• Determine the cost of goods sold and gross profit for merchandising operations.
2
Classified Financial Statements
• Financial Statement can provides more meaningful information to the users if the items in the Financial Statements are grouped and arranged in a more systematic manner.
• This type of FS is known as Classified Financial Statement (classified Statement of Financial Position and classified Statement of Comprehensive Income).
3
Classified Statement of
Financial Position • The most common classification on the Statement
of Financial Position are as follows:
ASSETS
OWNER’S
EQUITY
LIABILITIES
NON CURRENT ASSETS
CURRENT ASSETS
CURRENT LIABILITIES
NON CURRENT LIABILITIES
OWNER’S EQUITY
4
Classified Statement of
Financial Position (SOFP)
Those assets that are intended to be used in the operations of the business of a number of years (more than one year).
More permanent in nature, because the assets are not intended for sale.
Sometimes can also be known as fixed assets.
Examples: Land, buildings, machinery, equipment, motor vehicles, furniture's and fixtures.
NON CURRENT ASSETS
5
Classified Statement of
Financial Position
Those assets that are already in form of cash or which will be converted into cash in the ordinary course of business operations, usually within a twelve months period.
Examples: Cash, Debtors, Inventory/Stock. Debtors refer to an individual or an organisation that owes the
business a sum of money. Stocks refer to goods that are purchased for resale. Current assets in the Statement of Financial Position are rank in
the order of liquidity, which means the ability of the assets to be converted into cash.
Cash is the most liquid assets and the stock is the least.
CURRENT ASSETS
6
Classified Statement of Financial
Position NON CURRENT LIABILITIES
Obligations that are expected to be paid within more than one year.
Sometimes can also be known long term liabilities. Examples: Long terms loan, loans secured by mortgages.
CURRENT LIABILITIES
Obligations that are expected to be paid within one year. Sometimes can also be known short term liabilities. Examples: short terms loan, creditors, bank overdraft.
7
Classified Statement of
Financial Position
OWNER’S EQUITY
Any changes in the owner’s equity are shown in this section.
Owner’s Equity:Capital(+) Net profit(-) Drawings
8
Classified Statement Of
Comprehensive Income
Expenses are often classified as Statement of Comprehensive Income:
1. Selling and distribution expenses – expenses incurred in promoting goods and placing them in the customer’s hand.
Examples: advertising, salesman salaries, delivery expenses.
2. Administrative expenses – general expenses incurred in running the business.
Examples: office salaries, telephone, water and electricity, postage, stationaries, insurances, etc.
3. Financial expenses – expenses incurred in obtaining the necessary monetary resources of the business.
Example: Interest on loans.
9
Statement of Comprehensive
Income of a Trading Business
• In trading business, the main source of revenue is the
sales of goods, commonly known as sales.
• So, unlike services business, expenses of trading
business are classified into two components:
1. the cost of goods sold
2. operating expenses
10
STATEMENT OF COMPREHENSIVE
INCOME IN TRADING BUSINESS
Jaya Furniture
Statement of Comprehensive Income for the year ended 31 December 20x6
RM
Sales revenue
(-) Cost of goods sold
Gross profit
(-) Operating expenses
Net profit
600 000
(350 000)
250 000
200 000
50 000
======
11
COST OF GOODS SOLD AND GROSS PROFIT
(all the goods bought were sold)
Example:
In the month of April, Thomas’s Bicycle Shop purchased 20 bicycles costing RM100 each. He then sold all the bicycles in the same month for RM150 each.
Thomas’s Bicycle Shop
Statement of Comprehensive Income for the month ended 30 April 20x6
RM
Revenue:
Sales (20 x RM150)
(-) Cost of goods sold:
Purchases (20 x RM100)
Gross profit
3 000
(2 000)
1 000
======
12
COST OF GOODS SOLD AND GROSS PROFIT
(not all the goods bought were sold)
Example:
In the month of April, Thomas’s Bicycle Shop purchased 20 bicycles costing RM100 each. He then sold 15 bicycles in the same month for RM150 each. 5 bicycles remained unsold.
Thomas’s Bicycle Shop
Statement of Comprehensive Income for the month ended 30 April 20x6
RM RM
Revenue:
Sales (15 x RM150)
(-) Cost of goods sold:
Purchases (20 x RM100)
(-) Stocks (5 x RM100)
Gross profit
2 000
(500)
2 250
(1 500)
750
======
13
COST OF GOODS SOLD AND GROSS PROFIT
(not all the goods bought were sold, there are some remaining
stocks in that particular month)
Example: In the month of May, Thomas’s Bicycle Shop still has 5 bicycles remained unsold. He purchased another 30 bicycles at RM100 and only managed to sold 28 bicycles during that month at RM150.
Thomas’s Bicycle Shop
Statement of Comprehensive Income for the month ended 31 May 20x6
RM RM
Revenue:
Sales (28 x RM150)
(-) Cost of goods sold:
Opening stocks(5x RM100)
Purchases (30 x RM100)
(-) Closing stocks (7 x RM100)
Gross profit
500
3 000
(700)
4 200
(2 800 )
1 400
======
14
Other expenses in the cost of goods
sold
• Besides the cost of purchases, the other costs involved in
putting the goods into a saleable condition should be
charged to the cost of goods sold.
• Example: packaging cost, transportation cost (carriage
inwards), import duty, insurance and freight costs, etc.
• These costs must be added to the purchases cost in
determining the cost of goods sold.
15
Returns of unsatisfactory goods
• On certain occasion, business have to return goods that have been
purchased from supplies because the goods are damaged, faulty or
wrong specification in terms of colour, size and shape. On the other
hand, customer also returns the goods that the business sold to them.
• These returns are known as purchases returns (return outwards) and
sales returns (return inwards).
• Both the returns effect the gross profit.
• Purchases returns reduce the cost of goods sold.
• Sales returns reduce the sales revenue.
16
COMPLETED STATEMENT OF
COMPREHENSIVE INCOMEName of business
Statement of Comprehensive Income for the year ended 31 December 20x6
RM RM
Revenue:
Sales
(-) Sales returns
(-) Cost of goods sold:
Opening stock s
(+) Purchases
Carriage inwards
Import duty
Insurance freight
(-) Purchases returns
Cost of goods available for sale
(-) Closing stocks
Gross profit
XX
XX
XX
XX
XX
(XX)
XXXX
(xx)
XXXXXX
(XXXX)
XXXX
(XXXX)
XXXX
======
17
THE END
18
Free Powerpoint TemplatesPage 2
LEARNING OUTCOMES
At the end of this chapter you should be able to:
Explain the specific types of journal.
Enter various transactions into appropriate journal.
Post from the journals to the accounts in the appropriate ledger.
Free Powerpoint TemplatesPage 3
ACCOUNTING CYCLE
Transactions
Adjustments
Financial
Statements
Source
Documents
Ledger
Trial
BalanceJournal
Free Powerpoint TemplatesPage 4
JOURNAL
Journals are the books in which transactions being
first recorded, before the entries are made in the T
accounts.
Free Powerpoint TemplatesPage 5
TYPES OF JOURNALS
Journal Purpose
General Journal To record transactions which do not fall under
any of other specific journals.
Purchases Journal To record credit purchases.
Sales Journal To record credit sales.
Purchases returns Journal To record returns outwards.
Sales returns Journal To record returns inwards.
Cash Book To record receipts and payments of cash and
cheques.
Petty Cash Book To record petty cash transactions.
Free Powerpoint TemplatesPage 6
SOURCE DOCUMENTS
Journal Purpose
General Journal Invoice, memo etc.
Purchases Journal Purchases invoice / debit note received from
suppliers.
Sales Journal Sales invoice / debit note issued to customers.
Purchases Returns Journal Credit note received from suppliers.
Sales Returns Journal Credit note issued to customers.
Cash Book Receipt, cheque butt, bank slip and payment
vouchers.
Petty Cash Book Petty cash vouchers.
Free Powerpoint TemplatesPage 7
PURCHASES JOURNAL
Purchases journal is used to record credit purchasesonly.
Basic contents in purchases journal:
o Date
o Name of creditors (suppliers)
o Invoice number
o Folio
o Amount (as in purchases invoice)
Free Powerpoint TemplatesPage 8
PURCHASES JOURNAL
Purchases Journal
Date Details (creditors) Invoice No Folio Amount (RM)
2006
Jan 2 Robert
Jan 8 Hermes
Jan 19 Brenda
Jan 30 Garry
9/101
9/102
9/103
9/104
PL 16
PL 29
PL 55
PL 89
6 700
13 800
1 200
5 100
Jan 31 Purchases A/c (Dr) GL 63 26 800
Free Powerpoint TemplatesPage 9
POSTING CREDIT PURCHASES TO THE
PURCHASES LEDGER
Purchases Journal
Book of original entry for credit purchases
Purchases Ledger
Creditors’ Accounts
Debit Credit
General Ledger
Purchases Account
Debit Credit
Each purchase posted separatelyTotal only to Purchase Account
Free Powerpoint TemplatesPage 10
Purchases Ledger
Robert
2006
Jan 2 Purchases
Folio
PJ 49
RM
6 700
Brenda
2006
Jan 19 Purchases
Folio
PJ 49
RM
1 200
Hermes
2006
Jan 8 Purchases
Folio
PJ 49
RM
13 800
Free Powerpoint TemplatesPage 11
General Ledger
Purchases
2006
Jan 31 Total Creditors
Folio
PJ 49
RM
26 800
Garry
2006
Jan 30 Purchases
Folio
PJ 49
RM
5 100
Free Powerpoint TemplatesPage 12
SALES JOURNAL
Sales journal is used to record credit sales only.
Contents of sales journal:
o Date
o Name of debtors (customers)
o Invoice number
o Folio
o Amount (as in sales invoice)
Free Powerpoint TemplatesPage 13
SALES JOURNAL
Sales Journal
Date Details (debtors) Invoice No Folio Amount (RM)
2006
Jan 1 Deek
Jan 8 Richard
Jan 28 Connie
Jan 30 Steven
16554
16555
16556
16557
SL 12
SL 39
SL 125
SL 249
5 600
16 400
2 200
11 000
Jan 31 Sales A/c (Cr) GL 44 35 200
Free Powerpoint TemplatesPage 14
POSTING CREDIT SALES TO THE
SALES LEDGER
Sales Journal
Book of original entry for credit sales
General Ledger
Sales A/C
Debit Credit
Sales Ledger
Debtors’ A/C
Debit Credit
Each sale posted separately Total only to Sales Account
Free Powerpoint TemplatesPage 15
Sales Ledger
Deek
2006
Jan 1 Sales
Folio
SJ 26
RM
5 600
Connie
2006
Jan 28 Sales
Folio
SJ 26
RM
2 200
Richard
2006
Jan 8 Sales
Folio
SJ 26
RM
16 400
Free Powerpoint TemplatesPage 16
General Ledger
Sales
2006
Jan 31 Total Debtors
Folio
SJ 26
RM
35 200
Steven
2006
Jan 30 Sales
Folio
SJ 26
RM
11 000
Free Powerpoint TemplatesPage 17
PURCHASES RETURNS JOURNAL
Sometimes, goods bought previously may be returned to the supplier for several reasons.
Also known as “RETURNS OUTWARDS”.
Those transactions are recorded in the Purchases Returns Journal.
Contents of purchases returns journal:
o Date
o Name of creditors (suppliers)
o Credit notes number
o Folio
o Amount
Free Powerpoint TemplatesPage 18
PURCHASES RETURNS
Purchases returns Journal
Date Details (creditors) CN No Folio Amount (RM)
2006
Jan 11 Mr Burn
Jan 16 Lily
Jan 28 Maria
Jan 30 Edward
9/34
9/35
9/36
9/37
PL 29
PL 46
PL 55
PL 87
1 800
1 000
300
3 600
Jan 31 Purchases returns
A/c (Cr)
GL 116 6 700
Free Powerpoint TemplatesPage 19
POSTING PURCHASES RETURNS TO THE
PURCHASE LEDGER
Purchases Returns Journal
Book of original entry for debit notes
General Ledger
Purchases Returns A/C
Debit Credit
Purchases Ledger
Creditors’ A/C
Debit Credit
Each debit note posted
separately
Total only to Purchases
Returns Account
Free Powerpoint TemplatesPage 20
Purchases Ledger
Mr Burn
2006
Jan 11 P/returns
Folio
PR 7
RM
1 800
Maria
2006
Jan 28 P/returns
Folio
PR 7
RM
300
Lily
2006
Jan 16 P/returns
Folio
PR 7
RM
1 000
Free Powerpoint TemplatesPage 21
General Ledger
Purchases Returns Account
2006
Jan 31 Total Creditors
Folio
PR 7
RM
6 700
Edward
2006
Jan 30 P/returns
Folio
PR 7
RM
3 600
Free Powerpoint TemplatesPage 22
SALES RETURNS JOURNAL
Sometimes, goods which have been sold are returned by
customers for several reasons:
o Goods were of the wrong type.
o They were the wrong color.
o Goods were faulty.
o Customer had bought more than he needed.
Also known as “RETURNS INWARDS”.
Those transactions are recorded in the sales returns journal.
Free Powerpoint TemplatesPage 23
SALES RETURNS JOURNAL
Contents of sales returns journal:
o Date
o Name of debtors (customer)
o Credit note number
o Folio
o Amount (as in credit note)
Free Powerpoint TemplatesPage 24
SALES RETURNS JOURNAL
Sales Returns Journal
Date Details (debtors) CN No Folio Amount (RM)
2006
Jan 2 Edwin
Jan 17 Maria
Jan 19 Vicky
Jan 29 Marcel
9/37
9/38
9/39
9/40
SL 12
SL 58
SL 99
SL 112
400
1 200
2 900
1 600
Jan 31 Sales Returns A/c (Dr) GL 114 6 100
Free Powerpoint TemplatesPage 25
POSTING SALES RETURNS TO THE
SALES LEDGER
Sales Returns Journal
Book of original entry for credit notes
Sales Ledger
Debtors’ A/C
Debit Credit
General Ledger
Sales Returns A/C
Debit Credit
Each credit note
separately
Total only to Sales
Returns Account
Free Powerpoint TemplatesPage 26
Sales Ledger
Edwin
2006
Jan 2 S/returns
Folio
SR 10
RM
400
Vicky
2006
Jan 19 S/returns
Folio
SR 10
RM
2 900
Maria
2006
Jan 17 S/returns
Folio
SR 10
RM
1 200
Free Powerpoint TemplatesPage 27
General Ledger
Sales Returns
2006
Jan 31 Total Debtors
Folio
SR10
RM
6 100
Marcel
2006
Jan 29 S/returns
Folio
SR10
RM
1 600
Free Powerpoint TemplatesPage 28
GENERAL JOURNAL
The other items which do not pass through the above books.
Contents:
o Date
o A/C to be debited and the amounts.
o A/C to be credited and the amounts.
o Folio
o Description
Free Powerpoint TemplatesPage 29
GENERAL JOURNAL
Date Details Fol Dr Cr
The name of the account to be debited.
The name of the account to be credited.
XX
XX
The description
Free Powerpoint TemplatesPage 30
Example 1: Purchase non-current assets on credit
On 1st July 2006, bought a machine from Toolmaker
Bhd. on credit for RM50 000.
Date Details Folio Dr (RM) Cr (RM)
2006
Jul 1 Machinery
Toolmaker Bhd.
Purchase machine on credit
GL1
PL55
50 000
50 000
General Journal
Free Powerpoint TemplatesPage 31
Post to Ledger
General LedgerMachinery A/C GL1
1/7 Toolmaker GJI 50 000
General Journal GJ1
Date Accounts and Explanation F Debit Credit
1/7 Machinery GL1 50 000
Toolmaker Bhd PL55 50 000
(Purchase machine on credit)
Toolmaker Bhd A/C PL55
1/7 Machinery GJI 50 000
Free Powerpoint TemplatesPage 32
Example 2: Drawing of Goods
On 12 January 2006, Swan took goods out of the business stock
amounting RM2 000 for personal use.
Date Details F Dr (RM) Cr (RM)
2006
Jan 12 Drawings
Purchases
Withdrew stocks for personal use
2 000
2 000
Journal Entry
Free Powerpoint TemplatesPage 33
Drawings
2006
Jan 12 Purchases
Folio RM
2 000
Purchases
2006
Jan 12 Drawings
Folio RM
2 000
Post to Ledger
Free Powerpoint TemplatesPage 34
Example 3: Opening Entries
Jumanji Enterprise has started a business on 1 January
2006 with assets and liabilities as follows:
Assets: Vehicles RM154 000, Stock RM39 000,
Cash RM10 000.
Liabilities: Short-term loan RM50 000.
Free Powerpoint TemplatesPage 35
Date Details Folio Dr (RM) Cr (RM)
2006
Jan 1 Vehicles
Stock
Cash
Short-term Loan
Capital
154 000
39 000
10 000
50 000
153 000
203 000 203 000
Assets and liabilities at this date
entered to open the books.
General Journal
Free Powerpoint TemplatesPage 36
Post to Ledger
Vehicles
2006
Jan 1 Balance b/d
Folio RM
154 000
Cash
2006
Jan 1 Balance b/d
Folio RM
10 000
Stocks
2006
Jan 1 Balance b/d
Folio RM
39 000
General Ledger
Free Powerpoint TemplatesPage 37
Capital
2006
Jan 1 Balance b/d
Folio RM
153 000
Short-term Loan
2006
Jan 1 Balance b/d
Folio RM
50 000
General Ledger
Post to Ledger
Free Powerpoint TemplatesPage 38
FINANCIAL STATEMENTS OF A SOLE
TRADER
Trading, Profit and Loss Account
(Statement of Comprehensive
Income) and Balance Sheet
(Statement of Financial Position)
SHAC 1023
2
Trading Account -
Profit and Loss Account
To calculate gross profit
To calculate net profit
Trading, Profit and Loss Account
(Statement of Comprehensive Income)
Two formats
In this topic, the cost of goods sold format will only be discussed.
Double Entry System
Format
Cost of Goods Sold
Format
Trading, Profit and Loss Account
Purchases Account
Bank / Cash / Creditors Trading Account
Sales Account
Trading Account Bank / Cash / Debtors
Return inwards Account
Debtors *Trading Account
Return outwards Account
*Trading Account Creditors
Opening stocks Account
Balance b/d Trading Account
**Closing Stocks Account
Trading Account Balance c/d
Note:
*Under cost of goods sold format, return inwards will be shown as a
credit entry in the Trading Account (so that net sales can be
computed) but as a minus sign and vice versa for Return outwards.
**The valuation for closing stocks will be discussed in Chapter 12
(Week 13)
RM RM RM
Opening stocks xx Sales xx
Purchases xx (-) Return inwards (xx)
(-) Return outwards (xx) Net sales xx
Net purchases xx
Carriage inwards xx
Customs Duty xx
Cost of goods ready for sale xx
(-) Closing stocks (xx)
Cost of goods sold (COGS) xx
GROSS PROFIT b/d xx
xx xx
6
Trading Account for the year ended 31 December 20x5
Examples:
Rent received Account
Profit and Loss Bank / Cash
Wages and Salaries Account
Bank / Cash Profit and Loss
8
Profit and Loss Account for the year ended 31 December 20x5
RM RM RM
Wages and salaries xx GROSS PROFIT c/d xx
Electricity and Water xx Rent received xx
Insurance xx Commissions received xx
Advertising xx Discounts received xx
Carriage outwards xx
Motor expenses xx
General expenses xx
Bad debts xx
Discount allowed xx
NET PROFIT xx
xx xx
9
Combining Trading Account and Profit and Loss Account
Trading, Profit and Loss Account for the year ended 31 December 20x5
RM RM RM
Opening stocks xx Sales xx
Purchases xx (-) Return inwards (xx)
(-) Return outwards (xx) xx
Carriage inwards xx
xx
(-) Closing stocks xx
COGS xx
GROSS PROFIT c/d xx
xx xx
Other expenses (as per xx GROSS PROFIT b/d xx
Slide 14) xx Other income (as per xx
NET PROFIT xx slide 14) xx
xx xx
Horizontal
Format
10
Trading, Profit and Loss Account (Statement of Comprehensive Income)
for the year ended
31 December 20x5 RM RM RM
Sales xx
(-) Return inwards (xx)
xx
Less : COGS
Opening Stock xx
Purchases xx
(-) Return outwards (xx) xx
xx
(-) Closing stocks (xx)
COGS xx
GROSS PROFIT xx
+ Other income (as per slide 14) xx
xx
(-) other expenses (as per slide 14) xx
NET PROFIT xx
Vertical
Format
EFFECT OF NET PROFIT ON EQUITY
Net profit is considered as earned equity. It
therefore increases owner’s equity while
net loss decreases equity.
The net profit (or net loss) will be
transferred to the Statement of Financial
Position under owner’s equity section at
the end of the accounting period.
Statement of Financial Position as at 31 December 20x5
RM RM
Fixed Assets Owner’s Equity
Land and Buildings xx Capital xx
Office Equipment xx + Net profit xx
Motor vehicles xx (-) Drawings (xx)
xx xx
Current assets Current liabilities
Stocks xx Creditors xx
Debtors xx
Bank xx Long term liabilities
Cash xx Loan from bank xx
xx xx
Horizontal
Format
Statement of Financial Position as at 31 December 20x5
RM RM
Fixed Assets
Land and Buildings xx
Office Equipment xx
Current Assets
Stocks xx
Debtors xx
Bank xx
Less: Current Liabilities
Creditors (xx)
Working Capital xx
xx
Financed By:
Capital xx
+ Net profit xx
+ Long Term liabilities xx
xx
Vertical
Format
THE END
LEARNING OUTCOMES
At the end of this chapter you should be able to:
Understand the importance of Cash Book and Petty
Cash Book.
Draw up the Cash Book and Petty Cash Book
Understand the different format of two-column and
three-column Cash Book
Explain the special transactions related to Cash Book
Balance off Cash Book and Petty Cash Book
Understand the Petty Cash System.
CASH BOOK
The Cash and Bank accounts are usually taken out of the
ledger and kept in a separate book called the Cash Book.
In the Cash Book, the debit column for cash is put next to the
debit column for bank and similarly to the credit column of the
two accounts.
EXAMPLE : 2 separate accounts
Bank
Date Particular Folio RM Date Particular Folio RM
3/6/06
9/6/06
29/6/06
Debtor-William
Sales
Debtor-Andrew
5 000
1 500
3 500
2/6/06
5/6/06
15/6/06
Salary
Rental
Creditors-Aaron
2 000
1 200
1 000
Cash
Date Particular Folio RM Date Particular Folio RM
1/6/06
5/6/06
25/6/06
Debtor-Sherry
Commission
Sales
700
300
800
7/6/06
13/6/06
28/6/06
Wages
Stationaries
Creditors-Ricky
500
100
250
EXAMPLE : 2 accounts in one book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Sales
Sales
Debtor-Andrew
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
28/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
500
100
250
2 000
1 200
1 000
It is more convenience and easier to monitor all money received and
money paid out on the particular date in a same book, on the same page.
CASH BOOK FORMAT
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
Two-column Cash Book
Date : Date of transaction as in the source document
Particular : The other account/s name involved in the transaction
Folio : Reference of the account
Cash : All receipts of cash (debit column) and all payments of cash (credit column)
Bank : All receipts of cheques or cash banked in (debit column) and all payments using
cheques or cash withdrawn from bank account (credit column)
CASH BOOK FORMAT
Cash Book
Date Particular Folio Discount Cash Bank Date Particular Folio Discount Cash Bank
Three-column Cash Book
Discount : The amount of discount allowed (debit column) and the amount of discount
received (credit column).
Since cash discounts always arise in connection with receipts and payments of money,
an extra column is provided on each side of three-column Cash Book for recording
the amount of the discounts.
The discount columns do not represent the discount accounts. So we do not have to
balance off the columns.
The columns only served as memorandum columns and on the closing of Cash Book,
the total amount of the discount columns are posted to the appropriate discount
accounts in the ledger.
CASH BOOK TRANSACTIONS
Transactions related to Cash Book:
1. Contra Entries
2. Dishonored Cheque
3. Drawings
4. Bank Overdraft
Contra Entries:
When there is a transfer of money from cash to bank account
or vice versa.
The contra entries are indicated by sign C or in the folio column to show that
two entries are made against each other.
Journal entries:
Date Particular F Dt Kt
Dt Bank
Kt Cash
(Deposit cash to bank account)
xx
xx
Date Particular F Dt Kt
Dt Cash
Kt Bank
(Withdraw cash from bank account)
xx
xx
Date Particular F Dt Kt
Dt Debtors
Kt Bank
(Adjustment for dishonoured cheque)
xx
xx
Date Particular F Dt Kt
Dt Bank
Kt Creditors / Accrued Expenses
(Adjustment for dishonoured cheque)
xx
xx
Dishonoured Cheque:
When cheques presented to bank been rejected because of insufficient funds,
post-dated cheques or stale, disagreement with amounts in words and figures,
etc.
On notification of dishonored cheque by bank, the Cash Book need to be adjusted
accordingly to cancel the entries made earlier.
Journal entries:
Drawings:
When the owner draws some money for his personal use.
Journal entries:
Date Particular F Dt Kt
Dt Drawings
Kt Cash
(Take out cash for personal use)
xx
xx
Date Particular F Dt Kt
Dt Drawings
Kt Bank
(Issue cheque for personal use)
xx
xx
Overdraft Bank:
When the owner applies for overdraft facilities, he is allowed to overdraw his
current account up to an agreed amount.
This means that owner can draw out more cash than what he has in his current
account.
When this happens, the owner’s bank account will show a credit balance and it is
called overdraft bank.
Since the bank account shows a credit balance, it is no longer an asset account
but will appear as current liability in the Statement of Financial Position.
Name of Company
Statement of Financial Position as at ……….
Current Liabilities
Bank Overdraft
BALANCE OFF Cash Book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Debtor-Andrew
Sales
Sales
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
29/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
500
100
250
2 000
1 200
1 000
BALANCE OFF Cash Book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Debtor-Andrew
Sales
Sales
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
29/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
500
100
250
2 000
1 200
1 000
1 800 10 000
BALANCE OFF Cash Book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Debtor-Andrew
Sales
Sales
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
29/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
500
100
250
2 000
1 200
1 000
1 800 10 000 1 800 10 000
BALANCE OFF Cash Book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Debtor-Andrew
Sales
Sales
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
29/6/06
30/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
Balance c/d
500
100
250
950
2 000
1 200
1 000
5 800
1 800 10 000 1 800 10 000
BALANCE OFF Cash Book
Cash Book
Date Particular Folio Cash Bank Date Particular Folio Cash Bank
1/6/06
3/6/06
5/6/06
9/6/06
25/6/06
29/6/06
Debtor-Sherry
Debtor-William
Commission
Debtor-Andrew
Sales
Sales
700
300
800
5 000
1 500
3 500
2/6/06
5/6/06
7/6/06
13/6/06
15/6/06
29/6/06
30/6/06
Salary
Rental
Wages
Stationaries
Creditors-Aaron
Creditors-Ricky
Balance c/d
500
100
250
950
2 000
1 200
1 000
5 800
1 800 10 000 1 800 10 000
1/7/06 Balance b/d 950 5 800
Cash and Bank balances in the Statement of
Financial Position
Name of Company
Statement of Financial Position as at ……….
Current Assets
Cash 950
Bank 5 800
PETTY CASH BOOK
In practice, business needs to keep some ready cash to pay for small expenses.
The small expenses usually for postage, stationeries, traveling expenses, general
expenses, sundries, etc.
Another book called Petty Cash Book is set up to keep the records of the
outgoing of small cash.
When Petty Cash Book is set up, junior staff can take charge of the transactions
and this can reduce the work of senior staff who is in charge of the Cash Book.
The use of Petty Cash Book also increase the internal control on cash and better
management for small cash.
The Petty Cash Book is a part of ledger and it balance should appear in the
Statement of Financial Position as current asset.
PETTY CASH SYSTEM
The Petty Cash Book always begin with the same amount in each period.
The amount of Petty Cash Book can vary according to the needs of the company..
Illustration:
A company allocates a fixed amount of RM100.00 to be managed by Petty Cash cashier.
At the end of the period, the cashier will total up the amount of payment been made by
Petty Cash. Let’s say the total amount of payment is RM70.00. Thus, the Petty Cash still
has a balance of RM30.00 at the end of the period. Before the beginning of the next
period, the Cash Book cashier will then reimburse the RM70.00 to make sure the Petty
Cash starts with a fixed amount of RM100.00 again.
RM
Period 1 Cheque issued to Petty Cash cashier
Total Petty Cash payments during the period
100.00
70.00
Petty Cash balance
Reimbursement to Petty Cash
30.00
70.00
Petty Cash in hand at the end of period 1 100.00
PETTY CASH SYSTEM
Date Particular F Dt Kt
Dt Petty Cash Book
Kt Bank (Cash Book)
(Issued cheque for Petty Cash)
xx
xx
Journal Entries:
Date Particular F Dt Kt
Dt Related Expenses
Kt Petty Cash Book
(Payment from Petty Cash for …. )
xx
xx
EXAMPLE : Petty Cash Book
Date Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
Stationeries
expenses
Traveling
expenses
General
expenses
Petty Cash Book
Date : Date of transaction
Particular : The other account/s name involved in the transaction
Voucher : Voucher no of particular payment
Debit : Receipts of cash to top up / reimburse the petty cash balance
Credit : All payments of cash to pay small expenses
Analysis of payment: Types of expenses been paid / the purpose of payment
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Petty Cash Book
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Total 100.00 71.00 5.00 21.00 15.00 30.00
Petty Cash Book
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Total 100.00 71.00 5.00 21.00 15.00 30.00
100.00 100.00
Petty Cash Book
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Total 100.00 71.00 5.00 21.00 15.00 30.00
31 Balance c/d 29.00
100.00 100.00
Petty Cash Book
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Total 100.00 71.00 5.00 21.00 15.00 30.00
31 Balance c/d 29.00
100.00 100.00
Feb 1 Balance b/d 29.00
Petty Cash Book
BALANCE OFF Petty Cash Book
Date
2006
Particulars Voucher Debit Credit
Analysis of Payment
Postage
expenses
GL 080
Stationeries
expenses
GL 081
Traveling
expenses
GL 082
General
expenses
GL 083
Jan 1
2
17
22
25
26
Balance b/d
Bank
Stationeries
Stamp
Pen / paper
Donation
Toll
30.00
70.00
1.00
5.00
20.00
30.00
15.00
5.00
1.00
20.00
15.00
30.00
Total 100.00 71.00 5.00 21.00 15.00 30.00
31 Balance c/d 29.00
100.00 100.00
Feb 1 Balance b/d
Bank
29.00
71.00
Petty Cash Book
Petty Cash Book balance in the
Statement of Financial Position
Name of Company
Statement of Financial Position as at ……….
Current Assets
Petty Cash 100.00
THE END
BANK RECONCILIATION STATEMENTS
SHAC 1023
BANK RECONCILIATION
STATEMENTS
*Businesses normally open a current account with the
bank and the bank account balance has to be
checked.
*All monies paid into or out of the bank account must
be recorded in the firm’s Cash Book.
*When money is debited into the bank account, the
firm’s Cash Book is debited. This deposit will be
recorded by the bank by crediting the bank account.
BANK RECONCILIATION
STATEMENTS
*When money is paid out from the bank
account, the firm’s Cash Book is credited. This
withdrawal will be recorded by the bank as a
debit entry.
*Debit entries in the Cash Book will appear as
credit entries in the Bank Statements issued by
the bank and credit entries in the Cash Book
will appear as debit entries in the Bank
Statements.
BUSINESS
DEPOSITS (CASH/CHEQUES) CHEQUE PAYMENTS
Business
Cash Book
debited
Bank
Bank Statement
credited
Business
Cash Book
credited
Bank
Bank Statement
debited
Debit balance
in:
Credit balance
in:
Bank Statement Cash Book Business has overdraft
balance in the bank
Cash Book Bank Statement Business has money in the
bank
Purpose of Bank Reconciliation
Statement
*The recording of receipts and payments in the Cash
Book will be at a point in time different from the
recording by the bank. Because of this different
timing in recording, very often a Bank Statement
balance may not agree with the balance in the Cash
Book.
*A Bank Reconciliation Statement has to be prepared
to reconcile the difference between the two
balances.
Disagreement Of Cash Book and
Bank Statement
*Besides showing the cash and cheques deposited into the current bank account, the bank statement also shows the following items where applicable:
1 On the debit side of the Statement
a Bank charges and commission
b Bank overdraft interest
c Dishonored cheques
d Telegraphic transfers made by the business
e Standing orders
Disagreement Of Cash Book and
Bank Statement
2 On the credit side of the Statement
a Interest and dividends collected by the bank on behalf of the business
b Represented cheques, i.e. cheques dishonoured represented for payment
c Credit transfers, amounts paid direct by debtors to the business bank account
These items do not appear in the Cash Book.
Disagreement Of Cash Book and
Bank Statement
* Reasons for time difference can be looked at in more detail:
1 Items in the debit side of the Cash Book not on the Bank
Statement.
- Mainly cheques received and banked but not recorded by
the bank because these cheques have not been cleared by
the clearing system when the Bank Statement was produced.
- Also called lodgements not credited.
Effect: Cash Book Balance > Bank Statement Balance
Disagreement Of Cash Book and
Bank Statement
2 Items on the credit side of the Cash Book not on the Bank
Statement.
- Are usually cheques issued by the business but have not yet
been presented to the bank for payments.
- Also called unpresented cheques.
*Both these entries that have been made into the Cash Book but not yet
recorded in the Bank Statement will be shown in the Bank Reconciliation
Statement
Effect: Cash Book Balance < Bank Statement Balance
Disagreement Of Cash Book and
Bank Statement
3 Payments on Bank Statement not in the Cash Book, e.g. bank
charges, a new cheque book and outstanding orders.
4 Bankings shown on the Bank Statement but not in the Cash
Book – credit transfers, e.g. dividends received.
Effect: Cash Book Balance > Bank Statement Balance
Effect: Cash Book Balance < Bank Statement Balance
Disagreement Of Cash Book and
Bank Statement
5 Dishonoured cheque – cheque received by the business but returned by the bank because the payer does not have enough money in his/her bank account.
Effect: Cash Book Balance > Bank Statement Balance
Disagreement Of Cash Book and
Bank Statement
*Recording Errors found in Cash Book and Bank
Statement – due to negligence.
- If found in the Bank Statement, business must inform
the bank so that they can be corrected immediately.
*If the error is found in the Cash Book, an adjustment
must be made in the Cash Book. If the error is found
in the Bank Statement, the error will be stated in the
Bank Reconciliation Statement
Bank Reconciliation Statement
Preparation
Step 1: Check all entries in the Cash Book against
the Bank Statement. All items appearing in both the
Cash Book and the Bank Statement will be ticked
(check-marked). For items that are not ticked, the
nature and detail of the item must be ascertained.
Step 2: Write up the Cash Book by entering those
items that are on the Bank Statement but not in the
Cash Book. The Cash Book is then balanced.
Step 3: Prepare a Reconciliation Statement . It can be started with the
Balance as per Cash Book or as per Bank Statement.
The following are the Cash Book of a firm and its Bank Statement.
The Cash Book (Bank column only)
RM RM
2006 2006
Feb. 1 Balance b/d 1 115 Feb. 5 Kane 50 /
12 Sales 320 / 14 Purchases 200 /
20 Mathew 150 / 28 Fu Bros. 170
26 Sales 400 / Balance c/d 1 565
1 985 1 985
Mar. 1 Balance b/d 1 565 1 565
Bank Reconciliation Statement
Preparation
Bank Statement
Dr. Cr. Balance
RM RM RM
2006 Feb. 1 Balance b/f 1 115
6 Cheque 50 / 1 065
12 Deposit 320 / 1 385
16 Cheque 200 / 1 185
25 Deposit 150 / 1 335
26 Deposit 400 / 1 735
*The ticked items are those which have been recorded in the Cash Book and the Bank
Statement. The unticked items (Fu Bros.) in the Cash Book has not yet been entered
into the Bank Statement.
To reconcile the balance in the Cash Book with the Bank
Statement a Bank Reconciliation Statement is drawn up.
Bank Reconciliation Statement as at 28 Feb. 2006
RM
Debit Balance as per Cash Book 1 565
Add unpresented cheque: Fu Bros. 170
Credit balance as per Bank Statement 1 735
*It is possible to draw up the Bank Reconciliation Statement starting with the Bank Statement Balance.
Bank Reconciliation Statement as at 28 Feb. 2006
RM
Credit Balance as per Bank Statement 1 735
\
Less unpresented cheque: Fu Bros. 170
Debit balance as per Cash book 1 565
The following is the Cash Book of a business and its Bank
Statement:
Cash Book
RM RM
2006 2006
June 1 Balance b/d 2 170 June 8 Salaries 350/
5 Sales 220/ 12 Callen 100/
11 Pent Co. 180/ 18 Rent 150/
15 Sales 260/ 24 John 200
26 Paul 160 30 Balance c/d 1 880
2 980 2 980
July 1 Balance b/d 1 880
Bank Statement
Dr. Cr. Balance
RM RM RM
2006 June 1 Balance b/f 2 170
5 Deposit 220/
8 Cheque 350/ 2 040
12 Cheque 100/ 1 940
15 Deposit 250/ 2 190
16 Deposit 180/ 2 370
20 Cheque 150/ 2 220
24 Cheque 300/ 1 920
28 Invest Bhd. (Div.) 400 2 320
30 Bank charges 10 2 310
Bank Reconciliation Statement starting with the
Cash Book balance
Bank Reconciliation Statement as 30 June 2006
RM RM
Debit Balance as per Cash Book 1 880
Add unpresented cheque:
John 200
dividends paid direct to bank:
Invest Bhd. 400 600
2 480
Less uncredited cheque:
Paul 160
bank charges 10 170
Credit Balance as per Bank Statement 2 310
Bank Reconciliation Statement starting with the
Bank Statement Balance
Bank Reconciliation Statement as 30 June 2006
RM RM
Debit Balance as per Bank Statement 2 310
Add uncredited cheque:
Paul 160
bank charges 10 170
2 480
Less unpresented cheque:
John 200
dividends paid direct to bank:
Invest Bhd. 400 600
Credit Balance as per Cash Book 1 880
Adjusting the Cash Book before the Reconciliation
In practice the Cash Book is brought up to date before the reconciliation is attempted.
This is done by immediately entering in the Cash Book all items found on the Bank Statement but not in the Cash Book, such as bank charges, dividends paid direct to the bank, etc.
By this means the number of adjustments needed in the Reconciliation Statement is reduced.
We have to consider only the items in the Cash Book which are left out on the Bank Statement such as unpresented cheque and cheques not yet credited.
* In the above example, if the Bank Reconciliation Statement is prepared after
adjusting the Cash Book, then, they would appear thus:
Cash Book
RM RM
2006 2006
June 1 Balance c/d 2 170 June 8 Salaries
350
5 Sales 220 12 Drawings 100
11 Pent Co. 180 18 Callen 150
15 Sales 250 24 Rent 300
26 Paul 160 30 John 200
30 Dividends: Invest
Bhd. 400
Bank charges
Balance c/d
10
2 270
3 380 3 380
July 1 Balance b/d 2 270
RM
Debit balance as per Cash Book 2 270
Add unpresented cheque: John 200
2 470
Less uncredited cheque: Paul 160
Credit Balance as per Bank Statement 2 310
Difference in the opening Balance
*When comparing the Cash Book and the Bank Statement one may encounter
(i) a difference between the two opening balances
(ii)an error or errors either in the Cash Book or the Bank Statement
Bank Reconciliation Statement as at 30 June 2006
Cash Book (Bank columns)
Cheque
No.
RM
2006 2006
1/3 Bal c/d 500 6/3 Rates 1002 40 /
5/3 Sales 300 / 13/3 Wages 1003 150/
20/3 Sales 1 180/ 23/3 Purchases 1004 10
30/3 Watson 132 26/3 Queens 1005 155
Circle 210 31 Bal c/d 1 967
2 322 2 322
1/4 Bal b/d 1 967
* Take note of the two discrepancies in the Cash Book and the Bank
Statement set out below
Dr. Cr. Balance
RM RM RM
2006 2006
1/3 Bal b/d 690
2/3 Cheque 190 500
5/3 Deposit 300 / 800
8/3 Cheque 40 / 760
14/3 Cheque 150 / 610
20/3 Deposit 1 180 1 790
24/3 Cheque 100 1 690
Bank Statement
Dr. Cr.
RM RM
Balance b/d 1 967 Purchases
(Correction of
error)
90
Balance c/d 1 877
1 697 1 697
Balance b/d 1 877
Cash Book (Adjustment)
Bank Reconciliation Statement as at 30 June 2006
RM
Debit balance as per Cash Book 1 960
Add unpresented cheque: Queens 155
2 122
Less uncredited cheque:
Watson 132
Circle 210
Error in the cash Book 90 432
Credit Balance as per Bank Statement 1 690
The error need not be entered in the Reconciliation Statement if it
starts with the corrected Cash Book balance of 1 877
*An overdraft will appear as a credit balance in the Cash Book but as a debit balance in the Bank Statement.
*When there is an overdraft the adjustment required in the Bank Reconciliation Statement is not overdrawn.
Eg:
Cash Book
RM RM
Balance 100 (overdraft))
Wenny 30
(unpresented
cheque)
Bank Overdrafts
Dr. Cr. Balance
RM RM RM
Balance 100 Dr.
(overdraft)
The cheques paid to Wenny increases the overdraft in the Cash
Book by RM30. Since this cheque has not been presented at the
bank, the balance in the Bank Statement remains unchanged.
Therefore, unpresented cheques have to be subtracted from the
overdraft in the Cash Book in order to reconcile the difference
between the cash Book balance and the Bank statement balance.
Bank Statement
SHAC 1023
ADJUSTMENTS
FOR
FINAL ACCOUNTS
1
LEARNING OUTCOMES
After studying this topic, students should be able to:
Explain why adjusting entries are needed.
Identify the major types of adjusting entries.
Record adjusting entries for prepayments and accruals. .
Write off bad debts and provide for doubtful debts and discount expense.
Adjustments for depreciation of fixed assets.
Prepare final accounts after adjustments.
2
WHY ADJUSTING ENTRIES ARE
NEEDED
In order for revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred, adjusting entries are made to revenue and expense accounts at the end of the accounting period.
In short, adjusting entries are needed to ensure that the revenue recognition and matching principles are followed.
Adjusting entries are also necessary because the trial balance may not contain up-to-date and complete data.
3
Types of Adjustments
Accruals and
prepayments
Bad debts written off,
Bad debts recovered,
provision for doubtful debt,
Provision for discount
expense
depreciation
Adjustments related to
expenses and revenues
Adjustments related
to debtors
Adjustment related to
fixed assets
4
Prepayments and Accruals
Prepaid
Accruals
Prepaid expenses
Prepaid (unearned) revenues
Accrued expenses
Accrued revenue
5
PREPAID EXPENSES
Payments of expenses that will benefit more than one accounting
period are called prepaid expenses.
Examples of common prepayments are insurance, supplies,
advertising and rent.
Adjusting entries are made to record the expenses applicable to
the current accounting period and to show the remaining
amounts in the asset account.
6
Journal Entry:
Dr Prepaid Expense (Current asset)
Cr Expense (to reduce expense with the prepaid
amount)
Expense Account
Prepaid exp
Prepaid expense
Expense Bal c/d
Example:
On Oct 1, Indah Enterprise paid RM600 for a one-year fire
insurance policy. Coverage began on October 1. Accounting
period ends December 31. RM50 (RM600/12 months) of
insurance expires each month.
Therefore, the amount of prepaid insurance is RM450
(9 months x RM50)
7
Insurance Account
Bank / Cash 600 Prepaid Insurance 450
Profit and Loss 150
600 600
Prepaid insurance Account
Insurance 450 Bal c/d 450
8
PREPAID (UNEARNED) REVENUE
Cash received before revenue is earned is known as prepaid or unearned revenue.
Items like rent, magazine subscriptions and customer deposit for future service may result in unearned revenues.
Unearned revenues are the opposite of prepaid expenses. Indeed, unearned revenue on the books of one company is likely to be a prepayment on the books of the company that has made the advance payment. For example, if identical accounting periods are assumed, a landlord will have unearned rent revenue when a tenant has prepaid rent.
9
Journal entry:
Dr Revenue Account (to reduce revenue by the prepaid amount)
Cr Prepaid Revenue Account (current liability)
Revenue Account
Prepaid
revenue
Prepaid revenue Account
Bal c/d Revenue
Example:
At December 31, Indah Enterprise received RM3 900 for rent
revenue. Out of that amount, RM300 is for next year’s rent.
10
Rent Revenue Account
Prepaid Rent
revenue
300 Bank / Cash 3 900
Profit and Loss 3 600
3 900 3 900
Prepaid Rent Revenue Account
Bal c/d 300 Rent Revenue 300
11
ACCRUED EXPENSES
Expenses incurred but not yet paid in cash or recorded at the statement date.
The accrued amount must be reported in the financial statementseven though no record has been made at the year end.
Interest, taxes and salaries are common examples of accrued expenses.
Adjustments for accrued expenses are necessary to record the obligations that exist at the Statement of Financial Position date and to recognize the expenses that apply to the current accounting period.
12
Journal Entry:
Dr Expense (to increase expense with the accrued
amount)
Cr Accrued expense (current liability)
Expense Account
Accrued exp
Accrued expense (liability)
Bal c/d Expense
Example:
At December 31, Indah Enterprise owed its employees
RM1 000 in salaries that will be paid on January 1. The
owner already paid RM11,000 amount of salaries from
January to November.
13
Salaries Account
Bank / Cash 11 000
Accrued salaries 1 000 Profit and Loss 12 000
12 000 12 000
Accrued Salaries Account
Bal c/d 1 000 Salaries 1 000
1 000 1 000
14
Revenues earned but not yet received in cash or recorded.
Accrued revenues may accumulate (accrue) with the passing of time e.g. interest revenue. Or they may result from services that have been performed but neither billed or collected, as in the case of commissions and fees.
An adjusting entry is required to show the receivable that exists at the Statement of Financial Position date and to record the revenue that has been earned during the period.
ACCRUED REVENUES
15
Journal Entry:
Dr Accrued Revenue account (Current Asset)
Cr Revenue account (to increase revenue with the accrued
amount)
Revenue Account
Accrued
revenue
Accrued revenue Account
Revenue Bal c/d
Example:
In December, Indah Enterprise earned RM200
of interest. The amount has not been received
in cash until the year end.
16
Interest revenue Account
Profit and Loss 200 Accrued interest
revenue
200
Accrued interest revenue Account
Interest
revenue
200 Bal c/d 200
17
Accrued Prepaid
Expenses To increase
Dr Expense
Cr Accrued Expense
To decrease
Dr Prepaid Expense
Cr Expense
Current Liability Current Asset
Revenue To increase
Dr Accrued Revenue
Cr Revenue
To decrease
Dr Revenue
Cr Prepaid Revenue
Current Asset Current Liability
Accruals and Prepayments – A Summary
18
BAD DEBTS
Although each customer must satisfy the credit requirements of the seller before the credit sale is approved, inevitable some accounts receivable become uncollectible.
Customers may not be able to pay probably because they experienced a decline in sales due to a downturn in the economy or laid off from their jobs.
When a particular debtor account is determined to be uncollectible, the loss is charged to Bad Debts Expense. (This is also known as direct write-off method)
Journal Entry:
Dr Bad Debt Account (increase expense)
Cr Particular Debtor Account (to reduce debtor’s balance)
19
Bad Debts Expense Account
Callen & Co RM500
Callen & Co
Bad Debts RM500
Example:
Assume that Indah Enterprise writes off Callen & Co RM500 balance
as uncollectible on 31 December.
20
PROVISION FOR DOUBTFUL DEBT
The provision for doubtful debt involves estimating uncollectible accounts at the end of each period.
This provides better matching of expenses with revenues on the income statement. Receivables (debtors accounts) are therefore reduced by estimated uncollectible amounts on the Statement of Financial Position through use of provision (contra asset account).
Frequently the provision is estimated as a percentage of the outstanding receivables (debtors). A schedule is prepared in which customer balances are classified by the length of time they have been unpaid. The schedule is often called an aging schedule.
21
(A) Provision for Doubtful Debt is estimated
for the first time:
Journal Entry:
Dr Profit and Loss (expense)
Cr Provision for Doubtful Debt (contra
asset account)
Example:
Assume that Indah Enterprise has credit sales of
RM1,200,000 in 20x3 of which RM200,000 remain
uncollected at December 31. The credit manager estimates
that RM10 000 of these sales will prove uncollectible.
22
Profit and Loss Account for the year ended 31 December
20x3 (extract)
Provision for
Doubtful Debt
10 000
Provision for Doubtful Debt Account
Bal c/d 10 000 Profit and Loss 10 000
23
Statement of Financial Position as 31 December 20x3 (extract)
Current Assets
Debtors RM200,000
Less:
Provision for Doubtful
Debt (10,000)
190,000
24
(B) Provision for Doubtful Debt Account already
exists:
1. Increase provision
Journal Entry:
Dr Profit and Loss (with the increase amount)
Cr Provision for Doubtful Debt (contra
asset account)
Example:
Assume that Indah Enterprise estimates that in 20x4 the
provision for doubtful debts is increased by RM3,000.
25
Profit and Loss Account for the year ended 31 December
20x4 (extract)
Provision for
Doubtful Debt
3 000
Provision for Doubtful Debt Account
Bal c/d 13 000 Bal b/d 10 000
Profit and Loss 3 000
13 000 13 000
26
(B) Provision for Doubtful Debt Account already
exists (cont’d)
2. Decrease provision
Journal Entry:
Dr Provision for Doubtful Debt
Cr Profit and Loss (with the
decrease amount)
Example:
Assume that Indah Enterprise estimates that in 20x5 the
provision for doubtful debts is decreased by RM2,000.
27
Profit and Loss Account for the year ended 31 December
20x5 (extract)
Provision for
Doubtful Debt
2 000
Provision for Doubtful Debt Account
Profit and Loss 2 000 Bal b/d 13 000
Bal c/d 11 000
13 000 13 000
28
Estimating the provision
Provision for Doubtful Debt = ____% X *Outstanding Debtors
*If bad debts are written off at the year end, outstanding
Debtors = Debtors balance – Bad debts
So far, the amount of the provision for doubtful debt was given.
Normally, the management establishes a percentage relationship
between the amount of debtors and the expected losses from
uncollectible accounts.
the figure can be computed as follows:
29
BAD DEBT RECOVERED
Debtor Account
Bad Debt
Recovered
Bad Debt Recovered Account
Profit and Loss Debtor
Occasionally, a company collects from a customer after the
account has been written off as uncollectible.
To record the recovery of a bad debt,
Dr Debtor (to increase debtor’s balance)
Cr Bad Debts Recovered (revenue account)
30
PROVISION FOR DISCOUNT EXPENSE
Provision for Discount expense =
____% X Outstanding Debtors – Provision for
Doubtful Debt
Besides providing for doubtful debt, a business may also make provision for discount expense (discount allowed).
The discount will only be allowed to good debtors. Therefore, the computation of provision for discount expense is as follows:
31
Journal Entries:
First time provision is made:
Dr Profit and Loss
Cr Provision for Discount Expense
Provision for Discount Expense Account already exists:
1. Increase provision
Dr Profit and Loss (with the increase amount)
Cr Provision for Discount Expense
2. Decrease provision
Dr Provision for Discount Expense (with the decrease amount)
Cr Profit and Loss
Note that the journal entries for provision for discount expense are similar
to provision for doubtful debt. The difference is only in the calculation of
the figures.
32
Statement of Financial Position as at … (extract)
Current Assets
Debtors xxx
Less: Provision for
Doubtful Debt (xx)
Less: Provision for Discount
Expense (xx)
33
Depreciation
A company typically owns a variety of fixed assets that have long lives such as buildings, equipment and motor vehicles. The period of service is referred to as the useful life of the asset.
Such assets are recorded at cost as required by the cost principle.
According to the matching principle, a portion of this cost should be reported as an expense during each period of the asset’s useful life.
Depreciation is the process of allocating the cost of an asset to expense over its useful life.
34
Depreciation Account
Provision for Profit and
Depreciation Loss
Provision for Depreciation A/C
Bal c/d Depreciation
Journal Entry:
Dr Depreciation Account (Expense)
Cr Provision for Depreciation Account
(Contra to Fixed Assets Account)
Note :
The provision for depreciation (or Accumulated Depreciation) is a contra asset
account. It is offset against an asset account (i.e the fixed asset account) on the
Statement of Financial Position, and its normal balance is a credit.
35
Depreciation Account
Provision for depreciation
– office equipment
480 Profit and Loss 480
Provision for Depreciation – Office Equipment
Bal c/d 480 Depreciation 480
Example:
Assume that depreciation on the office equipment is estimated to be RM480 a year.
Dr Depreciation RM480
Cr Provision for Depreciation (Office Equipment) RM480
36
Trading, Profit and Loss Account for the year ended…
Depreciation 480
Statement of Financial Position as at …
Office Equipment xxx
Less: Provision for Depreciation (480)
Note:
Depreciation methods will be discussed in Topic 11.
37
38
SHC 1123
CORRECTION OF ERRORS
AND
SUSPENSE ACCOUNTS
SHC 1163
Dr. Noriza Mohd Jamal
1
SHC 1123
LEARNING OUTCOME
After you have been guided through the lecture, you should be
able to:
Explain and differentiate significant errors and insignificant
errors
Make correction of errors
Prepare the suspense account for correction of errors
Explain the effect of errors on financial statement
2
SHC 1123
TYPE OF ERRORS
Significant error (errors that affect trial balance) refer text book for details.
Mathematics or balancing errors
Entries on the same side of two accounts
Single entry
Entries of different amount
3
SHC 1123
MATHEMATICS
OR
BALANCING ERRORS
This error resulted from miscalculations in either of the following:
Journals
Accounts (balancing error)
Trial balance
4
SHC 1123
Mathematics Errors in Journals
Eg: The following error occurs in a sales journal:
Date Particular Amount
1 June Saga Enterprise 1,500.00
15 June Jaguh Trading 2,000.00
22 June Tiara & Sons 1,400.00
29 June Kriss One Trading 2,690.00
30 June Sale Account (Ct) 7,950.00
Error! The total should be RM7,590.00. If the debtors’
account have been debited with the correct amount, then
the sales account will be overstated by RM360.00
5
SHC 1123
Mathematics Errors in Accounts
(Balancing Error)
Eg: The following errors occur in a purchase account:
Purchase Account
Cash 1,000.00 Withdrawal 500.00
Cash 2,580.00 Balance c/f 8,130.00
Total creditors 5,230.00
8,810.00 8,810.00
Error! The balance c/f should be RM8,310.00. This error results in
understatement of purchase account balance by RM180.00.6
SHC 1123
Mathematics Errors in Trial
Balance
Such errors occur when:
We miscalculate the total of debit or credit column
in the trial balance
We list the debit balance item in the credit column in
the trial balance or vice versa.
Eg: Purchase has been listed on the credit side, Return
outwards has been listed on the debit side of the trial
balance.
7
SHC 1123
ENTRIES ON THE SAME SIDE OF TWO
ACCOUNTS
Both accounts are either debited or credited
Eg: An acquisition of office equipment cost RM900 has been debited in both cash and office equipment account
Cash Account
Off Equip 900
Off. Equip. Account
Cash 900
Error! Cash should be credited8
SHC 1123
SINGLE ENTRY
A transaction has been posted only into one account
Eg: Goods withdrawal has been posted from the general
journal into the purchase account, but no posting into the
drawings account has been done.
Means that purchase account has been credited but
drawings account is not debited.
9
SHC 1123
ENTRIES OF DIFFERENT AMOUNTS
Debit and credit entries for a transaction are of different
amount.
Eg: Cash purchase of RM550 has mistakenly credited as
RM505 in the cash account.
Purchase Account
Cash 550
Cash Account
Purchase 505
Error! The amount is understated by RM45 in the cash
account
10
SHC 1123
☛ Errors which do not affect the trial balance
Error of principle
Error of commission
Error of omission
Error of original entry
Compensating errors
11
SHC 1123
PRINCIPLE ERROR
An error of recording a transaction in an account of the
different class or category.
Eg: Maintenance expense of RM800.00 cash has been
debited in office furniture account.
Cash Account
Off. Furn. 800
Off. Furniture Account
Cash 800
Error! Should be debited in Maintenance Expense
Account12
SHC 1123
COMMISSION ERROR
An error of recording a transaction in a wrong account
within the correct category of account.
Eg: A purchase of machine of RM800 has been debited in
office equipment account.
Cash Account
Machinery 800
Off. Equip Account
Cash 800
Error! Should be debited in Machinery Account13
SHC 1123
A transaction is completely overlooked and thus not
recorded at all.
A credit purchase of fax machine of RM500.00 has been
overlooked, thus not recorded in any of the accounting
book.
No account being debited and no account being
credited the trial balance will balance.
OMMISSION ERROR
14
SHC 1123
Such errors occur when:
Wrong amount is recorded in a book of original entry.
Eg: A credit purchase of motor vehicle of RM45,000
has been recorded as RM54,000 in the general
journal. Thus the transaction will be posted to both
other creditor and motor vehicle accounts as
RM54,000, overstating both (other creditor and motor
vehicle ) accounts by RM9,000.
ERRORS OF ORIGINAL ENTRY
15
SHC 1123
ERRORS OF ORIGINAL ENTRY
(Continued)
A transaction is recorded in a wrong book of original
entry.
Eg: A credit purchase of machine of RM1,500 has
been recorded in the Purchase Journal. This will result
in overstatement of purchase account by RM1,500.00
and understatement of machine account by the same
amount.
16
SHC 1123
COMPENSATING ERROR
Such errors occur when the net effect of two or more errors
cancelled out each other.
Eg: (Error #1) Electricity charges of RM350.00 cash has been
debited in electricity account as RM530.00
Cash Account
Electricity 350
Electricity Account
Cash 530
Error #1! Overstated Electricity Account by RM180
17
SHC 1123
COMPENSATING ERROR (Continued)
Eg: (Error #2) Dividend received of RM240.00 cash has been
credited in dividend income account as RM420.00
Cash Account
Dividend
Income 240
Dividend Income Account
Cash 420
Error #2! Overstated Dividend Income Account by RM180
18
COMPENSATING ERROR
(Continued)
From the example:
Error #1! Debit (Electricity Account) has been overstated by RM180
Error #2! Credit (Dividend Income Account)has been overstated by RM180
The net effect of error #1 and #2 will be 0 the trial balance will balance
19
SHC 1123
COMPLETE REVERSAL ENTRIES ERROR
An error of recording a transaction on the wrong side of
each of the two accounts involved in the double entry.
Eg: Cash purchase RM500 has been recorded by debiting
cash account and crediting the purchase account.
Cash Account
Purchase 500
Purchase Account
Cash 500
Error! Cash account should be credited and purchase
account should be debited20
SHC 1123
CORRECTION OF ERRORS VIA SUSPENSE
ACCOUNTS
Suspense accounts is a temporary accounts to record the
unbalance figure in the trial balance
If:
Dr balance > Cr balance
in the trial balance
Cr balance > Dr balance
in the trial balance
Suspense Accounts
Cr balance
Suspense Accounts
Dr balance
21
SHC 1123
Eg: The credit total in a trial balance is exceeding its debit total by
RM5,200. Thus, the suspense account will has a debit balance.
Once errors are identified, the necessary adjustments need to be
passed in the suspense account until there is no balance in the
account.
CORRECTION OF ERRORS VIA SUSPENSE
ACCOUNTS (Continued)
Suspense Account
Total error 5,200
22
SHC 1123
THE EFFECT OF ERRORS ON PROFIT
OR LOSS
The errors will affect the profit or loss if the they occur in the following accounts:
Revenue account
Expenses account
Account that affects the value of stock (purchase, sales, return inwards, return outwards)
23
SHC 1123
Summary of the Effect of Errors on
Profit or Loss
Over/under stated
Gross profit Net profit
Revenue Understated No effect Understated
Overstated No effect Overstated
Expenses Understated No effect Overstated
Overstated No effect Understated
Sales/Return outwards
Understated Understated Understated
Overstated Overstated Overstated
Purchase/Return inwards
Understated Overstated Overstated
Overstated Understated Understated
24
SHC 112325
CHAPTER 11
ACCOUNTING FOR
INVENTORIES
9/6/2015 2
Learning Outcomes
• Describe inventory costing methods under a perpetual and periodic inventory systems.
• Calculate the cost of inventory under the following costing methods: First-in First-out (FIFO), and Average Cost (AVCO).
• Differentiate the effects of each inventory costing methods on financial statements.
• Prepare a Statement of Financial Position presentation of inventory.
9/6/2015 3
Definition of inventory• Inventory is used to indicate:
(a) goods or other assets purchased for resale but not yet
sold;
(b) consumable stores unused;
(c) raw materials and components purchased for use in production
of goods for sale but not yet sold;
(d) goods still in production process known as work- in-progress;
and
(e) finished goods not yet sold.
In this chapter, we focus primarily on inventory
of goods purchased for resale.
9/6/2015 4
Statement of financial
Position Items
Statement of
Comprehensive
Income
ItemsRetailer
Inventory Cost of
Goods Sold
Sale
Manufacturer
Raw
MaterialsWork in
ProcessFinished
GoodsCost of
Goods Sold
Sale
Direct Labor Overhead
Inventory Types
Discussed
9/6/2015 5
Inventory Issues
• What to include?
- What inventories
- What costs
• What inventory system to use?
- periodic
- perpetual
•What cost flow
assumption?
- FIFO
- AVCO
•Statement of Financial
position (SOFP) valuation
- Cost or market
9/6/2015 6
Costs of inventory
• Cost of inventory is defined as an expenditure which has
been spent in the normal course of business in
bringing the inventory to its present location and
condition, by either purchase or production.
• Cost of inventory purchased includes purchase price,
import and custom duties, transport and handling charges
(carriage inwards) and any other costs such as insurance,
wages etc.
• Cost of inventory produced includes cost of materials used,
direct labour, direct expenses and production overheads.
9/6/2015 7
Inventory systems
• An inventory system is a system of determining the
physical quantity and cost of stocks in hand.
• Two inventory systems:
(1) periodic inventory systems
(2) perpetual inventory systems
• This topic will focus on perpetual
inventory system.
9/6/2015 8
Periodic inventory system
• Periodic inventory systems keep the inventory balance at the
same value as it was at the beginning of the year.
• At year end, the inventory balance is adjusted to a physical
count.
• To account for inventory purchases in a periodic inventory
system, an account called "Purchases" is used rather than
debiting "Inventory".
9/6/2015 9
Perpetual inventory system
• Perpetual inventory systems show all changes
in inventory in the "Inventory" account.
Purchase accounts are not used in a perpetual
inventory system.
• Perpetual inventory system is a system of
recording every movement of goods as and
when they occur so that up-to-date stock
balance in hand and cost of goods sold are
available all the time.
9/6/2015 10
Role of Inventory Accounting System
• Provide information for financial statements and tax
returns
• Provide timely information on inventory quantities and
costs to facilitate ordering and manufacturing decisions
• Provide necessary controls to
protect inventories from theft
and other misuse
9/6/2015 11
Costs flow assumption
• First-In-First-Out method
This cost flow assumption closely follows the actual flow of goods. In other words, the items purchased first are assumed to have been sold first. Goods purchased at the end of the accounting period remain in ending inventory.
During times of rising prices, FIFO will result in a higher ending inventory value and a lower cost of goods sold.
9/6/2015 12
• Weighted average method
Under the weighted average cost flow assumption all costs are added and divided by the total number of units purchased (to get the average price per unit)
Average price per unit
= Total balance + Total of additional purchases
Unit on hand + Unit of additional purchases
Average price per unit has to be calculated whenever there is an additional purchases. Whenever there is a sale, cost of goods sold is determine by the latest average price per unit.
9/6/2015 13
Aug.1 Purchased 10 units @ RM91 RM910
Aug. 3 Purchased 15 units @ RM106 RM1 590
Aug. 14 Sales 20 units @ RM130 RM2 600
Aug. 17 Purchased 20 units @ RM115 RM2 300
Aug. 28 Purchased 10 units @ RM119 RM1 190
Aug. 31 Sales 23 units @ RM150 RM3 450
Information for the inventory examples
Bikers Store Sdn. Bhd.
9/6/2015 14
FIFO
Date
Unit Price RM Unit Price RM Unit Price RM
1/8 10 91 910 10 91 910
3/8 15 106 1 590 15 106 1 590
14/8 10 91 910
10 106 1 060 5 106 530
17/8 20 115 2 300 20 115 2 300
28/8 10 119 1 190 10 119 1 190
31/8 5 106 530
18 115 2 070 2 115 230
10 119 1 190
Total
purchases
5 990 Cost of
goods sold
4 570 Ending
Inventory
1 420
Purchases COGS End. inv
9/6/2015 15
Weighted average
Date
Unit Price RM Unit Price RM Unit Price RM
1/8 10 91 910 10 91 910
3/8 15 106 1 590 25 100* 2500
14/8 20 100 2 000 5 100 500
17/8 20 115 2 300 25 112** 2 800
28/8 10 119 1 190 35 114# 1 190
31/8 23 114 2 622 12 114 1 368
Total
purchases
5 990 Cost of
goods sold
4 622 Ending
Inventory
1 368
* (910 + 1 590) / 25 = RM100
** (500 + 2 300 ) / 25 = RM112
# (2 800 + 1 190) / 35 = RM114
Purchases COGS End. inv
9/6/2015 16
The effects of each method on
financial statements
Bikers Store Sdn. Bhd.
Trading Account For the Year Ended 31 August 2006
FIFO AVCO FIFO AVCO
Beg. Inv 0 0 Sales 6 050 6 050
Purchases 5 990 5 990
(-) End. Inv 1 420 1 368
COGS 4 570 4 622
Gross Profit 1 480 1 428
6050 6050 6050 6050
9/6/2015 17
Bikers Store Sdn. Bhd.
Statement of Financial Position As at 31 August 2006
RM
Current assets
Ending inventory: 1 420 (FIFO)
1 368 (AVCO)
The effects of each method on
financial statements
9/6/2015 18
If prices are rising, each of the accounting methods
produce the following results:
• FIFO gives a better indication of the value of ending
inventory, it also increases net income because
inventory that might be several years old is used to
value the cost of goods sold.
• Weighted average cost produces results that fall
somewhere between FIFO and LIFO.
9/6/2015 19
Factors affecting selection of inventory valuation
methods
• Simple and easy to apply
• Industry norms
• Taxation purpose
• Lack of information
• Advise from an expert etc.
9/6/2015 20
End
Questions??
Accounting for fixed assets
(Property, Plant and Equipment)
Non-current assets
Non-current assets are those assets generally used in the business for more than one accounting period and not intended for resale to customers.
Can be categorized as tangible, intangible and investment assets.
Can also be called as FIXED assets
Determining costs for fixed assets Normally, a fixed asset is recorded at
historical cost which may be:
(i) the actual purchase price plus any costs incurred in bringing the asset to the present working location and for getting the asset ready for use, such as costs of site preparation, delivery and handling costs, installation costs or professional fees.
(ii) the costs of production in the case of self-constructed asset such as material and labourcosts plus overhead.
Journal for fixed asset acquired (bought) or self-constructed
Dr. Fixed asset account
Cr. Bank / Other Creditor /Relevantexpense account
Example
Bob Enterprise bought a machine and a truck in January 2006 by cheques, and incurred the following expenses for their purchases:
Machine (RM) Truck (RM)List price 100 000 45 000Trade discount 1 000 250Custom duties 8 500 4 650Transport charges 2 000 -Installation costs 10 000 -Road tax - 1 000Insurance 1 200 800
Machine (RM) Truck (RM)
List price 100 000 45 000
Less:Trade discount (1 000) (250)
Net price paid 99 000 44 750
Add: Custom duties 8 500 4 650
Transport charges 2 000 -
Installation costs 10 000 -
Total cost 119 500 49 400
Date Description Debit Credit
1-Jan Machine 119 500
Truck 49 400
Bank 168 900
The allocation of the cost of NON-CURRENT assets to EXPENSES in the periods in which
services are received from the asset.
Cost of machines
Statement of Financial Position
Non-current or fixed assets:
Machinery
Income Statement
Other expenses: Depreciation
as the services are received
(at the end of the year)
Depreciation
Factors in calculating depreciation
To calculate depreciation, we must know:
(1) Cost of Assets
Actual purchase price paid to acquire the asset
(2) Estimated useful life
The length of service the business expects to get
from the asset
(3) Estimated residual/scrap/salvage value
The expected cash value of an asset at the end
of its useful life
Depreciation methods4 methods for calculating depreciation: Straight line Double Declining balance/Reducing balance Sum-of-the-years-digits Units of production
Example:
Danon Enterprise purchased a truck at 1 January 2006.The information pertaining to the truck is as follows:
Cost of truck RM41 000Estimated salvage value RM1 000Estimated useful life (Years): 5 years
Straight-Line Depreciation
Depreciation expense per year = Cost – Residual valueYears of useful life
Depreciation expense per year = RM41 000 – RM1 0005
= RM8 000
Year Depreciation(RM) Provision for depreciation (RM)
Book value(RM)
(Annual Fixed Asset Value)
41 000
2006 8 000 8 000 33 000
2007 8 000 16 000 25 000
2008 8 000 24 000 17 000
2009 8 000 32 000 9 000
2010 8 000 40 000 1 000
Depreciation expenses
Date Particulars Total(RM) Date Particulars Total(RM)
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
PfD
PfD
PfD
PfD
PfD
8 000
8 000
8 000
8 000
8 000
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
I.S
I.S
I.S
I.S
I.S
8 000
8 000
8 000
8 000
8 000
Danon Enterprise
Statement of Comprehensive For The Year Ended 31 December (RM)
Other expenses:
2006 Depr.expenses 8 000
2007 Depr.expenses 8 000
2008 Depr.expenses 8 000
2009 Depr.expenses 8 000
2010 Depr.expenses 8 000
Provision for depreciation a/c(PfD)
Date Particulars Total(RM) Date Particulars
Total(RM)
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
Bal. c/d
Bal. c/d
Bal. c/d
Bal.c/d
Bal. c/d
8 000
8 000
16 000
16 000
24 000
24 000
32 000
32 000
40 000
40 000
31/12/06
01/01/07
31/12/07
01/01/08
31/12/08
01/01/09
31/12/09
1/01/10
31/12/10
Depr.exp
Bal. b/d
Depr.exp
Bal. b/d
Depr.exp
Bal. b/d
Depr.exp
Bal. b/d
Depr.exp
8 000
8 000
8 000
8 000
16 000
16 000
8 000
24 000
24 000
8 000
32 000
32 000
8 000
40 000
Danon Enterprise
Statement of financial position As at 31 December 2010
Fixed Assets:
Truck 41 000
Prov. For Depr. (40 000)
1 000
Double-declining balance method
DDB Rate, r = 1 – n S / C
Where:
n = Useful life
S = Salvage value
C = Cost
Depreciation in the early years of an asset’s estimated useful life is higher than in later years. Continue
15
DDB Rate, r = 1 – n S / C
= 1 – 5 1 000 / 41 000
= 52%
Year Depreciation(RM) Provision for depreciation (RM)
Book
value(RM)
41 000
2006 (52% X 41 000) 21 320 21 320 (41 000 – 2 1320) 19 680
2007 (52% X 19 680) 10 234 (21 320 + 10 234) 31 554 (19 680 – 10 234) 9 446
2008 (52% X 9 446) 4 912 (31 554 + 4 912) 36 466 (9 446 – 4 912) 4 534
2009 (52% X 4 534) 2 358 (36 466 + 2 358) 38 824 (4 534 – 2 358) 2 176
2010 (52% X 2 176) 1 132 (38 824 +1 132) 39 956 (2 176 – 1 132) 1 044
Depreciation expenses
Date Particulars Total(RM) Date Particulars Total(RM)
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
PfD
PfD
PfD
PfD
PfD
21 320
10 234
4 912
2 358
1 132
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
I.S
I.S
I.S
I.S
I.S
21 320
10 234
4 912
2 358
1 132
Danon Enterprise
Statement of Comprehensive Income For The Year Ended 31 December
RM
2006 Depr.expenses 21 320
2007 Depr.expenses 10 234
2008 Depr.expenses 4 912
2009 Depr.expenses 2 358
2010 Depr.expenses 1 132
Provision for depreciation a/c (PfD)
Date Particulars Total(RM) Date Particulars Total(RM)
31/12/06
31/12/07
31/12/08
31/12/09
31/12/10
Bal. c/d
Bal. c/d
Bal. c/d
Bal. c/d
Bal. c/d
21 320
21 320
31 55431 554
36 46636 466
38 82438 824
39 956
39 956
31/12/06
01/01/07
31/12/07
01/01/08
31/12/08
01/01/09
31/12/09
01/01/10
31/12/10
Depr.exp
Bal. b/d
Depr.exp
Bal. b/d
Depr.exp
Bal. b/d
Depr.exp
Bal. c/d
Depr.exp
21 320
21 320
21 320
10 234
31 554
31 554
4 912
36 466
36 466
2 358
38 824
38 824
1 132
39 956
Danon Enterprise
Statement of Financial Position As at 31 December 2010
Fixed Assets:
Truck 41 000
Prov. For Depr. (39 936)
1 044
Disposal of fixed assets
1. Dr Disposal (cost)
Cr Fixed assets (cost)
- close fixed assets a/c
2. Dr Provision for depreciation
Cr Disposal
- close prov for dep a/c
3. Dr Bank/Cash
Cr Disposal
- proceeds from disposal
4. Close Disposal a/c
Dr disposal, cr SOCI (profit from disposal)
Dr SOCI, Cr disposal a/c (loss from disposal)
FINANCIAL REPORTING FOR COMPANIES
LEARNING OUTCOME
After you have been guided through the lecture, you should be able to:
Explain the presentation of company financial report
Explain the important terms relating to company shares.
Prepare a basic company financial statement
Introduction
Section 167 of Companies Act, 1967 states that all company accounting records must be properly and completely kept according to the accepted accounting principles.
Section 169 requires that company financial report must be presented to the members of the company during the annual general meeting.
Section 172(2) requires that every company must appoint an independent auditor to audit their financial report before it is presented to the company members.
Company Financial Report
Company financial report is presented in the annual report.
Company annual report consists of:
o Chairman report
o Report of the Board of Director
o Auditor’s report
Company financial report is normally presented in vertical
(statement) format.
o Financial report – Statement of Comprehensive
Income, Statement of Financial Position ,Cash Flow
Statement, Statement of Changes in Owners’ Equity
and Notes to the Accounts.
Important Terms for Company’s Share Capital
Authorised capital: It is the maximum number of capital that a
company can issue and is stated in the Memorandum of Association. If a
company decides to increase the authorized capital, it must obtain the
approval from ROC and/or Securities Commission.
Issued capital: It is part of authorised capital that has been
allotted for cash or some other assets.
Paid-up Capital: The issued capital that have been paid by the
shareholders.
Nominal Capital: When a share is issued, its face value must be
stated. The face value may be RM0.50, RM1.00 etc and this is also known as nominal or par value. The total of the nominal value is
the nominal capital.
Share Premium: Public listed company normally offer its shares at
a value more than the par value. The excess of offer value over the par
value is called share premium.
Classes of Share Capital
Preferred shares: These are shares that carry a right to a fixed rate
of the dividend and the repayment of capital on liquidation in priority to
other classes of shares. These shares are not traded on the stock
exchange 3 types:
o Cumulative: Dividends payable in one year can be carried
forward to the following year and be paid before dividends are paid
to holders of other shares.
o Non-cumulative: Dividends are payable out of current
year’s profit and cannot be carried forward to the following
year.
o Redeemable: These shares are repayable at some future
date, i.e. the company can buy them back.
Ordinary shares: These shares normally carry full voting rights and
are entitled to the surplus profits after all the preferential rights have been
met. Control of a company normally lies with the ordinary shares. These
shares can be traded on the stock exchange.
Statement of Comprehensive
Income
The procedure of preparing the trading and profit and loss accounts for a
company is similar to other types of organisation, except that there are
certain expenses that are incurred only by a company. For examples,
directors’ remuneration, interest on bond and debenture, audit fees,
secretarial fees and profit or loss from associate and subsidiaries.
After the net profit has been determined, the company has to make a
tax provision for that particular year. Tax will be deducted from the net
profit to arrive at the net profit after tax figure.
Net profit after tax then will be added to undistributed profit from the
previous year (known as retained profit brought forward). The total
will then being appropriated in the appropriation account.
The appropriation may be in the form of:
o Dividend
o Transfer to reserves
o Amounts written off as goodwill
The balance of profit after the appropriation will be carried forward
(known as retained profit carried forward).
The Statement of Financial Position (SOFP)
The major differences between company Statement of Financial Position
with those of sole proprietor and companies
are:o Authorised share capital , Issued and Paid-up Capital.
o Reserves – Profits or revenues retained by a company.
o Debentures and bond.
o Intangible assets and investment.
Name of Company
Statement of Comprehensive Income
For the year ended XX/XX/XXXX (extract)
RM RM
Net profit before taxation xxxxx
Less: Taxation xxx
xxxxxNet profit after taxation
Add: Retained profit b/f xxxx
xxxxxDistributable retained profit
Less: Appropriation of profit
Dividend xx
Transfer to reserves xx
Goodwill written-off xx xxx
xxxxRetained profit c/f
END