Sem5 akuan nota

SHAC 1023

Dr. Noriza Mohd Jamal

[email protected]

T08, 02-09-04

1

mailto:[email protected]

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

2

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.

3

Introduction

What is accounting?

4

Introduction

What is accounting?

5

Importance of Accounting to

business

“language of business”

Identify the performance

of a business

(profit/loss, loans, properties)

6

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.

7

Definition of Accounting

The process of identifying, recording and presenting the business activities to the various group of users.

8

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.

9

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.

10

Users of Accounting information

These decision makers include:

Investors

Creditors

Financial Analysts / Advisor

Business Contact Group

Government Agencies

Public

Employee

11

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.

12

Basic Accounting concepts

These basic accounting concepts include:

Business Entity concept

Going Concern concept

Objectivity concept

Money Measurement concept

Time Period concept

13

Types and various forms of

business

There are three forms of business:

Sole proprietorship / sole trader

Partnership

Company

14


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

15


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.

16


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.

17

18

BASIC FRAMEWORK

OF

ACCOUNTING

SHAC 1023


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


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.

2

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?

3

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.

4

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

5

ASSETS

Resources that are owned or controlled by a business.

Used to provide future services or benefits.

Examples:

6

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:

7

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.

8

9

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

10

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

11

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

12

ILLUSTRATION

Once upon a time….

Mr Danny wants to open

new cleaning service business

called CleanShine.

13

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

14

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

15

Transaction 3: CleanShine borrowed RM30 000 from Bank to purchase a motor van on 8 April 20x6.

CleanShine


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

16

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


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

17

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

18

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).

19

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.

20

21

Double Entry System

SHAC 1023


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.

4

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.

5

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.

6

Record at debit sidefor decrease in

owner’s equity or liability.


Decrease in accounts

Record at credit side for a

decrease in asset.

7


DEBIT CREDIT

Assets Increase Decrease

Liabilities Decrease Increase

Owner’s equity Decrease Increase

8

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.

9

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.

10

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

11

Format of Statement of


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

12

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

13

Double Entry System

for Revenues and Expenses

Revenues

Expenses

14

Drawings

• DrawingsThe owner withdraw some cash or assets belonging to the business for his personal use.* involve drawings account

15

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

16

Recording of drawings, revenue and expenses in

ledger accounts (services business)


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.

17


DEBIT CREDIT

Assets Increase

Liabilities Increase

Owner’s equity Increase

Revenue Increase

Expenses Increase

Drawings Increase

18

Recording of revenue and expenses

in ledger accounts (trading business)


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.

19

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.

20

Classification of accounts

Accounts

Impersonal

Real

Nominal

personal

21

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

22

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


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



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.



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


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


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


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


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


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


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


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


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


(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.


Statement of Comprehensive Income for the month ended 30 April 20x6

RM RM

Revenue:

Sales (15 x RM150)



(-) Stocks (5 x RM100)

Gross profit

2 000

(500)

2 250

(1 500)

750

======

13


(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.


Statement of Comprehensive Income for the month ended 31 May 20x6

RM RM

Revenue:

Sales (28 x RM150)


Opening stocks(5x 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


RM RM

Revenue:

Sales

(-) Sales returns


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 1

SHAC 1023

Journal and Posting

http://www.powerpointstyles.com/


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.



ACCOUNTING CYCLE

Transactions

Adjustments

Financial

Statements

Source

Documents

Ledger

Trial

BalanceJournal



JOURNAL

Journals are the books in which transactions being

first recorded, before the entries are made in the T

accounts.



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.



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.



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)



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



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



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



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



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)



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



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



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



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



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



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



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



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



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



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.




Contents of sales returns journal:

o Date

o Name of debtors (customer)

o Credit note number

o Folio

o Amount (as in credit note)




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



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



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



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



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



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



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



Post to Ledger

General LedgerMachinery A/C GL1

1/7 Toolmaker GJI 50 000

General Journal GJ1


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



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



Drawings

2006

Jan 12 Purchases

Folio RM

2 000

Purchases

2006

Jan 12 Drawings

Folio RM

2 000

Post to Ledger



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.



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



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



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




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


(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


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


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


Dt Cash

Kt Bank

(Withdraw cash from bank account)

xx

xx


Dt Debtors

Kt Bank

(Adjustment for dishonoured cheque)

xx

xx


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:


Dt Drawings

Kt Cash

(Take out cash for personal use)

xx

xx


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


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


Cash Book


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


Cash Book


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


Cash Book


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


Cash Book


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


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


Dt Petty Cash Book

Kt Bank (Cash Book)

(Issued cheque for Petty Cash)

xx

xx

Journal Entries:


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


Date

2006


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


Date

2006


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


Date

2006


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


Date

2006


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

Feb 1 Balance b/d 29.00

Petty Cash Book


Date

2006


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

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


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


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.


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


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


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


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.



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


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


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


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


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


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


20x4 (extract)

Provision for

Doubtful Debt

3 000


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


20x5 (extract)

Provision for

Doubtful Debt

2 000


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


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


Cr balance > Dr 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. 31 Sales 23 units @ RM150 RM3 450

Information for the inventory examples

Bikers Store Sdn. Bhd.

http://en.wikipedia.org/wiki/Image:Kusuma_bike_large.jpg




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


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


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





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


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






Provision for depreciation a/c (PfD)


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.


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

Education

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