Accounting Topical Revision Notes
For Cambridge iGCSE and O Level (7707)
Preface
This revision book is written according to the latest Accounting syllabus for the
Cambridge iGCSE and O Level (7707) examinations from Year 2020 to 2022.
This electronic book is created to complement students' study needs for quick reference
during their course of study and revision. Students are able to obtain the required
information whenever and wherever needed. This minimise hindrance to their revision
progress and schedule.
Author's years of experience coaching students through the Cambridge GCE O Level
(Singapore) examinations allows her to understand the stumbling blocks that students
face while studying the Accounting subject. This is manifested in this book where:
knotty concepts that students struggles with are simplified
related topics are logically grouped to enhance understanding
illustrative examples are provided to refresh memories
ISBN: 978-981-14-2372-7
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Accounting Topical Revision Notes
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About Author
The eBook is written by Adelina Loo, owner cum tutor at Art of Maths LLP which
specialises in secondary school mathematics and accounting. Adelina coaches secondary
school students in Singapore in the Principles of Accounts subject.
Adelina majored in Accounting and was a Chartered Accountant with the Institute of
Singapore Chartered Accountants (ISCA). Prior to becoming a private tutor, she worked
as an accountant in corporations of various industries. Her last appointment was as
Head of Accounts department of a US MNC. She has also provided consulting services to
Singapore's small-medium enterprises (SMEs) on accounting matters including the
computerisation of their accounting processes.
Full profile of author can be found at www.artofpoa.com.
Feedback
Every reasonable care has gone into making this eBook comprehensive and error free. If
you have any concerns that you wish to feedback, please leave a message at our
Facebook page www.facebook.com/ArtOfMaths/
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Accounting Topical Revision Notes
For Cambridge iGCSE and O Level (7707)
Table of Contents
Chapter 1. Accounting Principles and Policies ....................................................... 1
1.1 Accounting Principles ........................................................................................................................... 1
1.2 Accounting Policies ................................................................................................................................ 6
Chapter 2. Business Documents and Books of Prime Entry ............................. 7
2.1 Business Documents .............................................................................................................................. 7
2.2 Books of Prime Entry ............................................................................................................................ 8
2.2.1
Trade discounts and Cash discounts ................................................................... 9
2.2.2
General Journal ........................................................................................................... 10
2.2.3
Special Journals........................................................................................................... 10
2.2.4
Cash book ....................................................................................................................... 11
2.2.5
Petty Cash Book .......................................................................................................... 12
Chapter 3. Trial Balance ................................................................................................. 14
3.1 List of Errors Not Affecting Trial Balance................................................................................ 15
Chapter 4. Correction of Errors .................................................................................. 16
4.1 Suspense Account ................................................................................................................................ 16
4.2 Correcting Profit for the year ........................................................................................................ 17
Chapter 5. Bank Reconciliation ................................................................................... 18
Chapter 6. Trade receivables and Trade payables ............................................. 21
6.1 Control Accounts .................................................................................................................................. 21
6.2 Trade receivables and Sales Ledger Control Account......................................................... 22
6.3 Trade payables and Purchases Ledger Control Account ................................................... 24
Chapter 7. Capital and Revenue Expenditure and Receipts .......................... 26
7.1 Capital expenditure ............................................................................................................................ 26
7.2 Revenue expenditure.......................................................................................................................... 27
7.2.1
Exception to capital expenditure rule .............................................................. 27
7.3 Capital receipts ..................................................................................................................................... 28
7.4 Revenue receipts .................................................................................................................................. 28
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Accounting Topical Revision Notes
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Chapter 8. Accounting for Depreciation ................................................................. 29
8.1 Depreciation .......................................................................................................................................... 29
8.1.1
Depreciation policy ................................................................................................... 30
8.1.2
Straight-line method of depreciation ............................................................... 31
8.1.3
Reducing-balance method of depreciation .................................................... 33
8.1.4
Revaluation method of depreciation................................................................. 35
8.2 Sales of non-current assets.............................................................................................................. 36
Chapter 9. Other Payables and Other Receivables ............................................. 38
9.1 Recording Accrued and Prepaid Expenses ............................................................................... 38
9.2 Recording Accrued and Prepaid Income .................................................................................. 39
Chapter 10. Irrecoverable Debts and Provision for doubtful debts .......... 40
10.1 Irrecoverable debts ............................................................................................................................. 40
10.2 Recovery of irrecoverable debts.................................................................................................... 41
10.3 Provision for doubtful debts ........................................................................................................... 42
Chapter 11. Valuation of Inventory .......................................................................... 45
Chapter 12. Sole Traders............................................................................................... 46
12.1 Advantages and Disadvantages of Sole Traders ................................................................... 46
12.2 Difference between Trading Business and Service Business............................................ 46
12.3 Income Statement ............................................................................................................................... 47
12.3.1 Trading business......................................................................................................... 47
12.3.2 Service business........................................................................................................... 48
12.4 Statement of Financial Position.................................................................................................... 49
12.5 Equity Accounts .................................................................................................................................... 50
12.5.1 Drawings accounts .................................................................................................... 50
12.5.2 Capital accounts ......................................................................................................... 50
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Accounting Topical Revision Notes
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Chapter 13. Partnerships .............................................................................................. 52
13.1 Advantages and Disadvantages of Partnership .................................................................... 52
13.2 Partnership Agreement .................................................................................................................... 52
13.3 Accounting for Partners' Transactions ..................................................................................... 53
13.3.1 Interest on Capital ..................................................................................................... 53
13.3.2 Interest on Drawings ................................................................................................ 53
13.3.3 Partners' Salary / Bonuses / Commissions .................................................... 54
13.3.4 Loan from Partners ................................................................................................... 54
13.3.5 Interest on Loan from Partners ........................................................................... 55
13.4 Appropriation account...................................................................................................................... 56
13.5 Capital account..................................................................................................................................... 58
13.6 Current account ................................................................................................................................... 59
13.7 Presentation of Partners' Equity in Statement of Financial Position .......................... 60
Chapter 14. Limited Company .................................................................................... 61
14.1 Advantages and Disadvantages .................................................................................................... 61
14.2 Types of Capital .................................................................................................................................... 61
14.2.1 Issued, Called-up, Paid-up Share Capital......................................................... 61
14.2.2 Preference Shares Capital ...................................................................................... 62
14.2.3 Ordinary Shares Capital.......................................................................................... 63
14.2.4 General Reserves......................................................................................................... 63
14.2.5 Retained Earnings ..................................................................................................... 64
14.2.6 Debentures (Loan Capital) .................................................................................... 64
14.3 Income Statement of Limited Company .................................................................................... 65
14.4 Statement of Changes in Equity .................................................................................................... 65
14.5 Statement of Financial Position.................................................................................................... 65
Chapter 15. Clubs and Societies ................................................................................. 66
15.1 Receipts and Payments Accounts ................................................................................................. 66
15.2 Income and Expenditure Accounts .............................................................................................. 67
15.3 Statements of Financial Position .................................................................................................. 68
15.3.1 Accumulated Fund ..................................................................................................... 68
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Accounting Topical Revision Notes
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Chapter 16. Manufacturing Accounts ...................................................................... 69
16.1 Direct And Indirect Costs ................................................................................................................. 69
16.2 Manufacturing Account .................................................................................................................... 70
16.3 Income statement ................................................................................................................................ 72
16.4 Statements of financial position ................................................................................................... 72
Chapter 17. Incomplete Records ............................................................................... 73
17.1 Changes in Capital Method ............................................................................................................. 73
17.2 Statement of Affairs............................................................................................................................ 75
17.3 Account Analysis Method ................................................................................................................. 77
17.3.1 Determining Sales ...................................................................................................... 77
17.3.2 Determining Total Purchases ............................................................................... 77
17.3.3 Determining Cost of Sales....................................................................................... 77
17.3.4 Determining Depreciation ..................................................................................... 78
17.3.5 Determining Operating Expenses ....................................................................... 78
17.3.6 Determining Other Income .................................................................................... 78
17.4 Ratio Analysis Method ....................................................................................................................... 81
Chapter 18. Analysis and Interpretation ............................................................... 82
18.1 Liquidity Analysis ................................................................................................................................ 82
18.2 Profitability Analysis.......................................................................................................................... 86
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Accounting Topical Revision Notes
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Chapter 1. Accounting Principles and Policies
1.1 Accounting Principles
1. Duality principle states that all aspects of an accounting transaction are recognised. It
is the fundamental of accounting and underlying basis for double entry
accounting system.
2. Money Measurement principle states that only transactions measured in monetary
terms are recorded.
Good business
relationship with
customer and
supplier
Good business
location
Hardworking staffs
Unable to measure in dollar ($) value
Therefore, cannot be recorded in business books
3. Business Entity principles states that owner and business are separate entities.
Therefore,
Business transactions are recorded in business books
Transactions between business and owner are recorded in Equity accounts:
Capital account:
Owner
Drawings account:
Owner
contributes assets
withdraws assets
Business
Business
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Accounting Topical Revision Notes
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4. Consistency principle states that a business is to use the same accounting methods
and procedures from period to period to enable meaningful comparison
over time.
Example where concept is applied:
Depreciation of non-current assets. Assuming a business decides to adopt
reducing-balance method for depreciating Motor Vehicles.
Depreciation
method
Year 1
Year 2
Year 3
Year ∞
Reducingbalance
Reducingbalance
Reducingbalance
Reducingbalance
5. Prudence principle states that a business must not overstate its profits / assets and
understate its losses / liabilities when choosing alternatives accounting
treatments.
Topic
Application
Depreciation of
Non-current assets
Non-current assets are reported at net book value in the
Statement of Financial Position.
.... must not overstate its non-current asset and understate
its depreciation expenses .....
Provision for
Doubtful Debts
Trade receivables are reported at net trade receivables in
the Statement of Financial Position.
.... must not overstate its trade receivables and understate
its debts that are deemed uncollectible.....
Inventory
Inventory are valued at lower of cost and net realisable
value.
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6. Matching principle states that expenses incurred must be matched against income
earned within the same period to determine the profit or loss for that
period.
Topic
Application
Depreciation of
Non-current assets
Depreciation is recorded as an expense in Income
Statement.
.... depreciation expense must be matched against income
that non-current assets helped to generate .....
Provision for
Doubtful Debts
Doubtful debts are recorded as an expense in Income
Statement.
.... loss from debts estimated to be uncollectible must be
matched against sales earned from trade receivables .....
Other payables &
Other receivables
All income and expenses are adjusted for any prepayment
or accrual.
.... all business expenses must be matched against all
income generated by the business .....
7. Historic Cost principle states that transactions are to be recorded at the original
purchase price based on source documents.
NOW
5 YEARS LATER
Purchase car at $80,000
Car is worth $40,000
Statement of financial position
Non-current asset Cost
Motor vehicles
$80,000
Statement of financial position
Non-current asset
Cost
Motor vehicles
$80,000
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Accounting Topical Revision Notes
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8. Materiality principle states that a transaction or an item is considered material if it
makes a difference to decision-making.
The value of a transaction or an item is compared to the size and nature of the
business to determine if it is material.
Value of business
$1,000,000
Cost of basket
$10
Cost of basket is
not material to
decision-making
Revenue
expenditure
This concept is asked in conjunction with questions on Capital and Revenue
Expenditure.
Example:
Transaction
Type of expenditure
Purchase motor vehicle
Capital
Pay for road tax
Revenue
9. Going Concern principle states that a business is assumed to operate indefinitely.
Examples where concept is applied:
Credit transactions:
Suppliers are confident that the business will continue to exist after goods
are delivered though money has yet to be received.
Long-term borrowings:
Bank is confident that the business continues to exist in the future to repay
the loan.
10. Realisation principle states that business incomes should be regarded as earned
when the legal title to goods or services are passed from the seller to the
buyer.
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11. Accounting Period principle states that the life of a business is divided into equal
time periods known as financial period or accounting period.
This explains the need to prepare Income Statement and Statement of financial
position at the end of every accounting period.
12 months
12 months
12 months
Prepare
final
statements
Prepare
final
statements
Prepare
final
statements
12 months
12 months
The cycle continues.....
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Accounting Topical Revision Notes
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1.2 Accounting Policies
1. Comparability
financial information is comparable with similar information with same business
or another accounting period
2. Relevance
Financial information
must be provided in time for financial decisions to be made
can be used to confirm or correct prior expectations about past events
is able to help form, revise or confirm expectations about the future
3. Reliability
Financial statements are
depended upon by users as being a true representation of the underlying
transactions and events
independently verifiable
free from bias
free from significant errors
prepared with suitable caution on judgements and estimates
4. Understandability
financial statements provides clear information that can be understood by the
users
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Accounting Topical Revision Notes
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Chapter 2. Business Documents and Books of Prime Entry
2.1 Business Documents
Business documents are sources of information which proofs that a transaction
occurred.
Business documents
Transactions
Business documents
Transactions / Uses
1. Invoices
Credit purchases and sales
2. Credit note
Returning of goods by credit customers or to credit supplier
3. Debit note
When an original invoice to a credit customer or from a credit
supplier is undercharged
4. Receipt
Cash purchases and sales; acknowledgement of payment
5. Payment voucher
Record payment to creditors
6. Petty cash voucher Record payment through petty cash
7. Cheque counterfoil Portion of cheques that are kept by the payers
8. Bank statement
Deposits or payments through the business bank account
9. Paying-in slip
Deposit slip for depositing cheques or cash into the bank
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Accounting Topical Revision Notes
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2.2 Books of Prime Entry
Also known as Day Books / Books of Original Entry / Journals
The first books of entry where a business records its transactions
Transactions
Business documents
Journals
Types of Books of Prime Entry:
Books of prime entry
Transactions recorded
1. Sales Journal
Credit sales of goods
2. Sales Return Journal
Returning of goods by credit customers
3. Purchase Journal
Credit purchase of goods
4. Purchase Return Journal
Returning of goods to credit suppliers
5. Cash Book
Cash and Bank transactions
6. Petty Cash Book
Petty cash transactions
7. General Journal
All transactions not recorded in the above journals
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Accounting Topical Revision Notes
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2.2.1 Trade discounts and Cash discounts
Trade discounts
Discounts given to encourage customers to buy in bulk
No double-entry for trade discounts
Example:
Company Y sold goods on credit to customer Z at a list price of $500 less 10% trade
discounts.
*Common error
Answer:
Net price of goods sold = 500 x 90% = $450
Debit Trade receivables - customer Z
Credit Sales
Debit trade receivables $450
Debit discount
$50
Credit sales
$500
$450
$450
Cash discounts
Discounts given to encourage customers to pay promptly
Cash discounts are recorded as follows:
Discount given to trade receivables:
Debit Discount allowed
Credit Trade receivables
Example:
Trade receivables X paid $500 owing by cheque after deducting 5% cash
discount.
Answer:
Debit Discount allowed (500 x 5%)
Debit Bank (500 - 25)
Credit Trade receivables X
$25
$475
$500
Discount received from trade payables:
Debit Trade payables
Credit Discount received
Example:
Paid $800 owed to trade payables Y by cheque after 10% cash discount.
Answer:
Debit Trade payables Y
$800
Credit Discount received (800 x 10%)
$80
Credit Bank (800 - 80)
$720
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Accounting Topical Revision Notes
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2.2.2 General Journal
Format:
General Journal
Date
Particulars
Debit
Transaction Account to debit
Account to credit
Date
Credit
Amount
Amount
[ Narration ]
Notes:
A transaction can have more than one debit account or credit account
Total amount debited must be equal to total amount credited
Narration is a short description of the transaction
2.2.3 Special Journals
Features:
Transactions of similar nature are recorded together
Only total amount in a special journal is posted to the General Ledger
Advantages / Purposes:
Enable easy retrieval of information
Avoids overcrowding in the General Ledger
Increase efficiency and productivity
Types
Double-entry
1. Sales Journal
Debit Sales ledger control
Credit Sales
2. Sales Return Journal
Debit Sales Return
Credit Sales ledger control
3. Purchase Journal
Debit Purchases
Credit Purchase ledger control
4. Purchase Return Journal
Debit Purchase ledger control
Credit Purchase Return
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2.2.4 Cash book
Interpreting 3-column Cash Book
Debit
Credit
Cash Book
Date Particulars
20X1
Jan 1 Bal b/d
Discount
Cash
Allowed
$
$
100
6 Sales
20 Mac Ltd
Bank
Date Particulars
$
500
20X1
Jan 8 Ace Ltd
50
15
28 Bank
15 Drawing
60
200
31 Bal c/d
30
15
Feb 1 Bal b/d
350
270
Discount
Cash
Received
$
$
20
Bank
$
260
80
20 Purchases
130
28 Cash
200
31 Bal c/d
590
270
20
Feb 1 Bal b/d
350
590
30
Cash discount given
to trade receivable
Cash discount received from
trade payables
Debit Discount allowed
Credit Trade receivable
Debit Trade payable
Credit Discount received
To calculate cash discount in percentage,
15
× 100 =
20%
Mac Ltd:
(15 + 60 )
On Jan 28, $200 was debited to Cash account and credited from Bank account. This
represent withdrawal of funds from bank account for office use.
Balance b/d on Feb 1,
Cash account $270 Dr [ Current asset ]
Bank account $30 Cr [ Current liability - Bank overdraft ]
Only Bank account can have a credit balance.
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2.2.5 Petty Cash Book
Petty cash are small amount of cash kept in the office to pay for minor recurring
expenditures.
Petty Cash Book is used to record transactions involving petty cash funds.
Imprest System is a system for maintaining the petty cash fund.
Key features:
a fixed sum called imprest amount or float is maintained
petty cash fund is reimbursed after making approved payments
Advantages
provides internal control
avoid overcrowding of the Cash Book
Double- entry:
Set up petty cash fund:
Debit Petty cash
Credit Bank or Cash
Reimburse petty cash funds: Debit Expenses
Credit Bank or Cash
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Interpreting Petty Cash Book:
Petty Cash Book
Analysis of payments
Total
Receipts Date
$
20X1
100
Jan 1
5
15
18
20
25
28
Particulars
Cash
Newspaper
Pens
Eraser
Stamps
Cab fare
Drinks
31 Balance c/d
100
29
Feb 1 Balance b/d
71
Bank
Total
Payments Stationery
$
$
10
15
2
3
16
25
71
Travel Postage Sundry
$
$
$
10
15
2
3
16
17
16
3
25
35
29
100
Amount paid = $(17 + 16 + 3 + 35) = $71
Amount paid = Amount Reimbursed
Bal b/d + Amount reimbursed
= Imprest amount
Double-entry for reimbursement of petty cash fund on 1 February 20X1:
Debit Stationery expenses
Travel expenses
Postage expenses
Sundry expenses
Credit Bank
$17
$16
$3
$35
$71
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Accounting Topical Revision Notes
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Chapter 3. Trial Balance
Transactions
Business
documents
Journals
Ledger
Trial
Balance
Definition:
Trial Balance is a list of the ending balances of all accounts at a given date.
Purpose:
Check arithmetic accuracy of the accounts
Aid in preparation of the financial statements, namely Income Statement and
Statement of Financial Position
Limitation:
A balanced trial balance does not mean that the entries in the accounts contains no
errors. There are errors that are not revealed by a trial balance.
Format:
Particulars
Trial Balance as at "state the date here"
Debit
$
Asset accounts
Liabilities accounts
Expenses accounts
Income accounts
Drawings
Capital
Purchases
Purchases Returns
Sales
Sales Returns
Provision for depreciation
Provision for doubtful debts
Irrecoverable debts
Irrecoverable debts recovered
Credit
$
X
X
X
X
X
X
X
X
X
X
X
X
X
X
XXX
XXX
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Accounting Topical Revision Notes
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3.1 List of Errors Not Affecting Trial Balance
Type of Errors
Interpretation
Example
Error of Omission
Transaction not recorded
Paid rent $500 by cheque.
This was not recorded in the
books.
Error of Original Entry
Wrong amount was recorded
Payment of rent $500 by
cheque was recorded in the
books as $50.
Error of Commission
Recorded in wrong accounts
within the same account type
Payment of rent $500 was
recorded to the wages
account.
Error of Principle
Recorded in wrong accounts
under different account type
Purchase of stationery $300
was recorded to the fixtures
account.
Compensating error
An error on the debit side of
an account is offset by an
error of the same amount on
the credit side of another
account
Both sales and discount
allowed accounts are overcast
by $150.
Error of
Complete Reversal
Recorded on the wrong side
of both accounts
(Amount must multiply by 2)
Payment of rent $500 by
cheque was wrongly credited
to the rent account and
debited to the bank account.
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Chapter 4. Correction of Errors
4.1 Suspense Account
Purpose:
To temporarily balance a trial balance until the errors are discovered and corrected.
To facilitate the preparation of draft financial statements
Recording in Suspense Account
Only errors affecting the balancing of the trial balance are corrected in the
Suspense account
Balances in Suspense account:
Debit balance: Asset
Credit balance: Liability
Example:
The totals of Company K's trial balance on 30 June 20X2 did not agree. There was a
shortage of $500 on the credit side. This was entered in a suspense account.
The following errors were later discovered.
(a) Goods of $250 returned by customer was omitted from the sales return account.
(b) Payment of $1,000 for wages was erroneously recorded to the stationery account.
(c) Interest of $120 received from the bank was debited to the interest account.
(d) Purchase of a printer for $500 was debited to the general expense account.
(e) A sales of $690 was recorded in the sales account as $960.
(f)
Purchases of goods amounting to $80 was not recorded.
Answer:
Date Details
20X2
Jun 30 Sales return (a)
Sales (e)
Purchases (f)
Bal c/d
Suspense A/C
Debit Date
$
20X2
250 Jun 30
270
80
140
740
July 1
Details
Bal b/d
Interest (c)
Bal b/d
Credit
$
500
240
740
140
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4.2 Correcting Profit for the year
Statement of Corrected Profit or Loss:
Statement of corrected profit or loss for the year ended “state the date here”
Profit / Loss for the year before correction
$
XX
Add: Errors that understate profit
X
Expense overstated or income understated
Less: Errors that overstate profit
(X)
Expense understated or income overstated
Corrected profit / loss for the year
XX
Example:
Continuing from previous example, the following errors were discovered:
(a) Goods of $250 returned by customer was omitted from the sales return account.
(b) Payment of $1,000 for wages was erroneously recorded to the stationery account.
(c) Interest of $120 received from the bank was debited to the interest account.
(d) Purchase of a printer for $500 was debited to the general expense account.
(e) A sales of $690 was recorded in the sales account as $960.
(f)
Purchases of goods amounting to $80 was not recorded.
Profit for the year ended 30 June 20X2 was $6 000.
Answer:
Statement of corrected profit for the year ended 30 June 20X2
$
Profit for the year before correction
$
6,000
Add:
(c) Interest income understated [ 120 x 2 ]
240
(d) General expense overstated
500
740
Less:
(a) Sales return understated
250
(e) Sales overstated [ 960 - 690 ]
270
(f) Purchases understated
80
Corrected profit for the year
600
6,140
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Chapter 5. Bank Reconciliation
Purpose:
Determine accurate bank balance
Identify errors in the bank statement and Bank account
Deterrence against fraud
Difference between Bank Account and Bank Statement:
Bank account
Bank statement
Prepared by business
Prepared by bank
represents money own
by business
represents money owing
to business by bank
Asset
Liability
Debit (+) Credit (-)
Debit (-) Credit (+)
As such, a debit balance in the Bank account is represented by a credit balance in the
bank statement.
Steps to bank reconciliation:
1. Cancel similar transactions in the Bank account and bank statement.
Debit in Bank account cancel against Credit in bank statement
Credit in Bank account cancel against Debit in bank statement
Date Details
Date
Particulars
Cheque
Bank A/C
Debit Date Details
$
Bank Statement
Debit
$
(Payment)
Cheque
Credit
$
(Deposit)
Credit
$
Balance
$
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Accounting Topical Revision Notes
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2.
Update Bank account
(a) Correct any errors found in Bank account
(b) Record transactions not cancelled in bank statement
Example:
Date
July
6
16
30
31
Details
Fence Ltd
Max Print
Sales
Bal c/d
Cheque
(a)
error
Bank A/C
Debit Date
$
July
2,100
1
10
5
300
9
1,070
17
28
3,480
Aug
1
Details
Cheque
Bal b/d
Rent
Purchases
Drawings
Mary's Cafe
0023
0024
0025
0026
Bal b/d
Credit
$
730
600
1,400
150
600
3,480
1,070
Starting balance in updated Bank account
Date
July
1
2
7
8
12
13
18
20
31
31
Bank Statement
Particulars
Debit
belongs to previous months$
Bal b/d
IGNORE!!
Cheque 0020
530
Cheque 0023
600
Cash
Cheque 0024
1 400
(b)
Returned cheque
2 100
Deposit
Cheque 0025
(b) 150
Bank charges
160
Credit transfer: Dividends
Credit
$
2 100
100
(b)
500
Balance
$
200 Dr
730 Dr
1 330 Dr
770 Cr
630 Dr
2 730 Dr
2 630 Dr
2 780 Dr
2 940 Dr
2 440 Dr
Note:
Amount received from Max Printing is correctly recorded in the bank statement.
Answer:
Date Details
July
31 Max Print
Dividend
Bal c/d
Cheque
(a)
(b)
Updated Bank A/C
Debit Date Details
$
July
90
31 Bal b/d
500
Fence Ltd
Bank charge
2,740
3,330
Aug
1 Bal b/d
Cheque
(b)
(b)
Credit
$
1,070
2,100
160
3,330
2,740
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Accounting Topical Revision Notes
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3.
Prepare bank reconciliation statement
(a) Record any errors found in bank statement
(b) Record transactions not cancelled in Bank account
Date Details
Cheque
Bank A/C
Debit Date Details
$
Deposits not credited
Cheque
Credit
$
Cheques not presented
Continue from the previous example:
Bank reconciliation statement as at 31 July 20XX
$
Balance per updated Bank account
2,740 Cr
Add cheques not yet presented:
Mary's Cafe
600
2,140
Less deposit not yet credited:
Sales
300
Balance per bank statement
2,440 Dr
Alternative presentation of bank reconciliation statement
Bank reconciliation statement as at 31 July 20XX
$
Balance per bank statement
2,440 Dr
Less cheques not yet presented:
Mary's Cafe
600
3,040
Add deposit not yet credited:
Sales
300
Balance per updated Bank account
2,740 Cr
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Accounting Topical Revision Notes
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Chapter 6. Trade receivables and Trade payables
6.1 Control Accounts
Sales ledger control account (also known as Trade receivable control account) is a
summary of the sales ledger.
Purchase ledger control account (also known as Trade payable control account) is a
summary of the purchase ledger.
Purpose / Advantages
Independent check on the accuracy of postings in the sales and purchases ledgers
Avoid overcrowding in the General Ledger with voluminous details
Deter and detect errors
Provide total amount of trade receivables and trade payables
Contra or Offset transaction
refers to a transfer of amount owing between a trade receivables who is also a
trade payable.
Double-entry:
Debit Purchases ledger control
Credit Sales ledger control
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Accounting Topical Revision Notes
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6.2 Trade receivables and Sales Ledger Control Account
Trade receivables are customers who bought goods from the business on credit.
Recorded in
General Ledger
Recorded in
Sales Ledger
Trade receivables
account
Sales ledger
control
account
Trade receivables
account
Trade receivables
account
Format for Trade receivables account AND Sales Ledger control account:
Trade receivables A/C OR Sales Ledger Control A/C
Date Details
Bal b/d
Debit
$
XX
Date Details
Sales returns
Credit
$
X
Sales
X
Cash / Bank
X
Bank (dishonoured cheque)
X
Discount allowed
X
Discount allowed (withdrawn)
X
Irrecoverable debts
X
Other charges - interest;
delivery
X
Purchase ledger control
(contra)
Bal c/d
X
XXX
XX
XXX
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Transactions affecting trade receivables accounts:
Transactions
Books of
Prime Entry
Business
Document
Account
Credit sales
Sales Journal
Invoice
Sales
Undercharging
General Journal
Debit note
Sales
Return of goods
Sales Return
Journal
Credit note
Sales return
Payment received
Cash Book
Receipt
Cash / Bank
Discount given
Cash Book
Receipt
Discount allowed
Write off debts
General Journal
Court papers /
lawyer's letter
Irrecoverable debts
Returned cheque
Cash Book
Bank statement
Bank
Discount withdrawn
Cash Book
Bank statement
Discount allowed
Other charges
General Journal
Invoice
Depends on the charges
Contra
General Journal
Receipt
Purchases ledger control
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6.3 Trade payables and Purchases Ledger Control Account
Trade payables are suppliers who supply goods to the business on credit.
Recorded in
General Ledger
Recorded in
Purchase Ledger
Trade payables
account
Purchases
ledger
control
account
Trade payables
account
Trade payables
account
Format for Trade payables account AND Purchases ledger control account:
Trade payable A/C OR Purchases Ledger Control A/C
Date Details
Purchases Returns
Debit
$
X
Date Details
Credit
$
XX
Bal b/d
Cash / Bank
X
Purchases
X
Discount received
X
X
Sales ledger control (contra)
X
Other charges - interest;
delivery
Bal c/d
XX
XXX
XXX
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Accounting Topical Revision Notes
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Transactions affecting trade payables accounts:
Transactions
Books of
Prime Entry
Business
Document
Account
Credit purchases
Purchase Journal
Invoice
Purchases
Undercharging
General Journal
Debit note
Purchases
Return of goods
Purchase Return
Journal
Credit note
Purchases Returns
Payment
Cash Book
Payment voucher
Cash / Bank
Discount received
Cash Book
Payment voucher
Discount received
Other charges
General Journal
Invoice
*Depends on the
charges
Contra
General Journal
Receipt
Sales ledger control
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Accounting Topical Revision Notes
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Chapter 7. Capital and Revenue Expenditure and Receipts
7.1 Capital expenditure
Definition:
is the cost of acquiring asset and improving or extending non-current asset
benefit will last for more than one accounting period
recorded as non-current assets
Cost of Asset:
Original purchase price + all cost required to bring asset to usable state
Double-entry:
Debit Non-current asset
Credit Cash / Bank / Other payable
Example:
Company X purchase a piece of machinery from Great Machinery Ltd on credit at list
price of $50,000 less 10% discount. Also included in the invoice were the following costs:
Installation of machinery
2 years warranty
Yearly maintenance
Answer:
Cost of asset =
( 50,000 x 90% )
Original
purchase price
$2,000
$450
$1,200
+
2,000
= $47,000
Expense required to bring
asset to usable state
Debit Plant & machinery
Credit Other payable - Great Machinery Ltd
$47,000
$47,000
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7.2 Revenue expenditure
Definition:
is the purchase of goods for resale or services to run a business on a daily basis
benefit last less than one accounting period
recorded as current asset or expenses
Cost of expenditure = Original amount incurred
Double-entry:
Debit Expense
Credit Cash / Bank / Other payable
Example:
Continued from the above scenario for capital expenditure...
Answer:
Warranty and maintenance are considered yearly expenditure, therefore
Cost of expenditure = 450 + 1,200 = $1,650
Debit Maintenance expense
Credit Other payable - Great Machinery Ltd
$1,650
$1,650
7.2.1 Exception to capital expenditure rule
Materiality concept states that a transaction or an item is considered material if it
makes a difference to decision-making.
Example:
Company X has a capital of $1 million. Recently, it paid $6 for a waste paper basket for
office use.
Answer:
Though the waste paper basket can last the business for more than one accounting
period, the amount of $6 is insignificant compared to the overall worth of the business.
Instead of being considered as a capital expenditure, the waste paper basket
is considered as revenue expenditure.
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7.3 Capital receipts
Definition:
income obtained from investment and financing activities of the business
benefit will last for more than one accounting period
recorded as non-current liabilities or capital
Examples:
Issuance of shares
Capital contribution from owner
Loan from financial institutions / banks
Government grants
7.4 Revenue receipts
Definition:
income obtained through normal business operations
benefit last within one accounting period
recorded as income
Examples:
Sales of goods
Discount received
Interest income
Dividend income
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Chapter 8. Accounting for Depreciation
8.1 Depreciation
Definition:
Depreciation:
Allocation of the original cost of a non-current asset over its useful life
Represent the loss of value of a non-current asset for each accounting period
Provision for depreciation or Accumulated depreciation:
Total depreciation of a non-current asset to-date
Contra asset
Credit account
Book value:
Original cost of a non-current asset less its accumulated depreciation
Non-current assets are valued at net book value according to the Prudence concept
Cause of depreciation:
1. Wear and tear
2. Obsolescence
3. Passage of time
4. Legal limit
5. Depletion
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8.1.1
Depreciation policy
Depreciation policy
Calculation of depreciation in
Year of Purchase
Year of Sale
Full year depreciation in the
year of purchase and none
in the year of sale
12 months
No depreciation
Full year depreciation in the
year of purchase and year
of sale
12 months
12 months
No depreciation in the year
of purchase
No depreciation
From start of accounting
period to date of sale
Depreciation is charged
from date of transaction
From date of purchase to
end of accounting period
From start of accounting
period to date of sale
Question did not specify
any of the above
From date of purchase to
end of accounting period
From start of accounting
period to date of sale
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8.1.2
Straight-line method of depreciation
Formula:
( Cost - Scrap value)
Useful life
OR
Cost
×
Rate of depreciation (%)
Effect on Profit for the year:
Depreciation expenses remains constant over the asset's useful life
Effect on profit for the year is constant
Example:
Company Z bought some cupboards for $8,000 on 1 March 20X1 and paid by cheque.
The scrap value of these cupboards is estimated at $500 after 5 years of usage.
On 1 May 20X2, the company bought a new set of tables for $3,600 by cheque. These
tables will be depreciated at 20% per annum on cost.
Prepare the Fixtures & Fittings account and Provision for depreciation of fixtures &
fittings account for the years ended 30 June 20X1 and 20X2.
Answer:
Date Details
20X1
Mar 1 Bank
July 1 Bal b/d
20X2
May 1 Bank
July 1 Bal b/d
Fixtures & Fittings A/C
Debit
Date Details
$
20X1
8,000 Jun 30 Bal c/d
8,000
3,600
11,600
20X2
Jun 30 Bal c/d
Credit
$
8,000
11,600
11,600
11,600
 ( 8000 − 500 )  4
= $500
(a) Depreciation for 30 June 20X1: 
×
5

 12
 ( 8000 − 500 )  
2
(b) Depreciation for 30 June 20X2: 
 + ( 3600 × 20% ) ×  = $1,620
5
12 

 
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Date Details
20X1
Jun 30 Bal c/d
Provision for depreciation A/C
Debit Date Details
$
20X1
500 Jun 30 Income statement (a)
20X2
Jun 30 Bal c/d
July 1 Bal b/d
20X2
Jun 30 Income statement (b)
2,120
2,120
July 1
Bal b/d
Credit
$
500
500
1,620
2,120
2,120
Income Statement for the year ended 30 June 20X2 (extract)
$
Less expenses:
Provision for depreciation of fixtures & fittings
1,620
Statement of Financial Position at 30 June 20X2 (extract)
Accumulated
Cost
Book Value
depreciation
$
$
$
Non-current asset:
Fixtures & fittings
11,600
2,120
9,480
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8.1.3
Reducing-balance method of depreciation
Formula:
( Cost - Accumulated depreciation )
×
Rate of depreciation (%)
Effect on Profit for the year:
Depreciation expenses decreases over the asset's useful life
Profit for the year increases as depreciation expenses decreases
Example:
Company X paid a cheque of $80,000 for a car on 1 March 20X1. On 1 May 20X2, the
company purchased a delivery van for $130,000 on credit.
The company depreciates motor vehicle at 10% per annum using the reducing-balance
method. A full year depreciation is charged in the year of purchase.
Prepare the Motor vehicle account and Provision for depreciation of motor vehicle
account for the years ended 30 June 20X1 and 20X2.
Answer:
Date Details
20X1
Mar 1 Bank
July 1 Bal b/d
20X2
May 1 Other payable
July 1 Bal b/d
Motor Vehicles A/C
Debit
Date Details
$
20X1
80,000 Jun 30 Bal c/d
Credit
$
80,000
80,000
20X2
130,000 Jun 30 Bal c/d
210,000
130,000
210,000
210,000
(a) Depreciation for 30 June 20X1: [80000 × 10% ] = $8,000
(b) Depreciation for 30 June 20X2: ( 80000 − 8000 ) × 10%  + [130000 × 10% ] = $20,200
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Accounting Topical Revision Notes
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Date Details
20X1
Jun 30 Bal c/d
20X2
Jun 30 Bal c/d
Provision for depreciation A/C
Debit
Date Details
$
20X1
8,000 Jun 30 Income statement (a)
28,200
28,200
Credit
$
8,000
July 1 Bal b/d
8,000
20X2
Jun 30 Income statement (b) 20,200
28,200
July 1
Bal b/d
28,200
Income Statement for the year ended 30 June 20X2 (extract)
$
Less expenses:
Provision for depreciation of motor vehicles
20,200
Statement of Financial Position at 30 June 20X2 (extract)
Accumulated
Cost
Book Value
depreciation
$
$
$
Non-current asset:
Motor vehicles
210,000
28,200
181,800
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Accounting Topical Revision Notes
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8.1.4
Revaluation method of depreciation
Formula:
Value of asset
at start of
accounting year
+
Purchases
during the year
-
Disposal
during the year
-
Value of asset
at end of
accounting year
Example:
Machinery was valued on 1 January 20X1 as $25,000. During the year, the company sold
an old piece of machinery costing $5,000 and purchased a new set for $13,000. On 31
December 20X1, machinery was valued at $28,000.
Prepare the Provision for depreciation of machinery account for the year ended 31
December 20X1.
Answer:
Depreciation: 25,000 + 13,000 - 5,000 - 28,000 = $5,000
Date Details
20X1
Dec 31 Bal c/d
Provision for depreciation A/C
Debit
Date Details
$
20X1
5,000
Dec 31 Income statement
Credit
$
5,000
20X2
Jan 1
Bal b/d
5,000
Income Statement for the year ended 31 December 20X1 (extract)
$
Less expenses:
Provision for depreciation of machinery
5,000
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8.2 Sales of non-current assets
Determining Gain or Loss on sales:
Loss on sales of non-current asset
( Cost - Provision for depreciation )
Selling price
Gain on sales of non-current asset
( Cost - Provision for depreciation )
Selling price
Components in the Disposal of non-current asset account:
Date
Disposal of non-current asset A/C
Details
Debit Date Details
$
Cost of non-current asset
X
Provision for depreciation
Cash / Bank /
other receivables
Income statement - Profit
X
OR
Income statement - Loss
Credit
$
X
X
X
Recording Disposal of non-current asset in Income Statement:
Income Statement (extract)
$
Other Income:
Profit on disposal
XX
Expenses:
Loss on disposal
XX
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Example:
Company Y had the following balances on 1 July 20X2: Machinery $130,000 and
Provision for depreciation of machinery $50,000
On 1 April 20X3, one of the machines bought in May 20X1 was sold on credit for $15,000.
This machine was previously purchased for $60,000.
It is the business policy to charge a full year’s depreciation in the year of purchase and
none in the year of sale. Machinery are depreciated at an annual rate of 20% using the
reducing-balance method.
Record the disposal in the Machinery account, Provision for depreciation of machinery
account and Disposal account.
Answer:
Machinery A/C
Debit
Date
$
20X3
130,000 Apr 1
Date Details
20X2
July 1 Bal b/d
Details
Disposal
Credit
$
60,000
*Common error
recording selling price of
$15,000 instead of cost
Depreciation for machinery sold:
Year ended 30 June 20X1: 60,000 x 20% = $12,000
Year ended 30 June 20X2: (60,000 - 12,000) x 20% = $9,600
Total depreciation = $12,000 + $9,600 = $21,600
Date
20X3
Apr 1
Date
20X3
Apr 1
Details
Disposal
Details
Machinery
Provision for depreciation A/C
Debit
Date Details
$
20X2
21,600 July 1 Bal b/d
Credit
$
50,000
Disposal A/C
Debit
Date Details
$
20X3
60,000 Apr 1 Provision for depreciation
Other receivables
Income statement
Credit
$
21,600
15,000
23,400
60,000
60,000
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Chapter 9. Other Payables and Other Receivables
9.1 Recording Accrued and Prepaid Expenses
Expense Accounts
Debit (+)
Credit (-)
Balance b/d [Prepaid expense]
Balance b/d [Accrued expense]
Cash/Bank/Other payable [Expense paid]
Income statement [Expense incurred]
Balance c/d [Accrued expense]
Balance c/d [Prepaid expense]
Recording in Statement of Financial Position:
Prepaid expense : Current asset > Other receivables
Accrued expense : Current liability > Other payables
Example:
Company Z has a balance of $3,000 in its prepaid rent account on 1 January 20X1. On 1
July 20X1, $12,000 rent was paid by cheque. The premise was rented at $1,200 per
month. Prepare Rent Expense account for the year ended 31 December 20X1.
Answer:
Date
20X1
Jan 1
Details
Jul 1
Bank
Balance b/d
Rent Expense A/C
Debit
Date Details
$
20X1
3,000 Dec 31 Income statement
(1200 × 12 months )
12,000 Dec 31 Balance c/d
15,000
20X2
Jan 1
Balance b/d
Credit
$
14,400
600
15,000
600
Income Statement for the year ended 31 December 20X1 (extract)
$
Less expenses:
Rent expense
14,400
Statement of financial position at 31 December 20X1 (extract)
$
Current asset
Other receivables
600
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9.2 Recording Accrued and Prepaid Income
Income Accounts
Debit (-)
Credit (+)
Balance b/d [Accrued income]
Balance b/d [Prepaid income]
Income statement [Income earned]
Cash/Bank/Other receivable
[Income received]
Balance c/d [Prepaid expense]
Balance c/d [Accrued income]
Recording in Statement of Financial Position:
Prepaid income : Current liability
Accrued income : Current asset
Example:
Company Z was owed $500 interest for the year ended 31 December 20X1. On 30 June
20X2, the company received a cheque of $2,000. At the end of the accounting period,
$800 of interest income remains outstanding. Prepare Interest Income account for the
year ended 31 December 20X2.
Answer:
Date Details
20X2
Jan 1 Balance b/d
Dec 31 Income statement
20X3
Jan 1
Balance b/d
Interest Income A/C
Debit
Date Details
$
20X2
500
Jun 30 Bank
2,300 Dec 31 Balance c/d
Credit
$
2,000
800
2,800
2,800
800
Income Statement for the year ended 31 December 20X2 (extract)
$
Other income:
Interest income
2,300
Statement of financial position at 31 December 20X2 (extract)
$
Current asset:
Prepaid interest income
800
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Chapter 10. Irrecoverable Debts and Provision for doubtful
debts
10.1 Irrecoverable debts
Definition:
Debts that are confirmed not collectible from trade receivables
Expense
Debit account
Double-entry:
Debit Irrecoverable debts
Credit Trade receivables
Example:
On 1 January 20X1, a trade receivable owing $600 has been declared bankrupt. The debt
is to be written off as irrecoverable.
Answer:
Date Details
20X1
Jan 1 Bal b/d
Trade receivables A/C
Debit
Date Details
$
20X1
600
Jan 1 Irrecoverable debt
Credit
$
600
Date Details
20X1
Jan 1 Trade receivables
Irrecoverable debt A/C
Debit
Date Details
$
20X1
600
Jan 1 Income statement
Credit
$
600
Income Statement (extract)
$
Expenses:
Irrecoverable debts
600
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10.2 Recovery of irrecoverable debts
Definition:
Debts that are previously written off as irrecoverable was subsequently recovered
Income
Credit account
Double-entry:
Debit Cash / Bank
Credit Irrecoverable debts recovered
Example:
On 1 January 20X1, a debt of $600 owed by a trade receivables was written off as
irrecoverable. On 1 July 20X1, the trade receivable returned to repay the debt of $600
by cash.
Answer:
Date Details
20X1
July 1 Irrecoverable debt
recovered
Cash A/C
Debit
Date
$
600
Details
Credit
$
Irrecoverable debt recovered A/C
Date Details
Debit
Date Details
20X1
$
20X1
July 1 Income statement
600
July 1 Cash
Credit
$
600
Income Statement (extract)
$
Other Income:
Irrecoverable debts recovered
600
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Accounting Topical Revision Notes
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10.3 Provision for doubtful debts
Definition:
Provision for debts that are deemed uncollectible based on reasonable estimation
Contra-asset
Credit account
Calculating Provision for doubtful debts:
Trade receivables at end of accounting period
×
Rate of provision for doubtful debts (%)
Double-entry:
Creating Provision for doubtful debts:
Debit Income statement
Expense
Credit Provision for doubtful debts
Adjusting an Increase in Provision for doubtful debts
Debit Income statement
Expense
Credit Provision for doubtful debts
Adjusting a Decrease in Provision for doubtful debts
Debit Provision for doubtful debts
Income
Credit Income statement
Presentation in Income Statement:
Income Statement (extract)
$
Other Income:
Decrease in provision for doubtful debts
Expenses:
Increase in provision for doubtful debt
Presentation in Statement of Financial Position:
Statement of Financial Position (extract)
$
Current assets:
Trade receivables
Less Provision for doubtful debt
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Accounting Topical Revision Notes
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Example 1: Creating Provision for doubtful debts
Company X decides to create a provision for doubtful debts at 5% of its trade receivable.
For the year ended 31 December 20X1, trade receivable was $20,000.
Answer:
Provision for doubtful debts for 31 Dec 20X1 = $20,000 X 5% = $1,000
Date Details
20X1
Dec 31 Bal c/d
Provision for doubtful debt A/C
Debit
Date Details
$
20X1
1,000 Dec 31 Income statement
Credit
$
1,000
20X2
Jan 1
1,000
Bal b/d
Example 2: Increase in Provision for doubtful debts
Continuing from Example 1, Company X's trade receivables amounted to $34,000 for
the year ended 31 December 20X2. Provision for doubtful debts is maintained at 5% on
trade receivables.
Answer:
Provision for doubtful debts for 31 Dec 20X2 = $34,000 X 5% = $1,700
Date Details
20X2
Dec 31 Bal c/d
Provision for doubtful debt A/C
Debit
Date Details
$
20X2
1,700
Jan 1 Bal b/d
Dec 31 Income statement
1,700
20X3
Jan 1 Bal b/d
Credit
$
1,000
700
1,700
1,700
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Accounting Topical Revision Notes
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Example 3: Decrease in Provision for doubtful debts
Continuing from Example 1, Company X's trade receivables amounted to $16,000 for
the year ended 31 December 20X2. Provision for doubtful debts is maintained at 5% on
trade receivables.
Answer:
Provision for doubtful debts for 31 Dec 20X2 = $16,000 X 5% = $800
Provision for doubtful debt A/C
Date Details
Debit
Date Details
20X2
$
20X2
Dec 31 Income statement
200
Jan 1 Bal b/d
Dec 31 Bal c/d
800
1,000
20X3
Jan 1 Bal b/d
Credit
$
1,000
1,000
800
Income Statement for the year ended 31 Dec 20X2 (extract)
$
Other Income:
Decrease in provision for doubtful debts
200
Statement of Financial Position at 31 Dec 20X2 (extract)
$
Current asset:
Trade receivable
16,000
Less: Provision for doubtful debts
(800)
$
15,200
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Chapter 11.Valuation of Inventory
Inventory is valued at the lower of cost and net realisable value. This is in accordance to
the Prudence concept.
Effect of Incorrect Valuation of Inventory
Inventory is Overvalued
Effect on
Gross profit
Profit for
the year
Owner's
Equity
Asset
valuation
Current period
Overstated
Overstated
Overstated
Overstated
Next period
Understated
Understated
No effect
No effect
Inventory is Undervalued
Effect on
Gross profit
Profit for
the year
Owner's
Equity
Asset
valuation
Current period
Understated
Understated
Understated
Understated
Next period
Overstated
Overstated
No effect
No effect
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Chapter 12.Sole Traders
12.1 Advantages and Disadvantages of Sole Traders
Advantages
Easy and less expensive to set up and maintain
Owner has full control over the management of the business
Disadvantages
Owner may lose more than his/her investment in the business if the business fails
Banks and financial institutions may be less willing to lend
More difficult for ownership to be transferred
12.2 Difference between Trading Business and Service Business
Trading business
Earns its profit through the buying and selling of goods
Assets includes unsold inventory
Service business
Earns its revenue through the provision of services to customers
Do not hold any inventory
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12.3 Income Statement
Income statement measures the profitability of a company for a specified time period,
at regular intervals.
12.3.1 Trading business
“Name of company”
Income Statement for the year ended “date”
$
Revenue
Less Sales Returns
Opening inventory
Purchases
Carriage inwards
Purchases Returns
Drawings of goods
Closing inventory
Cost of sales
Gross profit
XX
XX
XX
XX
(XX)
XX
(XX)
XX
(XX)
$
XX
( XX )
XX
Trading
portion
( XX )
XXX
Net revenue > Cost of sales = Gross profit
Net revenue < Cost of sales = Gross loss
Other Incomes:
Irrecoverable debt recovered
Profit on disposal
Decrease in provision for doubtful debts
Expenses:
Irrecoverable debts
Loss on disposal
Provision for depreciation of non-current asset
Increase in provision for doubtful debts
Profit for the year
XX
XX
XX
XXX
Profit & Loss
portion
(XX)
(XX)
(XX)
(XX)
(XXX)
XXX
( Gross profit + Other income ) > Expenses = Profit
( Gross profit + Other income ) < Expenses = Loss
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12.3.2 Service business
“Name of company”
Income Statement for the year ended “date”
$
Revenue
Other Incomes:
Irrecoverable debt recovered
Profit on disposal
Decrease in provision for doubtful debts
Expenses:
Irrecoverable debts
Loss on disposal
Provision for depreciation of non-current asset
Increase in provision for doubtful debts
Profit for the year
XX
XX
XX
(XX)
(XX)
(XX)
(XX)
$
XXX
XXX
(XXX)
XXX
( Revenue + Other income ) > Expenses = Profit
( Revenue + Other income ) < Expenses = Loss
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12.4 Statement of Financial Position
Measures the financial position of a company at a given date.
“Name of company”
Statement of Financial Position at “date”
$
Non-current Assets
Fixtures & Fittings
Motor vehicles
Office equipment
Premises / Buildings
Plant & Machinery
Cost
$
Accumulated
Depreciation
$
Book
value
XX
XX
XX
XX
XX
XXX
XX
XX
XX
XX
XX
XXX
XX
XX
XX
XX
XX
XXX
XX
XX
XXX
Intangible Assets
Goodwill
Copyrights
Current Assets
Trade receivables
Less: Provision for doubtful debts
XX
(XX)
Inventory (Not applicable for service business)
Other receivables (prepaid expense/accrued income)
Petty cash
Cash / Bank
Total Assets
Owner's Equity
Capital
Add: Profit for the year (OR Less: Loss for the year)
Less: Drawings
XX
XX
XX
XX
XX
XXX
XXX
XX
XX
XX
XX
Non-current liabilities
Loans or Mortgages
Current liabilities
Trade payables
Other payables (accrued expenses / prepaid income)
Bank overdrafts
Total equity and liabilities
XX
XX
XX
XX
XX
XXX
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12.5 Equity Accounts
12.5.1 Drawings accounts
Assets that the owner withdraws from the business for personal use are recorded in the
drawings account.
Drawings A/C
Date Details
Cash / Bank
Purchases [ drawing of goods ]
Debit
$
X
Date Details
X
Credit
$
Capital A/C
XX
XX
XX
12.5.2 Capital accounts
Personal assets that the owner brings into the business are recorded in the capital
account.
Capital A/C
Date Details
Drawings A/C
Income statement
Debit
$
XX
X
Loss for the year
Balance c/d
XX
XXX
Date Details
Balance b/d
Credit
$
XX
Cash / Bank
X
Assets / Expenses
X
Income statement
X
Profit for the year
XXX
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Example:
On 1 January 20X1, John, a sole trader has a balance of $6,000 in his capital account.
During the year, the following transactions took place:
1. Withdrew goods worth $300 for personal use on 1 March 20X1.
2. Took stationery valued $60 for use at home on 1 May 20X1.
3. On 1 April 20X1, paid $2,500 using personal cheque for a computer to be used in
office.
4. Withdraw $200 from the business bank as personal allowances on 1 August 20X1.
5. Deposited $2,000 cash into business bank account on 1 November 20X1.
Profit for the year amounted to $5,000.
Answer:
Date
20X1
Mar 1
May 1
Aug 1
Details
Purchases
Stationery
Bank
Date Details
20X1
Dec 31 Drawings
Bal c/d
Drawings A/C
Debit
Date Details
$
20X1
300
Dec 31 Capital
60
200
560
Capital A/C
Debit
Date
$
20X1
560
Jan 1
14,940 Apr 1
Nov 1
Dec 31
15,500
20X2
Jan 1
Credit
$
560
560
Details
Bal b/d
Office equipment
Bank
Income statement
Bal b/d
Credit
$
6,000
2,500
2,000
5,000
15,500
14,940
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Chapter 13.Partnerships
13.1 Advantages and Disadvantages of Partnership
Advantages
Bigger pool of capital
Combined skills and experiences of partners
Sharing of business tasks or duties between partners
Disadvantages
Disagreements due to conflicting views of partners
All partners are held responsible for contractual losses of the business
Partners can be forced to pay partnership debts with their personal assets
13.2 Partnership Agreement
Purpose
To specify matters of concern to the partners so that all partners are clear on how the
partnership operates to avoid future disputes.
Contents of partnership agreement
Contribution of capital
Appropriation of profits / losses
Drawings of assets for personal use
Interest chargeable on drawings
Interest payable on capital
Partners’ salary
Interest chargeable on loans from partners
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13.3 Accounting for Partners' Transactions
13.3.1 Interest on Capital
To compensate any partner who has contributed more capital than the other partners
Calculation
Interest on capital = Capital x Rate (% per annum) x Time (year)
Example:
The balances in the partners' Capital accounts on 1 January 20X1 are: $30,000 for
partner A and $45,000 for partner B. On 1 June 20X2, partner B contributed additional
capital of $12,000 into the business bank account. Interest on capital is at 8% per annum.
Answer:
On 31 December 20X1, interest on capital for:
Partner A = 30,000 x 8% = $2,400
Partner B = (45,000 x 8%) + (12,000 x 8% x 7/12 months) = $4,160
Effect on Current account and Profit
Partners' current account: Increases
Profit available for allocation: Decreases
13.3.2 Interest on Drawings
To discourage the withdrawal of cash or goods by the partners so as to keep its assets
for business opportunities
Calculation
Interest on drawings = Drawings x Rate (% per annum) x Time (year)
Example:
On 1 January 20X1, partner A withdraw goods costing $2,000. On 1 July 20X1, partner B
withdrew cash $1,500 from the business. Interest on drawings is at 10% per annum.
Answer:
On 31 December 20X1, interest on drawings for:
Partner A = 2,000 x 10% = $200
Partner B = 1,500 x 10% x 6/12 months = $75
Effect on Current account and Profit
Partners' current account: Decrease
Profit available for allocation: Increases
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Accounting Topical Revision Notes
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13.3.3 Partners' Salary / Bonuses / Commissions
Provides compensation to partners who has contributed time and effort to operate the
business
Accounting Treatment
Not a business expense but an entitlement of the partner
If unpaid, credited to partner's current account
If paid, do not need to record in partner's current account
Example:
Partner B is allowed an annual salary of $8,000. The business paid him $3,000 on 1 May
20X1. The balance amount remains outstanding at 31 December 20X1.
Answer:
Debit Appropriation account $8,000
Credit Cash / Bank
$3,000
Credit Current a/c - Partner B $5,000
Effect on Current account and Profit
Partners' current account: Increases
Profit available for allocation: Decreases
13.3.4 Loan from Partners
Treated the same way as loan from external parties. Therefore, it is considered a
business liability
Accounting Treatment
Recorded in Statement of Financial Position as a liability
Example:
Partner A provided a loan of $15,000 to the business on 1 September 20X1.
Answer:
Debit Bank
$15,000
Credit Loan from Partner A
$15,000
Effect on Current account and Profit
Partners' current account: No effect
Profit available for allocation: No effect
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13.3.5 Interest on Loan from Partners
To provide a return on the funds loaned to the business by the partner
Calculation
Interest on loan = Loan x Rate (% per annum) x Time (year)
Accounting Treatment
Business expense in the Income Statement
If unpaid, credited to partner's current account
If paid, do not need to record in partner's current account
Example:
Partner A provided a loan of $15,000 to the business on 1 September 20X1. Interest on
loan is charged at 5% per annum. Half the interest is paid to the partner while the
balance amount remains owing at 31 December 20X1.
Answer:
On 31 December 20X1,
interest on loan = 15,000 x 5% x 4/12 months = $250
Debit Interest expense
$250
Credit Bank
$125
Credit Current a/c - Partner A $125
Effect on Current account and Profit
Partners' current account: Increases (if not paid)
Profit available for allocation: Decreases as Profit for the year decreases
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13.4 Appropriation account
Purpose
To determine the final profit or loss for allocation to all partners after taking into
account interest on capital, interest on drawings, partners' salary, bonus or commission.
Calculation of Profit Available for Distribution to Partners
Profit for the year
+
-
Interest on drawings
Interest on capital
Partners' salary / bonus / commission
Format:
Appropriation Account for the year ended “date”
$
Profit for the year
Interest on drawings
Partner A
Partner B
X1
X2
Interest on capital
Partner A
Partner B
X1
X2
Partners' salary
Partner A
Partner B
X1
X2
Share of profit
Partner A [(A+B) - C - D] x profit sharing ratio
Partner B [(A+B) - C - D] x profit sharing ratio
X1
X2
$
X
(A)
XX
XXX
(B)
(A+B)
XX
(C)
XX
XXX
(D)
(A+B) - C - D
XXX
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Accounting Topical Revision Notes
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Example:
A and B are business partners. The balances in the partners' Capital accounts on 1
January 20X1 are: $30,000 for partner A and $45,000 for partner B.
Total drawings made by the partners for the year are: $2,000 for partner A and $3,000
for partner B.
Their partnership agreement states the following:
1. Interest on capital is at 8% per annum
2. Partner B is paid a monthly salary of $600
3. Interest on drawings is at 10% per annum
4. Partner A provided a loan of $15,000 to the business. Interest on loan is charged at 5%
per annum
5. Profits or losses are to be shared between A and B in the ratio of 3:2
Profit for the year ended 31 December 20X1 before interest on loan is $20,000
Answer:
Appropriation Account for the year ended 31 December 20X1
$
$
Profit for the year [20,000 - (15,000 x 5%)]
19,250
Interest on drawings
Partner A (2,000 x 10%)
Partner B (3,000 x 10%)
200
300
Interest on capital
Partner A (30,000 x 8%)
Partner B (45,000 x 8%)
2,400
3,600
Partners' salary
Partner B (600 x 12 months)
Share of profit
Partner A 6,550 x 3/5
Partner B 6,550 x 2/5
500
19,750
6,000
7,200
6,550
3,930
2,620
6,550
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Accounting Topical Revision Notes
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13.5 Capital account
Records capital contribution or withdrawal by each partner. It shows the total capital
invested in the business by the partner.
Format:
Date
Capital A/C
Debit
Date
$
X
Details
Cash / Bank / etc
Details
Credit
$
X
X
Balance b/d
Cash / Bank
Capital withdrawn
Additional capital contributed
Example:
A and B are business partners. The balances in the partners' Capital accounts on 1
January 20X1 are: $30,000 for partner A and $45,000 for partner B.
On 1 June 20X1, partner B contributed additional capital of $12,000 which was
deposited into the business bank account; while partner A transferred $15,000 of his
capital into loan for the business. The business closes its books on 31 December.
Answer:
Date Details
20X1
Jun 1 Loan
Dec 31 Balance c/d
A
$
15,000
15,000
Capital A/C
B
Date Details
$
20X1
Jan 1 Balance b/d
57,000 Jun 1 Bank
A
$
30,000
B
$
45,000
12,000
30,000
57,000
30,000
57,000
15,000
57,000
20X2
Jan 1 Balance b/d
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13.6 Current account
Records the profits or losses allocated to a partner and the amount of profit withdrawn
by the partner. The closing balance of the Current account shows how much profits that
was undrawn or overdrawn by the partner.
Format:
Date
Details
Drawings
Interest on drawings
Share of losses
Current A/C
Debit
Date
$
X
X
X
OR
Details
Balance b/d
Interest on capital
Salary
Interest on loan
Share of profits
Credit
$
X
X
X
X
X
Example:
Using figures from example on Appropriation account....The balances in the partners'
Current accounts on 1 January 20X1 are: $3,000 for partner A and $4,000 for partner B.
Answer:
Date Details
20X1
Dec 31 Drawings
Int. on drawings
Balance c/d
A
$
2,000
200
7,880
Current A/C
B
Date
$
20X1
3,000 Jan 1
300 Dec 31
14,120
Details
Balance b/d
Int. on capital
Salary
Interest on loan
Share of profit
10,080 17,420
A
$
3,000
2,400
750
3,930
B
$
4,000
3,600
7,200
2,620
10,080 17,420
20X2
Jan 1
Balance b/d
7,880 14,120
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Accounting Topical Revision Notes
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13.7 Presentation of Partners' Equity in Statement of Financial Position
Format:
Statement of financial position at “date”
Capital Account
Partner A
Partner B
Current Account
Partner A
Partner B
Total Partners' Equity
$
$
X1
X2
XX
X1
X2
XX
XXX
Example:
Using figures from example on Capital and Current accounts....
Answer:
Statement of financial position at 31 December 20X1
$
$
Capital Account
Partner A
15,000
Partner B
57,000
72,000
Current Account
Partner A
Partner B
Total Partners' Equity
7,880
14,120
22,000
94,000
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Chapter 14.Limited Company
14.1 Advantages and Disadvantages
Advantages
Large amount of capital can be raised
Business is managed by professionals
Disadvantages
Expensive and complicated to start
Has to comply with more rules and regulations
High administration cost
14.2 Types of Capital
14.2.1 Issued, Called-up, Paid-up Share Capital
Issued share capital
Amount of share capital issued to shareholders
Called-up capital
The amount of issued share capital that the company has requested for payments
from the shareholders
Paid-up capital
The amount of called-up share capital that the company has actually received the
payment from shareholders.
Example:
Z Ltd issued 500,000 shares of $1 per share on 1 January 20X1. Shareholders were asked
to pay 50% of the sum immediately. The balance 50% are due 1 March 20X2. By 1 March
20X1, holders of 400,000 shares paid the amount due.
Answer:
On 31 December 20X1,
Issued share capital = 500,000 x $1 = $500,000
Called-up capital = 500,000 x ($1 x 50%) = $250,000
Paid-up capital = 400,000 x $0.50 = $200,000
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14.2.2 Preference Shares Capital
Definition:
Preference shares are shares that a company issued to its shareholders where a fixed
rate of dividend is payable.
Characteristic:
No voting rights at shareholders' meetings
Dividend are paid before ordinary shareholders
Upon company's closure, preference shareholders are paid after outside liabilities
and before ordinary shareholders
Preference share dividend are recorded as expenses in Income Statement
Calculation:
Preference share capital = Total preference shares issued x Unit share price
Example: Issued 300,000 4% preference shares of $1 each
Preference share capital = 300,000 x $1 = $300,000
Preference share dividend = Preference share capital x Rate of dividend
Example: Issued 300,000 4% preference shares of $1 each
Preference share dividend = $300,000 x 4% = $12,000
Redeemable preference shares
Has a maturity date on which the company will repay the capital amount to the
preference shareholders and discontinue the dividend payment thereon.
Non-redeemable preference shares
Do not have a maturity date, and therefore are also known as perpetual preference
share
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14.2.3 Ordinary Shares Capital
Definition:
Ordinary shares are equity shares that a company issued to its shareholders where
dividend payable vary according to the profits of the company.
Characteristic:
Voting rights at shareholders' meetings
Dividend are paid after preference shareholders
Upon company's closure, are paid after outside liabilities and preference
shareholders
Ordinary share dividend are deducted from Profit for the year
Calculation:
Ordinary share capital = Total ordinary shares issued x Unit share price
Example: Issued 200,000 ordinary shares at $0.40 each
Ordinary share capital = 200,000 x $0.40 = $80,000
Ordinary share dividend = Ordinary share capital x Rate of dividend
Example: Dividend of 5% was proposed
Ordinary share dividend = $80,000 x 5% = $4,000
OR
Ordinary share dividend = Total ordinary shares issued x Dividend per share
Example: Dividend of $0.02 per share was proposed
Ordinary share dividend = 200,000 x $0.02 = $4,000
14.2.4 General Reserves
Definition:
A portion of profit for the year that was reserved for the future development of the
company.
Calculation:
Beginning balance + Transfer during the year = Ending balance
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14.2.5 Retained Earnings
Definition:
Is an accumulation of balances of profit after distribution of dividend and transfer to
general reserves since the beginning of the company's operation.
Calculation:
Beginning Balance
+
-
Profit for the year
Transfer to general reserve
Ordinary share dividend proposed / paid
Example 1:
On 1 July 20X1, Company X Ltd had 200,000 ordinary shares of $0.40 each; and retained
earnings of $60,000. On 15 June 20X2, dividend was proposed at $0.02 per ordinary
share. Profit for the year ended 30 June 20X2 amounted to $150,000. $6,000 was
transferred to the general reserves.
Answer:
Retained earnings on 30 June 20X2
= $60,000 + $150,000 - $6,000 - ($200,000 x $0.02) = $200,000
14.2.6 Debentures (Loan Capital)
Definition:
Long-term loan that carry a fixed rate of interest which is payable whether or not the
company makes a profit.
Characteristic:
Not members of the company, therefore no voting rights at shareholders' meetings
Interest on debentures are paid before paying shareholders dividend
Upon company's closure, debenture holders are paid before any capital
shareholders
Interest on debentures are recorded as expenses in Income Statement
Debentures are recorded in the Statement of financial position as non-current
liabilities
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14.3 Income Statement of Limited Company
Prepare the Income Statement for a limited company as you would for a sole trader
with the following additional expenses:
Income Statement for the year ended “date” (Extract)
$
Expenses:
Interest on debentures
Preference share dividend
X
X
14.4 Statement of Changes in Equity
Prepared to explain how profit for the year was divided.
"Name of company"
Statement of Changes in Equity for the year ended "date"
Balance at (beginning of year "date")
Profit for the year
Transfer to general reserves
Interim dividend paid
Final dividend paid
Balance at (end of year "date")
Ordinary
Shares
$
X
General
Reserves
$
X
X
XX
Retained
Earnings
$
X
X
(X)
(X)
(X)
XX
Total
$
XXX
X
(X)
(X)
XX
XXX
14.5 Statement of Financial Position
Prepare the Statement of financial position for a limited company as you would for a
sole trader except the Equity section.
Statement of financial position at “date” (Extract)
$
Capital & Reserves
Preference shares of $x each
Ordinary share of $x each
General reserves
Retained earnings
Shareholders' funds
XX
XX
XX
XX
XX
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Chapter 15.Clubs and Societies
15.1 Receipts and Payments Accounts
A summary of the Cash Book
Records all money received and paid
No distinction between cash and bank transactions
No distinction between capital / revenue expenditure and capital / revenue
receipts
No adjustments for prepayments and accruals
Exclude non-monetary transactions
Debit account
Debit balance - Current Asset
Credit balance - Current Liability
Example:
On 1 July 20X1, Z Sports Club had $20,000 in the bank and $3,000 cash. For the year
ended 30 June 20X2, the club had the following receipts and payments:
$
10,850
800
4,000
200
30,000
2,700
1,800
1,000
3,500
Subscriptions received
Competition entrance fees received
Proceed from shop sales
Competition prizes
Purchase of new motor vehicle
Wages - Sport coaches
Shop assistants
General expense
Rent
Answer:
Receipts and Payments Account for the year ended 30 June 20X2
Date Receipts
20X1
July 1 Bal b/d
20X2
Jun 30 Subscription
Competition fees
Proceed from shop
Bal c/d
Debit
$
23,000
10,850
800
4,000
550
39,200
Date Payments
20X2
Jun 30 Purchase motor vehicle
Wages - Sport coaches
Wages - Shop assistant
General expense
Competition prizes
Rent
Jul 1
Bal b/d
Credit
$
30,000
2,700
1,800
1,000
200
3,500
39,200
550
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15.2 Income and Expenditure Accounts
Prepared in the same principle as the Income Statement of a sole trader
Income > Expenditure = Surplus for the year
Income < Expenditure = Deficit for the year
Fund-raising activity: income and expenses for that activity are set off against each
other to determine profit or loss on that activity
Example:
Z Sports Club had the following receipts and payments for the year ended 30 June 20X2:
Subscriptions received
Competition entrance fees received
Proceed from shop sales
Competition prizes
Purchase of new motor vehicle
Wages - Sport coaches
Shop assistants
General expense
Rent
$
10,850
800
4,000
200
30,000
2,700
1,800
1,000
3,500
Profit from the club's shop was $500 and motor vehicle is to be depreciated at 10% per
annum.
Answer:
Income and Expenditure Account for the year ended 30 June 20X2
$
$
Income
Subscription
10,850
Profit from shop
500
Competition: entrance fees
800
cost of prizes
200
600
11,950
Expenditure
Wages - Sport coaches
2,700
General expenses
1,000
Rent
3,500
Depreciation of motor vehicle
3,000 10,200
Surplus for the year
1,750
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15.3 Statements of Financial Position
Prepared in the same principle as the Statement of Financial Position of a sole trader
Owner's Equity is replaced with Accumulated Fund
No Drawings
Format:
Statement of Financial Position at “date” (Extract)
$
Accumulated Fund
Opening balance
Add: Surplus for the year (OR Less: Deficit for the year)
XX
X
XX
15.3.1 Accumulated Fund
Definition:
Capital fund accumulated within the organisation from surpluses obtained from running
the club.
Calculation:
Accumulated fund = Assets - Liabilities
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Chapter 16.Manufacturing Accounts
16.1 Direct And Indirect Costs
Direct Material
Raw material required to make finished goods
Calculation:
Opening inventory of raw material + Purchases of raw material
+ Carriage Inwards of raw material - Closing inventory of raw material
Direct Labour
Wages of people directly involved in producing the finished goods
Prime Cost
Total direct cost of producing the finished goods
Calculation:
Direct Material + Direct Labour + Direct Expense
Factory Overheads
Indirect factory expenses
Costs involved in operating the factory which cannot be directly linked with the
manufacturing of the finished goods
Examples:
Wages of factory supervisor
Rent of factory
Depreciation of machinery
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16.2 Manufacturing Account
Purpose:
To calculate the total cost of manufacturing the finished goods
Production Cost of Completed Goods:
Work in Progress
Goods which are partly completed at the end of the financial year
To be excluded from cost of production
Cost of production is calculated as:
Prime cost + Factory overheads
+ Opening work in progress - Closing work in progress
Format:
Manufacturing Account for the year ended "date"
$
Cost of material consumed
Opening inventory of raw material
X
Purchases of raw material
X
Carriage inwards of raw material
X
XX
Less Closing inventory of raw material
(X)
Direct wages
Direct expenses
Prime Cost
Factory overheads
Indirect wages
X
Rent and rates
X
Depreciation of machinery
X
Etc
X
Add Opening work in progress
Less Closing work in progress
Production cost of finished goods
$
XX
XX
XX
XX
XX
XX
X
XX
X
XX
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Example:
Company X Manufacturer supplied the following balances and information for the year
ended 31 May 20X2:
1 June 20X1
31 May 20X2
$
$
Inventory of raw materials
40,000
43,000
Inventory of finished goods
80,000
62,000
Work in progress
20,000
18,000
For the year ended 31 May 20X2,
Purchases of raw materials
Purchase of finished goods
Wages - factory workers
factory managers
Depreciation of machinery
Rent - factory
$
550,000
16,000
52,000
36,000
8,000
60,000
Answer:
Manufacturing Account for the year ended 31 May 20X2
$
$
Cost of material consumed
Opening inventory of raw material
40,000
Purchases of raw material
550,000
590,000
Less Closing inventory of raw material
43,000
547,000
Direct wages
52,000
Prime Cost
599,000
Factory overheads
Indirect wages
36,000
Rent
60,000
Depreciation of machinery
8,000
104,000
703,000
Add Opening work in progress
20,000
723,000
Less Closing work in progress
18,000
Production cost of finished goods
705,000
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16.3 Income statement
Prepared in the same principle as the Income Statement of a sole trader except the
following in the calculation of Cost of Sales:
Income Statement (extract)
$
Opening inventory of finished goods
Production cost of completed goods
Purchases of finished goods
Closing inventory of finished goods
Cost of sales
X
X
X
XX
(X)
X
16.4 Statements of financial position
Prepared in the same principle as the Statement of Financial Position of a sole trader
Statement of Financial Position (extract)
Current asset:
Inventories - raw materials
work in progress
finished goods
$
$
X
X
X
XX
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Chapter 17.Incomplete Records
17.1 Changes in Capital Method
Profit or loss for the year is determined by calculating the change in an owner's equity.
Calculation of profit or loss for the year ended “state the date here”
$
Ending capital
XX
Add: Drawings
X
Less: Additional capital
(X)
Less: Beginning capital
(X)
Profit or (loss) for the year
XX
Example:
John started a trading business on 1 July 20X1 with a delivery van worth $50,000 and
cash of $18,000 deposited in the business bank account.
The following information relates to his first year of trading:
(a) Withdrew $500 per month from 1 January 20X2 from the business bank account
for personal use.
(b) Took goods costing $1,200 for home use.
(c) Paid $8,000 for office rent from his personal bank account.
(d) Sold his personal investment previously bought at $12,000 for $18,000, and
deposited the profit into the business bank account.
(e) Assets and liabilities balances as at 30 June 20X2 were:
Office equipment
Bank Overdraft
Motor vehicles
Accrued Commission income
Inventory
Trade receivables
Trade payables
Accrued Rent expense
$
4,000
7,500
50,000
500
8,900
16,400
7,800
2 000
Additional information to be taken into account:
1.
Depreciation is to be provided on motor vehicle at 10% per annum on net book
value.
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Answer:
Calculation of profit or loss for the year ended 30 June 20X2
Ending capital *
Add: Drawings [ ( $500 x 6 months ) + $1,200 ]
Less: Additional capital [ $8,000 + $6,000 ]
Less: Beginning capital [ $18,000 + $50,000 ]
Loss for the year
* Ending capital =
Total assets =
=
Total liabilities =
=
Ending capital =
=
$
56,500
4,200
(14,000)
(68,000)
(21,300)
Total assets - Total liabilities
4,000 + 50,000 + 8,900 + 16,400 - (50,000 x 10%)
$74,300
7,500 + 500 + 7,800 + 2,000
$17,800
74,300 - 17,800
$56,500
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17.2 Statement of Affairs
Is similar to a Statement of Financial Position except that it is prepared without the use
of double entry recording rules.
Format:
“Name of company”
Statement of Affairs at “date”
$
Non-current Assets
List down all non-current assets
:
:
Current Assets
Trade receivables
Less: Provision for doubtful debts
Inventory (Not applicable for service business)
Other receivables (prepaid expense/accrued income)
Petty cash
Cash / Bank
Cost
$
Accumulated
Depreciation
$
Book
value
XX
XX
XX
XXX
XX
XX
XX
XXX
XX
XX
XX
XXX
XX
(XX)
XX
XX
XX
XX
XX
XX
Current liabilities
Trade payables
XX
Other payables (accrued expenses / prepaid income)
XX
Bank overdrafts
XX
XX
Net current assets
(current assets - current liabilities)
(non-current assets + net current assets)
Financed by
Capital
Balance
XX
XXX
XXX
XXX
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Format for Statement of Affairs Including Calculation of Profit for the year
Statement of Affairs at “date” (Extract)
$
Financed by
Capital
Opening balance
Add: Additional capital
Add: Profit for the year (OR Less: Loss for the year)
Less: Drawings
$
$
XX
XX
XX
XX
(XX)
XXX
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17.3 Account Analysis Method
Profit or loss for the year is determined by reconstructing various ledger accounts to
determine the missing information on income and expenses.
17.3.1 Determining Sales
Total Sales = Cash sales
+
Obtain from
Cash Book
Credit sales
Prepare
Sales ledger
control account
Net Sales = Total sales - Sales return
17.3.2 Determining Total Purchases
Total Purchases = Cash purchases
Obtain from
Cash Book
+
Credit purchases
Prepare
Purchases ledger
control account
Net Purchases = Total purchases - Purchases return
17.3.3 Determining Cost of Sales
Opening
inventory
+
Total
purchases
+
Other Cost of
Purchases
-
Purchases
Return
-
Drawings
-
Closing
inventory
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17.3.4 Determining Depreciation
Beginning
Net book value
+
New asset
purchased
-
Sale of
non-current asset
Ending
Net book value
-
17.3.5 Determining Operating Expenses
Expenses
Paid
+
Opening
Prepaid
balance
-
Opening
Accrued
balance
-
Current
period
Prepaid
-
Current
period
Prepaid
+
Current
period
Accrued
+
Current
period
Accrued
17.3.6 Determining Other Income
Income
Received
+
Opening
Prepaid
balance
-
Opening
Accrued
balance
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Example:
The following information pertains to the year ended 30 June 20X2:
(a) Extract from the Bank Account:
Date Details
20X2
Jun 30 Trade receivables
Sales
Debit
$
5,000
1,800
Date Details
20X2
Jun 30 Trade payables
Purchases
Rent
General expense
Fixtures
Credit
$
3,250
1,500
2,000
700
4,000
(b) Extract from Balance Sheet:
Inventory
Fixtures
Trade receivables
Trade payables
Prepaid rent
Accrued general expense
1 July 20X1
$
4,500
2,000
3,000
1,200
200
90
30 June 20X2
$
2,800
5,000
4,500
1,100
350
150
(c) During the year,
(i) Credit note received amounted to $400
(ii) Credit note issued amounted to $600
(iii) Debts written off was $200
(iv) Owner withdraw goods amounting to $600 for personal use
For the year ended 30 June 20X2, calculate the followings:
1. Net sales
2. Total inventory purchased
3. Cost of sales
4. Total expenses
5. Profit or loss for the year
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Answer:
1. Cash sales = $1,800
Constructing the Sales ledger control account, we have
3,000 + Credit sales - 5,000 - 200 - 600 = 4,500
Therefore, credit sales = $7,300
Total sales = 1,800 + 7,300 = $9,100
Net sales = 9,100 - 600 = $8,500
2.
Cash purchase = $1,500
Constructing the Purchases ledger control account, we have
1,200 + Credit purchase - 3,250 - 400 = 1,100
Therefore, credit purchase = $3,550
Total inventory purchased = 1,500 + 3,550 = $5,050
3.
Cost of sales = 4,500 + 5,050 - 400 - 600 - 2,800 = $5,750
4.
Total expenses
= Rent expense + General expense + Depreciation of fixtures + Irrecoverable debts
= (2,000 + 200 - 350) + (700 - 90 + 150) + (2,000 + 4,000 - 5,000) + 200
= $3,810
5.
Loss for the year = Gross profit + Other income - Expenses
= (8,500 - 5,750) - 3,810
= - $1,060
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17.4 Ratio Analysis Method
Key financial information necessary to derived at the profit or loss for the year is
determined by calculating a group of financial ratios that relates to one another.
Gross Profit
× 100% = x %
Revenue
1.
Gross margin =
2.
Mark-up on cost =
Gross Profit
× 100% = x %
Cost of Sales
Example:
Mark-up of 20%
unit cost $1 + markup $0.20 = unit selling price $1.20
Profit for the year
× 100% = x %
Revenue
3.
Profit margin =
4.
Rate of Inventory turnover =
Average inventory =
Cost of Sales
= x times
Average Inventory
Beginning inventory + Ending inventory
2
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Chapter 18.Analysis and Interpretation
18.1 Liquidity Analysis
Liquidity measures the ability of a business to repay current debts and fund its daily
business operation.
1.
Working Capital
refers to the excess of current assets over current liabilities.
Formula:
Working capital = Current Assets - Current Liabilities
Analysis:
Current asset increase , Working capital increase
Current asset decrease , Working capital decrease
Current liability increase , Working capital decrease
Current liability decrease , Working capital increase
Effects of insufficient working capital:
•
•
•
•
•
•
Unable to repay debts on time
Unable to enjoy cash discounts
Unable to purchase goods on credit
Unable to enjoy bulk discount
Difficulty in retaining staffs
Lose the trust of customers
Improving working capital:
•
•
•
Owner may inject more capital
Take up a long-term loan
Sell excess non-current assets
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2.
Current ratio (or working capital ratio)
measures the ability of a business to pay its short-term debts using its current
assets.
Formula:
Current ratio =
Current asset
= x :1
Current liability
Analysis:
Example:
(a) Current ratio = 1:1
means the business has $1 of current assets to pay every $1 of current debt.
Therefore, business is liquid.
(b) Current ratio = 0.8:1
means the business has $0.80 of current assets to pay every $1 of current
debt; Or
means the business can only fulfill 80% of its current debts with its current
assets. Therefore, business is not liquid.
3.
Liquid ratio (or acid test ratio)
measures the ability of a business to pay its short-term debts using its quick
(or immediate) assets.
Formula:
Quick ratio =
Current asset − Inventory
= x :1
Current liability
Analysis:
Example:
(a) Quick ratio = 1:1
means the business has $1 of quick assets to pay every $1 of current debt.
Therefore, business is liquid.
(b) Quick ratio = 0.8:1
means the business has $0.80 of quick assets to pay every $1 of current debt
Or
means the business can only fulfill 80% of its current debts with is quick assets.
Therefore, business is not liquid.
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4.
Rate of Inventory Turnover
measures the rate at which a business sell and replenishes its inventory during
the financial year.
Formula:
Rate of Inventory Turnover =
Average inventory =
Cost of Goods Sold
= x times
Average Inventory
Beginning inventory + Ending inventory
2
Analysis:
Example:
Inventory turnover rate of 4 times means the business replenishes its inventory 4
times a year or every 3 months.
High inventory turnover rate means business is selling its inventory quickly.
Low inventory turnover rate means business is unable to sell its inventory
quickly and is holding too much stock.
Effect of inventory on liquidity and profitability:
High inventory level
Cash is tied up causing liquid ratio
to decrease
Increase in expenses which
reduces profit for the year due to:
High storage and handling
cost
Obsolescence
Theft
Low inventory level
Unable to meet customer demand
resulting in lost sales which leads
to:
decrease in profit for the year
lesser cash
Increase in cost of sales which
reduces profit for the year due to:
frequent replenishing which
results in high cost of
purchase
Improving inventory management:
Increase sales of inventory by
reducing selling price
giving trade discounts or special promotions
advertising to raise brand awareness
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5.
Trade receivables turnover
measures the average time (days) a business takes to collect from its credit
customers during the financial year.
It indicates how efficient a business is in managing its trade receivables.
Formula:
Trade receivables turnover =
Trade receivables
× 365 =
x days
Credit sales
Analysis:
Example:
Trade receivable turnover of 30 days means the business takes an average of 30
days to collect from its credit customers.
High trade receivables turnover (days)
Not efficient in collecting its debts
Lead to cash flow problem
6.
Trade payables turnover
measures the average time (days) a business takes to pay its credit suppliers
during the financial year.
It indicates how well a business manages its cash outflow.
Formula:
Trade payables turnover =
Trade payables
× 365 =
x days
Credit purchases
Analysis:
Example:
Trade payable turnover of 30 days means the business takes an average of 30 days
to repay its trade payables.
High trade payable turnover (days)
Advantages:
increase business' working capital
free short-term cash flow
Disadvantages:
suppliers may not want to offer trade credit or extend further credit line
business loses out on cash discount
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18.2 Profitability Analysis
Profitability measures the ability of a business to generate enough income to cover its
expenses.
Purpose of profitability analysis:
Identify areas to improve revenue
Identify areas to improve operating efficiency
Allow investors to determine their return on investments
Ratios used to measure profitability:
1.
Gross margin =
Gross Profit
× 100% = x %
Revenue
Analysis:
Gross margin of 10% means for every $1 of net sales revenue earned, the business
earns $0.10 of gross profit.
A high / increase in gross margin suggest:
•
High / increase in selling price
•
Low / decrease in cost price
2.
Mark-up =
Gross Profit
× 100% = x %
Cost of Sales
Analysis:
Mark-up of 10% means for every $1 cost, the business earns $0.10 of gross profit.
A high / increase in mark-up on cost suggest:
•
High / Increase in selling price
•
Loss of quantity sold if inventory turnover rate decrease
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3.
Profit margin =
Profit for the year
× 100% = x %
Revenue
Analysis:
Profit margin of 10% means the business earns a profit of $0.10 on every $1 of net
sales revenue earned.
A high / increase in profit margin suggest:
•
Increase in gross profit
•
Decrease in expenses
4.
Return on capital employed (ROCE) =
Net Profit before Interest
× 100% = x %
Capital Employed
Capital Employed = Issued shares + Reserves + Non-current liabilities
Analysis:
Return on capital employed of 10% means for every $1 of capital invested into the
business, the business generates a profit of $0.10.
A high / increase in return on capital employed suggest:
•
Business is profitable
•
High return on investment
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Analysis:
Scenario
Possible reasons / analysis
1.
• Increase in quantity sold
• Low selling price or
• High cost price
Gross margin
Inventory turnover rate
2.
Gross margin
Mark-up
3.
Gross margin
Profit margin
4.
Profit margin
Return on capital employed
• Increase in selling price
• Decrease in quantity sold
• Lower sales
• Decrease in gross profit
• Higher percentage decrease in expenses
• Profit earned is low compared to the
high amount of capital invested
• Business is worth investing if profit
continues on an increasing trend
Improving profitability:
Source for cheaper supplier to reduce cost of purchase of inventory
Hold promotion to increase sales
Increase product variety to attract more customers
Source for other income
Reduce expenses through cost cutting measures
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