Accounting (II) T&BD
Midsemester Exam Revision
Assets (db balance) = Owners Equity (cr balance) + Liabilities (cr balance)
Contents
1
2
3
4
Non-Current Assets ............................................................................................................................... 3
1.1
Measuring the cost of non-current assets .................................................................................... 3
1.2
Capital Expenditure ....................................................................................................................... 3
1.3
Depreciation.................................................................................................................................. 4
1.4
Writing down non-current assets ................................................................................................. 7
1.5
Revaluing non-current assets........................................................................................................ 7
1.6
Accounting for intangible assets: Goodwill .................................................................................. 7
Internal Control ..................................................................................................................................... 8
2.1
Goals of Internal control ............................................................................................................... 8
2.2
The Bank reconciliation................................................................................................................. 8
2.3
Preparing a bank reconciliation .................................................................................................... 9
2.4
Example bank reconciliation ....................................................................................................... 10
2.5
Petty Cash ................................................................................................................................... 12
Partnerships ........................................................................................................................................ 13
3.1
Characteristics ............................................................................................................................. 13
3.2
Starting up a partnership ............................................................................................................ 13
3.3
Sharing Profits/Losses ................................................................................................................. 13
3.4
Drawings ..................................................................................................................................... 13
3.5
A new Partner ............................................................................................................................. 14
3.6
Withdrawal of a partner ............................................................................................................. 14
3.7
Liquidation .................................................................................................................................. 14
Companies (1) ..................................................................................................................................... 15
4.1
Characteristics ............................................................................................................................. 15
4.2
Shareholders’ equity ................................................................................................................... 15
4.3
Issuing shares .............................................................................................................................. 16
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1
4.4
Dividends..................................................................................................................................... 16
4.5
Evaluating operations ................................................................................................................. 17
4.6
Accounting for income taxes ...................................................................................................... 17
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1 Non-Current Assets
Chapter 11 – Non-Current Assets: Property, plant and equipment, and intangibles
1.1 Measuring the cost of non-current assets




Cost of asset = sum of costs to bring the asset to usable place/condition
i.e. purchase price + charges
For land, includes stamp duty, commission, removal of previous buildings, etc.
o NB: Land and land improvements must be separate asset accounts since land does not
depreciate
For equipment, includes transportation, customs, etc.
1.1.1


Interest on Non-Current Assets
Interest may be expensed [db Interest Expense (an expense account)]
or capitalized [i.e. db building (an asset account)]
1.1.2

Lump Sum Purchase of Assets
Percentage of original total to reduced price
e.g.: Land, Building and Tractor, with a market value of $1,000,000, $500,000 and $80,000 respectively,
are sold for a lump sum price of $1,250,000. Journalize this transaction.
As a percentage of
total value
Final purchase
Original Price
x
(Original Price/Total
price
Original Price)
$ 1,000,000.00
63% x $ 1,250,000.00
Asset
Land
=
Journalized cost
of each asset
=
$
791,139.24
395,569.62
Building
$ 500,000.00
32% x
$ 1,250,000.00
=
$
Tractor
Total
$
80,000.00
$ 1,580,000.00
5% x
1
$ 1,250,000.00
=
$
63,291.14
$ 1,250,000.00
Date
Transactions & Descriptions
Debit
Credit
15-Feb Building
$ 791,139.24
Land
$ 395,569.62
Equipment (Tractor)
$
63,291.14
Cash at Bank
$
1,250,000
Purchased Building, Land and Equipment with a lump sum payment of $1,250,000
1.2 Capital Expenditure


Capital expenditure is debited to an asset account (e.g. db Vehicle)
o It extends the life or changes the function of an asset
Maintenance expenditures are expensed (i.e. db expense: maintenance)
o They keep the asset in ordinary working order
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1.3 Depreciation

For matching principle/managerial decision making
e.g.
15-Feb Depreciation Expense: Vehicle
Accumulated Depreciation: Vehicle
To record annual depreciation of vehicle
1.3.1
$
60,000
$
60,000
Methods of depreciation
1.3.1.1 Straight line
 easiest
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝑙𝑖𝑛𝑒 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
(𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒, 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
1.3.1.2 Units of production (UOP) method
 Accurate where output is measurable
 And where output is relative to useful life
𝑈𝑂𝑃 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 =

(𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒, 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
NB: for UOP, times output from above equation by the amount of units produced in the timeperiod in the question.
1.3.1.3 Reducing balance (RB) method
 Accurate
 Is depreciated more at the beginning, as in real life
𝑁(𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠)
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 1 −
√
𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
𝐶𝑜𝑠𝑡
Most probably, the depreciation rate will be given.
𝑅𝐵 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 ∗ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
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1.3.1.4 Example/Comparison
A machine is purchased for $50,000,000. Its scrap value is $10,000,000. It will last 4 years.
Alternatively, it will produce 100,000 goods. The first year it produces 10,000; the second 50,000; the
third 30,000 and the last 10,000. Tabulate the depreciation.
Depreciation Table of Machine
Year
Straight Line
Depreciation
Units of Production
Carrying
Units
$ 50,000,000
Total Units
0
Reducing Balance
Depreciation
100000
Carrying
Depreciation
$ 50,000,000
Carrying
$ 50,000,000
1
$10,000,000
$ 40,000,000
10000
$ 4,000,000
$ 46,000,000
$ 16,562,984.75
$ 33,437,015
2
$10,000,000
$ 30,000,000
50000
$ 20,000,000
$ 26,000,000
$ 11,076,335.47
$ 22,360,679
3
$10,000,000
$ 20,000,000
30000
$ 12,000,000
$ 14,000,000
$
7,407,191.96
$ 14,953,487
4
Residual
Value
$10,000,000
$ 10,000,000
10000
$ 4,000,000
$ 10,000,000
$
4,953,487.81
$ 10,000,000
$10,000,000
Annual depreciation of Machine
$25,000,000.00
$20,000,000.00
$15,000,000.00
$10,000,000.00
$5,000,000.00
$1
Straight Line

2
Units of Production
3
4
Reducing Balance
As the graph shows:
o Straight line annual depreciation is equal
o UOP’s depends on output
o RB depreciates more at the start, and less at the end
o All end with the same residual value
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1.3.2
Other Issues
1.3.2.1 Partial years
 /annual rate by part of year used
1.3.2.2 Changing the useful life of a product
 Take old remaining amount and recalculate
1.3.2.3 Fully depreciated non-current assets may continue to be used
1.3.3

Disposing of a non-current Asset
Asset account credited against debited contra(depreciation) account and loss
15-Feb Accumulated Depreciation: Vehicle
Loss on Disposal of Vehicle
Vehicle
To dispose of Vehicle
$
$
60,000
40,000
$ 100,000.00
1.3.3.1 Selling a non-current Asset
 As with disposal, include db cash and (cr gain | db loss)
15-Feb Accumulated Depreciation: Vehicle
Loss on Sale of Vehicle
Cash at Bank
Vehicle
To sell partially depreciated Vehicle at a loss
OR
15-Feb Accumulated Depreciation: Vehicle
Cash at Bank
Gain on Sale of Vehicle
Vehicle
To sell partially depreciated Vehicle with a profit
Accounting (2) Transactions and Business Decisions
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$ 60,000.00
$ 30,000.00
$ 10,000.00
$ 100,000.00
$ 60,000.00
$ 60,000.00
$ 20,000.00
$ 100,000.00
6
1.3.3.2 Trading in a non-current Asset
 As with sale, but as if two happening simultaneously
15-Feb Accumulated Depreciation: Vehicle (Old)
Vehicle (New)
Cash at Bank
Gain on exchange of Vehicle (Old)
Vehicle (Old)
To exchange partially depreciated Vehicle
$ 60,000.00
$ 120,000.00
$ 60,000.00
$ 20,000.00
$ 100,000.00
1.4 Writing down non-current assets


When recoverable amount is less than assumed residual value
db loss after usual depreciation journal entry
15-Feb Loss on write-down of vehicle
Vehicle
Recognizing impairment loss on building
$
60,000
$
60,000
$
60,000
1.5 Revaluing non-current assets



First usual depreciation entry
Then db Asset | cd Revaluation reserve for an upwards revaluation
Db Revaluation reserve | cd asset for downwards revaluation
15-Feb Revaluation Reserve
Vehicle
To record downward revaluation of Vehicle
$
60,000
1.6 Accounting for intangible assets: Goodwill


Account for the difference in purchase price and market price of assets of a bought company
Can only be reduced (amortized | depreciation), not increased
15-Feb Assets (Including Recievables, land, inventory, etc)
Goodwill
Liabilities
Cash at Bank
To record purchase of revision enterprises
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$ 10000000
$ 2000000
$ 3000000
$ 9000000
7
2 Internal Control
2.1 Goals of Internal control




Safeguard business assets
Encourage adherence to business practices
Promote operational efficiency
Ensure accurate accounting records
A system is made effective if it:




Emphasizes the importance of hiring competent and ethical personnel
Responsibilities are assigned
There are proper channels for authorization (e.g., cheque requisition forms)
Separation of duties
o Operations | accounting
o Custody of assets | accounting
o Authorization | custody of assets
o Accounting | accounting (e.g. bookkeeper separate from cash reconciliation person)
2.2 The Bank reconciliation
This compares Cash at Bank (internal) and the Bank Statement (from the Bank).
There are only a few situations where it is ok if they are different:
2.2.1


Recorded by the business but not the bank
Deposits in transit (business has recorded them already, bank hasn’t yet processed them)
Outstanding Cheques (business has issued them, bank has not yet paid them)
2.2.2





Recorded by Bank but not by business
Bank collections (paid by customers to banks directly)
EFTs
Service charge (learned from Bank statement)
Interest revenue on savings (as above)
Cost of specially printed cheques (as above)
And not ok.


Dishonoured cheques (was a cash receipt, has to be written down to 0)
Cheques returned but not dishonoured (as above)
2.2.3 Errors made by business or bank
To be corrected by either party
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2.3 Preparing a bank reconciliation
1. Compare balance per books (cash at bank in general ledger) and balance per bank (from bank
statement)
2. To the bank statement, add or subtract relevant:
2.1. Add deposits in transit (cash receipts in the ledger not in the statement)
2.2. Subtract outstanding cheques (cash payments in the books not in statement)
2.3. This gives adjusted bank balance
3. Journalise items on the statement that aren’t in the ledger; to cash at bank:
3.1. Debit
3.1.1.Bank collections
3.1.2.EFT cash receipts
3.1.3.Interest revenue
3.2. Credit
3.2.1.EFT cash payments
3.2.2.Service charges
3.2.3.Cheque printing charges
3.2.4.Other bank charges
3.3. This gives adjusted book balance
4. Compare adjusted bank balance and adjusted book balance
If cash is different in till to in receipts, the cash deposit for the day is:
15-Feb Cash at Bank
Cash short/over
Sales revenue
Daily Cash Sales
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2000
3.05
2003.05
9
2.4 Example bank reconciliation
Oats and Sugar
Bank Reconcilliation
September 20X9
Bank Balance, September 20X9, from statement
Add:
Deposits in transit
20 Sep, (eg1) $550
Less
Outstanding Cheques
15 Sep, (eg1) $250
17 Sep, (eg2) $350
1000
550
550
250
350
-600
Adjusted Bank Balance, September 20X9
950
Journal entries for reconciliation
30 - Sep Cash at bank
10000
Bill Receivable
Interest Revenue
Bill receivable, with interest, collected by bank
30 - Sep Cash at bank
9000
1000
50
Interest Revenue
Interest earned on cheque account balance
30 - Sep Misc. Expenses
50
30
Cash at bank
Bank service charge
30 - Sep Accounts receivable - X accounts
Cash at bank
Cheque dishonoured
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30
4000
4000
10
Oats and Sugar
Summary of Adjustments to Cash at Bank
September 20X8
Cash at Bank
Balance, September 30 from ledger
Add:
Less:
Bank collection of bill receivable
Interest earned on Cheque account balance
Service Charge
Dishonoured cheque
EFT - Rent
Adjusted Cash at Bank
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1100
10000
50
10050
30
4000
6170
-10200
950
11
2.5 Petty Cash
Petty cash is a float for minor, irregular, everyday expenses. Created, withdrawn from: expenses
recorded when replenished.
2.5.1
Opened:
15-Feb Petty Cash
Sales revenue
To open the petty cash fund
2.5.2
2000
2000
Replenished
15-Feb Office Supplies
Delivery Expenses
Catering
Miscellaneous Expenses
Cash at Bank
To replenish Petty Cash fund
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150
50
300
120
620
12
3 Partnerships
NB: Capital accounts have a credit balance
3.1 Characteristics






Limited life
Mutual agency
Unlimited liability
Co-ownership of property
No other tax (e.g. no company tax(
Each partner has own owner’s equity account
3.2 Starting up a partnership


Each owner gets an owners equity account equal to the sum of their net input
Each asset contributed is debited against a credit in their Capital account
3.3 Sharing Profits/Losses
Can be done based on:




Prescribed fraction
Capital contribution (% of individual capital to partnership capital)
Based on service
Based on a combination
3.4 Drawings
Accumulated into a Drawings account

Closed by subtracting against Capital account
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3.5 A new Partner
A few options
3.5.1
Purchase a partner’s interest
15-Feb Capital, Dr Old
Capital, Mr New
To transfer Old's capital to New
3.5.2
2000
2000
Invest into a partnership
15-Feb Assets
2000
Capital, Mr New
Mr New invests in Assets and gets admitted into partnership
2000
3.5.3 With a bonus to the old Partner
Credit the difference to old partners, according to agreed split
3.5.4 With Bonus to new partner
Debit the difference to old partners (i.e. they pay they bonus from their capital share)
3.6 Withdrawal of a partner
All assets must be revalued before the withdrawal of a partner (e.g. depreciation accounted for, etc.)
3.7 Liquidation
1.
2.
3.
4.
Sell assets
Assign gain or loss to Capital accounts
Pay liabilities
Distribute remainder
3.7.1 Sale of non-cash assets
Non-cash assets  realisation @ purchase price
Realisation  Cash @ sale price
Realisation  Capital @ difference
3.7.2 Deficiency
1. Covered by Partner
2. If unable, covered by other partners
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4 Companies (1)
4.1 Characteristics






Limited liability
Perpetual succession
Separate legal person
Company tax
No mutual agency
Ownership =/ management
4.2 Shareholders’ equity
Capital account is “Share Capital”
4.2.1
1.
2.
3.
Retained earnings
Close sales revenue to income summary
Close expenses to income summary
Close income summary to retained earnings
30-Jun Sales Revenue
Income Summary
Close sales revenue
Income summary
Expenses
Close expenses
Income Summary
Retained earnings
Close Net Profit to Retained Earnings
4.2.2


2000
2000
500
500
1500
1500
Types of shares
Normal
Preference
o Usually bought to fund something
o Usually fixed dividends
o Have first right in liquidation
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4.3 Issuing shares
4.3.1
Cash purchase
15-Feb Cash at bank
Share Capital
Issued shares
4.3.2
2000
2000
Non-cash purchase
15-Feb Asset
2000
Share Capital
Issued shares in exchange for Asset
4.3.3
1.
2.
3.
2000
Issuing shares payable by instalments
Application
Allotment
Call
4.3.4 Issuing preference shares
As above, but capital account is “preference share capital
4.4 Dividends
15-Feb Retained earnings
Dividends payable
Declared a cash dividend
Dividends payable
Cash at Bank
Paid cash dividend
NB: can be cumulative, where dividends in arrears must be paid
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2000
2000
2000
2000
16
4.5 Evaluating operations
4.5.1


4.5.2

4.5.3

Share value
Market value
Book value
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦−𝐸𝑞𝑢𝑖𝑡𝑦 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝑡𝑜 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
o
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
o
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑆ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
Rate of return on total assets
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 =
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥+𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Rate of return on ordinary shareholders equity
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡−𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑒𝑞𝑢𝑖𝑡𝑦
4.6 Accounting for income taxes
Difference between expense and payable amount to deferred tax liability (if expense is greater)
Or to Future income tax benefit (if payable is greater)
4.6.1 Income tax expense
Expense on income statement

𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 = (𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥) ∗ (𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
4.6.2 Income tax payable
Liability on balance sheet

𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑝𝑎𝑦𝑎𝑏𝑒 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 (𝑓𝑟𝑜𝑚 𝑡𝑎𝑥 𝑟𝑒𝑡𝑢𝑟𝑛) ∗ 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
Accounting (2) Transactions and Business Decisions
Johanan Ottensooser
oatsandsugar.wordpress.com
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