Topic 1 Conceptual Framework

What is Accounting?
Recording + reporting + interpreting
Transactions occurred during acc year Financial statement >Income Statement (P&L+Trad) >Balance Sheet >Cash Flow Financial information >Company performance >Decision making By USERS External >Investors >Creditors >Government & Tax Authorities >Labor union

Book-keeping

Internal >Owners >Managers >Employee >Shareholders

BUSINESS STAKEHOLDERS = INTERNAL + EXTERNAL USERS

Accounting Concepts
1.Accounting/Business Entity 2.Going Concern 3.Money Measurement 4.Historical Cost 5.Accounting Period 6.Objectivity 7.Consistency 8.Conservatism/Prudence 9.Accrual 10.Matching Principle 11.Materiality 12.Full disclosure

1. Accounting/Business Entity
business as an entity separate entity between business and owners transactions to be recorded are related with the business ONLY E.g.: drawings account opened to record withdrawal by owner.

2. Going Concern
Business is assumed to have indefinite life Current market value irrelevant >resources will not be sold >but will be utilized in business E.g.: Assets will be recorded at original cost regardless the current market price with an assumption that the co. will keep operating in the future and to be sold.

3. Money Measurement
Money as measurement unit Accounting data = can be measured in monetary terms E.g.: Transaction involves RM will be recorded in the books.

4. Historical Cost
Recorded at the original cost Current market value irrelevant >based on the going concern concept >not in the event of liquidation E.g.: Assets will be recorded at original cost regardless the current market price

5. Accounting Period
Life of business being divided into equal period Can be a month, half-year, full-year or any other length E.g. : 1 January 31 December 1 July 30 June 1 August 31 July 1 September 28 February

6. Objectivity
Transactions are recorded must be objective verifiable evidence Transactions recorded are based on information written in source of documents >e.g. Receipts, invoices

7. Consistency
Applying same accounting method in each accounting period

8. Conservatism/Prudence
Due to uncertainty of future events, cautious accounting practices are observed so that;
income statement & assets are not overstated expenses & liabilities are not understated.

The accountant will try;

not to anticipate income but to provide for all possible losses.

E.g.: Provision for doubtful debts

9. Accrual
Revenue & expenses are immediately recorded whenever it earned & incurred Regardless when the payment and money will received Cash receipt/paid is not relevant E.g. :Prepaid expenses, accrued expenses, unearned revenue, revenue receivables.

10. Matching Principle

Revenue earned has to be matched with the expenses incurred in getting that earning E.g.: Revenues earned for 2011 must be deducted with expenses incurred in year of 2011.

11. Materiality
The principle that trivial matters are to be disregarded in accounting, and all important matters are to be disclosed.

12. Full disclosure principle

financial statements include disclosure of information on conditions that may have significant effects on the company's financial status.

Topic 2 Source Documents

List of Source Docs

Invoice Credit note Debit note Payment voucher Cheque counterfoil Receipt Bank statement

Topic 3 Double entry recording & account

Assets

Liabilities

Owners Equity

Assets
+ Dr

Liabilities
Cr + Dr

Owners Equity

Assets

+ Dr Revenues/Capital Cr

Liabilities

Cr

+ Dr Drawings/Expenses -Cr

Debit Balance Credit Balance

Asset Drawings Purchases Return Inwards Expenses Liability Capital Sales / Revenues Return Outwards

Topic 6 Accounting for Fixed Assets

Depreciation Expense
Straight Line Method Reducing Balance Method
Cost Residual Value Useful life Rate of depreciation x Net Book Value (NBV) of asset Or

% x Cost

Guidelines to do working :
1.Depreciation expense (depends on method applied) 2.Accumulated Depreciation (up to company year end /disposal date) If asset being sold, continue to find: 3. Net book value( Original cost Accu depreciation up to disposal date) 4. Gain or Loss (Selling price- NBV)

Extracted from lecture exercise 6 from topic fixed asset.

Vehicle

Cost

Rate

Depreciation expenses 1/7/20021/1/200331/12/2002 30/9/2003

Accum. Dep. NBV as at as at 30/9/2003 30/9/2003 2,250 6,750

A 9,000 20% 1,800 x 6/12 = 900 1800 x 9/12 = 1,350 Gain on disposal = 7,200 - 6,750 = 450 Depreciation expenses 1/7/20021/1/200331/12/2002 31/12/2003 1,800

Vehicle B

Cost 9,000

Rate

Accum. Dep. NBV as at as at 31/12/2003 31/12/2003 2,700 6,300

20% 1,800 x 6/12 = 900

Vehicle C

Cost 12,000

Rate 20%

Depreciation expenses 1/12/2003 31/12/2003 2,400 x 1/12 = 200

Accum. Dep. NBV as at as at 31/12/2003 31/12/2003 200 11,800

Journal entries for depreciation expense

Dr Depreciation Expense xx Cr Accumulated Depreciation
Dr Profit & Loss/ Income statement Cr Depreciation Expense xx xx xx

Journal entries for Disposal of Fixed Asset

1.Debit bank/cash account to record the cash/cheque received. 2.Debit accumulated depreciation account to minus total depreciation of disposal asset 3.Credit fixed asset account to minus the disposal asset. 4.Record any gain/loss on disposal. Recording the disposal of fixed asset: 1)Dr Cash/Bank xx 2)Dr Accumulated Depreciation xx 4)Dr P&L - Loss on disposal xx 3)Cr Fixed Asset 4)Cr P&L- Profit on Disposal

xx xx

Journal entries for disposal asset

Dr Bank/Cash a/c Cr Disposal a/c
Dr Acc. depreciation a/c Cr Disposal a/c Dr Disposal a/c Cr Equipment a/c
Record at the selling price of the disposal asset

Record the total accumulated depreciation of the disposal asset

Record the purchase price of the disposal asset

Dr P&L- loss on disposal or Dr Disposal Cr P&L-Gain on disposal Cr Disposal a/c

27

Reminder!!
For fixed assets questions : 1.Check companys ACCOUNTING PERIOD and company year ends. 2.Take note on the PURCHASED DATE and DISPOSAL DATE (if any) when calculating current years depreciation expense and accumulated depreciation. 3.READ QUESTION carefully.

Topic 7 Principle of Internal Checks

Principle of Internal Checks

Revenue
Accrued Revenue or Revenue Unearned Revenue

Expense
Prepaid Expense Accrued Expense

Receivable

Revenue
Revenue Receivable
Revenue earned by the company

Unearned Revenue
Revenue have not earned by company yet

But cash have not received or recorded yet

An current asset item.

But cash have received in advanced.

A current liability item.

Expenses
Prepaid Expenses
Expenses paid or recorded in the books in advance

Accrued Expenses
Expenses incurred/used by the business But not yet paid or recorded in the books. A current liability item.

But will be enjoyed the service in the next accounting period.

A current asset item.

Bad Debts
Bad Debts Expense
Amount owed by a debtor which cannot be collected.

Dr Bad debts expense xx (to add)

Cr Debtors xx (to minus)

Recovery of bad debts

A debtor pay back after recognized as bad debts expense Dr Cash/Bank xx (received cash)

Cr Recovery of bad debts

xx (other income)

Provision for doubtful debts

Step 1 : Calculate the current year doubtful debts using information given. Step 2 : Check whether the provision for doubtful debts is given in the trial balance or not. Step 3 : If given compare current year doubtful debts with the balance given to find increase/ decrease amount.
If increase the increase amount will be the doubtful debts exp and the calculated amount will the provision for doubtful debts. If decrease the decrease amount will the doubtful debts but as other income and the calculated amount will the provision for doubtful debts.

Step 4 : If not given the amount calculated will be the doubtful debts exp and provision for doubtful debts.

Depreciation
1.Calculate current year s depreciation expense 2.Adjustment : Dr Depreciation expense (create depreciation acc for each of assets) Cr Accumulated depreciation acc ( to add)

Topic 5,8&9: Final Account for Sole Trader

1.Statement of Comprehensive Income 2.Statement of Financial Position

Cycle of Accounting Record Process

Source Documents Journal

Statement of Financial Position (Balance Sheet)

Transactions take place

Ledger

Statement of Comprehensive Income (Income Statement)

Trial Balance

Statement of Comprehensive Income

Trading Account + Profit & Loss Account

Vertical Format
Ibrahim Trading Statement of Comprehensive Income for the period ended 31st December 2003

Trading Account

Accounts will be transferred to Trading Account :

1.Sales / Revenue 2.Purchases 3.Return Inwards and Return Outwards 4.Opening Stock and Closing Stock 5.Additional Cost on purchases

1. Sales / Revenue
Activity involved in selling of products or services in return for money (cash/credit). Sale of products is recorded in Sales Account. Sale of services is recorded in Service Revenue Account.

2. Purchases
Activity involved in acquiring goods for resale (cash/credit).

3.Return Inwards & Return Outwards

Return Inwards/Sales Return -Return goods sold from customer due to defective, damaged, unsatisfactory, of the wrong brand or specification. Return Outwards/Purchases Return -Return goods purchased to creditor due to defective, damaged, unsatisfactory, of the wrong brand or specification.

4.Opening Stock & Closing stock

Opening Stock Balance at the beginning of the accounting period. The closing stock of one accounting period will become the opening stock of the next accounting period. Closing Stock Goods that remain unsold at the end of the accounting period. Recorded in the books as an asset.

5.Additional Cost on Purchases or preparing Cost incurred in purchasing of stock

the stock to be finished goods and ready to sell. Example : 1. Carriage Inwards cost of transport borne by the buyer. 2. Duty on Purchases import duties levied on goods imported and excise duties imposed on locally manufactured goods. 3. Wages on Purchases wages which form part of the cost of preparing the goods or getting them ready for resale. 4. Other purchase expenses: packing & grading expenses, insurance on purchases, inward freight.

Format Trading Account

Co. name Trading Account for the year ended xx xx 20xx
Sales (-) Return Inwards Net Sales Opening stock Purchases (-)Return Outwards Net Purchases (+)Additional cost on purchases Cost of goods available for sales (-) Closing Stock Cost of goods sold Gross Profit / Loss x (x) xx x x (x) xx x

x xx (x)

xx
xxx

1.Net sales = Sales Return inwards /Sales returns 2.Net purchases = Purchases Return outwards /Purchases returns 3.Cost of goods available for sales = Opening stock + Net + Additional purchases cost on purchases 4. Cost of goods sold = Cost of goods available for sale Closing stock 5. Gross Profit/Loss = Net sales - cost of goods sold

Profit and Loss Account

Accounts will be transferred to Profit and Loss Account :

1.Other revenue/income 2.Operating expenses (other than expenses recorded in trading account)

1.Other revenue/income
Revenue earned by the company other than sales/main revenue.

Examples : discount received commission received rent revenue

2. Operating Expenses
Expenses incurred other than additional cost on purchases.
Examples : Discount allowed Rental fees Insurance Salary

Format Profit and Loss Account

Co. Name Profit and Loss Account for the year ended xx xx 20xx Gross Profit/Loss x (+) Other income x Total income xx (-) Operating Expenses Net Profit/Loss (x) xxx

1. Total income = Gross profit/Loss + other income 2. Net Profit/Loss = Total income Operating expenses

The Statement of Financial Position

Cycle of Accounting Record Process

Source Documents Journal

Statement of Financial Position (Balance Sheet)

Transactions take place

Ledger

Statement of Comprehensive Income (Income Statement)

Trial Balance

Accounts to be transferred Financial Position:

1.All accounts categorize as: -asset (Fixed asset, Current Asset) -liability (Current Liability, Long-term Liability) -owners equity (Capital, Drawings, Net profit/loss).

Statement (Vertical) Format

cost Accum. Depre. NBB

How to get FREE mark??? for final account for sole trader question.
1. Youll get 1 (1/2 mark) for transferring an account to correct format even though with wrong adjustment amount. 2. Youll get 1 (1/2 mark) for properly written down company and title of the statement.

Format of Midterm Test

- THREE questions answer all (10% theory, 40% calculation = Total marks is 50 marks) Your midterm results will contribute 15% to total coursework mark. Reminder : -Please bring your calculator, test pad, stapler!! -Allocate time wisely during exam -Suggested: Theory question : Fixed Assets : Statement of Comprehensive Income & Statement of Financial Position: Please do Self-Study questions for topic Fixed Asset and the 10 Questions (Lecture Exercise) for final account for sole trader.

Make the most of yourself, for that is all there is for you.
All the best!!!