HỌC VIỆN CÔNG NGHỆ BƯU CHÍNH VIỄN THÔNG

BÀI GIẢNG MÔN

FA2 – Quản lý hồ sơ tài chính

Giảng viên: THS. PHẠM VŨ HÀ THANH

Điện thoại/E-mail: thanhpvh@[Link]
Khoa: TÀI CHÍNH KẾ TOÁN 1
 Foundations In Accountancy FA2
Maintaining Financial Records

Contents for study – 3 credits/45 hours

 Contents and
guidance

1 The principles and process of basic bookkeeping M Materials

FA2 Textbook – BPP Publisher

2 Generally accepted accounting principles and concepts
FA2 Revision Kit – BPP Publisher
Lecture Slide– PTIT materials
3 Recording transactions and events for assets

4 Recording for business transactions and events G Grading policy

Attendance 10%
5 Control accounts and the correction of errors
Average of mini mid term tests (ind) 20%
6 The extended trial balance Assigment 10%

7 Incomplete records and other accounts Final exam (practice room) 60%

Msc. Pham Vu Ha Thanh - PTIT 3

 FA2-BPP
Contents

1 Assets, liabilities and the accounting equation 8 Cost of goods sold and the treatment of
inventories

2
Statement of financial position and statement
9 Non - current assets and depreciation
of profit or loss

3 Recording and summarizing transactions 10 The account of sole traders

Posting transactions, balancing accounts and

4 11 Extended trial balance
the trial balance

5 Accounting principles and characteristics 12 Incomplete records

6 Control accounts and the correction of errors 13 Partnerships

Accruals and prepayments, receivables and

7
irrecoverable debts
Chapter 1: The principles and process
of basic bookkeepi
 1.1. The elements of financial statements

This topic introduces some of the basics of accounting –

double entry and the accounting equation.
In this topic we also introduce the two main financial
Topic List statements – the statement of financial position and the
statement of profit or loss.
Assets and liabilities
Refer to BPP textbook:
Double entry Chapter 1: 1,2,3,5,6,7
Payables and receivables Chapter 2: full
The accounting equation
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Assets Liabilities

An item of value which a business owns or has the

Something which is owed to someone else
use of

Eg: Eg:
 Land and buildings  Bank loan/ overdraft
 Vehicles  Amount owed to trade payables (supplies)
 Inventories  Tax
 Cash

A receivable is an asset. A receivable represents A payable is a liability. A payable represents

money owed to the business. money owed by the business.
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

An asset – defined by IASB as „a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity‟

A liability – „a present economic obligation for which the entity is the obligor‟

The business entity concept: keep business assets and liabilities separate from the personal assets and
liabilities

Legal view Accounting Business: Its purpose is to make profit for its owners.
view Profit: is the excess of income over expenditure.
Sole trader Unlimited Separate
- A commercial or industrial concern which deal in
Partnership Unlimited Separate the manufacture, resale, supply of goods and
Company Limited Separate services.
- An organisation which uses economic resources to
create goods or services which customers will buy.
- Providing jobs for people to work in.
- Investing money in resources in order to make
more money for its owners.
 Non – current asset: an asset acquired for use within Current liabilities: debts which must be settled within
the business over more than one accounting period one year

Current assets: items owned by the business with the Non-current liabilities: debts which are not payable
intention of turning them into cash within one year

The cash cycle

Cash

Cash is used to buy goods which are sold. Sales on pay buys
credit create receivables, but eventually cash is
earned from the sales. Some of the cash will then be
used to replenish inventories. Receivables Inventories of goods
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

D DEBIT C CREDIT
Increases in Increases in

E EXPENSES L LIABLITIES
Eg incur advertising costs Eg buy goods on credit

A ASSRETS I INCOME
Eg new office equipment Eg make a sale

D DRAWINGS C CAPITAL
Eg the owner takes cash for his own use Eg owner pays in personal money

Decreases in liabilities, capital or income Decreases in assets, drawings or expenses

Left hand side Right hand side

 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Every transaction has a debit and a credit. Total debits = Total credits

If a business buys goods for resale with cash then:

DEBIT Purchases
CREDIT Cash Accounting equation
Assets = Liabilities + Capital
Cash sales result in:

DEBIT Cash Profit = Income - Expenditure

CREDIT Sales
 SALE PURCHASES
By the business to a customer By the business from a supplier

Creates an Creates an

ACCOUNT RECEIVABLE ACCOUNT PAYABLE

A customer who owes money to the business A supplier who is owed money by the business

Recorded as an Recorded as an

ASSET LIABILITY
Of the business Of the business

Settled when the business Settled when the business

RECEIVES CASH PAYS CASH

 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Accounting equation
Capital: amount invested in the business by the owner(s). It is owed to the owners(s).

Accounting equation 1
Assets = Capital + Liabilities

Accounting equation 2
Assets = (Capital introduced + retained profits) + Liabilities

Accounting equation 3
Assets = (Capital introduced +profit earned – Drawings) + Liabilities
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Accounting equation 4
Assets = (Capital introduced + profit retained in previous periods + Liabilities
+ profit earned in current period – Drawings)

Accounting equation 5
Assets = (Capital introduced in previous periods + Liabilities
+ profit retained in previous periods
+ profit earned in current period
+ Capital introduced in current period
– Drawings in current period)
What is a Assets and Payables and The accounting
business? liabilities receivables equation

Assets = Capital + Liabilities

 What is a Assets and Payables and The accounting
business? liabilities receivables equation

On 1 September 20X8, Courtney Wilder decides to open up a stall in the market, to sell West
Indian fruit and vegetables. He has saved up some money and has $1,000 to put into his business

Assets = Capital + Liabilities

Text Text

Courtney Wilder uses some of the money invested to purchase a market stall from George Sobers,
who is retiring from his fruit and vegetables business. The cost of the stall is $600
He also purchases some fruit & vegetables from a trader in the wholesale market, at a cost of $340
This leaves $60 in cash, after paying from the stall and goods for resale, out of the original $1,000.
Courtney keeps $30 in the bank and draws out $30 in small change. He is now ready for his 1 st day
of trading on 3 September 20X8
Assets = Capital + Liabilities
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

What is a business? Business entity concept

A business exists to make a profit. Profit is the A business must always be treated as a separate
excess of income over expenditure. entity from its owner when preparing accounts.

Business equation
P=I+D-C This derives from the accounting
P Is profit earned in current period equation: Assets – Capital + liabilities.
I Is increase (or decrease) in net assets in
Net assets = Total assets less total
current period
liabilities
D Is drawings in current period
Drawings = Capital withdrawn from the
C Is capital introduced in current period business by the owner(s)
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Suppose that on 3 Sep 20X8, Courtney has a very successful day. He is able to sell all of this fruit & vegetables
for $500 in cash
Assets = Capital + Liabilities

Increase in net assets

Net assets = Total assets – Total liabilities

At any point in time, net assets = capital introduced + retained profit to that point in time

At a later point in time, the increase in net assets = additional profit made in the intervening period

At that later point, total net assets = capital introduced + increased retained profit
 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Suppose that Courtney decides to pay himself $100, in what he thinks of as „wages‟, as a fair
reward for his day‟s work

Any amounts paid by a business to its proprietor are treated by accountants as

withdrawals of profit (drawings), and not as expenses incurred by the business

Assets = Capital + Liabilities

 What is a Assets and Payables and The accounting
business? liabilities receivables equation

The next market day is on 10 September, and Courtney gets ready by purchasing more fruit and
vegetables for cash, at a cost of $400. He had a family party to attend during the day, however, and so
he decided to accept the offer of help for the day from his aunt, Sheila, whom he agrees to pay a
wage of $50 at the end of the day.

Trading on 10 September is again very brisk, and Courtney and Sheila sell all their goods for $760
cash. Courtney pays Sheila her wage of $50 and draws out $150 for himself.

Assets = Capital + Liabilities

 What is a Assets and Payables and The accounting
business? liabilities receivables equation

Suppose on 10 September, in addition to all the other transactions, Courtney decides to hire a van at a
cost of $30 to transport the fruit & veg, paying for the hire out of cash from his own pocket.

Assets = Capital + Liabilities

 Statement of financial position and
statement of profit or loss

In this chapter we introduce the two main financial

Topic List statements – the statement of financial position and the
statement of profit or loss.
Statement of financial position
Statement of profit or loss
Capital and revenue
 Statement of Statement of Capital and
financial position profit or loss revenue

Statement of financial position Statement of profit or loss

A statement of the assets, liabilities and capital A statement of revenue earned and costs incurred in
of a business at a given time earning it

The statement of financial position The statement of profit or loss usually highlights gross
demonstrates the accounting equation: profit and net profit.
The first part shows the gross profit for the period.
Asset (A) = Capital (B) + Liabilities (C) Gross profit = Sales – Cost of goods sold
The gross profit is then adjusted to show the net profit
for the period.
Net profit = Gross profit + Other income – Other
expenses
PROFORMA STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X5
$ $
Non-current assets
Land and buildings X
Plant and machinery X
Fixtures and fittings X
X
Current assets
Inventory X
Receivables X
Cash at bank and in hand X
X
Total assets A

Capital and liabilities

Capital
Proprietor‟s capital X
Retained profits X
X
Non-current liabilities X
Current liabilities X
Trade payables X
Bank overdraft X
A
 Statement of Statemaent of Capital and
financial position profit or loss revenue

STATEMENT OF PROFIT OR LOSS FOR THE PERIOD ENDED 31 MARCH 20X5

$ $
Sales X
Cost of sales (X)
Gross profit X
Salaries X
Delivery costs X
Rent expense X
(X)
Profit for the year X

* Note that the expenses included above are not an exhaustive list.
 Statement of Statemaent of Capital and
financial position profit or loss revenue

Business have income (or revenue) from sources

such as:
- selling goods,
- provision of services,
- income from investment in other business,
- income from lending/deposits,
- rent income, royalty income etc.
The income will be used to finance the activities of
the business which incur costs:
- purchasing raw materials for use in
manufacturing goods,
- purchasing ready-made goods for onward
sale, purchasing equipment,
- paying expenses such as staff salaries,
stationery, lighting and heating, rent and so
on.
 Statement of Statemaent of Capital and
financial position profit or loss revenue

Cost of goods sold Overheads

Business Cost of goods sold Overhead Include
Selling  Salaries of a sales management and
Retail Purchase cost of goods sales staff
bought from suppliers  Salaries and commissions of salesmen
 Traveling and entertainment expenses
of salesmen
 Marketing costs (e.g. advertising and
Manufacturing Cost of raw materials in the
sales promotion expenses)
finished goods made, plus the
 Discounts allowed to customers for
cost of the labour required to
early payment of their debts
make the goods, and often
Distribution  The costs of getting goods to
plus an amount of production
customers, such as the costs of
'overhead' costs
running and maintaining delivery vans
Administration  The expenses of providing
management and administration for the
Services Spare parts costs business, for example, rent (and local
taxes), insurance, telephone and
postage, stationery
 Statement of Statement of Capital and
financial position profit or loss revenue

Capital and revenue items

Capital expenditure: Results in the acquisition Revenue expenditure: Expenditure incurred

of non – current assets or an improvement in an during trading activities or to maintain current
existing non – current asset‟s earning capacity. earning capacity (ie repairs)

Capital income: Proceeds from the sale of non – Revenue income: Proceeds from sale of
current assets goods or rent, interest and dividends earned
from non-current assets

Alert. You must be able to identify, record and account for capital and revenue items accurately.
 Statement of Statement of Capital and
financial position profit or loss revenue

On 1 October 20X8, Rita Blake started trading as a snack vendor, selling hot and cold food from a van which she parks in a
local lay-by on a main road.
(a)She borrowed $3,200 from her bank, and the interest cost of the loan was $40 per month.
(b)She rented the van at a cost of $1,500 for three months. Running expenses for the van averaged $450 per month.
(c)She hired a part-time helper at a cost of $150 per month.
(d)Her main business was to sell food to customers who stop their cars by her van, but she also did some special catering
arrangements for business customers, supplying food for office parties. Sales to these customers were usually on credit.
(e)For the three months to 31 December 20X8, her total sales were:
(i) Cash sales $10,300
(ii) Credit sales $2,000 (all paid by 31 December 20X8)
(f) She purchased food from a local food wholesaler, Best Stores Ever. The cost of purchases in the three months to 31
December 20X8 was $7,300, and at 31 December, she had sold all of it. She still owed $1,000 to Best Stores Ever for unpaid
purchases on credit.
(g)She used her own home for her office work. Telephone and postage expenses for the three months to 31 December were
$220.
(h)During the period, she paid herself $330 per month.
Require: Prepare an income statement for the three months 1 October - 31 December 20X8
 Statement of Statement of Capital and
financial position profit or loss revenue

1 State the basic accounting equotion?

2 What is the main difference between a cash and a credit transaction?

3 What is an account payable and receivable?

4 What is a statement of financial position?

5 How long does a business kepep a non-current asset?

6 What is a statement of profit or loss?

7 Distinguish between capital expenditure and revenue expenditure?

 1.2. An overview of recording business
transactions

This topic covers the main sources of data and the

Topic List function each source or record has.
We will see how the documents are recorded in books
Double entry bookkeeping
of prime entry to reflect business transactions.
Books of prime entry
The preparation of journals and Refer to BPP textbook
ledger accounts
Chapter 1: 8
Balances on ledger accounts and
the trial balance Chapter 3: 1-7, 9
Computerized systems Chapter 4: 1-5, 7-9
 What is a Double entry Sources Books of prime
business? documents entry

Basic principles Double entry bookkeeping

Double entry bookkeeping is based on the same idea as the

accounting equation. The rules of double entry bookkeeping
 Every accounting transaction has two equal but opposite effects are best leant by considering the cash
 Equality of assets and liabilities is preserved  A credit entry indicates a payment
made by the business; the matching
In a system of double entry bookkeeping every accounting event
debit entry is then made in an account
must be enters in ledger accounts both as a debit and as an
denoting an expense paid, an asset
equal but opposite credit.
purchased or a liability settled.
 A debit entry in the cash book
Debit Credit indicates cash received by the
An increase in an expense An increase in income business; the matching credit entry is
An increase in an asset An increase in a liability then made in an account denoting
A decrease in a liability A decrease in an asset revenue received, a liability created or
an asset sold.
 The role of source Sales and purchase Cash day books
document day books

Source documents Books of prime entry

Business transactions are nearly always recorded
The source documents are recorded in books of
on a document. These documents are the source of
prime entry.
the information in the accounts. Such documents
 Sales day book
include the following:
 Purchases day book
 Sales order
 Sales returns day book
 Purchase order
 Purchases returns day book
 Invoice
 Cash day books (cheques issued day book and
 Credit note
cash received day book)
 Debit note
 Petty cash book
 Goods received note (GRN)
 Journal
 Goods dispatched/delivery note (GDN)
 Remittance advice
 Cheque stubs
 Petty cash vouchers
 The role of source Sales and purchase Cash day books
document day books

Sale day book Purchase day book

The sales day book is used to keep a list of all This is used to keep a record of invoices which a
invoices sent out to customers each day. Here is an business receives. Here is an example.
example.
SALE DAY BOOK PURCHASE DAY BOOK

Date Invoice Customer Receivables Total Date Supplier Payables Total

number ledger ref invoiced ledger ref invoiced
$
$
3.4.X9 RST PL31 215
3.3.X9 207 ABC SL12 4,000
10.4.X9 JMU PL19 1,804
208 XYZ SL59 1,200
15.4.X9 DDT PL24 758
5,200
2,777

There are also sales and purchase returns day books, which record goods returned by customers/ to suppliers.
 The role of source Sales and purchase Cash day books
document day books

Cash day book

Cash receipts and payments are recorded in the cash day books.

Cash receipts are recorded in the cash received day book as follows, with the total column
analysed into its component parts.
CASH RECEIVED DAY BOOK
Date Narrative Discounts Total Receivables Cash Sundry
allowed ledger sales
$ $ $ $ $
3.3.X9 Cash sale 150 150
Receivable:
ABC 50 1,000 1,000
(discount taken)
50 1,150 1,000 150
 The role of source Sales and purchase Cash day books
document day books

Cash payments are recorded in the cheques issued day book.

CHEQUES ISSUED DAY BOOK
Date Narrative Discounts Total Payables Cash Petty
received ledger purchases Cash
$ $ $ $ $
3.3.X9 DEF - 300 300 -
Petty Cash - 100 - - 100
- 400 300 - 100

Note that for accounting purpose „cash‟ includes cheques, unless specified as „cash in hand‟
or „petty cash‟ (see next page).
 The role of source Sales and purchase Cash day books
document day books

Petty cash book

Most businesses keep a small amount of cash on the premises for small payments, eg stamps, coffee. Petty cash
payments and receipts are recorded in a petty cash book.
PETTY CASH BOOK
RECEIPTS PAYMENTS
Date Narrative Total Date Narrative Total Stationery Coffee
$ $ $ $
3.3.X9 Bank 50 3.3.X9 Paper 10 10
Coffee 5 5
50 15 10 5

Under the „ imprest system‟: $

Cash still held in petty cash X
Plus voucher payments X
Must equal the agreed sum or float X
 Recording source Posting to
documents ledgers

Documents / transactions Book(s) of prime entry Summarized &

recorded posted to

Sales invoices Sales Day Book Receivables ledger/control account

Credit notes sent Sales returns day book Receivables ledger/control account

Purchase invoices Purchase day book Payables ledger/control account

Credit notes received Purchase returns day book Payables ledger/control account

Cash received Cash book General ledger

Cheques, standing orders, direct Cash book General ledger
debits
Notes and coins paid and received Petty cash book General ledger

Adjustments Journal General ledger

 Recording source Posting to
documents ledgers

Source documents Documenting

Sales Sales Wages Cheques Petty Journal Purchase Purchase
Credit invoices documents received Cash vouchers invoices credit
notes and paid vouchers notes

Book Sales Wages Cash Petty Journal Purchases

Recording
Of Totals Totals Day
Day book book Cash
Prime book book book
entry

General ledger
1. Bank accounts
Receivables Payables ledger

Posting
Ledger 2. Receivables ledger control a/c (memorandum)
ledger
accounts (memorandum) 3. Payables ledger control a/c
4. Sales tax control a/c
5. Other accounts

Presenting
Financial Income Statement of
statements Statement Financial
position
 Recording source Posting to
RECORDING SALES …
documents ledgers

The receivables ledger control account is a balance sheet account and it should exactly
reflect the receivables ledger, which does not appear in the accounts.
 Recording source Posting to
RECORDING PURCHASES
documents ledgers

• Purchase invoices are entered in the purchase day book and credit notes in the purchase
returns day book.
• The invoices and credit notes are then posted to the supplier account, with a
corresponding credit/debit to the purchase accounts.
 Checks to be done every month is the reconciliation of the payables ledger to the payables
ledger control account
 The payables ledger control account is a balance sheet account and it should exactly reflect
the payables ledger, which does not appear in the accounts.
 Recording source Posting to
CASH BOOK documents ledgers

• A book of prime entry, used to keep a cumulative record

of money received and paid out by the business via its
bank account.
• This could be money received on the business premises
in notes, coins and cheques which are subsequently
banked.
 Recording source Posting to
CASH BOOK documents ledgers

• There are also receipts and payments made by bank transfer, standing order, direct
debit, and, in the case of bank interest and charges, directly by the bank.
• The cash book is used to record receipts of cash, as well as cash payments.
 Recording source Posting to
Example documents ledgers

• At the beginning of 10 Jan, Peter Jeffries had $2,100 in the bank. During 10 Jan 20X8, he had
the following receipts and payments:
• Cash sale: receipts of $220
• Payments from credit customer Khan: $3,100 less discount allowed $100 (R/L ref.07)
• Payments from credit customer Likert: $1,480 (R/L ref.12)
• Payments from credit customer Lee: $2,400 less discount allowed $70 (R/L ref.10)
• Cash sale: receipt of $190
• Cash receipts for sale of machine: $370
• Payment to supplier Price: $1,250 (P/L ref.27) Discount received $50
• Payments to supplier Burn: $2,420 (P/L ref.16) Discount received $80
• Payment of telephone bill: $235
• Payment of gas bill: $640
• Payment of $3,400 to Fawcett for new plan t and machinery
Require: Prepare the cash book (balancing it)

44
 Recording source Posting to
BALANCING CASH BOOK
documents ledgers

$
Opening balance 2,100
Receipts 7,590
9,690
Payments (7,945)
Closing balance 1,745

Balance b/d Balance brought down Opening balance

Balance c/d Balance carried down Closing balance

CARRYING/BRINGING Recording source Posting to
FORWARD BALANCES documents ledgers

T-account structure

Debit account

Balance b/d

Increase xxx Decrease xxx

Balance c/d

xxx xxx

Equal

46
CARRYING/BRINGING Recording source Posting to
FORWARD BALANCES documents ledgers

T-account structure

Credit account

Balance b/d

Decrease xxx Increase xxx

Balance c/d

xxx xxx

Equal

47
 Recording source Posting to
BANK STATEMENT
documents ledgers

• Is received periodically (normally monthly)

• Should be used to check that the amount shown as a balance in the cash book agrees
with the amount on the bank statement, and that no cash has 'gone missing'.
 Recording source Posting to
PETTY CASH BOOK documents ledgers

• A small amount of cash keeps on the premises to make occasional small payments
in cash.
• Often called the cash float
• It can also be the resting place for occasional small receipts
• Usually more payments than receipts, and petty cash must be 'topped-up' from
time to time with cash from the business bank account. (imprest petty cash)
• Cash registers in some form have been in use for a long time in retail shops.
• They used to be mechanically operated, but today most are computerised.
• The more sophisticated and larger stores will have cash registers which are all
connected to a central computer.
• The cash registers will update the computer automatically as a sale takes place,
and each cash register can be updated for price changes.
RECORDING CASH RECEIVED BY Recording source Posting to
THE REGISTER documents ledgers

The total of daily sales recorded by the cash register will be used in the following ways.
• To check the amount of money in the cash register at the end of the day against
the summary, if there are any discrepancies they are investigated.
• To record receipts in the cash book
• The entry in the cash book will be the total amount of cash received. This will be
analysed into sales and sales tax, to facilitate posting to the general ledger.
• Businesses which do not have a cash register still need to record money
received from sales they have made.
• Very small shops or businesses will probably just write down on a piece of
paper the money received as they sell something.
• Cash here means cash, cheques, cards or any other form of receipt
• This is a basic cash received sheet.
THE GENERAL/ NOMINAL Recording source Posting to
LEDGER documents ledgers

• Is the accounting record which summarises the financial affairs of a business

• There are two sides to the account, and an account heading on top, and so it is
convenient to think in terms of T accounts.
ACCOUNT NAME
DEBIT CREDIT

ADVERTISING EXPENSES
$
Date Narrative Ref $ Date Narrative Ref

11 Feb WBSC Agency PL 200

THE GENERAL/ NOMINAL Recording source Posting to
LEDGER documents ledgers

Purchase (payables) ledger control

Date Narrative Ref $ Date Narrative Ref $

20X8 20X8

03 Oct Bank CB 4 60,500 1 Oct Balance b/f 142,750

30 Nov Bank CB 7 72,250 31 Oct Purchases PDB 24 72,250

31 Dec Bank CB 10 52,250 30 Nov Purchases PDB 32 61,420

31 Dec Balance c/f 176,000 31 Dec Purchases PDB 38 84,580

361,000 361,000
THE GENERAL/ NOMINAL Recording source Posting to
LEDGER documents ledgers

Ledger account Non-current Current Current Non-current Capital Expense Income

asset Asset Liability Liability
Plant & machinery at cost √
Motor vehicles at cost √
Proprietor’s capital √
Inventories: raw materials √
Inventories: finished goods √
Total receivables √
Total payables √
Wages & salaries √
Rent & local taxes √
Advertising expenses √
Bank charges √
Motor expenses √
Telephone expenses √
Sales √
Bank √
Bank overdraft √
Bank loan √
 Recording source Posting to
DISCOUNTS documents ledgers

Type Description Timing Status

Trade discount A reduction in the cost of goods Given on Permanent

owing to the nature of the trading supplier‟s
transaction. it usually results from invoice
buying goods in bulk.

Cash discount A reduction in the amount payable to Given for Withdrawn if

(settlement the supplier, in return for immediate immediate or payment not
discount) or very early payment in cash, rather very prompt received within
than purchase on credit payment time period
 Recording source Posting to
DISCOUNTS EXAMPLE documents ledgers

Trent Marcus has three major suppliers.

• Parker is in the same business as Trent and offers 5% trade discount.
• Scott offers a trade discount of 6% on amounts in excess of $200 (i.e. the trade discount does
not apply to the first $200).
• Alan offers a 10% cash discount for immediate payment or a 5% cash discount for all items
paid for within 30 days of purchase.
In January 20X8, Trent makes purchases of goods worth the following amounts before
discounts have been deducted.
From Parker: $600
From Scott: $850
From Alan: $280 cash
$920 to be paid on 14.1.X8 for goods purchased on 3.1.X8
Calculate how much Trent has received as discounts in January. How much were trade
and cash discounts?
 Recording source Posting to
REBATE AND ALLOWANCES documents ledgers

• Kinds of 'discounts' as incentives, to encourage them to buy in bulk

• Rebates and allowances do not affect the cash function to a great
extent.
• Example:
A rebate is where the gas company will lower its overall tariff for
customers who use over a certain number of units per year, given in
the form of either:
• A reduction in the bills for the following year,
• A cheque for the calculated rebate amount.

Allowance: if certain number of units are ordered at one time, then

few extra units are given free of charge (e.g. buy 5 get 6)
EXAMPLE: OPTIONAL Recording source Posting to
CASH DISCOUNT RECEIVED documents ledgers

• Suppose that Sacker buys goods from Hashes Co, on the understanding that Sacker will be allowed a period
of credit before having to pay for the goods. The terms of the transaction might be as follows.
• Date of sale: 1 March 20X9
• Credit period allowed: 30 days
• Invoice price of the goods (the invoice will be issued at this price when the goods are delivered): $5,000
• Cash discount offered: 3% for immediate payment
• Sacker has the choice between:
• Holding on to the $5,000 for 30 days and then paying the full amount.
• Paying $5,000 less 3% (a total of $4,850) now.

• This is a financing decision about whether it is worthwhile for Sacker to save $150 by paying its debts sooner,
or whether it can employ its cash more usefully for 30 days, and pay the debt at the latest acceptable moment.
• Assume that if Sacker pays now, its bank account would go overdrawn for a month. The bank would charge an
overdraft fee of $70 together with interest of 2.0% per month (also charged on the overdraft fee). Sacker
currently has $500 in the bank (and has an agreed overdraft facility).
Assuming no other transactions, what should Sacker do? Work it out before looking at the solution.
EXAMPLE: CASH DISCOUNT Recording source Posting to
ALLOWED documents ledgers

• Champer purchases goods with a list price of $30,000. The supplier offers a
10% trade discount, and a 2.5% cash discount for payment within 10 days.
• Required
(a) Calculate the amount Champer will have to pay if it delays longer than 10
days before paying.
(b) Calculate the amount the company will pay if it pays within 10 days.

• Note: Ignore sales tax.

58
 Recording source Posting to
STEPS FOR POSTING
documents ledgers

1 Add up all the column on the receipts side of the cash book

Check that the totals of the analysis columns (excluding the discount allowed
2
memorandum column) add up to the total cash received column.

3 Identify general ledger accounts which require posting by marking against cash book amount.

4 Draw up a posting summary and post the general ledger

59
 Recording source Posting to
documents ledgers

 James has been asked to supply goods to Paul‟s business. He is anxious to get hold of a set of
Paul‟s latest accounts
What is the most likely reason for James wanting to look at Paul‟s accounts?
A. To calculate the amount of tax Paul needs to pay
B. To assess the ability of Paul‟s business to pay its debts as they fall due
C. To compare the performance of Paul‟s business with his own
D. To see the level of salary Paul is paying himself from the business

 Which of the following is a book of prime entry?

A. A cheque received
B. A statement of financial position
C. A bank ledger account
D. A cheques issued day book
 Recording source Posting to
documents ledgers

1 What are books of prime entry?

2 What is recorded in the sales day book?

3 What is a trade discount?

4 What is a cash discount?

5 Why might you offer a cash discount to customers?

 Posting transactions, balancing accounts
and the trial balance

This topic will looks more at ledger accounting.

Topic List The balances on the ledgers help provide the business
with information about what it is doing.
The general ledger
Sales tax is a general consumer expenditure tax. It is
The journal and imprest system not a major area of the syllabus but may appear in the
Day book analysis exam.
The receivables and payables
ledgers
Accounting for sales tax
The trial balance
 The The journal and Day book The receivables and Accounting for The trial
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Ledger accounting The general ledger

Is an accounting record which summarises the
Is the process by which a business keeps a record of
financial affairs of a business. Accounts within the
its transactions:
general ledger include the following.
 In chronological order
 Plant and machinery (non – current asset)
 Built up in cumulative totals
 Inventories (current asset)
 Sales (income)
A ledger account or „T” account looks like this.
 Rent (expense)
 Total payables (current liability)
NAME OF ACCOUNT
$ $
DEBIT SIDE CREDIT SIDE
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Journal
Format of journal entries is as follows.
Journal entries are often required in an
Date Debit Credit exam where you would not use the journal
$ $ in practice, to save you the time that would
DEBIT A/c to be debited X be involved in drawing up „T” accounts.
CREDIT A/c to be credited X
Narrative to explain transaction
Imprest system
The double entry for topping up the petty cash
Journals are used to record source information that is not
is as follows:
contained within the other books of prime entry.
$ $
They record the following:
 Period end adjustments DEBIT Petty cash X
 Correction of errors CREDIT Cash at bank X
 Large/ unusual transactions
 The The journal and Day book The receivables and Accounting for The trial
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Day books
Note that day books are often analysed as in the following extract (date and customer name not shown).
Total invoiced CD sales DVD sales
$ $ $
340 160 180
120 70 50
600 350 250
1,060 580 480
To identify sales by product, total sales would be entered („posted‟) as follows.
$ $
DEBIT Receivables a/c 1,060
CREDIT Sales: CDs 580
Sales: DVDs 480
Other books of prime entry are analysed in a similar way.
 The The journal and Day book The receivables and Accounting for The trial
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Receivables and payables ledgers

To keep track of individual customer and supplier Entries to the receivables ledger are made as follows.
balances it is common to maintain subsidiary ledgers  When making an entry in the sales day book, an
called the receivables ledger and the payables ledger. entry is then made on the debit side of the
Each account in these ledgers represents the balance customer‟s account in the receivables ledger
owed by or to an individual customer or supplier.  When cash is received and an entry made in the
cash received day book, an entry is also made on
Note that these receivables and payables ledgers are the credit side of the customer‟s account in the
kept purely for reference and are therefore known as receivables ledger
memorandum records. They do not form part of the The payables ledger operates in much the same way.
double entry system.
 The The journal and Day book The receivables and Accounting for The trial
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Accounting for sales tax

Sales tax is a tax on the sale of goods and services. Gross price = Net price + Sales tax

Output tax Input tax

Tax on goods or services sold. Tax on goods or services purchased.
DEBIT Cash (or receivables) $1,175 DEBIT Purchases $800
CREDIT Sales $1,000 CREDIT Sales tax account $140
CREDIT Sales tax account $175 CREDIT Trade payables $940

Each quarter the balance on the sales tax account (output tax less input tax) is calculated to
establish the amount owed to (or by) the tax authority.

Sales tax is calculated on the discounted price, even if the discount is not taken.
Receivables and payables shown in the statement of financial position include sales tax.
Sales and purchases shown in the statement of profit or loss exclude sales tax.
 The The journal and Day book The receivables and Accounting for The trial
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Tax Calculation
Gross Price (included Tax) = Net price + Tax
Net price = Gross price/(100%+%Tax)

• A = Sales tax output – sales tax input

If A > 0 Sales tax payable
If A < 0 Sales tax refundable

Output tax Input tax Total Treatment

received paid
$1,000 $(900) $100 Pay to tax authorities

$900 $(1,000) $(100) Refund from tax authorities

 The The journal and Day book The receivables and Accounting for The trial
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a Credit sales b Credit purchases

i. Include sales tax in sales day book; show i. Include sales tax in purchases day book; show
it separately it separately
ii. Include gross receipts from customers in ii. Include gross payments in cheques issued day
cash received day book; no need to show book; no need to show sales tax separately
sales tax separately iii. Exclude recoverable sales tax from statement
iii. Exclude sales tax element from of profit or loss
statement of profit or loss iv. Include irrecoverable sales tax in statement of
iv. Credit sales tax payable with output tax profit or loss
element of sales invoices v. Debit sales tax payable with recoverable input
tax element of payable credit purchases
 The The journal and Day book The receivables and Accounting for The trial
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c Cash sales d Cash purchases

i. Include gross receipts in cash received i. Include gross payments in cheques issued
day book; show sales tax separately day book: show sales tax separately
ii. Exclude sales tax element from ii. Exclude recoverable sales tax from
statement of profit or loss statement of profit or loss
iii. Credit sales tax payable with output tax iii. Include irrecoverable sales tax in statement
element of cash sales of profit or loss
iv. Debit sales tax payable with recoverable
input tax element of cash purchases
 The The journal and Day book The receivables and Accounting for The trial
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SALE TAX PAYABLE

$ $

Input tax 8,000 Output tax (credit sales) 15,000

Amount due to tax Output tax

authority (cash paid) 9,000 (cash sales) 2,000

17,000 17,000
 The The journal and Day book The receivables and Accounting for The trial
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Other features of sales tax

 Usually need to register for sales tax if sales exceed

certain limits
 Different types of supply charged at different rates eg zero,
reduced and standard rated
 Some suppliers may be exempt
 Small errors on sales tax returns can usually be corrected
on the next return. Larger ones require contact with the
authorities
 Penalties and interest are usually charged if sales tax is
paid late or returns are late
 The The journal and Day book The receivables and Accounting for The trial
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UK Sales Tax System Overview

• VAT invoices
• Registration
• VAT Payment and Refund
• VAT rates
• Errors and late Tax payments

73
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UK
Sales
Tax
Invoice

74
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Taxable sales of
business exceed a
certain amount for a
year (£ 77,000)

UK Sales Tax System

75
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UK Sales Tax Rates

1. Out of scope of VAT: no effect for VAT (for wages, dividend…)

2. Exempt supplies (for education, health care, insurance..)

No VAT is charged No VAT input claim

3. Taxable supplies
◦ Zero rate (for foods, books, children‟s clothing, exports..): often essential items (0%) can claim
VAT input

◦ Standard rate: used to be 17.5% (per 4 Jan 2011: 20%)

◦ Reduced rate (for installation of certain energy saving materials, power used in the home..):
incentive rate (5%)

76
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UK Special Sales Tax Schemes

• Annual accounting scheme: Submit VAT return
every 12 months

• Cash accounting scheme: VAT to be based on

the date of receipt or payment rather than on the
invoice date, quarterly return required.

• Flat rate scheme (< standard rate): applying a flat rate % to the business‟s total
business VAT inclusive turnover for a period, no deduction for VAT input

77
 The The journal and Day book The receivables and Accounting for The trial
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Trial balance
The trial balance is a list of ledger balances shown in Errors not highlighted by trial balance
debit and credit columns
 Complete omission of a transaction
The debits should equal the credits.
 Error of commission: posting to the wrong
account
If the trial balance does not balance, you need to set
up a suspense account.  Compensating errors
 Errors of principle
Suspense account. This is a temporary account
set up to make the trial balance work. Errors need to
be found and corrected, clearing the suspense
account, before the final accounts are prepared.
 The The journal and Day book The receivables and Accounting for The trial
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Error can not be revealed by Error can be revealed by

Trial Balance Trial Balance

1. Omission. 1. Transposition.
2. Commission. 2. Casting
3. Compensating. 3. Single entry error.
4. Error of principle.
5. In correct amount
6. Reversal
7. Original entry
 The The journal and Day book The receivables and Accounting for The trial
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POSSIBLE ERRORS NOT REVEALED IN THE TRIAL BALANCE

• The complete omission of a transaction, because neither a debit nor a

credit is made (an error of omission).
• If an invoice for purchases worth $200 was mislaid before it was
recorded, the books would still balance. Both purchases and creditors
would be understated by $200.

 The posting of a debit or credit to the correct TYPE of account, but to a

wrong account (sometimes called errors of commission).
– If the invoice referred to above was entered as a credit to the account of
a different supplier and the debit either correctly to purchases or
incorrectly to an expense account, the books would be incorrect, but
they would still balance.
 The The journal and Day book The receivables and Accounting for The trial
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POSSIBLE ERRORS NOT REVEALED IN THE TRIAL BALANCE

 Compensating errors
 (e.g. debit error of $100 is exactly cancelled by credit $100 error elsewhere).
These are unconnected errors which by coincidence cancel out.
 Errors of principle
 Cash received from customers being debited to the total receivables account
and credited to cash instead of the other way round). Another example of an
error of principle is where a purchase of, say, $200 has been credited to sales
and debited to debtors instead of debited to purchases and credited to
creditors.
• Posting incorrect amounts.
• When an invoice is misread and instead of the correct amount of say $600, $800 is
posted as both a debit and credit. The trial balance would still balance
 The The journal and Day book The receivables and Accounting for The trial
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Bailey Hughes started trading as a wholesale bookseller on 1 June 20X8 with a capital of $10,000 with
which he opened a bank account for his business
During June the following transactions took place
June 1 Bought warehouse shelving for cash from Warehouse Fitters ltd for $3,500
2 Purchased books on credit from Ransome House for $820
4 Sold books on credit to Waterhouses for $1,200
9 Purchased books on credit from Big, White for $450
11 Sold books on credit to Books & Co for $740
13 Paid cash sales of $310 from the warehouse shop intact to the bank
16 Received cheque from Waterhouses in settlement of their account
17 Purchased books on credit from RUP for $1,000
18 Sold books on credit to R S Jones for $500
19 Sent cheque to Ransome House in settlement of their account
20 Paid delivery expenses of $75 by cheque
24 Received $350 from Books & Co on account
30 Draw cheques for personal expenses of $270 and assistant’s wages $400
30 Settled the account of Big, White
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Cash received day book (receipts)

Date Narrative Total Capital Sales Receivables
$ $ $ $
1 June Capital
13 June Sales
16 June Waterhouses
24 June Books & Co

Trial Balance example

Sales day book
Date Customer Amount
$
4 June Waterhouses
11 June Books & Co
18 June R S Jones
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Cheques issued day book (payments)

Date Narrative Total Fixtures & Payables Rent Delivery Drawings Wages
fittings expenses

June $ $ $ $
Trial Balance example
1 Warehouse
fittings
19 Ransome House

20 Rent
21 Delivery
30 Drawings
30 Wages
31 Big, White
 The The journal and Day book The receivables and Accounting for The trial
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Purchases day book

Date Supplier Amount
$
2 June Ransome House
9 June Big, White

17 June RUP
Errors mind map
 The The journal and Day book The receivables and Accounting for The trial
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1 What is another name for a trial balance?

2 Why must a journal include a narrative explanation?

3 What types of error will not be discovered by drawing up a trial balance?

4 What are the advantages of batch processing?

5 Personal accounts from part of the double entry system. True or False?
Chapter 2: Generally accepted accounting
principles and concepts
 Accounting principles and characteristics

This chapter deals with the principles and

Topic List characteristics, the ‘why?’ as opposed to the ‘how?’

BPP Refer:
Accounting of financial information
Chapter 5
Qualitative characteristics
Relevant accounting standards
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Underlying assumptions
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

What are accounting principles and characteristics?

Accounting principles and characteristics are the assumptions underlying the financial accounts. The most
important ones are going concern and accruals.

Going concern Accruals (matching)

Assumes that the business will continue to operate Revenue must be matched against the costs
into the foreseeable future at its current level of incurred in earning it.
activity.
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Other concepts:
Materiality
Consistency

Similar items should be given similar Only material items should appear in the financial
treatment statements.
The same treatment should be applied Items are material if their omission or
from one period to another misstatement would affect the impact of the
financial statements on the reader.
Historical cost  Context important
 Some items are „sensitive‟
 Borrowing should not be „netted off‟ against
Transactions are normally stated in
cash balances
accounts at their historical amount.
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

GOING CONCERN ASSUMPTION ACRRUALS ASSUMPTION

Going Concern. The financial Accrual Basis. The effects of transactions and
statements presume that an enterprise other events are recognised when they occur,
will continue in operation indefinitely rather than when cash or its equivalent is
or, if that presumption is not valid, received or paid, and they are reported in the
disclosure and a different basis of financial statements of the periods to which
reporting are required. they relate (matching principle)

• There is no intention to put the

company into liquidation
• The assets of the business
should NOT be valued at their
'break-up' value
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

GOING CONCERN EXAMPLE

• Emma buys a T-shirt-printing machine for $60,000. The asset is

expected to be used for six years.
• The going concern assumption assumes that the business will continue
its operations and so the asset will live out its full six years in use.
• If this asset has no other operational use outside the business, and in a
forced sale it would only sell for scrap. After one year of operation, its
scrap value might be, say, $8,000. What would the net book value be
after one year?
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

ACCRUALS ASSUMPTION EXAMPLE

Zandra Shah has a business importing and selling toy model ponies. In October 20X9, she
makes the following purchases and sales.
PURCHASES
Date Quantity Total amount Invoice paid
$
7 Oct X9 30 300 1 Nov X9

Sales
Date Quantity Total amount Invoice paid
$
8 Oct X9 6 90 1 Nov X9
12 Oct X9 9 135 1 Nov X9
23 Oct X9 15 225 1 Dec X9

What is Zandra's income statement for October on both a cash basis and an accruals basis?
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

PRUDENCE EXAMPLE

• For example, each product costs $100 to • Where a business buys some goods for
make, but can be sold for $150. $1,200 but because of a sudden slump in
Inventories of finished products would be the market only $900 is likely to be received
valued in the statement of financial when the goods are sold. The prudence
position at $100 each. This is one aspect concept suggests that the inventory should
of the prudence concept: To value the be valued at $900 and the $300 deducted as
finished product at $150 would be to an expense from profit. It is not enough to
anticipate making a profit before the wait until the goods are sold, and then
profit had been realised. recognise the $300 loss. The loss should
be recognised as soon as it is foreseen.
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

• Prudence should not be held as an excuse for creating excessive

provision. For accounts to be reliable, they must also be neutral, i.e. free
from bias.

• A profit can be considered to be a realised profit when it is in the form of:

• Cash.
• Another asset which has a reasonably certain cash value e.g. amounts owing from
debtors, if it is reasonably certain that the debtors will eventually pay up what they
owe.
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

• It is generally agreed that sales revenue should only be 'realised' and so

'recognised' in the income statement when the following has taken place.

• The sale transaction is for a specific quantity of goods at a known price, so that the sales
value of the transaction is known for certain.

• The sale transaction has been completed, or else it is certain that it will be completed (e.g.
in the case of long-term construction work under contract, when the job is well under way
but not yet finished by the end of an accounting period).

• The critical event in the sale transaction has occurred; the critical event is the event after
which:
• It becomes virtually certain that cash will eventually be received from the customer
• Or cash is actually received
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Other principles…

• Business entity concept: means the assets/ liabilities/ income/ expense of the entity
is separated
from its owners‟
• Double entry bookkeeping reflects the fact that:
- Dual effects to the entity
- Total value of Dr entries equal to Cr entries
• Money measurement concept: accounts only deal with items to which a monetary
value can be attributed
• Separate valuation principle: each component part of an asset or liability on the
statement of financial position must be valued separately
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Qualitative characteristics Relevant standards for FA2

Relevance Faithful representation

IAS 16 Property, plant and equipment
Comparability Verifiability
Timeliness Understandability IAS 1 Presentation of financial statements

IAS 2 Inventories
These characteristics of financial information make
IAS 18 Revenue
them more meaningful to anyone using them.
IAS 37 Provisions, contingent liabilities and
contingent assets

Achieved using accounting policies and

relevant standards
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Relevance Comparability

- Capable to influence economic - Be comparable to prior years or to

decision of users other businesses
- Provided in time

Reliability Understandability

- Neutral Being understood by users who have

- Complete, free of material errors reasonable knowledge of accounting,
business, economic activities

101
 Accounting of Qualitative Relevant accounting
financial information characteristics standards

Accounting policies are the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.

E.g: change in Presentation (admin expenses) or Measurement (inventories) or Recognition

(revenue)

Accounting estimate is an adjustment of the carrying amount of an asset or liability, or related

expense, resulting from reassessing the expected future benefits and obligations associated with
that asset or liability.

When clear cut standards are not available

E.g:doubtful debts, depreciation of assets, obsolescence of inventories

 Accounting of Qualitative Relevant accounting
financial information characteristics standards

• What is accounting standards?

Rules according to which accounts have to be drawn up
• International accounting standards
• IAS 41 (but not all used)
• 13 IFRSs
• National accounting standards
26 VASs
Chapter 3: Recording transactions and
events for assets
 3.1. Cost of goods sold and the treatment
of inventories

This is an important chapter. It covers inventory which

Topic List is a key figure in both the statement of profit or loss and
the statement of financial position
Cost of goods sold
It also covers the calculation of cost of goods sold.
Accounting for opening and
closing inventories BPP Refer:
Counting inventory Chapter 8

Valuing inventories
Valuation and profit: IAS2
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

IAS 2 - Definition

 Assets held for sale in the ordinary course of

business
 Items in the process of production for such sale
(work-in-progress)
 Raw materials or supplies to be consumed in
the production process or in the rendering of
services
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Inventory Accruals Accruals / Matching concept

 At period end, match all invoices to GRNs  Goods might be unsold at the end of an
 received in the last month of the year accounting period and so still be held in
 All unmatched GRNs should be listed inventory.
 The Purchase cost of those unmatched GRNs  The purchased cost of these goods/ inventory
should be estimated based on: should NOT be included in the cost of sales of
 Delivery note from the supplier the period.
 Purchase order
 Pricing list
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Carriage inwards

Formula for the cost of goods sold

 Cost paid by purchaser of having goods
$ transported to his business.
Opening inventory value X  Added to cost of purchases.
Add purchases (net of returns) X
X
Less closing inventory value (X) Carriage outwards
Cost of goods sold X

 Cost to the seller, paid by the seller, of having

goods transported to customer.
 Is a selling and distribution expense.
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Opening Purchase / =Cost of Ending

Balance of Production Goods Sold balance of
Inventory + + Inventory
(P) (COGS)
(OI) (EI)

OI + P = COGS + EI

•costs of purchase
• costs of conversion
• other costs (i.e. Carriage inward cost ,…)
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Entries during the year

During the year, purchases are recorded by the
The exact reverse entry is made for the closing inventory
following entry
(which will be next year‟s opening inventory):
DEBIT Purchases $ amount bought
DEBIT Inventory $ closing inventory
CREDIT Cash or $ amount bought
CREDIT Statement of profit or loss $ closing inventory
payables
The inventory account is not touched at all.

Entries at year-end
The balance on the inventory account is still the opening
inventory balance. This must also be transferred to the
The first thing to do is to transfer the purchases account
statement of profit or loss:
balance to the statement of profit or loss:
DEBIT Statement of profit or loss $ opening inventory
DEBIT Statement of profit or loss $total purchases
CREDIT Inventory $ opening inventory
CREDIT Purchases $total purchases
Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Counting inventory

In order to make the entry for the closing inventory we need

to know what is in inventory at the year – end. We find this
out not from the accounting records, but by going into the
warehouse and actually counting the boxes on the shelves.

Some businesses keep detailed records of inventory coming

in and going out, so as not to have to count everything on the
last day of the year. These records are not part of the double
entry system.
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

A dealer in, say, kitchen appliances, may know from Identification rules
counting his inventory that he has 350 toasters in
inventory at the year – end. He then needs to know If we are using cost, and units have been bought at
what cash value to place on each toaster. This is the different prices during the year, we need to decide
problem of valuation. which items are left in inventory at the year-end.

Prices The possible rules are as follows . Only the first

The price used to value an item of inventory might be any two should be used for financial accounts (as

of a number of possibilities, eg selling price, replacement opposed to management accounts)

cost. However, we use the lower of the following  FIFO: first in. first out

 The cost of buying it and bringing it into its present  Average cost (continuous or periodic)

location and condition  LIFO: last in, first out

 The net realizable value( NRV): the expected selling

Your syllabus does not require you to apply LIFO.
price less future costs in getting the item ready for sale
and selling it
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

FIFO LIFO

The first goods purchased will be the first goods sold. No longer using.

AVCO AVCO Formula

1. Cumulative / Continuous weighted average: A new

weighted average cost is calculated whenever a
new delivery of materials into store is received.

2. Periodic weighted average (simple average): it

calculates average cost of units of inventory
available for sales during an accounting period.
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

FIFO
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

LIFO
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

AVCO
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Goods written off/down

1. Goods might be lost or stolen
2. Goods might be damaged, worthless and be
thrown away
3. Goods is out-of-fashion
4. Goods become osolete

Written off? Written down?

1. Goods might be lost or stolen 1. Goods is out-of-fashion
2. Goods might be damaged, worthless and be 2. Goods become osolete
thrown away => Taken at every period end
Dr COGS Dr COGS
Cr Inventory Cr Inventory
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Basic rule when written down:

“the lower of cost and net realisable value”

What is net realisable value?

Estimated selling price X

Less: estimated costs of completion (X)
Less: estimated selling and distribution costs (X)
NRV= XX
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

Valuation and profit IAS 2

Different inventory valuations produce different  Inventory should be valued at the lower of cost and
cost of sales figures and therefore different net realizable value – the comparison between the
profits. This is a temporary difference. two should ideally be made separately for each item
 Cost is the cost incurred in the normal course of
business in bringing the product to its present location
Remember. The higher the closing inventory and condition, including production overheads and
value, the higher the profit. some other overheads
 Net realizable value is selling price less costs from
now to completion and costs of marketing, selling and
distribution
 FIFO and average cost may be used, but not LIFO
Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2
 Cost of goods Accounting for opening Counting Valuing Valuation and
sold and closing inventories inventory inventories profit: IAS 2

1 How is the cost of goods sold calculated?

2 Distinguish between carriage inwards and carriage outwards?

3 Give three reasons why goods purchased might have to be written off?

4 When is an inventory account used?

5 How is closing inventory incorporated in financial statements?

6 Define net realisable value?

7 Why is inventory not valued at expected selling price?

8 Give three methods of pricing an inventory item at historical cost?

 3.2. Non-current assets and depreciation

This is very Important chapter. It covers capital

Topic List transactions, which you are very likely to come across,
both in the work place and in your exam.
The basics
BPP refer:
Acquisitions Chapter 9
Non-current assets register
Depreciation
Disposals
Reconciliation
 The basics Acquisitions Non-current Reconciliation Reconciliation Reconciliation
assets register

Non-current assets: the basics

Non-current asset:

Acquired and retained within the business with

a view to earning profits, normally used over
move than one accounting period

Property, plant and equipment Intangible non-current asset

A physically present non-current asset: A non-current asset with no physical existence:
 Plant and machinery  Patent right
 Motor vehicles  Database
 Land and buildings  Trademark
 Fixtures and fittings
Generally only material assets are capitalised.
 The basics Acquisitions Non-current Reconciliation Reconciliation Reconciliation
assets register

Self – constructed assets Acquisition of Non-current asset

Is treated in a similar way as purchased NCA:
Three methods of purchasing large NCA:
Costs involved:
 Cheque payment
 Raw materials
 Loan
 Labour costs
 Finance lease
 Related overhead costs

Cheque payment Loan Finance Lease

DR Non-current asset DR Non-current asset DR Non-current asset

CR Bank CR Loan payable CR Lease payable
 The basics Acquisitions Non-current Reconciliation Reconciliation Reconciliation
assets register

What is cost?
 Purchase cost (including transport costs, insurance during delivery period, import
duties, non refundable purchase taxes after deducting trade discount..)
 Other directly attributable costs (installation, modifying for use, testing for use,
permit from government agencies…)
 Initialestimate costs of dismantling & removing the item and restoring the
site on which it is located (if any)

Excluding:
X mistake during installation
X uninsured damage during transport, due to theft
X damage during unpacking & installing
X fines for not obtaining proper permits from government agencies
 The basics Acquisitions Non-current Reconciliation Reconciliation Reconciliation
assets register

Self-constructed NCA?
- All direct constructing costs
- Architects‟ fees
- Engineers‟ fees
- Insurance costs incurred during construction
- Interest on money borrowed to finance construction
- Walkways to and around the building
- Repairs (purchase of existing building)
- Reconditioning (purchase of an existing building)
- Modifying for use
- Permits from governmental agencies
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Funding Organisational implications

 Cash  Leasing
 Borrowing  Part exchange  Liquidity. The purchase of a non-current asset
 Hire purchase may seriously affect cash flow
 Staffing/training. A new machine may need
Step 1 Record inflow of funds skilled operatives
 Productivity/profitability. New machinery should
improve productivity and profitability
Step 2 Record outflow of funds and acquisition of the  Marketing. Existing customers informed and new
asset.
customers found in order to fully utilize asset
 Running expenses. Most non-current assets
Authorisation: any capital expenditure above a certain
amount must be authorized; usually a capital require fuel and/or maintenance

expenditure authorisation form records this.  Premises. Is there room for more non-current
assets?
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Recording capital acquisitions Journal 1

The acquisition may be recorded in the cash 13 Sept X2 DEBIT Motor vehicles a/c $13,200

book or in the purchase day book. CREDIT Spiller $13,200

However, the acquisition is more likely to be Being purchase of Peugeot 206 LM23 OLE
recorded with a journal.

Journal 2
13 Sept X2 DEBIT Plant & machinery $14,000

DEBIT Sales tax $2,450

CREDIT Cash $16,450

Being purchase of printing machine

The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Non-current assets register

Listing of all assets owned by the organization.

Not part of the double entry

An internal control

Likely details:
Description and location of asset
Purchase date
Cost
Depn method and estimated useful life
Accumulated depn b/f and c/f
Disposal date and proceeds
Profit/loss on disposal
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Depreciation Depreciation is charged to allocate a fair proportion of the

non-current asset‟s cost to the period benefiting from its
The measure of the use, wearing out and use.
other fall in usefull life of a non-current asset.
Depreciable amount = Cost – Expected residual value

DEBIT Statement of profit or loss Depn charge for the year

CREDIT Statement of financial position Accumulated depn

Depreciation is not a cash expense. Depreciation is not an asset replacement fund.

Judgements must be made on:
 Estimated useful life
 Method and rate of depreciation
 Residual value
The consistency concept demands that the same method of depreciation is used year on year.
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Methods of depreciation

Straight line Reducing balance

Cost of asset – residual value N% x The net book value of the asset.
Expected useful life of asset
The depreciation charge is higher in the first years
The depreciation charge is the same year on year.
of the asset‟s life.

Alert. Make sure that you learn both methods of depreciation. If you are given details of a non-current
asset which is purchased in the middle of the year, remember to adjust the depreciation charge for the
months it was not in use during the year.
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Straight line method

 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Reducing balance method

 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Which method of Depreciation should be used?

• A different method can be used for each type of asset.
• The method chosen must be fair in allocating the charges between
different accounting periods.

Depreciation under straight-line Depreciation under reducing

method balance method
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Recording depreciation in the accounts

1 Bring the credit balance of the accumulated depreciation down.

2 Depreciation charge:

DEBIT Depreciation expense (statement of profit or loss)

CREDIT Allowance for depreciation a/c (accumulated depreciation)

3 Non-current asset accounts are unchanged, showing the cost of the non-current assets.

Net book value = Non – current asset cost less accumulated depreciation
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Depreciation?
1 Not a Cash-expense

2 Not a fund set aside for future replacement of non-current assets

3 Not the way to revise the value of an asset to its realizable value like inventory

NCA is subjective and should be used consistently

 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Disposing of non-current assets

1 Calculate the profit/loss on disposal. $ $

Sales proceeds X

2 Less cost of making the sale (X)

The following must appear in the
Net sale proceeds X
disposals account.
Cost of non-current asset X
 Original cost of the asset (DR)
Less accumulated depreciation (X)
 Accumulated depn (CR) Net book value (X)
 Net sales proceeds (CR) Profit/(loss) on disposal X/(X)

Profit/(loss) of disposal= Net sales - NBV

 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

3 Ledger accounting entries:

DISPOSAL OF NON-CURRENT ASSET
(a) DEBIT Disposal of non-current asset $ $
account Non-current asset a/c 200 Acc. Depn a/c 100
CREDIT Non-current asset account Statement of profit or 30 Cash/receivable a/c 130
With cost of asset loss a/c (profit)
(b) DEBIT Accumulated depn a/c 230 230
CREDIT Disposal of non-current asset
account
With accumulated depn Alert. Disposals are a key area. Make sure you
(c) DEBIT Receivable account or cash book can post the ledger entries correctly.
CREDIT Disposal of non- current asset
account
With proceeds of asset sale

4 The balance on the disposal account is the profit/loss which is recorded in the statement of profit or loss.
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Non current assets Disposal a/c Accumulated Dep.

xx Historical cost xx
xx xx 2
1 xx xx
Acc. Dep to date

Income statement a/c Cash/ Receivable

Sale proceeds
xx xx
Profit on disposal 3
xx xx
xx 4 xx
Loss on disposal
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Part exchange is treated in the same way as a sale

This is an added complication.

• Non-current assets are
sometimes exchanged for The sales proceeds for the disposal is the part exchange value.
replacements as part of the DEBIT The new non-current assets account
same deal. CREDIT The disposal account
• The new asset is exchanged
for the existing asset, the With the part exchange values
remaining balance is paid in Any additional cost of the new asset is accounted for by:
cash (or by finance). DEBIT The new non-current assets account
• The most common form of part CREDIT Cash/ payable
exchange (or trade in) is found
in the motor trade. With the balance paid on the new asset
Disposals, like acquisitions, need to be authorized.
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

- Trade-in Allowance (TIA) – amount allowed for old

equipment toward the purchase price of similar new assets.
- Boot (cash paid) – balance owed on new equipment after
trade-in allowance has been deducted.

* TIA > Book Value = Gain on Trade

* TIA < Book Value = Loss on Trade

Gains and Losses is recognized (recorded) into Income

Statement.
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Non current assets Disposal a/c Accumulated Dep.

Bal. b/d xx Disposal old asset

AA = Cash paid
xx
AA xx xx xx xx
Disposal old asset
BB
BB = Trade-in allowance

BB = New assets cost – cash paid

xx
New asset cost

Income statement a/c

Cash/ Payables
Loss on disposal
xx
xx xx
xx xx
Profit on disposal
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

Reconciling physical assets ledgers accounts Discrepancies

and register

 The non-current assets register must reconcile with  Discrepancies have to be investigated.
both the general ledger and the assets themselves.  Items listed in the non-current assets register must
 The cost and accumulated depn totals in the non- be physically inspected on a regular basis.
current assets register must be compared to the  The non-current assets register must be kept up to
general ledger accounts. date.
 Discrepancies need to be followed up.
The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register
 The basics Acquisitions Non-current Depreciation Disposals Reconciliation
assets register

1 Define a non-current asset?

2 Under which concept should small value assets not be capitalised?

3 What is an asset‟s net book value?

4 When would it be appropriate to use the reducing balance method of depreciation?

5 What considerations should apply when deciding which method of depreciation to use?

6 How í the profit or loss on the sale of a non-current asset calculated?

7 The non-current asset register is part of the double entry system. True or False?

8 What types of checks should be made over non-current assets and the register?
Chapter 4: Recording for business
transactions and events
 4.1. Accruals and prepayments, receivables
and irrecoverable debts

You’ve met the concept of accruals before – this chapter

Topic List tells you how to deal with them in practice.
You also cover the treatment of irrecoverable debts and
Accruals and prepayments
allowances for receivables.
Irrecoverable debt and allowances
Provisions BPP Refer
Chapter 7
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Accrual: Accruals (matching) concept

- Expenses which related to an accounting period
but have not yet been paid.
- They are charged against the profit for the period
- Current liabilities in SOFP
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Accruals (matching) concept Prepayment:

- A payment made in one period but charged to the

later period to which it relates
- They are not charged against the profit for the
period
- Current asset in SOFP

• The double entry is made at year end to

create accruals and prepayment in the
balance sheet
• The double entry will be reversed in the
following period. At the beginning of each
new accounting period the bookkeeper will
reverse all accruals and prepayments from
the previous period.
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Prepayments Accruals

1 Review list of prepayments from previous year. 1 Review accruals listing for previous year.

2 Review all expense accounts for the year. 2 Review every income and expenditure account.

3 Calculate and list all prepayments 3 Review all invoices received after the year end.

4 Calculate the relevant accruals.

Accounting entries

Prepayments: Accruals:

DEBIT Prepayments DEBIT Expenses

CREDIT Expenses CREDIT Accruals

 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Types of accrual and prepayment

Electricity/ gas X Estimate based on previous bills (accrual)

Telephone X Calls estimate (accrual); rental is prepaid

Rent X Is rent paid in advance (prepayment) or

arrears (accrual)?

Salaries X One month‟s accrual if paid in arrears?

Salesmen‟s expenses X Specific expense claims (accrual)

Purchases X Goods received not invoiced (accrual)

X
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Irrecoverable debt: Reasons:

An irrecoverable debt is a debt which will definitely

• The customer has gone bankrupt.
not be recovered. • The customer is out of business.
A specific debt which is not expected to be paid. • Dishonesty may be involved.
Bad debt is the same meaning of irrecoverable • Customers in another country might be
debt. prevented from paying by the unexpected
introduction of foreign exchange control
policy.
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Business might decide to give up expecting payment

and to write the debt off.

DEBIT I/S-Irrecoverable debt exp.

CREDIT Total receivable control a/c

Whether business can claim relief for sales tax on

irrecoverable debts:

DEBIT I/S-Irrecoverable debt exp.

DEBIT Sales tax
CREDIT Total receivable control account
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Doubtful debt: Order of calculation

1 Write up trade receivables account for sales
A doubtful debt is a debt which is possibly
and cash received.
irrecoverable

2 Write off irrecoverable debts.

Should make an
Allowance
3 Record any specific allowances.
[Link]: against a particular customer

[Link]: a general % against trade 4 Calculate the general allowance.

receivables after taking into account:
• irrecoverable debts
• specific allowances
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

• When preparing a balance sheet, the credit balance on the allowance account
is deducted from the trade receivables balance.
• In subsequent years, adjustments may be needed to the amount of the
allowance.

1 Calculate the new allowance required

2 Compare it with the existing balance on the allowance account (i.e. the balance b/f
from the previous accounting period)..

3 Calculate the increase or decrease required.

 Accruals and Irrecoverable debts Provisions
prepayment and allowances

When calculating the allowance to be made, the following Note. Only the movement in the allowance
order applies. needs to be accounted for.
$ $
Receivables balance per receivables ledger control X Allowance required X
Less irrecoverable debts written off (X) Existing allowance (X)
Balance on which allowance is calculated X Increase/ (decrease) required X/(X)

Accounting entries
DR CR
(1) Write off irrecoverable debts Irrecoverable debt expense Receivables ledger control
(2) Write back irrecoverable debts paid in period Irrecoverable debt expense Irrecoverable debt expense
(3) Set up allowance Irrecoverable debt expense Allowance for receivables
(4) Increase allowance Irrecoverable debt expense Allowance for receivables
(5) Reduce allowance Allowance for receivables Irrecoverable debt expense
 Accruals and Irrecoverable debts Provisions
prepayment and allowances

Subsequent recovery of debts

If a debt previously provided for is recovered, then:

DEBIT Receivables ledger control

If an irrecoverable debt is recovered, having
previously been written off, then: CREDIT Irrecoverable debts expense

DEBIT Receivables ledger control DEBIT Cash

CREDIT Irrecoverable debts expense CREDIT Sundry income

Or, if written off in a previous accounting period, If a debt that was provided for in the prior year turns

DEBIT Cash irrecoverable, then:

CREDIT Sundry income DEBIT Receivables ledger control

CREDIT Irrecoverable debts expense

 Accruals and Irrecoverable debts Provisions
prepayment and allowances

All 3 criteria required:

Provision
A liability of uncertain timing or amount 1 Present obligation as a result of a past event.

2 Probable outflow of economic benefits.

Features of provisions
3 Reliable estimate can be made

 Less certainty than with an accrual

 Obligation to transfer economic benefits as a result of past transactions or events

 Examples include amounts likely to be paid as a result of a legal dispute or estimates of amounts be paid in

relation to warranties offered on goods sold during the year.

 Amount included is the „best‟ estimate

 Accruals and Irrecoverable debts Provisions
prepayment and allowances

1 Define an acrual?

2 What happens to the double entry made for accruals and prepayments in the following period?

3 What is a trade receivable?

4 What is the double entry for an irrecoverable debt subsequently received after the period end?

5 Why might a business have both cash as a current asset and an overdraft as a current liability?

6 What will be included in non-trade payable?

 4.2. Recording another transactions

You’ve met the concept of accruals before – this chapter

Topic List tells you how to deal with them in practice.
You also cover the treatment of irrecoverable debts and
Discount and rebates
allowances for receivables.
Sales tax

BPP Refer
Chapter 4: 6
Chapter 3: 8
 Discounts and Sales tax
rebate

ACCOUNTING FOR TRADE DISCOUNTS

• A trade discount is a reduction in the amount of money demanded from a

customer
• If a trade discount is received by a business for goods purchased from a
supplier, the amount of money demanded from the business by the supplier will
be net of discount (i.e. it will be the normal sales value less the discount).
• In other words, the trade discount does not appear in the accounting records.
• Similarly, if a trade discount is allowed by the business for goods sold to a
customer, the amount of money demanded by the business will be after
deduction of the discount.
 Discounts and Sales tax
rebate

ACCOUNTING FOR CASH DISCOUNT

1. A cash discount is an optional reduction in the amount of money payable by

a customer

• Cash discount received: is a matter of financing policy, not of trading

policy. This is because the discount is optional.

• Cash discount allowed: The same principle with above. It is allowing 162
cash discounts to customers
 Discounts and Sales tax
rebate

Accounting for sales tax

Sales tax is a tax on the sale of goods and services. Gross price = Net price + Sales tax

Output tax Input tax

Tax on goods or services sold. Tax on goods or services purchased.
DEBIT Cash (or receivables) $1,175 DEBIT Purchases $800
CREDIT Sales $1,000 CREDIT Sales tax account $140
CREDIT Sales tax account $175 CREDIT Trade payables $940

Each quarter the balance on the sales tax account (output tax less input tax) is calculated to
establish the amount owed to (or by) the tax authority.

Sales tax is calculated on the discounted price, even if the discount is not taken.
Receivables and payables shown in the statement of financial position include sales tax.
Sales and purchases shown in the statement of profit or loss exclude sales tax.
 Discounts and Sales tax
rebate

a Credit sales b Credit purchases

i. Include sales tax in sales day book; show i. Include sales tax in purchases day book; show
it separately it separately
ii. Include gross receipts from customers in ii. Include gross payments in cheques issued day
cash received day book; no need to show book; no need to show sales tax separately
sales tax separately iii. Exclude recoverable sales tax from statement
iii. Exclude sales tax element from of profit or loss
statement of profit or loss iv. Include irrecoverable sales tax in statement of
iv. Credit sales tax payable with output tax profit or loss
element of sales invoices v. Debit sales tax payable with recoverable input
tax element of payable credit purchases
 Discounts and Sales tax
rebate

c Cash sales d Cash purchases

i. Include gross receipts in cash received i. Include gross payments in cheques issued
day book; show sales tax separately day book: show sales tax separately
ii. Exclude sales tax element from ii. Exclude recoverable sales tax from
statement of profit or loss statement of profit or loss
iii. Credit sales tax payable with output tax iii. Include irrecoverable sales tax in statement
element of cash sales of profit or loss
iv. Debit sales tax payable with recoverable
input tax element of cash purchases
 Discounts and Sales tax
rebate

SALE TAX PAYABLE

$ $

Input tax 8,000 Output tax (credit sales) 15,000

Amount due to tax Output tax

authority (cash paid) 9,000 (cash sales) 2,000

17,000 17,000
Chapter 5: Control accounts and the
correction of errors
 5.1. Control accounts and the operation of
control accounts

Topic List
Control accounts wear introduced earlier and are
The control accounts and its covered in more detail here.
purpose Bank reconciliations are also covered in this chapter.
The operation of control account
BPP refer:
Chapter 6: 1,2,3
 Control accounts Entries in control Reconciling
account

Control accounts
The main control accounts are:
A control account is the grand total of similar items  Receivables ledger control account
(usually receivables or payables) recorded in the main (receivables)
ledger.  Payables ledger control account (payables)

The control account value should agree with the

total of the individual balances.

Other control account can be used for:

 Inventories  Wages and salaries  Sales tax

 Control accounts Entries in control Reconciling
account

1 Theory 2 Referrence to be used

Balance per RLCA i. SDB refer to a page in the sales day

= book;
Balance per list of balances ii. RL refer to a particular account in the
in receivables ledger
receivables ledger;
iii. GL refer to a particular account in the
general ledger;
Balance per PLCA
= iv. CRDB refer to a page in the cash
Balance per list of balances received day book.
in payables ledger v. CIDB refer to a page in the cheque
issued day book
 Control accounts Entries in control Reconciling
account

1 Receivable ledger control account Ref $ Ref $

• The personal accounts in the receivables Opening balance b/d 7,000 Opening b/d 200
ledger are debited on the day the invoices Sales SB 52,390 Cash received CB 52,250
are sent out. D
• The double entry in the ledger accounts
might be made at the end of each day, Dishonoured JNL 1,000 Discount CB 1,250
week or month, by posting from the sales checked allowed
day book
Cash paid to clear CB 110 Return inwards SR 800
credit balance DB

Closing balance c/d 120 Bad debts JNL 300

Closing balance c/d 5,820

60,620 60,620

Balance b/d 5,820 Balance b/d 120

 Control accounts Entries in control Reconciling
account

Ref $ Ref $
2 Payable ledger control account
Opening b/d 70 Opening b/d 8,300
• The personal accounts in the payable balance
ledger are debited on the day the invoices Cash paid CB 29,840 Purchase and PDB 31,000
are sent out. other expenses
• The double entry in the ledger accounts
might be made at the end of each day, Discounted CB 30 Cash received CB 20
week or month, by posting from the sales received clearing debit
day book balance

Return PRD 60 Closing balance c/d 80

outwards B

Closing c/d 9,400

balance

39,400 39,400

Balance b/d 80 Balance b/d 9,400

 Control accounts Entries in control Reconciling
account

3 Contra entries

• X owes supplier Y $1,000 and also sells

goods to Y with the sales invoice of $750
• They decided to set one amount off
against the other

$ $
Debit Payables ledger control 750
Credit Receivables ledger control 750
 Control accounts Entries in control Reconciling
account

1 Provide a check on the accuracy of entries made in the personal

accounts in the sales ledger and purchase ledger, by comparing
• the total balance on the receivables control account with
the total of individual balances in the sales ledger; and
• the total balance on the payables control account with the
total of individual balances in the purchase ledger;
Purpose
of control A comparison with the individual balances in the sales or purchase
account 2 ledger can be made for every week or day of the month

The error found much more quickly than if control accounts did not
3
exist.
 Control accounts Entries in control Reconciling
account

Where there is a separation bookkeeping duties, the control

1
account provides an internal check.

The person posting entries to the control accounts will act as a

2 check on a different person whose job it is to post entries to the
sales and purchase ledger accounts.
Purpose
of control
account With total receivables and payables balances, it is more quickly for
3 producing a trial balance or balance sheet.

The number of accounts in the double entry bookkeeping system

4
can be kept down to a manageable size.
 Control accounts Entries in control Reconciling
account

The control accounts should be balanced regularly (at least monthly)

The balance on the control account agreed with the schedule of the individual debtors'
or creditors' balances extracted from the sales or bought ledgers respectively.
An incorrect amount may be posted to the control account because of a miscast of the
total in the book of original entry

1. Reason: Adding up incorrectly the total value of invoices or payments

2. Consequence: The nominal ledger debit and credit postings will then balance, but
the control account balance will not agree with the sum of individual balances
extracted from the (memorandum) sales ledger or purchase ledger.
3. Correction: A journal entry must then be made in the nominal ledger to correct the
control account and the corresponding sales or expense account.
 Control accounts Entries in control Reconciling
account

A transposition error may occur in posting an individual's balance from the book of
prime entry to the memorandum ledger,

1. Reason: The sale to C Cloning of $250 might be posted to his account as $520.
2. Consequence: This means that the sum of balances extracted from the
memorandum ledger must be corrected.
3. Correction: No accounting entry would be required to do this, except to alter the
figure in C Cloning's account
 Control accounts Entries in control Reconciling
account

A transaction may be recorded in the control account and not in the memorandum
ledger, or vice versa.

1. Correction: This requires an entry in the ledger that has been missed out i.e. a
double posting if the control account has to be corrected or and a single posting if it
is the individual's balance in the memorandum ledger has to be corrected.

The list of balances extracted from the memorandum ledger may be incorrectly
extracted or miscast.

1. Correction: To fix this would involve simply correcting the total of the balances
 5.2. The correction of errors

Topic List
Control accounts wear introduced earlier and are
Types of error in accounting covered in more detail here.
Bank reconciliations are also covered in this chapter.
The correction of errors
BPP refer:
Chapter 6: 4,5,6
 Types of error Correction of
errors

Types of error
Omission
• Complete omission: Falling to record a transaction at all
• Partial omission: making a debit or credit entry, but not the  Errors of transposition Eg writing $381
corresponding double entry. instead of $318

Comission  Errors of omission eg failing to record an

invoice
• Putting a debit or credit entry in the wrong account.
• Errors of casting (adding up): incorrectly added up as  Errors of principle eg treating capital expense
$28,825 instead of $28,425 as revenue
 Errors of commission eg recording telephone
Compensating errors
expenses as electricity costs
• Error of reversal: debit and credit entries have been  Compensating errors eg telephone costs
reversed
• Error of transposition: numbers in the amount are understated by $342 and electricity cost
transposed and posted on both sides. overstated by $342
 Types of error Correction of
errors

Other errors

 Errors of original entry: the transaction was incorrectly recorded in

a day book, leading to incorrect ledger postings
 Errors of reversal: the debit and credit postings are reversed.
 Casting errors: amounts have been incorrectly totalled in a day
book or within a ledger account.
 Types of error Correction of
errors

Once an error has been detected, it needs to be put right:

ERRORS SOLUTIONS

1 If error needs a double entry to correct it. 1 Use a journal entry in the ledger account.

2 If error break the rule of double entry 2 Use the suspense account which is then

cleared using journal entries.

 Types of error Correction of
errors

Journal
The journal records transactions not covered by other
books of original entry.

The format of a journal entry is:

Date Reference $ $
DEBIT
CREDIT
Narrative to explain the transaction

Journals can be used to correct errors. The error must have

a debit equal in value to the credit.

It can only be used to correct errors which require both a

credit and an equal debit adjustment.
 Types of error Correction of
errors

Suspense accounts

Suspense accounts are opened when there is a difference between the DR totals and the CR totals in the
trial balance.
 The suspense account will show a balance equal to the difference
 Journal entries are made to „clear‟ the suspense account (the suspense account is temporary)

Exam questions may ask you to identify the original balance on a suspense account that has been cleared. In
these sorts of questions you are given some adjustments that have been corrected and need to identify
which would have caused a difference on the trial balance.
 Types of error Correction of
errors

Suspense account Suspense account

 If more than one error or unidentifiable posting to a  Under no circumstances should there still be a
ledger account arises, they will all be merged together suspense account when it conies to preparing the
in the same suspense account. balance sheet of a business.
 Until the causes of the errors are discovered, the  The suspense account must be cleared
bookkeepers are unlikely to know exactly how many  All the correcting entries made before the final
errors there are. accounts are drawn up.
 A suspense account can only be temporary.  Regular analysis of contents of the suspense account
 Postings to a suspense account are only made when  Ageing of items in the account with some targets set
the bookkeeper does not know yet what to do, or when e.g. items should be cleared out within 3 months,
an error has occurred. though sometimes this might not be possible
 Mysteries must be solved, and errors must be  Review of analysis by an independent person
corrected.
 Types of error Correction of
errors

1. There are exceptional circumstances when a view has to be taken and

accounts will have to be prepared with a balance on a suspense account.
2. It is important that authorisation is obtained at an appropriately senior
level so that management is aware of the existence and potential impact
of the remaining balance.
3. Where the errors are not found before the final accounts are prepared
and authorisation has been obtained not to investigate the balance
further, the suspense account balance will be included in the balance
sheet.
1. A debit balance should be shown on the assets side of the balance
sheet.
2. A credit balance it should be included on the liabilities side of the
balance sheet.
Types of error Correction of
errors
 5.3. Reconciliations

Topic List
Control accounts wear introduced earlier and are
Bank reconciliations covered in more detail here.
Bank reconciliations are also covered in this chapter.
Other controls over business
operations BPP refer:
Chapter 6: 7,8
 Bank Control over the
reconciliations business

Bank reconciliation
A comparison of a bank statement with the bank account in the general ledger. Differences are identified and
explained.

On bank statement not the ledger a/c On ledger a/c not on bank statement

 Standing orders not entered on ledger account  Unpresented cheques

 Dividends paid direct to the bank not entered  Outstanding ldgements
 Bank interest and charges not entered
 Direct debits not entered
 Bank Control over the
reconciliations business

Reasons:
 A bank statement is sent by a bank to its short-
term customers and suppliers item mising
 the opening balance on the account 1 Timing differences.
 receipts into the account and payments from
the account during the period 2 Errors by the business.
 the balance at the end of the period.
3 Errors by the bank.
 To identify and account for the differences
between the cash book and the bank statement.
 By reconciling the figures in the cash book with
those in the bank statement we can ensure that
both the books and the bank account are
accurate.
 Bank Control over the
reconciliations business
 Bank Control over the
reconciliations business

At 30 September 20X6, the balance in the cash book of Wordsworth Co was

$805.15 debit. A bank statement on 30 September 20X6 showed Wordsworth Co to
be in credit by $1,112.30.

On investigation of the difference between the two sums, it was established that:

(a) The cash book had been undercast by $90.00 on the debit side.
(b) Cheques paid in not yet credited by the bank amounted to $208.20.
(c) Cheques drawn not yet presented to the bank amounted to $425.35.

Required

Show the correction to the cash book.

Prepare a statement reconciling the balance per bank statement to the balance per
cash book.
 Bank Control over the
reconciliations business

1 Petty cash count/reconciliation 2 Reconciliation of payables ledger accounts

• Petty cash should be reconciled to supplier statements
regularly and any discrepancies • Reconciliation of any part of a business's
cleared or authorised for write off. records to a third party's records is a useful
• Take place when the imprest is check on the accuracy of the accounting
topped up. system.

• An organisation should also do • This is a way of checking that your own

independent spot checks on petty records are correct and those of the
cash which are unannounced. supplier.
 Bank Control over the
reconciliations business

3 Clearance of wages and other control 4 Sales tax reconciliation

accounts  The need for regular checks on the
• All other types of control accounts VAT or sales tax accounts is all the
should be checked regularly and cleared greater because the tax authorities
of all items which are not valid. may impose severe penalties for
• There should be no 'unknowns' left in a errors made.
control account balance.
 Bank Control over the
reconciliations business

5 Reconciliation of non-current assets to 6 Internal audit

the register
• Organisations of any size will often
• Fixed assets should be checked by have an internal audit department.
sight, not only to check that they • Internal auditors will check controls and
actually exist, but to make sure that procedures.
they have not been stolen or
damaged. • They will also carry out other any other
work required to ensure the accounting
• Checks should also be made from the
system is operating properly and
register to the physical assets to
accurately.
ensure that 'ghost' assets are not kept
on the register.
 Bank Control over the
reconciliations business

1 What is control account?

2 What are the main reasons for having control account?

3 What are the two common errors of commision?

4 What is a suspense account?

5 What kind of checks should be made on petty cash?

6 What is a bank reconciliation?

Chapter 6: The extended trial balance
 6.1. The accounts of sole traders

At the end of year the ledger accounts are closed off

Topic List and balances are collected to form a statement of profit
or loss and a statement of financial position.
Preparing accounts
BPP refer:
The opening trial balance Chapter 10
 Preparing The opening trial
accounts balance

Types of business Definition of sole traders

 A sole proprietorship also known as a sole

1 Sole traders: who does business trader, or simply proprietorship is a type of
business entity which is owned and run by one
for his/her self individual and where there is no legal distinction
between the owner and the business.
 All profits and all losses accrue to the owner
2 Partnerships: two or more people
 All assets of the business are owned by the
decide to run a business together proprietor
 All debts of the business are their debts and they
must pay them from their personal resources.
This means that the owner has unlimited liability.
3 Limited liabilities company:  It is a "sole" proprietorship in the sense that the
responsible for the amount to be owner has no partners (partnership)

paid for their shares (private &

public Co.)
 Preparing The opening trial
accounts balance

Advantages Disadvantages

 They are easy to start up  It is NOT easy to raise capital since it has to

 The owner has full autonomy with regard to make up for all the business's funds

business decisions  When a business becomes successful, the

 They usually have a quick decision process risks accompanying the business tend to

 They are subject to fewer regulations relative grow this type of business becomes too

to other types of businesses simple to handle the risks

 Unlimited liability to the debts of the company
 Preparing The opening trial
accounts balance

Methods for preparing sole trader final accounts

 Using an extended trial balance (covered in Chapter 11)
 Directly from ledger accounts

Preparing accounts directly from ledger accounts

1 Close off the ledger accounts

2 Gather up income and expense balances in an income and expense ledger account

3 Re-arrange the entries in the form of a statement of profit or loss

4 List all remaining ledger account balances (including the income and expense account)

5 Re-arrange these remaining balances to form the statement of financial position

 Preparing The opening trial
accounts balance

At the end of the accounting period:

 All ledger accounts forming part of statement of profit or loss have nil balances (the income and expense
account is transferred to the SOFP)a
 The statement of financial position accounts have cumulative balances (eg receivables, payables, cash in
the bank)

Opening trial balance for the next period:

Shows only SOFP accounts
DR CR
Eg Plant and equipment X
Trade receivables X
Cash at bank X
Inventory X
Payables X
Capital X
 Preparing The opening trial
accounts balance

 Simple, cash basis can be used

 Self employed businesses are not required to maintain a
statement of financial position but maintain their basic accounting
using lists of the financial transactions
 If a statement of financial position is not produced, the sole trader
must keep a record of all capital expenditure items
 More detailed financial records are required to be kept by the
sole trader if they are VAT registered.
 6.2. Extended trial balance

This chapter looks at the extended trial balance – how it

Topic List is prepared and also how it is used to prepare financial
statements.
Purpose of ETB
BPP refer:
Preparing the ETB Chapter 11
Preparing accounts from an ETB
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

Extended trial balance (ETB):

A worksheet used to record adjustments between
the trial balance and the final accounts

The ETB headings will look something like this.

Ledger account Trial balance Adjustments Statement of Statement of

figure profit or loss financial position
Dr Cr Dr Cr Dr Cr Dr Cr
$ $ $ $ $ $ $ $
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

An extended trial balance essentially records the adjustments which are required to the trial balance in
order to produce the final accounts.

Extended trial balance

Keeps track of adjustments for
Trial balance
 Correction of errors Final accounts
List of all
 Accruals and prepayments Statement of profit or
balances in the
 Allowance for depreciation, loss
ledger accounts
irrecoverable debts Statement of financial
 Closing inventory position

The ETB is essentially a worksheet, representing all the ledger account balances and what happens to them.
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

Steps involved in preparing the ETB

1 Draw up the trial balance. Enter it on the ETB and add it up

2 If debits don‟t equal credits, check the entries are correct, then insert a suspense account.

3 Correct errors and clear the suspense account.

4 Make the adjustments required:

 Accruals and prepayments
 Adjustments to inventory figures
 Other adjustments (eg depn and bad debts)

5 Add the adjustments columns. Check the entries are correct and debits equal credits.

6 Add the figures across each line of the ETB and record total in statement of profit or loss or statement of
financial position as appropriate.
7 Add the statement of profit or loss debits and credits.
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

8 Take the profit or loss for the period to the statement of financial position columns.
 Profit = DEBIT STATEMENT OF PROFIT OR LOSS = CREDIT STATEMENT OF FINANCIAL POSITION
 Loss = CREDIT STATEMENT OF PROFIT OR LOSS = DEBIT STATEMENT OF FINANCIALL POSITION

9 Add up the debits and credits in the statements of financial position and ensure they are equal. Investigate
and resolve any differences.

Your exam consists if 59 two mark questions so you will only be tested on one or two elements of the above
process in any one question. However understanding each aspect is easier when you are familiar with the
whole process form start to finish.
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

Format of an ETB
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

Accounts from the ETB Examples of workings

Ideally it should be a straightforward matter to use the  Sales and sales returns to be netted off
figures in the extended trial balance to draw up the  Cost of sales working: (opening inventory plus
statement of financial position c and statement of profit of purchases less closing inventory)
loss. However, bear in mind the following points.  Distribution and admin costs, aggregating
 You could be asked to identify which column certain figures in the ETB
balances will be entered into when completing the ETB  NBV of all non-current assets for final accounts.
 You could be given ETB totals for the statement of Note – total depreciation charge to statement of
profit of loss and SOFP columns and asked to profit or loss
calculate the profit/ loss for the year  Receivables – need to add in prepayments
 Payables – need to add in accruals

If the statement of profit or loss CR column total is greater than the DR column total the result is a profit. If
the DR column total is greater than the CR total the result is a loss.
You may be asked to identify which post ETB adjustments are needed based on information given to you.
These will be set out in form of journal entries. Here are some examples.

Accrued Accountancy fees Bank charges

The accountant estimates that a further $330 needs The bank sends a. letter stating that interest of $170
to be accrued for finalizing the accounts. and charges of $138 were accrued at the year end.
DEBIT Accountancy $330 DEBIT Bank interest $170
Bank charges $138
CREDIT Accruals $330
CREDIT Accruals $380

Drawings, not wages Write off of an irrecoverable debt

The owner realizes that $500 in the wages account A customer has gone bankrupt owing $5,000
was actually drawn by her, not paid to a staff DEBIT Irrecoverable debt $5,000
member expense
DEBIT Drawings $500 CREDIT Receivables $5,000
CREDIT Wages $500 ledger control
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

Journal entries are normally done before producing the final accounts.
These adjustment, as well as the information on the ETB, will taken into account in preparing the final
accounts. For instance:
 The payables figure may now include accountancy and bank interest accruals
 The receivables may be less and the statement of profit or loss receivables expense will need to be
increased

Accounts from other sources

Sole trader accounts are some times drafted from sources other than the ETB as we Chapter XX

 Accounts may be drawn up directly from ledger accounts, with adjustments made on the face of the
primary statements the statement of profit or loss and the SOFP
 Accounts may be drawn up from a TB extracted from ledger accounts figures adjusted but without using
an ETB
 Purpose of ETB Preparing the ETB Preparing accounts
from an ETB

1 Why is an ETB necessary?

2 What is the double entry to record closing inventory on the ETB?

3 The accruals and prepayments columns should always add up to the same amount. True or False?

4 If the debit column total of the SOPL in the ETB is greater than the credit column, has the business made a
profit or a loss?

5 In what ways can a computer help in the preparation of the ETB?

Chapter 7: Incomplete records and other
accounts
 7.1. Incomplete records

This area is a very good test of your accounts

Topic List preparation knowledge.
You need to know how the accounts fit together in order
to fill in the blanks.
Opening statement of financial
position
BPP refer
Credit sales, purchases and cost Chapter 12
of sales
Stolen or destroyed goods
Cash day books
Accruals, prepayments and
drawings
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Incomplete records Tips to solve the problems

Pay attention on the relationship between:

 A trader does not maintain a ledger, => NO continuous double  Cash received and paid
 Sales & account receivables
entry record of transactions
 Purchase & account payables &
Inventory
 Accounting records are destroyed by accident, such as fire
 FS preparation basis (i.e. accounting
equation, accounting assumption…)
 Some essential figure is unknown and must be calculated as a
balancing figures (eg. Damaged inventory, misappropriation of
assets…)
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Types of question
Opening statement
An incomplete records question may arise out of the following of financial position
scenarios. Often a question provides information
 Theft of cash (balance on the cash in hand account is unknown) about the assets and liabilities of a
 Theft or destruction of inventory (closing inventory is the business at the beginning of a period,
unknown) leaving you to calculate capital as the
balancing figure.
 Estimated figures, eg „drawings are between $15 and $20 per
Remember
week‟
Assets – liabilities = Proprietor‟s capital
 Calculation of capital by means of net assets
 Calculation of profit by P= increase in net assets plus drawings
minus increase in capital
 Calculation of year end inventory when the count was done after
year end
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Credit sales and receivables Purchases and trade payables

 The key lies in the formula linking sales, cash  Similarly you need a formula for linking purchases,
receipts and receivables. cash payments and payables.
 Remember Opening payables + purchases – cash payments =
Opening receivables + sales – cash receipts = closing closing payables
receivables  Use a control account.
 Alternatively put all the workings into a control
account to calculate the figure you want

RECEIVABLES LEDGER CONTROL ACCOUNT PAYABLES LEDGER CONTROL ACCOUNT

$ $ $ $
Opening receivables X Cash receipts X Cash payments X Opening payables X
Sales X Closing receivables X Closing payables X Purchases X
X X X X
 Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Gross margins and mark ups

Other incomplete records problems revolve around Gross profit may be expressed either as a percentage
the relationship between sales, cost of sales and of cost of sales or as a percentage of sales.
gross profit. Bear in mind the crucial formula.  In the example, gross profit is 25% of cost of sales
(ie 25/100). The terminology is a 25% mark up.
 Gross profit can also be expressed as 20% of sales
(ie 25/125). The terminology is a 20% gross margin
or gross profit percentage. The proforma would
appear as follows
% %

Cost of sales 100 Cost of sales 80

Plus Gross profit 25 Plus Gross profit 20

Equals Sales 125 Equals Sales 100

Net book value = Non – current asset cost less accumulated depreciation
 Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Stolen goods or goods destroyed

The cost of goods stolen/ destroyed can be calculated as follows.
$
Cost of goods sold based on gross profit margin or mark up A
Cost of goods sold calculated using standard formula (B)
(ie opening inventory plus purchases less closing inventory)
Difference (lost/ stolen inventory) C

 If no goods have been lost, A and B should be the same and therefore C should be nil
 If goods have been lost, B will be larger than A, because some goods which have been purchased were
neither sold nor remaining in inventory, ie they have been lost
 Stolen or lost inventory is accounted for in two ways depending on whether the goods were insured
If insured If not insured
DEBIT Insurance claim (receivable) DEBIT Expenses (inventory losses)
CREDIT Purchases CREDIT Purchases
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Cash day books

Incomplete records problems often concern Cash book
small retail businesses where sales are mainly $ $
for cash. Two-column cash day books are often Balance b/d X Cash Purchase X
used to prepare final accounts. Cash sales X Payments for other X
 The bank column records cheques drawn on Expenses
the business bank account and cheques Cash received from X Advances X
received from customers and other sources. other means
 The cash column records till receipts and any Drawings X
expenses or drawings paid out of till receipts Balance c/d X
before banking. X X
Debits (receipts) Credits (payments)
Cash Bank Cash Bank
$ $ $ $
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Movements between cash and bank need to be recorded by contra entries.

This will usually be cash receipts lodged in the bank (debit bank column, credit cash column), but
could also be withdrawals of cash from the bank to top up the till (debit cash column, credit bank
column).
Again, incomplete records problems will often feature an unknown figure to be derived. Enter in the
credit of the cash column amounts known to have been paid from till receipts: expenses, drawings,
lodgements into bank.
Enter in the debit of the cash column all receipts from cash customers or other cash sources.
 The balancing figure may then be a large debit, ,representing the value of cash sales if that is the
unknown figure.
 Alternatively it may be a credit entry that is needed to balance, representing the amount of cash
drawings or of cash stolen.
Opening statement of Credit sales, purchases Stolen or Cash day Accruals, prepayments
financial position and cost of sales destroyed goods books and drawings

Accruals and prepayments Drawings

When there is an accrued expense or prepayment, Note two tricky points about drawings
the charge to statement of profit or loss can be  Owner pays personal income into business bank
calculated from the opening balance, the cash account
movement and the closing balance. DEBIT Cash
CREDIT Drawings
Sometimes it helps to use a “T” account, eg as
 Owner pays personal expenses out of business
follows (for a rent payment). bank account
RENT DEBIT Cash
$ $ CREDIT Drawings
Prepayment: bal b/f 700 Statement of profit or 9,000  Be careful with Exam Wording:
loss (bal fig)
 “Approximate $40 per week”  Drawings for
Cash 9,300 Prepayment: bal c/f 1,000 the year = $40 x 52 = $2,080
10,000 10,000
 “between $35 & $45 per week”  treated
Drawings as missing item to be calculated
 7.2. Partnerships

Partnership accounts have a lot in common with sole

Topic List trader accounts. However, there are differences in the
way profit is appropriated and the way capital is
presented in the statement of financial position.
Characteristics
Partnership accounts BPP refer
Chapter 13
Admission of a new partner
 Characteristics Partnership Admission of a
accounts new partner

A partnership is an arrangement between two or more individuals in which they undertake to share the risks
and rewards of a joint business operation.

Partnership agreement What are control accounts?

There is usually a partnership agreement setting out These are the UK rules – they will vary between
the financial arrangements, eg: countries
 Residual profits are shared equally between the
 The amount of capital to be provided by each
partners
partner
 These are no partners‟ salaries
 The division of profits between partners. Profits
 Partners receive no interest on the capital they
might be earned in the form of salaries, interest invest in the business
on capital and residual profit share. The  Partners are entitled to interest of 5% per annum
agreement will usually specify a ratio (the profit on any loans they advance to the business in
sharing ratio) in which residual profits are to be excess of their agreed capital

shared by the partners

 Characteristics Partnership Admission of a
accounts new partner

Advantages and disadvantages

Partnership v sole trader Partnership v limited liability company

Advantages Advantages
 Spread risk  No need to comply with statutory requirements
 Network of contacts such as audit
 Partners bring in business, skills and experience  No need to comply with accounting standards
 Easier to raise finance  No formation or registration fees
Disadvantages Disadvantages

 Profits spread  No limited liability

 Dilution of control
 Disputes between partners
 Characteristics Partnership Admission of a
accounts new partner

Capital and current accounts

It is usual to maintain both a capital account and a current account for each partner.
A partner‟s capital account shows any cash or other assets brought by him into the business. He will usually make
an initial capital contribution when he joins the partnership, but there may also be further injections ( or withdrawals)
of capital later on.
While the balance on a partner‟s capital account is likely to remain stable for long periods, his current account
balance will fluctuate more rapidly.

PROFORMA CURRENT ACCOUNT

X Y Z X Y Z
$ $ $ $ $ $
Drawings X X X Balance b/f X X X
Interest on drawings X X X Salary X X X
Interest on capital X X X
Balance c/f X X X Profit share X X X
X X X
 Appropriation accounts

1 After calculating the net profit earned by the 4 The sum available for appropriation must now
business an appropriation account must be be share amongst the partners and credited to
prepared to determine the allocation of profit their current accounts.
between the partners
Some partners may be entitled to a salary. This is
5
To discourage excessive drawings partners often credited to the partner concerned and taken out
2 of the “pool” available for appropriation.
agree to charge themselves interest on any sums
withdrawn from the business. Partners may be entitled to interest on their
6
capital account balances. Each partner is
Such interest is charged to the partner concerned
3 credited with the appropriate amount and again
(ie debited to his current account) and credited to
the „poll‟ is reduced.
the appropriation account, in creasing the profit
available for sharing between the partners. 7 Finally, the residual „pool‟ of profits is shared
amongst the partners in their profit sharing
ratio.
 Characteristics Partnership Admission of a
accounts new partner

PROFORMA APPROPRIATION ACCOUNT

$ $
Net profit X
Add interest on drawings
A X
B X
C X
X
X
Less: Salary: A X
Interest on capital: A X
B X
C X
(X)
Profit X
 Characteristics Partnership Admission of a
accounts new partner

$ $
Appropriation: A X
B X
C X
X

When a partner make a loan to the partnership he is a payable of the partnership. The loan is shown
separately form the partner‟s capital as a long – term liability.
Remember
Interest on a partner‟s loan is an expense charged to the statement of profit or loss not an appropriation.
However, the interest is added to the partner‟s current account.
In an exam question, you will be told the rate.
 Characteristics Partnership Admission of a
accounts new partner

A new partner introduces funds to:

 Share in the ownership of assets
 Share in future profits ( the partner purchases goodwill)

Goodwill Recording admissions

The value of the partnership not represented by Calculate goodwill and credit to existing partners
1
tangible assets (such as reputation). in old profit sharing ratio in the capital accounts

Record cash introduced by the new partner in

2
the partner‟s capital accounts
On admission a new partner, goodwill can be
If goodwill is not maintained further entries are
maintained or removed.
made to credit goodwill account and debit the
3
capital accounts with the value of goodwill
reallocated in the new profit sharing ratio.
 Characteristics Partnership Admission of a
accounts new partner

- When goodwill arises (right before admission of new partner)

Dr Goodwill
Cr Partner‟s capital accounts (Old partners)

- Alternative Goodwill treatments

• Option 1: Maintain Goodwill in partnership accounts  NO RECORD

• Option 2: Share Goodwill to new partners

Dr Partner‟s capital accounts
Cr Goodwill account
THANK YOU