TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE

Centre for Pre-University Studies

FPAC1014 Business Accounting

Lecture Workbook

* The contents are not for sale and strictly meant for internal circulation

1
Introduction
The study of accounting provides an excellent introduction to understanding so many aspects of the
way in which businesses and other organisations operate. For many it will give an opportunity to
take the first steps necessary towards a career in some aspect of finance, accountancy, management
or some related field.

The purpose of this note

The intention is that this book will:

 Help you to make good progress with your learning so that you enjoy your course of study
and gain real satisfaction from the work you do.

 Provide you with the background knowledge you need to help you achieve your best at
foundation level.

 Develop your knowledge and understanding of accounting techniques and concepts.

 Help you to develop your skills in recording, analyzing and evaluating financial information.

2
Topic 1 Introduction to Accounting

1. Types of business organisations

Businesses are organisations which provide goods and services in order to make a profit.

1. Sole traders: where one individual owns the business. The individual controls the business. If
successful, the profits made by the business belong to this individual; if unsuccessful, the individual
can lose whatever has been invested and private resources too.

2. Partnerships: where several individuals own the business. Partners jointly control the business
sharing profits between them. They are also jointly responsible for the debts of the business, and can
lose their private resources if the partnership is unsuccessful.

3. Limited liability companies: these are owned by shareholders who each contribute to the funds
needed to establish and run the company. Most shareholders do not take part in the day-to-day
management and control of the company, but elect directors to undertake these responsibilities on
their behalf. Shareholders are rewarded by receiving some of the profits made by the company if
successful. Shareholders’ responsibility for the debts of the company is limited to the amount they
invest.

2. Common accounting terminologies

2.1 Revenue

(a) Revenue is income that a company receives for its products or services provided.

(b) Examples of revenue:

2.2 Expenses

(a) Business expenses are the costs of carrying on a trade or business to earn revenue.

(b) Expenses are the opposite of revenues.

(c) Examples of expenses:

2.3 Assets

(a) An asset is a resource that a company owns with the expectation that it will provide future
benefits.

(b) Examples of assets:

3
 2.4 Liabilities

(a) Liabilities are a company’s obligations and are the opposite (contra) to assets.

(b) Examples of liabilities:

2.5 Owner’s equity

(a) For sole traders, owner's equity is described by the equation below:

3. Accounting Equation

1. Introduction

Every business transaction will have an effect on a company’s financial position as measured by the
company’s assets, liabilities and owner’s equity. The relationship between assets, liabilities and
owner's equity is shown by the Accounting Equation which states that:

Assets = Liabilities + Equity

2. Assets

(a) Assets are resources with economic value that an individual, corporation or country owns or
controls with the expectation that it will provide future benefit.

(b) Assets are classified according to how long the assets are likely to be used in the company and
how liquid the assets are.

2.1 Current Assets

(a) Assets which will be consumed within one year and could easily be converted to cash without
suffering substantial drop in value.

(b) Examples are:

4
 2.2 Non-current Assets

(a) Non-current assets are those assets owned by a company that contributes to the company's
income and are not held for resale purposes.

(b) Non-current assets are durable in nature and are expected to keep providing benefit for more
than one year.

(c) Examples are:

3. Liabilities

(a) A liability is as an obligation of an entity, the settlement of which may result in the transfer or
use of assets such as cash.

(b) Liabilities are classified according to the time allowed by the creditor to settle the debt.

3.1 Current liabilities

(a) Current liabilities represent the amount owed to creditors due for payment within 12 months.

(b) Examples are:

3.2 Non-current liabilities

(a) Non-current liabilities are debt obligations of the company that is not due for repayment
within the next 12 months.

(b) Examples are:

4. Owners’ equity

Businesses need to be financed and a portion of the financing fund comes from those owning the
business. This funding that is supplied to the company by the owners is called "equity".

5. The Accounting equation

5
 (a) The accounting equation represents the relationship between the assets, liabilities, and owner's
equity. For each transaction, the total debits equal the total credits. It can be expressed as:

Assets = Liabilities + Owner’s Equity

(b) The accounting equation displays that all assets are either financed by borrowings or by the
owner.

Example:

David Ham has the following items in his business as at 30 April 2018:

RM
Capital 20 900
Trade payables 1 600
Fixtures 3 500
Motor vehicles 4 200
Inventory 4 950
Trade receivables 3 280
Cash at bank 6 450
Cash in hand 120

During the first week of May 2018, the following transactions took place:

(a) He bought extra goods for resale RM770 on credit.

(b) One of the trade receivables paid him RM280 in cash.
(c) He bought extra fixtures by cheque RM1 000.
(d) He brought his own personal van with a value of RM3000 for office use
(e) He withdraws RM200 cash for personal use
(f) He paid by the firm’s cheque RM500 for his family house rent
(g) Credit sales of goods costing RM800 for the same amount.
(h) Paid RM600 by cheque to trade payable.

Owner’s
Assets Liabilities
equity
Trade Trade
Fixtures Vehicles Inventory Bank Cash Capital
receivables payables
1 May

(a)

(b)

(c)

6
 (d)

(e)

(f)

(g)

(h)

7 May

• Capital expenditure

• Capital expenditure is money spent that has a long-term benefit to the business (more than one year). In
practice, this usually means money spent on buying or improving non-current assets.
• The benefits derived from capital expenditure continue to be earned over a number of years, so the cost
of the non-current assets should be spread over those years.
• The total cost of the non-current asset is never charged to the income statement for the year in which it
was purchased.
• The cost is spread over the years that it is used in order to reflect in the income statement the cost of
using the asset during that particular financial year.

• Revenue expenditure
• Is money spent that has a short-term benefit to the business (less than one year), for example the day-
to-day running costs of the business.

• Capital receipts
• Arise from the sale of non-current assets or capital being invested in the business from either the
owners or outside lenders.

• Revenue receipts
• Are receipts that arise from normal business activities. Examples include rent received, commission
received, etc

7
Topic 2 Books of Prime / Original Entry

1. Introduction

(a) All transactions are initially recorded in a book of prime entry before they can be entered in the
ledger.

(b) Important transaction details such as date or transaction, relevant customer or supplier details,
types and quantities, terms of transactions and the amount of the transaction are noted.

(c) The various types of books of prime entry are the:

(i)Specialized Journals-

(ii)

(iii)

2. Cash Book
(a) A cash book is a book of prime entry used to record payments and receipts by cash and cheques

(b) A cash book consists of the cash account and the bank account put together in one book.

(c) There are two types of cash book namely the two-column cash book and the three column cash
book.

Debit=receipts Two-column Cash Book Credit=payment

Cash Bank Cash Bank
Date Particulars / Details =>cash =>bank Date Particulars / Details =>cash =>bank
account account account account

Cash Discount (s)- given to encourage prompt / early payment within credit period
1. Discount Allowed – cash discount given to customers to encourage prompt payment within credit period
2. Discount Received -received from suppliers
Three-Column Cash Book

Discount Discount
Date Particulars Cash Bank Date Particulars Cash Bank
Allowed Received

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 2.1 Recording in a two-column cash book

May Transactions RM
Owner started business with cash- capital injection
1 80 000
Debit Cash account (cash into the business)
2 Paid shop rental by cash 3 000
4 Cash purchase 购买 of goods 30 000
5 Cash sales(sales of goods). The cash received was not bank in 35 000
Open bank account with cash
6 50 000
Debit Bank account Credit Cash Account
7 Bought office furniture with cheque 8 000
12 Sold some goods and received a cheque 23 000
17 Owner withdrew cash from bank for personal use (drawings) 6 000
Owner withdrew cash from bank for office use=>put in office
29 4 000
Debit Cash account Credit Bank account
31 Paid cheque for purchase of tables for office use 3 000

Cash Book
Date Particulars Cash Bank Date Particulars Cash Bank
May RM RM May RM RM
1 Capital 80 000 2 Rental 3 000
5 Sales 35 000 4 Purchase 30 000
6 Cash 50 000 6 Bank 50 000
12 Sales 23 000 7 Furniture 家具 8 000
29 Bank 4 000 17 Drawings 6 000
29 Cash 4 000
31 Tables / Furniture 3 000
Balance c/d 36000 52 000
119 000 73 000 119 000 73 000
June
1 Balance b/d 36 000 52 000

2.2 Recording in a three-column cash book

9
 July Transactions RM
1 Owner deposited his savings into the business new bank account 90 000
Withdrew cash from bank for office use
3 3 000
Debit Cash account Credit Bank account ~>contra entry
8 Paid office rent with cheque 10 000
15 Purchased goods on credit from Isabella – not in CB 60 000
16 Sold goods on credit to Wati – not in CB 50 000
17 Settled Isabella debt 60K by cheque and received a 10% cash discount
19 Purchased a fax machine for office use by cheque 2 000
22 Cash purchases(purchased of goods) paid by cheque 15 000
26 Cash sales to Hashimo – cheques were received Dr Bank Cr Sales 16 000
Wati paid by cheque 47.5K in full settlement of its account 50K. Discount
29 47.5K
allowed 5%5% X 50K
Cash received from cash sales =>sales of goods 20 000
30 Purchased goods on credit from Isabella ->not in CB 120 000
Cash in the office was banked in ->Debit Bank account Credit Cash account
30 18 000
 Contra entry
Paid off the amount owed 120K to Isabella by cheque. Discount allowed 10%
31
12K
Cash sales. 90% of the cash received was banked in ->90% x 70K Dr Bank,
31 70 000
10% Dr Cash a/c
Hashimo is not debtor/ trade receivable-> not recorded in personal account(Hashimo account)
Notes:
1. July 15, July 16 and July 30- do not record credit transactions in Cash Book
2. July 26- Dr.Bank; Cr Sales ( do not record cash transactions in personal account)
No need to record into personal accounts ( Hashimo) for cash transactions (no debts)
3. The discounts columns are totalled and not balanced as the two discounts are different discounts

Three-Column Cash Book

Discount Discount
Date Particulars Cash Bank Date Particulars Cash Bank
Allowed Received
July July
1 Capital 90 000 3 Cash 3 000
3 Bank 3 000 8 Rental 10 000
26 Sales 16 000 17 Isabella 6 000 54 000
Office
29 Wati 2 500 47 500 19 2 000
equipment
Sales 20 000 22 Purchases 15 000
30 Cash 18 000 30 Bank 18 000
31 Sales 7 000 63 000 31 Isabella 12 000 108 000
31 Balance c/d 12 000 42 500
2 500 30 000 234 500 18 000 30 000 234 500
Aug
1 Balance b/d 12 000 42 500

3. Specialized Journals
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 Specialized journals are used to record all credit transactions of the business goods including
returns. The following are the specialized journals:

(i) Sales Journal- to record credit sales of goods

(ii) Purchases Journal – to record credit purchases of goods

(iii) Sales Returns Journal /Returns Inwards Journal

Returns of goods from trade receivables

(iv) Purchases of goods to trade payables

4. General Journal

(a) Used to record credit transactions which cannot be recorded in specialized journals such as:

(i) Credit purchases of non-current assets (vehicles, buildings, equipment)

(ii) Non-cash drawings/ Non-cash withdrawals for personal use (stock / inventory withdrawals)

(iii) Opening and closing of accounts

(iv) Adjustments of accounts (depreciation, doubtful debts, accruals& prepayments)

(v) Correction of errors

(vi) Additional capital of non-cash items

(b) The account to be debited is always stated first before the one to be credited

(c) Every entry should have a suitable narrative (description)

(d) General Journal Format

Date Particulars Debit (RM) Credit (RM)

Account A xx

Account B xx

(short description / narrative)

4.1 Worked Example:

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 (a) Credit purchases of non-asset items

Popular Book Store purchases book shelves total RM2000 for office use on credit from Ba
5 March
Wood

General Journal
Date Particulars Debit (RM) Credit (RM)

(b) Recording inventory withdrawals

21 March Owner of Popular Book Store took magazines homes costing RM300 for his children

General Journal
Date Particulars Debit (RM) Credit (RM)

(c) Recording additional capital:

22 March Popular Book Store’s owner brought his home computer RM5000 for office use

General Journal
Date Particulars Debit (RM) Credit (RM)

(d) Recording opening entries of an existing business:

12
1 April The balance of assets and liabilities are as follows:
Assets: Motor Vehicles - RM30 000; Inventory - RM90 000; Trade receivables -
RM12 000
Liabilities: Bank overdraft - RM5 000; Trade payables - RM24 000

General Journal
Date Particulars Debit (RM) Credit (RM)

(e) Recording a newly established business

Three Enterprise started business with RM10 000 cash and deposited RM200 000 into the
1 July
bank

General Journal
Credit
Date Particulars Debit (RM)
(RM)

5. Purchases Journal

5.1 A purchases journal is a record of all credit purchases.

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 5.2 The source documents are the purchases invoices received.

5.3 A typical purchases journal is as below:

Purchases Journal
Feb Particulars Invoice No. RM

5.4 The list of purchases is totaled at the end of a certain period (daily, weekly or monthly) and the total
is posted to the debit side of the purchases account in the general ledger.

The double- entry postings in the above example are:

Debit Purchases account

Credit Celery Co. account
Credit Carrot Co.

GENERAL LEDGER
Purchases Account

Feb Particulars RM Feb Particulars RM

PURCHASES LEDGER
Celery Co. Account
Feb Particulars RM Feb Particulars RM

Carrot Co. Account

Feb Particulars RM Feb Particulars RM

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6. (a) Sales Journal

6.1 When goods are sold, the seller sends a sales invoice to the customer. A copy of this invoice is
retained by the seller as source documents to record in a sales journal

6.2 A sales journal is a record of all credit sales.

6.3 The list of credit sales is totaled at the end of a certain period and the total is posted to the credit
side of the sales account in the general ledger .

6.4 Each individual customer’s ledger account in the sales ledger is debited with the value of goods sold
to them. The sales account in the general ledger will be updated with the total of credit sales
periodically (once a month).

6.5 Illustration example:

Sales Journal
Jul
Particular Invoice No. RM
y

The double- entry postings in the above example are:

Debit Jeremy
Debit Martin
Credit Sales account

GENERAL LEDGER
Sales account

July Particulars RM July Particulars RM

SALES LEDGER
Jeremy account
15
 July Particulars RM July Particulars RM

Martin account

July Particulars RM July Particulars RM

(b) Sales Returns Journal

6.6 Sales not accepted are returned by customers.

6.7 Credit notes will be sent to the customers and the copies of credit notes retained by the seller which
will be the source document when the sales returns journal is written up.

6.8 The total of the sales returns is posted to the debit of the sales returns account and not debited to the
sales account.

6.9 Each individual entry in the sales returns journal is posted to the credit of the customers who
returned the goods.

6.10 Illustration example:

Sales Journal
July Particular Invoice No. RM

16
 Sales Returns Journal
July Particular Credit Note No. RM

GENERAL LEDGER
Sales Account

July Particulars RM July Particulars RM

Sales Returns Account

July Particulars RM July Particulars RM

SALES LEDGER
Compact

July Particulars RM July Particulars RM

ABC

July Particulars RM July Particulars RM

17
Topic 3 Double Entry Book-keeping System

1. Introduction

18
 (a) The system is a set of rules for recording financial information and is based on the fact that every
financial transaction has equal and opposite effects in at least two different accounts.

(b) The two effects of an accounting entry are known as Debit and Credit. The double entry system is
based on the principal that:
(i) for every debit entry, there will always be an equal credit entry.
(ii) the sum of debits and the sum of the credits must be equal in value.

2. The Double Entry Rules

(a) In deciding which account has to be debited and which account has to be credited, the following
rules of accounting are applied:

Accounts Debit Entry Credit Entry

Assets To record an increase To record a decrease
Liabilities
To record a decrease To record an increase
Owners’ equity

6. Worked Example
2016 Transactions Dr. Cr.

Aug 1 Suzana starts her firm with RM50 000 in cash

Aug 8 Purchase of machinery on credit from Nippon for RM30 000

Aug 20 Suzana paid Nippon RM6 000

Aug 25 Suzana bought another machine costing RM11 000 from Nippon
Suzana introduces RM15 000 cash into her business for additional
Aug 29
capital

Cash Account

Capital Account

19
 Machinery Account

Nippon Account

7. Trial Balance

20
 7.1 After posting all transactions from an accounting period (which may be a week, a month or a
year) accountants prepare a trial balance to check the arithmetical accuracy of the accounts.

7.2 A trial balance is used to verify that the total of all accounts with debit balances equals the total
of all accounts with credit balances.

7.3 The trial balance lists every open general ledger account by account number and provides
separate debit and credit columns for entering account balances.

7.4 Suzana's trial balance at 8 August 2016 appears below.

Exercises
1 Complete the following table. The first item has been completed as an example.

No. Transactions Debit (RM) Credit (RM)

Owner deposited RM21 500 into the firm’s bank account as

(a)
capital

(b) Paid rent of RM500 with cheque

(c) Bought office phone for RM75 with cheque

(d) Bought RM75 of office supplies with cheque

(e) Bought RM500 in parts for computer with cheque

(f) Bank charges of RM10 deducted from bank account

Owner invested another RM11 000 into firm’s bank

(g)
account

21
 No. Transactions Debit (RM) Credit (RM)

Purchased car costing RM8 000 with cheque. The car is

(h)
for business use

(i) Bought RM700 office chair with cheque

(j) Received RM150 phone bill

(k) Received RM100 electric bill. Paid bill with cheque

(l) Purchase goods RM20 000 for resale from Ali Bakar

(m) Cash purchases RM3 000

(n) Paid Ali Bakar RM12 000 with cheque

(o) Sold goods RM30 000 on credit to Money More

Sold goods RM13 000 for cash. Cash received was

(p)
deposited into bank account

(q) Received a cheque RM22 000 from Money More

(r) Owner withdraws goods costing RM4 000 for personal use

Owner withdraws goods costing RM1 000 for customer

(s)
samples

(t) Owner used company cheque RM800 to pay his house rent

(u) Some goods costing RM3 500 was returned to Ali Bakar

Money More returned some goods which was sold to him

(v)
for RM2 500

(w) The company received RM50 000 from a 8% bank loan

(x) Six months interest of 8% on the bank loan was paid

(y) The company repaid part of the bank loan RM5 000

2 Write up the various accounts needed in the books of Henry Books Distributors to record the following
transactions. Prepare a trial balance as at 30 April 2016.

April Transactions Dr. Cr.

1 Started business with RM600 000 in the bank

22
3 Bought motor van paying by cheque RM40 000

Bought office fixtures of RM2 000 on credit from Sam

6
Suppliers

Bought goods costing RM160 000 for resale on credit

7
from Big Book Store

Withdrew RM300 from business bank account for office

9
use

11 Paid Sam Suppliers a cheque RM400

Cash sales RM35 000. A cheque was received and

15
banked on the same day

19 Credit purchases costing RM80 000 from Big Book Store

23 Paid Big Book Store by cheque RM100 000

28 Cash RM2 800 was received from sales

Bank Account

Capital Account

23
Motor Vehicles Account

Office Fixtures Account

Sam Suppliers

Purchases Account

Big Book Stores

24
 Cash Account

Sales Account

Henry Books Distributors

Trial Balance as at 30 April 2016

25
Notes:

Accounting Concepts

1. Introduction

(a) Basic assumptions and rules and principles which form the basis of recording business transactions
and preparing accounts.

(b) To maintain uniformity and consistency in preparing and maintaining accounting records to provide
reliable information.

(c) The concepts were developed over the years and are generally accepted by members of the
accounting profession.

(d) A list of the major accounting concepts and principles is as below.

2. Business Entity Concept

(a) The business enterprise and its owners are assumed to be two separate distinct independent entities
for the purpose of accounting.

26
 (b) The accounting records are made from the business enterprise point of view and are to be
accounted for separately from its owners.

(c) If personal expenses are paid out of assets of the entity, it would be considered to be drawings.

(d) Assets contributed by owners to the business entity represents a form of liability (equity) of the
business.

3. Dual Aspect Concept

(a) Every transaction is assumed to has a dual effect where every transaction would be recorded in two
different accounts in their respective opposite sides.

(b) The duality concept is commonly expressed in the accounting equation where every transaction has
an equal impact on assets and liabilities in such a way that the sum of assets is always equal to the
sum of liabilities as reflected in the equation below:

Assets = Liabilities + Equity

4. Money Measurement Concept

(a) Only transactions that are capable of being measured in monetary terms are recognized in financial
statements.

(b) Transactions which could not be expressed in terms of money would not be recorded.

5. Going Concern Concept

(a) The business enterprise is assumed to continue operate in the foreseeable future and is not expected
to be liquidated or curtail its operational activities significantly in the near future.

(b)The concept provides a basis for reporting the value of assets in the balance sheet at net book value
and not at closing-down value.

6. Accounting Period Concept

(a) Profits of are ascertained for a specified period of time called the accounting period.

(b) The life of a business is assumed to be indefinite and divided into many accounting periods for the

27
 preparation of the income statement and balance sheet at regular intervals.

(c) The usual accounting period is one calendar year or one financial year.

(d) Examples of an accounting period is starts from 1st January 2013 and ends on 31st December
2013 or starts from 1st April 2013 and ends on 31 March 2014

7. Matching Concept

(a) Expenses are charged against revenue to ascertain profits of an accounting period.

Revenue 2020 – Expenses 2020 = Profit 2020

(b) The expenses and revenue must belong to the same accounting period

8. Accrual Concept

(a) Expense and revenue must be recognised in the accounting periods to which they relate rather than
on cash basis.

(b) Revenue must be recorded in the accounting period in which it is earned and thus any accrued
revenue must be recognized in the accounting period in which it arises rather than in the accounting
period in which the revenue was or will be received.

(c) Expenses must be recorded in the accounting period in which they incurred rather than in the
accounting period in which the expenses are paid.

9. Historical Cost Concept

(a) All assets are to be recorded at their original acquisition costs and not at current market prices.

(b) Example: Buildings purchased for RM200 000 in year 2010 and is now valued RM250 000 at market
price. The amount to be recorded in the books would be RM200 000.

10. Prudence Concept / Conservatism Concept

(a) The preparation of financial statements requires professional judgment where caution is exercised in
the adoption of policies and estimates of the values.

(b) Prudence requires that assets and income are not overstated whereas liabilities and expenses are not
understated

(c) Assets should not be recognised at a value which is higher than what is expected to be recovered

28
 from its sale or use while liabilities should not be presented below the value which is likely to be
paid.

(d) Inventory is thus recorded at the lower of cost or net realizable value (NRV) rather than the expected
selling price.

11. Consistency Concept

(a) Accounting methods once adopted must be applied consistently in future. The same methods and
techniques should be used for similar items or situations.

(b) A business must refrain from changing its accounting policy unless on reasonable grounds. But
should the policy be changed, the nature of change, the reasons for the change and its effect on items
of financial statements must be disclosed.

(c) The consistency concept is important as it allows comparability of the financial statements of a
company.

12. Materiality Concept

(a) Financial statements are prepared to provide useful information for the users in decision making.
Information which could affect or influence the decisions of the users of financial statements is
considered as material.

(b) Considerable judgment is required in deciding whether a piece of information is material or not.
Materiality could be based on a percentage of turnover or on total asset value.

(c) Information which is considered as material is reported as line items in the financial statements while
those which are not material could be aggregated with other similar items.

13. Substance Over Legal Form

(a) Substance over form is an accounting concept which means that the economic substance of
transactions and events must be recorded in the financial statements rather than just their legal form
in order to present a true and fair view of the affairs of the entity.

(b) For example, an asset may be leased to a lessee without the transfer of legal title at the end of the
lease term. Such a lease may, in substance, be considered as a finance lease if for instance the lease

29
 term is substantially for entire useful life of the asset or the lease agreement entitles the lessee to
purchase the asset at the end of the lease term at a very nominal price and it is very likely that
such option will be exercised by the lessee in the given circumstances.

Topic 4 Adjustments for Depreciation

1. Depreciation

30
 (a) The reduction in an asset’s value is caused by the passage of time, wear and tear and obsolescence.

(b) Method of distributing costs of non-current assets over the life of the assets to the appropriate
period

2. Depreciation of non-current assets should be provided for in business accounts:

(a) To provide for the loss of the assets used during business operations.

(b) For a better allocation of the costs of non-current assets against revenue as depreciation is charged
every year.

3. Residual value
(a) Also known as SALVAGE value

(b) The remaining value of an asset after it had been fully depreciated

4. Common methods to calculate depreciation:

4.1 Straight-Line Method

(a) A constant amount of depreciation is allocated throughout the useful life of a fixed asset

(b) This method spreads the cost of the non-current asset evenly over its useful life

(c) The salvage value reduces the depreciable base

Asset Cost−Salvage/residual Value

(d) Formula: Annual depreciation = ; or
Useful life

= % x (Asset cost – salvage value)

1.2 Reducing Balance Method

(a) Depreciation is calculated as a constant proportion of the balance of the asset after deducting the
amount previously provided

(b) An accelerated method of depreciation where it results in higher depreciation expense in the earlier
years of ownership

(c) The amount of depreciation reduces as the life of the asset progresses.

(d) The salvage value is not to be deducted when figuring the depreciable base

31
 (e) Formula:
Depreciation = % x Net Book Value

(f) Net book value is the asset’s net value at the start of an accounting period. It is calculated by
deducting the accumulated (total) depreciation from the cost of the asset
Net book value = cost – accumulated depreciation

2. Exercise:
(a) On 1 January Year 1, Company Ah Fatt purchased an equipment at the cost of RM130 000. The
equipment is estimated to have 5 year useful life and a salvage value (residual value) of RM5
000 at the end of the 5th year.

(i) Straight-Line Method

End of Year Annual depreciation Accumulated depreciation

(ii) Reducing Balance Method (Rate 10% per annum)

End of
Annual depreciation Accumulated depreciation Net Book value (NBV)
year
1

3. Accounting Entries for recording depreciation

At the end of every accounting period, depreciation of assets is charged for the year until the asset
is disposed or until the asset is fully depreciated.
32
Debit: Statement of profit or loss

Credit: Accumulated Depreciation account

Example:
A company bought machinery for RM100 000 in 2013. The depreciation rate is 10% per annum
using the straight-line method

Workings: Annual Depreciation = 10% x RM100 000 = RM10 000

Machinery Account

Accumulated Depreciation Account

33
Statement of profit or loss for the year ended

Statement of financial position as at

34
Accounting for disposal of non-current assets

• Non-current assets could be disposed in the following ways:

• A non-current asset is being scrapped or given away because it is obsolete or no longer in use, and the
asset has no resale value;

• A non-current asset is sold for cash or part-exchanged with another asset

• Accounting entries:

• Depreciation of asset
Dr. Cr.
Statement of profit or loss x
Accumulated depreciation x

• Disposal of asset
Dr. Cr.
1 Disposal x
Non-current asset x

2 Accumulated depreciation x
Disposal of non-current x

3 Bank x
Disposal of non-current asset x

4 Balancing the disposal of non-current account

• Disposal of non-current asset

• If the asset costing RM90 000 is fully depreciated, no further entry is required.

Non-current Asset
Balance b/d 90 000

Accumulated Depreciation
Balance b/d 90 000

35
• If the asset is not fully depreciated (cost RM90 000 & accumulated depreciation RM50 000) and gave
away for free, the accounting entries would be:

Non-current Asset
Balance b/d 90 000

Accumulated Depreciation
Balance b/d 50 000

Disposal of Non-current Asset

• If the asset is not fully depreciated (cost RM90 000 & accumulated depreciation RM50 000) and sold
for cash RM10 000, the accounting entries would be

Non-current Asset
Balance b/d 90 000

Accumulated Depreciation
Balance b/d 50 000

Bank

Disposal of Non-current Asset

• If the asset is not fully depreciated (cost RM90 000 & accumulated depreciation RM50 000) and sold
for cash RM45 000, the accounting entries would be:

Non-current Asset
Balance b/d 90 000

Accumulated Depreciation
Balance b/d 50 000
36
 Bank

Disposal of Non-current Asset

Bad Debts & Allowance for Doubtful Debts

1. Bad Debts
(a) Accounts receivables are not always collected in full. A debt which is uncollectible is a bad debt.

(b) When a debt is unlikely to be recovered from a receivable, it must be written off from the books so
that the business’s assets (receivables) are not overstated which is in line with the prudence
concept.

(c) Accounting entries

37
 Dr. Cr.

Bad debts x

Trade Receivables x

2. Bad Debt Recovered

(a) A bad debt previously written off may occasionally settled in full or in part subsequently

(b) Accounting entries

Dr. Cr.

Bank x

Bad debt recovered x

3. Doubtful Debts
(a) Accounts receivable which are likely to be potential bad debts

(b) Provision for doubtful debts is an estimate of debts that are deemed not collectible in the future
accounting periods.

(c) The allowance for doubtful debts is determined after the trial balance is prepared

(d) Adjustments for allowance for doubtful debts are needed for:

(i) Creating allowance for doubtful debts for the first time; or

(ii) Increased allowance for doubtful debts brought forward from previous period; or

(iii) Decreased allowance for doubtful debts brought forward from previous period.

3.1 Creating Allowance for Doubtful Debts

(a) When a business determines its doubtful debts and want to make adjustments for the allowance of
doubtful debts for the first time, the allowance for doubtful debts is created for recording the
adjustments for its doubtful debts.

(b) Accounting entries

Dr. Cr.

38
 Statement of profit or loss x

Allowance for doubtful debts x

(c) The whole amount of the doubtful debts is entered in both the statement of profit or loss and
allowance for doubtful debts account.

3.2 Increased Allowance for Doubtful Debts

(a) The allowance for doubtful debts will be increased when the doubtful debts determined for the
current period is more than the allowance for doubtful debts of the previous period.

(b) Accounting entries

Dr. Cr.

Statement of profit or loss x

Allowance for doubtful debts x

(c) Only the increased amount of the doubtful debts is entered in both the statement of profit or loss
and allowance for doubtful debts account.

3.3 Decreased Allowance for Doubtful Debts

(a) The allowance for doubtful debts will be decreased when the doubtful debts determined for the
current period is less than the allowance for doubtful debts of the previous period.

(b) Accounting entries

Dr. Cr.

Allowance for doubtful debts x

Statement of profit or loss x

(c) Only the decreased amount of the doubtful debts is entered in both the statement of profit or loss
and allowance for doubtful debts account.

4. Example
The following information was extracted from the books of Sabah Winds on 31 December:

Trade Receivables
Year
RM
2010 100 000
2011 120 000
2012 200 000
2013 150 000
39
 2014 180 000

Additional information:

The company decided to create and maintain an allowance for doubtful debts account of 10% of trade
receivables for the year 2010.

(a) Complete the table below

Creation, Increased or Account to be

31 Doubtful Debts
(Decreased) in Allowance
December (RM) Debited (RM) Credited (RM)
(RM)
2010

2011

2012

2013

2014

(b) Prepare the allowance for doubtful debts account, statement of profit or loss (extract) for year 2010
to 2014 and statement of financial position (extract) at the end of each financial year

Allowance For Doubtful Debts

40
Statement of profit or loss for the year ended 31 December

41
Statement of financial position as at 31 December

42
5. Exercise
(a) A trader decided to open an allowance for doubtful debts account in 2011. The allowance was to be 5%
of outstanding trade receivables at each year end.

You are required to complete the table below and prepare the allowance for doubtful debts account for
the years 2011 to 2014 from the following information.

Trade receivables Allowance for Doubtful Debts Create / Increased /

Year
RM (RM) (Decreased)

2011

2012

2013

2014

Allowance for Doubtful Debts Account

43
Statement of profit or loss for the year ended 31 December

Statement of financial position as at 31 December

44
Accruals and Prepayments

Trial balance as at 31 December 2016

Dr. Cr.
Salaries 260 000
Rent 7 000

Additional information:
1. Monthly salaries are RM20 000.
2. The company has rented out a section of its premises for a monthly rent income of RM1000.

Note:

45
 Trial balance as at 31 December 2016
Dr. Cr.
Insurance 11 000
Sales commission 17 000
Rent 4 000

Additional information
1. The annual insurance premium is RM12 000.
2. Sales commission is paid at 10% of total sales. The total sales for the year was RM200 000.
3. The company rented out a section of its premises for a monthly rent of RM800 beginning 1 July
2016.
4. The company has a 5% fixed deposit of RM100 000. No interest for the year has been received
yet.

Note:

2. Recording accruals and prepayments in ledger accounts

46
1.1 Double entry

Accounts Debit Credit

Expenses paid Expense account Cash / Bank account

Revenue received Bank account Revenue account

1.2 Statement of profit or loss

At year end, the expenses and revenue ledger accounts are balanced. The expenses incurred and the
revenue earned during the year will be posted to the statement of profit or loss.

1.3 Worked examples:

(a) During the year 2016, Harith Supplier's annual rent was RM24 000. Harith Suppliers has paid
rent of RM20 000 in 2016.
Rent Expense

(b) Jose Brothers has paid RM30 000 for insurance during 2016 of which RM2000 was paid in
advance for insurance in 2017.

Insurance

47
 (c) Lorrin sublets a section of her shop to Dani for a rental of RM1000 per month. At 31
December 2016 Dani owes one month's rent.

Rent Revenue

(d) Askar owes salaries of RM4000 at 1 January 2016. He paid a total of RM50 000 salaries
during 2016. Salaries owing at 31 December 2016 was RM7000.

Salaries

Topic 5 Financial Statements

1. Introduction

(a) The statement of profit or loss and the statement of financial position are called financial
statements and are prepared at the end of an accounting period.

(b) The statement of profit or loss is also known as the income statement while the statement of
financial position is also named as the balance sheet.

(c) The financial statements show the calculation of profit earned or the loss incurred during the
period and the financial position of the business at the end of the period.

(d) Financial statements are usually prepared from a trial balance.

(e) Statement of profit or loss may be prepared either in account form or in statement form.
Statement of profit or loss in both the forms give the same information.

48
              Statement of profit or loss for the year ended 31 December 2021
RM RM RM
Sales x
Less: Sales returns (x)
Net sales x
Less: Cost of sales
Opening inventory x
Purchases x
Less: Purchases returns (x)
Net purchases xx
Add: Carriage inwards x
Wages x
Insurance on purchases x
Import duties x
x
x
Less: Closing inventory (x)

49
 Cost of sales (x)
Gross profit x
Add: Other income
Decrease in allowance for doubtful debts
x
/ Doubtful debts
Rent received x
Commission received x
Interest received x
Discounts received x
x
x
Less: Expenses
Rent expense / paid x
Carriage outwards x
Interest paid x
Repairs & maintenance / motor expenses x
Commission paid x
Bad debts x
Discount allowed x
Increase in allowance for doubtful debts
x
/ Doubtful debts
Advertising x
Depreciation x
Utilities x
Salaries / Salaries & wages / W & S x
Insurance x
(x)
Profit / (Loss) for the year xx

Statement of financial position as at 31 December 2021

RM RM RM
Accumulate
Net book
Non-current Assets Cost d
value
depreciation
Plants and machinery x x x
Motor vehicles x x x
Office equipment x x x
Furniture x x x
Fixtures and fittings x x x
x x x

Current Assets
Inventory x
Trade receivables x
Less: Allowance for doubtful debts (x)
50
 x
Accrued revenue x
Prepaid expenses x
Bank x
Cash x
x
xx

Financed by:
Opening capital x
Add: Additional capital x
x
Add: Profit / (Loss) for the year x
x
Less: Drawings (x)
x

Non-current Liabilities
Bank loan x
x

Current Liabilities
Trade payables x
Accrued expenses x
Revenue received in advance x
Bank overdraft x
x
xx

Illustration 1
The following trial balance was extracted from the books of DD for the year ended 31 st December 2019:
 
Debit Credit
RM RM
Capital 50 000
Plants & machinery 18 000
Wages 10 000
Repairs 1 600
Salaries 28 000
Cash in hand 2 500
Land & buildings 74 500
Purchases 123 500
Sales 249 000
Bank overdraft 4 000
Discounts received 8 500
51
 Commissions received 1 500
Trade receivables 45 000
Trade payables 26 300
Commission paid 1 000
Inventory on 1st January 2019 37 000
Advertising 600
Office expenses 1 000
Fixtures & fittings 4 000
Stationery 400
Interest 2 000
Rent 1 700
Bank loan ______ 11 500
350 800 350 800

The closing inventory on 31st December 2019 was valued at RM28000.

(a) Prepare the statement of profit or loss for the year ended 31 st December 2019.
(b)   Prepare the statement of financial position as at 31st December 2019.

52
53
Illustration 2

The following balances are extracted from GG’s ledgers.

Debit Credit
RM RM
Opening inventory 17,000
Sales 55,000
Purchases 25,000
Commission received 1,500
Insurance 600
Wages and salaries 24,000
Commission 1,100
Rent 12,000
Utilities 1,650
Interest 850
Interest received 1,000
54
Rent received 24,000
Land & buildings 48,000
Motor vehicles 20,000
Fixture & fittings 4,000
Furniture 3,500
Office equipment 2,000
Trade receivables 18,000
Cash 3,000
Drawings 9,000
Capital 69,600
Bank loan 24,000
Trade payables 13,500
Bank overdraft 1,100
189,700 189,700

Additional information:
Closing inventory is valued at cost RM6,000.

Required:
(a) Prepare the statement of profit or loss for the year ended 31 December 2019.
(b) Prepare the statement of financial position as at 31 December 2019.

Solution:

55
56
Illustration 3
The following trial balance was extracted from the books of Chinaman for the year ended 31 May 2019:-
 

Debit Credit
RM RM
Salaries and wages 4 200
Insurance 1 200
Administrative expenses 2 670
Selling expenses 3 180
Carriage on purchases 2 700
Sales returns 400
Purchases returns 700
Cash in hand 1 255
Carriage outwards 725

57
 Bank overdraft 7 900
Bank loan 12 000
Capital 31 280
Drawings 7 550
Land and buildings 29 500
Trade receivables 21 000
Trade payables 9 600
Plants & machinery 25 000
Purchases 93 250
Sales 160 400
Equipment 20 000
Inventory (1st June 2018) 8 250
Interest on bank loan 1 000 _______
221 880 221 880

The closing inventory on 31st May 2019 was valued at RM 14700.

• Prepare the statement of profit or loss for the year ended 31 st May 2019
• Prepare the statement of financial position as at 31st May 2019

58
59
Illustration 4

The following trial balance was extracted from the books of a business, Eastern Winds for the year
ended 31st December 2017.
 
Debit Credit
RM RM
Capital 50 000
Plants & machinery 18 000
Wages 10 000
Repairs 1 600
Salaries 28 000
Cash in hand 2 500
Land & buildings 74 500
Purchases 123 500
60
 Sales 249 000
Bank 4 000
Discounts 8 500
Commissions 1 500
Trade receivables 45 000
Trade payables 26 300
Bad debts 1 000
Inventory on 1st January 2017 37 000
Advertising 600
Office expenses 2 700
Fixtures & fittings 4 000
Office stationery 400
Interest 2 000
Bank loan (repayable 2029) ______ 11 500
350 800 350 800

The closing inventory on 31st December 2017 was valued at RM28 000.

(a) Prepare statement of profit or loss for the year ended 31 st December 2017

(b)   Prepare statement of financial position as at 31st December 2017

 

61
62
Illustration 5

The following trial balance has been extracted from the books of Takewah Brothers for the year
ended 31st December 2017:

Debit Credit
RM RM
Sales 198 000
Discount received 700
Bank interest 200
Purchases 53 000
Carriage outwards 4 900
Carriage inwards 2 000
Bad debts 300
Rent 44 100
Office salaries 26 200

63
 Sales commission 37 600
Discount allowed 100
Stationery 2 400
Advertising 8 700
Utilities 7 200
Cash at bank 4 700
Inventory on 1st January 2017 39 000
Trade receivables & Trade payables 10 000 11 300
Office furniture 8 000
Delivery van 37 300
Premises – cost 29 000
Bank loan (repayable in 2018) 22 000
Capital 98 300
Drawings 14 000
Interest on loan 2 000 ______
Total 330 500 330 500

The closing inventory on 31st December 2017 was valued at RM 41,000

 
(i) Prepare the statement of profit or loss for the year ended 31 st December 2017; and

(ii) the statement of financial position of the business as at 31 st December 2017

 

64
65
Illustration 6

The following trial balance has been extracted from the books of Casey Traders for the year ended 31 st
December 2015:

Debit Credit
RM RM
Sales 198 000
Discount received 700
Bank interest 200
Purchases 53 000
Carriage outwards 4 900
Carriage inwards 2 000
Bad debts 300
Rent 44 100
Office salaries 26 200
Sales commission 37 600
Discount allowed 100
Stationery 2 400
Advertising 8 700

66
 Electricity 7 200
Cash at bank 4 700
Inventory on 1st January 2015 39 000
Trade receivables 10 000
Trade payables 11 300
Office furniture 8 000
Delivery van 37 300
Premises – cost 29 000
Loan from State Bank (repayable in 2018) 22 000
Capital 98 300
Drawings 14 000
Interest on loan 2 000 ______
330 500 330 500

The closing inventory on 31st December 2015was valued at RM41 000

 
• Prepare the statement of profit or loss for the year ended 31 st December 2015; and
• the statement of financial position as at 31st December 2015
 

67
68
Illustration 7
Sally is in the import business. The following balances were extracted from her books on 31 March 2020.

RM
Sales 95 800
Purchases 48 340
Returns outwards 960
Inventory at 1 April 2019 10 780
Carriage inwards 11 500
Motor vehicle running expenses 6 500
Motor vehicles 53 000
Insurance 7 700
Electricity 4 950
Marketing expenses 6 200
Discount received 5 860
8 % Bank loan 30 000
Cash 270
Bank overdraft 1 680
Trade receivables 18 500
Trade payables 9 750
Drawings 11 310
69
 Capital at 1 April 2019 35 000

Additional information
• Inventory at 31 March 2020 was valued at RM12 600.
• The loan interest is outstanding at 31 March 2020.
• Insurance, RM450, was prepaid at 31 March 2020.
• Electricity RM130 was due at 31 March 2020.
• RM100 was owing for workers’ transport claims at 31 March 2020.

REQUIRED

• Prepare the statement of profit or loss for Sally for the year ended 31 March 2020.
• Prepare the statement of financial position of Sally at 31 March 2020

70
71
Illustration 8
The following trial balance was extracted from the Mighty Company’s books at 30 April 2010.

Dr Cr
RM RM
Sales 1 600 000
Purchases 946 000
Plant and machinery 1 490 000
Furniture & fittings 348 000
Inventory at 1 May 2009 124 000
Capital 1 400 000
12% Loan 100 000
Wages 160 000
Accumulated depreciation at 1 May 2009:
Plant & machinery 320 000
Furniture & fittings 197 000
Trade receivables 360 000
Trade payables 92 000

72
 Cash 48 000
Distribution expenses 43 000
Utilities 50 000
Insurance 30 000
Advertising 79 000
Drawings 25 000
Loan interest 6 000 ________
3 709 000 3 709 000

Additional information:
1. Inventory at 30 April 2010 cost RM230 000.
2. Depreciation is to be provided for as follows:
Plant & machinery 2% p.a. on cost
Furniture & fittings 25% p.a. reducing balance
3. Wages accrued RM12 000.
4. Distribution expenses accrued RM5 000.
5. Insurance prepaid at 30 April 2010 is RM2 000.

Required:
• Prepare the statement of profit or loss for the year ended 30 April 2010
• Prepare the statement of financial position at 30 April 2010.

73
74
Illustration 9

Raz, a boutique retailer, provided the following balances that were extracted from her business ledger as at
30 June 2019.

Trial Balance as at 30 June 2019

Debit Credit
RM RM
Inventories @ 1 July 2018 8,000
Sales 90,000
Purchases 43,200
Returns outwards 1,000
Returns inwards 2,000
Wages 4,000
Salaries 16,500
Carriage inwards 1,200
Carriage outwards 2,100
Import duties 1,300
Insurance for purchases 1,600

75
Office insurance 1,100
Rent 10,400
Utilities 3,900
Commission received 2,200
Interest received 300
Allowance for doubtful debts @ 1 July 2018 300

Motor vehicles at cost 22,000

Furniture at cost 12,000
Office equipment at cost 15,000
Trade receivables 12,700
Trade payables 11,000
Cash 23,000
Bank overdraft 3,500
Capital 74,000
Drawings 2,300
182,300 182,300

Additional information:
1. Closing inventories are valued at cost RM6,500 but the market value are RM7,900.
2. Salary RM1,500 not yet paid and prepaid rent was RM800.
3. Interest RM100 is not yet received and commission received in advance is RM150.
4. A Trade Receivable, Encik Ghani, with an outstanding debt of RM200 is to be written off as bad debts.
Allowance for doubtful debts is to be increased to RM500 as at 30 June 2019.
5. Depreciation to be provided as follows:
Motor vehicles 20% per annum, using the straight line method.
Furniture All furniture were acquired during the year, with useful life of 6 years and nil
scrap value.
Office equipment 25% per annum on cost.

Required:
(a) Prepare the statement of profit or loss for the year ended 30 June 2019.
(b) Prepare the statement of financial position as at 30 June 2019.

76
77
Topic 6

Trade Receivables Control Accounts and Trade Payables Control Accounts

1. Division of Ledgers

Ledger Notes
(a) Sales ledger Contains individual trade receivables accounts only
(b) Purchases ledger Contains individual trade payables accounts only
(c) General ledger Contains all other accounts

2. Control Accounts

(a) Contains the totals of all postings made to accounts in either sales ledger or purchases ledger

(b) Duplicate the information contained in the sales ledger and purchases ledger

78
 (c) Trade receivables control account represent or summarize all customers’ accounts in the sales
ledger

(d) Trade payables control account represent or summarize all suppliers’ account in the purchases
ledger.

3. Uses of Control Accounts

(a) to act as a check on the accuracy of the totals of the balances in the sales and purchases

(b) ledgers to determine the reliability of ledger accounts

(c) To provide totals of trade receivables and trade payables quickly when preparing the trial balance.

4. Limitations

(a) Control accounts may themselves contain errors

(b) Control accounts could not detect some types of errors such as compensating errors

5. important points:

(a) Trade receivables control account is also known as sales ledger control account

(b) Trade payables control account is also known as purchases ledger control account

(c) Cash sales and cash purchases are not recorded in the control accounts.

(d) Allowance for doubtful debts is not included in trade receivables control account.

6. Worked Example: The following information has been extracted from the books of Able.

SALES LEDGER
Indra White
Mar 1 Balance b/d 700 Mar 6 Sales returns 100
5 Sales 3 000 8 Bank 2 700
16 Sales 8 000 8 Discount allowed 200
_____ Balance c/d 8 700
11 700 11 700

Jenny Sorene
Mar 1 Balance b/d 1 000 Mar 13 Sales returns 200
11 Sales 5 000 19 Bank 3 500
_____ 31 Balance c/d 2 300
6 000 6 000

79
 Bitter Bird
Mar 1 Balance b/d 200 Mar 21 Bank 10 000
18 Sales 25 000 Balance c/d 15 200
25 200 25 200

GENERAL LEDGER
Trade Receivables Control Account
Mar 1 Balance b/d 1 900 Mar 31 Sales returns 300
31 Sales 41 000 Bank 16 200
Discount allowed 200
_____ Balance c/d 26 200
42 900 42 900

April 1 Balance b/d 26 200

7. Trade receivables control account – Details & Notes

Trade receivables Control Account

August RM August RM
1 Balance b/d x 1 Balance b/d x
31 Sales (credit sales) x 31 Bank x
Interest income x Sales returns x
Bank – dishonoured cheque x Discount allowed x
Discount allowed (cancelled) x Bad debts x
Balance c/d x Contra x
_ Balance c/d x
x x
Sept. Sept.
1 Balance b/d x 1 Balance b/d x

Particulars Notes
(a) Debit balance Total amount owing by Trade receivables
(b) Credit balance Total amount overpaid by Trade receivables – minority balance
Set off the balances of Trade receivables account and Trade payables account
(c) Contra / Set-off
of a same company

8 Trade payables control account – details & notes

Trade payables Control Account

August RM August RM
1 Balance b/d x 1 Balance b/d x
31 Bank x 31 Purchases x
Purchases returns x Interest charged x

80
 Discounts received x Balance c/d x
Contra x
Balance c/d x _
x x

Sept. Sept.
1 Balance b/d x 1 Balance b/d x

Particulars Notes
(a) Debit balance Total amount overpaid to Trade payables – minority balance
(b) Credit balance Total amount owing to Trade payables

(c) Contra Set off balances of the same individual or company

8. Exercise :

(a) The following information has been extracted from the books of Auto Burger.
RM
Sales ledger balances at 1 April 2011 32 906
Purchases ledger balances at 1 April 2011 24 240
Credit purchases 12 942
Credit sales 15 338
Returns from credit customers 260
Returns to credit suppliers 874
Discounts received arising from credit transactions 552
Discounts allowed arising from credit transactions 619
Payments to credit suppliers 14 118
Receipts from credit customers 17 206

Additional information
(a) Abco , a credit customer, has ceased trading. The full balance on their account of RM325 must
be written off as bad debt.
(b) A cheque for RM200 paid to a credit supplier has been incorrectly posted to the debit side of
the drawings account.

81
 (c) A cheque for RM817 paid to Boyman Limited, a credit supplier, was returned unpaid by Auto
Burger’sbank. The cheque was in full settlement of an invoice for RM860
(d) Michael is both a customer and a supplier. A contra entry must be processed to clear the
balance owing to Michael of RM435

(b) JR's sales ledger control account balances at 1 March 2008 were as follows.

Dr RM340 600 Cr RM1 960

During March 2008 the following transactions took place.

RM
Credit sales 295 000
Cash sales 219 750
Sales returns from credit customers 6 480
Receipts from debtors 238 600
Discounts allowed 3 500

Additional information for the month of March 2008

1 The receipts from debtors included a cheque for RM3600 in full settlement of a debt of RM3800. This
was returned by the bank on 28 March marked "insufficient funds".

82
2 Eva Little and JR both buy from and sell to each other. At 31 March 2008 Eva owed JR RM5000 and JR
owed RM8600 to Eva. They agreed to offset balances, the net amount being payable by JR on 31
March 2008.

1 It was agreed that a debt of RM2300 from Alice Springs was bad and it was written off.

2 The total credit balances in the sales ledger control account at 31 March 2008 were RM8340.

REQUIRED
Prepare JR's sales ledger control account for the month of March 2008.

Sales Ledger Control Account

Topic 7

Bank Reconciliation Statement

1. Introduction
(a) Bank reconciliation statement is a report which compares the bank balance as per company’s
accounting records with the balance stated in the bank statement.

(b) It is normal for a company’s bank balance as per accounting records to differ from the balance as per
bank statement due to timing differences.

Bank Statement
Date Dr Cr Balance
Cheque No.
June RM RM RM
1 Balance b/d 2 000 Cr
2 Cash 300 2 300 Cr

83
 5 Cheque 3211 700 1 600 Cr
7 Cheque 3212 200 1 400 Cr
11 Standing Orders – Star World 100 1 300 Cr
15 Cheque 3215 600 700 Cr
19 Dividends (GH Co.) 4 000 4 700 Cr
21 Cheque 3214 5 000 300 Dr
27 Bank Charges 10 310 Dr
30 Deposit 1 000 690 Cr

Cash Book (Bank Column Only)

RM RM
Cheque No.
June June
1 Balance b/d 2 000 5 3211 Honey Wind 700
2 Deposit 300 6 3212 William Big 200
22 Ali Bakar 1 000 7 3213 Swatika Boy 500
29 Chaze Bea 600 10 3214 Yama Car 5 000
30 Balance c/d 3 100 14 3215 TNB 600
7 000 7 000
July
1 Balance b/d 3 100

Differences in bank statement and cash book entries

June Bank Statement Cash Book Notes
7 -- (500)
11 (100) --
19 4 000 --
29 -- 600
27 (10) --

2. Importance of Bank Reconciliation

(a) Preparation of bank reconciliation helps in the identification of errors in the accounting records of
the company or the bank.

(b) Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control
mechanism to help protect the valuable resource through uncovering irregularities such as
unauthorized bank withdrawals

(c) Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a
business.

3. Reasons for differences between the cash book and the bank statement:

84
 Reasons Cash Book Bank Statement
Unpresented cheques
(a) Cheques issued for payments but have not presented to
the bank
Uncredited deposits
(b) Deposits by the company to the bank but not yet
credited into bank account
Direct Debits
(c) Transfer of funds for payments instead of issuing
cheques (direct payment – internet banking)
Direct Credits
(d) Deposits or payments by customers directly into bank
account (receipts)
Standing Order
(e) Instruction to bank to make regular payments of
specific amount on a recurring basis
Interest on Deposits
(f) Interest earned from bank deposits credited directly by
the bank
Bank Charges
(g)
Service charges deducted from bank account
Dishonored cheques
(h) Cheques deposited but the bank is unable to receive
payment on those checks due to insufficient funds
Errors
(i)
Mistakes in cash book

Errors
(j)
Mistakes in bank statement

4. Preparing a bank reconciliation statement

(a) Check the opening balance of both the cash book and bank statement to ascertain the two
balances are the same.

(b) Compare the cash book debit column (receipt) with the credit column of bank statement to tick all
common items.

(c) Compare the cash book credit column (payment) with the debit column of bank statement to tick
all common items.

5. Methods of preparing a bank reconciliation statement

(a) Updating the cash book

All items not ticked in the bank statement will be adjusted in the cash book and all items not
ticked in the cash book will be recorded in the bank reconciliation statement

(b) Without updating the cash book:

85
 (i) Start with cash book balance
All items not ticked will be recorded in the bank reconciliation statement

(ii) Start with bank statement balance

All items not ticked will be recorded in the bank reconciliation statement

Example:

1. On 2 March 2014, Mella received the following bank statement while her cash book was as below:

Bank Statement
Balance
Dr (RM) Cr (RM)
(RM)
Feb. 1 Balance b/d 650 Cr
4 Monki People 1 500 2 150 Cr
9 Sweetie 730 1 420 Cr
14 Interest 12 1 408 Cr
25 Credit transfer (dividends) 130 1 538 Cr

Cash Book (bank columns only)

2014 RM 2014 RM
Feb. 1 Balance b/d 650 Feb 7 Sweetie 730
3 Monki People 1 500 14 Iron Rod Holdings 400
28 Ronaldo 200 Balance c/d 1 220
2 350 2 350

March 1 Balance b/d 1 220

(i) Update the cash book for Mella on 28 February 2014. Balance the cash book on that date and then
prepare the bank reconciliation statement.

Cash Book (bank columns only)

Bank Reconciliation Statement at 28 February 2014

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(ii) (a) Prepare the bank reconciliation statement at 2 March 2014 (without updating the cash book)

87
6. Exercise:

88
 Company Metsu’s bank statement dated 31 December 2013 shows a balance of RM7 540, while the
company’s cash records on the same date show a balance of RM8 000.

The following additional information is available:

The following cheques issued by the company are still outstanding:

1. No. 1207 issued on Dec 26 RM490
No. 1208 issued on Dec 29 RM460
2. A deposit of RM400 made on Dec 31 does not appear on bank statement.
3. A cheque of RM850 was returned by the bank.
4. The bank charged RM50 as service fee.
5. Interest income earned on the company’s bank balance was RM1 250.
6. Amount paid directly by customers into the bank was RM550.
Standing instructions for monthly rent RM2 000 was carried out by the
7.
bank
8. A deposit of RM430 was incorrectly entered as RM340 in the cash book.

(i) Update the cash book and then preparing the bank reconciliation statement

Topic 8 Manufacturing Accounts

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• Introduction
• There are companies which manufacture products to be sold from raw materials. Such companies
will prepare:

(i) manufacturing accounts to determine the total cost of manufacture of its products;
(ii) statement of profit or loss to determine the profits
(iii) statement of financial position to determine the financial position

• Manufacturing Account
• A manufacturing account is an account in which the costs of producing finished goods are
accumulated.

• Eventually the factory cost of finished goods produced in the period is transferred to the statement of
profit or loss as part of the cost of finished goods sold.

• Manufacturing accounts are prepared for internal management use only to distinguish between the
costs and profitability associated with manufacturing operations and those associated with trading
activities.

• The Manufacturing Account has two main sections:

• Prime Cost (Direct cost)
[Total direct cost: Direct material (raw material) + Direct labour + Direct expenses]
Prime cost is cost that is directly linked to manufacturing products, such as the cost of raw
materials, the wages of people working to create the products, and royalty payments.

• Factory Overhead (Indirect cost)

Factory overhead contains all the other expenses associated with production. It is cost which is
not directly linked to the production process. Examples of factory overhead includes factory
rent, maintenance costs for the machinery, and the wages of supervisors and other staff that do
not work directly with the products.

• Inventory of work-in-progress (WIP)

• Inventory of WIP is inventory that have not been completely manufactured at the end of the financial
year.

• Such inventory needs to be accounted for in determining total production cost where the beginning
WIP is added to production costs and ending WIP is subtracted from production costs.

• Format of a manufacturing account

90
 ABC Industries
Manufacturing account for the year ended ...............................
RM RM RM
Direct Materials
Opening inventory of raw materials x
Add: Purchases of raw materials x
Less: Purchases returns of raw materials x
x
Add: Carriage inwards of raw materials x
Import duties of raw materials x
x
x
x
Less: Closing inventory of raw materials x
Costs of raw materials used / consumed x

Direct Labour
Factory wages x

Direct Expenses
Royalties x
Prime Costs (Total direct costs) x

Add: Factory Overheads

Factory salaries x
Factory rent x
Factory building depreciation x
General factory expenses x
Factory premises maintenance x
Factory machinery depreciation x
Factory manager’s / supervisor’s salaries x
x
xx
Add: Opening work in progress x
x
Less: Closing work in progress x
Production cost xxx

ABC Industries
Statement of profit or loss for the year ended …............................
91
 RM RM RM
Sales x
Less: Costs of sales
Opening inventory of finished goods x
Production cost xxx
Purchases of finished goods x
Less: Purchases returns of finished goods x
x
Less: Closing inventory of finished goods x
x
Gross profit x

Add: Other Income

Commission received x
Rent received x
Interest received x
Discounts received x
x
xx
Less: Expenses
Office salaries / wages & salaries x
Advertising expenses x
Office rent x
Distribution costs x
Sundry office expenses x
Interest paid x
Commission paid x
Depreciation on office equipment x
Carriage outwards x
Insurance x
Office premises maintenance x
Doubtful debts x
Discounts allowed x
Bad debts x
Administration & distribution expenses x
Office utilities x
x
Profit for the year x

• Worked Example:

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 Sandar Manufacturing makes a single product. The following balances were extracted from the books at
the end of the financial year on 30 September 2013:

RM
Inventory at 1 October 2012:
Raw materials 17 500
Work in progress 24 000
Finished goods 50 000

Purchases of raw materials 82 600

Sales 500 000
Carriage 12 000
Factory wages 75 000
Office wages & salaries 35 000
Sundry office expenses 14 500
Factory manager’s salary 20 500
Factory rent 18 400
Royalties 9 000
General factory expenses 15 200
Premises maintenance 40 000
Factory machinery (at cost) 120 000
Factory machinery – accumulated depreciation 70 000

Inventory at 30 September 2013:

Raw materials 16 300
Work in progress 29 000
Finished goods 46 000

Additional information at 30 September 2013:

• 60% of the carriage relates to raw materials and 40% to goods sold.
• General factory expenses owing RM400.
• 70% of the maintenance relates to the factory premises and 30% to the office premises
• Factory machinery is depreciated at the rate of 15% per annum using the reducing balance method.

Prepare the manufacturing account and the statement of profit or loss for the year ended 30 September 2013.
Clearly label the prime costs and costs of production.

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94
• Exercise
The following balances were extracted from Oil Manufacturing’s books on 31 January 2013.
RM

95
 Inventory 1 February 2012:
Raw materials 14 700
Work in progress 23 570
Finished goods 35 000
Purchases of raw materials 75 600
Purchases of finished goods 15 500
Factory wages 62 140
Rent 28 000
Factory management salaries 31 500
Office salaries 41 600
Sales 342 500
Sales returns 1 250
Distribution costs 28 650
Sundry office expenses 9 870
8% Loan 40 000
Interest 2 400
Land and buildings (cost) 80 000
Plant and machinery (cost) 90 000
Office equipment (cost) 30 000
Accumulated depreciation on plant and machinery 32 000
Accumulated depreciation on office equipment 12 000
Allowance for doubtful debts 1 550
Trade receivables 45 000
Trade payables 60 700
Bank overdraft 33 030 Cr
Capital 110 000
Drawings 17 000

Additional information:
1 Inventory at 31 January 2013 were valued as follows:
RM
Raw materials 16 250
Work in progress 18 780
Finished goods 32 500

2 At 31 January 2013
Factory wages, RM1 120, were accrued.
Sundry office expenses, RM630, were prepaid.

3 Rent is to be apportioned on the basis of area occupied. Three fifths of the area is occupied by the
factory and two fifths by the office.

4 Depreciation is charged on plant and machinery at 20% per annum using the reducing balance method.

5 Office equipment is depreciated using the straight-line method at 20% on cost.

6 The allowance for doubtful debts is to be maintained at 4% of trade receivables.

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(a) Prepare the manufacturing account of Oil Manufacturing for the year ended 31 January 2013. Show
clearly the cost of raw materials consumed, prime cost and cost of production.

(b) Prepare the statement of profit or loss of Oil Manufacturing for the year ended 31 January 2013.

(c) Prepare the statement of financial position of Oil Manufacturing at 31 January 2013.

97
98
Topic 9 Break-Even Analysis

1. Definition
(a) Break-even occurs when there is no profit or loss.

99
 (b) Break-even point results where sales and total costs are equal.

Break-Even Sales = Total Fixed Costs + Total Variable Costs

2. Break-even Formula
(a) There are two formulas to determine the break-even point where either way, the result would be
the same.

¿
(b) Break-even = Total ¿ Costs
Unit Contribution units

Where unit contribution = unit sales price – unit variable cost

This method gives the break-even point in terms of number of units to be sold.

¿
(c) Break-even = RM Total ¿ Costs
Contribution Sales Ratio

This method gives the break-even point in terms of sales revenue.

Contribution per unit

Where contribution sales ratio =
Selling price per unit

3. Break-Even graphs
(a) The break-even chart is a graphical representation of costs at various levels of activity shown
on the same chart as the variation of revenue with the same variation in activity.

(b) The chart illustrates three possible situations of loss making, break-even and profit-making.
The point at which neither profit or loss is made is known as the “break-even” point which is
the point of intersection between the revenue and total costs lines. The break-even point is the
point at which total revenues equal total costs.

100
 TR => Total Revenue TC => Total Costs
=> Total Variable Costs (TVC) + Fixed Costs (FC)

(c) Above the break-even point is when a business begins to make a profit. A business will make a loss
if it produces and sells output below the break-even point.

Exam tips: Practise drawing break-even graphs. You will probably not be asked to draw a full graph
as they are too time consuming to prepare, but you could be asked to:
 Draw in a missing curve (line) or two
 Interpret a given graph

4. Example 1
Coco Water Limited expects to sell 100 000 bottles at RM10 each. The variable cost per unit is RM6
and total fixed costs is RM150 000 per annum.
(i) Calculate the break-even point in units and in sales revenue; and
(ii) Sketch the break-even chart for Coco Water Limited.
(iii) Sketch the profit-volume graph for Coco Water Limited.

¿ costs ¿ costs
(i) Break-even point = units or RM
selling price−variable cost contribution sales ratio

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 (ii) Workings:
0 bottles (RM) 80 000 bottles (RM)
Total costs= VC + FC 0 + 150 000 = 150 000 (80 000 x 6) + 150 000 = 630 000
Sales revenue @ RM10 0 x 10 = 0 80 000 x 10 = 800 000

Costs / Sales Revenue (RM)

800 000 TR

630 000 TC

BEPt

150 000

80 000 Volume (units)

Profits (RM)

BEPt
0
37 500 120 000 Volume (units)

-150 000

5. Target Profits or Target Sales Volume

(a) Breaking even is hardly a satisfactory outcome for most businesses and managers may be more
interested in learning the necessary sales level to achieve a targeted profit.

(b) The targeted sales level could be calculated in quantities or in total value sales.

102
 ¿
(c) Formula targeted sales = Total ¿ Costs +Target Profit
Unit Contribution units or RM
Total ¿ Costs+Target Profit ¿
Contribution Sales Ratio

6. Example 2
Based on the details of Coco Water Limited, calculate the sales required to achieve a target profit of
RM30 000.

¿
Sales = Total ¿ Costs+Target Profit
Unit Contribution

7. Uses of Break-Even Analysis

(a) To measure profits and losses at different levels of production and sales
(b) To predict the effect of changes in sales prices
(c) To forecast the effect on profitability when there are changes in costs

8. Limitations of Break-Even Analysis

(a) It assumes that there are no changes in the levels of inventory, so that everything produced
during the period is assumed to have been sold. This is unrealistic as most businesses have
changing levels of inventory throughout the financial year.

(b) It does not allow product mix and is usually calculated for a single product, which is not
realistic.

(c) Cost behavior is assumed to be either fixed or variable, so semi-variable costs are not
considered. Again, this is unrealistic as many costs have behavior that is not either perfectly
fixed or perfectly variable but a combination of the two.

(d) Fixed costs are assumed to remain fixed for the whole period of time, so stepped fixed costs are
not considered. Stepped fixed costs are costs that remain fixed until a certain level of business
activity is reached, when they increase in increments. They will remain fixed at this new
increment until the next level of business activity (for example an increase in the storage costs
due to an increase in the production level).

(e) Variable costs are assumed to be perfectly linear with the level of production, so changes in costs
are not considered (for example overtime or bulk-buying discounts).

(f) The selling price is assumed to remain fixed throughout the year, so seasonal sales or discounts
are not considered.

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Exercises:
1. Thorny Limited manufactures only one product. The selling price and marginal cost per unit of
the product is as follows:
RM RM
Selling price 95
Direct materials 30
Direct labour 20
Variable production overheads 20
70
Contribution 25

The annual fixed costs are as follows:

RM
Fixed factory overheads 300 000
Fixed administration overheads 200 000

Required:
(i) Calculate the break-even point in units and value
(ii) Calculate the sales needed to achieve a profit of RM1 000 000
(iii) Sketch the break-even chart
(iv) Sketch the profit-volume graph

¿ costs
(i) Break-even point =
selling price−variable cost

¿
(ii) Sales = Total ¿ Costs +Target Profit Unit Contribution

104
 (iii) Workings:
0 units (RM)
Total costs
Sales revenue
* Preferably double of break-even point

Costs / Sales Revenue (RM)

40 000 Volume (units)

Profits (RM)

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9. Margin of Safety
(a) The difference between actual sales achieved or forecast as achievable and the break-even level
of sales.

(b) The margin indicates to management how far sales can fall before the business will move out of
profit and into a loss-making situation.

(c) Formula: Margin of safety = total sales – sales at break-even point

(d) Example: Based on the details of Coco Water Limited, calculate the margin of safety.

Margin of safety

Exercises
1. Kingkoton manufactures a single product, the Kingko. The following information (based on budgeted
output of 800 units) relates to one unit of Kingko:

Per unit RM
Selling price 35.00
Variable production costs 13.50
Fixed production costs 3.50
Variable selling costs 1.50
Fixed selling costs 1.00

Kingkoton produces and sells 800 Kingkos a week. Calculate the

(i) Weekly breakeven point in units and in revenue.

(ii) Margin of safety in revenue and as a percentage.

106
2. Bord manufactures one product. The following information (based on budgeted output of 18 000 units
per year) is available for the production of one unit of product for the year ending 30 June 2015.
RM
Selling price 32.00
Direct materials 6.50
Direct labour 8.50
Variable factory overheads 3.00
Variable selling and administration overheads 2.50

Fixed factory overheads RM90 000 per annum

Fixed selling and administration overheads is RM60 000 per annum

(a) Calculate the break-even point in units and in revenue.

Additional information
1 The directors are considering purchasing additional machinery at a cost of RM45 000.
2 This will increase capacity by 50%.
3 The machinery will be written off over five years, with an estimated residual value of RM5000.
4 The directors plan to reduce the selling price by 12.5% and this will increase demand by 50%.
5 Fixed selling and administration overheads will increase by 10%

(b) Calculate the revised breakeven point in units and in revenue.

107