RE-U

CENTRE FOR PRE-UNIVERSITY STUDIES

NIVERSITY STUDIES

FPAC1014
BUSINESS ACCOUNTING

LECTURE NOTES

Prepared by: Ms Ma Wyei Leng

Programme: Foundation in Business

Session: 202605

*FOR INTERNAL CIRCULATION ONLY

Topic Contents
Introduction to Accounting
• Accounting Equation
1
• Capital and Revenue Expenditure
• Capital and Revenue Income
Books of Prime Entry
• Cash book
2
• Specific Journals
• General journal
Double entry system
• Double entry rules
3 • Ledger accounts
• Trial balance
• Accounting concepts
Year-end adjustments
• Depreciation of non-current assets
• Disposal of asset
4
• Bad debts
• Provision for doubtful debts
• Accruals and Prepayments
Financial statements
5 • Statement of profit or loss
• Statement of financial position
Control Accounts
• Purpose of Control Accounts
6
• Trade receivables control account
• Trade payables control account
Bank Reconciliation Statement
• Bank statement
7
• Reasons for differences
• Preparation of bank reconciliation statement
Manufacturing account
• Cost of materials consumed
8 • Labour cost
• Manufacturing overheads
• Manufacturing accounts

Break-even analysis
• Fixed costs and variable costs
9
• Using formulae
• Using graphs

1
 TOPIC 1: INTRODUCTION TO ACCOUNTING

1. What is a business?
Business are Organization which provide good and services in order to make a profit

Some ideas are listed below:

a) A business is a commercial or industrial concern which exists to deal in the manufacture,

resale or supply of goods and services.
b) A business is an organisation which uses economic resources to create goods or services
which customers will buy.
c) A business is an organisation providing jobs for people to work in.
d) A business invests money in resources in order to make even more money for its owners.

2. Type of Business Organization

- A sole proprietorship is owned and run by one individual for

personal benefit.
- The owner is personally liable for all business debts, and the
Sole Proprietorship business ends upon their death.
- The proprietor assumes all risks, extending to personal and
business assets.

- A general partnership is an agreement between two or more

people to run a business for profit.
Partnerships - Partners share responsibility for debts, risking personal assets if
the business fails.

- A limited liability company is owned by shareholders who

contribute funds but typically delegate management to elected
Limited Liability directors.
Company - Their liability for company debts is limited to their investment
amount.

有限责任公司由股东所有，股东出资，但通常将管理权委托给选举产⽣的董事。

2
3. The Accounting Cycle
o The accounting cycle is the name given to the sequence of events and processes that are
used to develop the accounting records of an organization.
会计循环是指⽤于建⽴组织会计记录的⼀系列事件和流程．

Briefly, the cycle is made up of the following stages:

o Stage 1: the collecting of source documents that provide details for the financial records.
收集提供财务记录详细信息的原始凭证

o Stage 2: the listing of key details in books of prime entry. There are separate books of
prime entry for different categories of transactions: credit sales, credit purchases,
returns, cash and bank transactions and other miscellaneous transactions.
在原始凭证簿中列出关键细节。不同类别的交易有单独的原始凭证簿： 赊销、赊购、退货、现⾦和银⾏交易以及其他杂项交易。

o Stage 3: posting the information shown in the books of prime entry to ledger accounts.
There are separate ledger accounts for each aspect of a business’s finances.
将原始凭证簿中显示的信息过账到分类账账户。企业财务的每个⽅⾯都有 单独的分类账账户

o Stage 4: checking and control systems to ensure that accounting records are
arithmetically correct.
检查和控制系统，以确保会计记录在算术上正确。

o Stage 5: summarizing financial information periodically (and at least annually) in the

financial statement (statement of profit or loss, statement of financial position, etc).
：定期（⾄少每年⼀次）在财务报表（损益表、财务状况表等）中 汇总财务信息

3
4. Common Accounting Terminology

• Revenue
收⼊是指公司因其提供的产品或服务⽽获得的收益

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

• Examples of revenue:

• Expenses
营业费⽤是指为赚取收⼊⽽开展贸易或业务的成本。费⽤与收⼊相反。
• Business expenses are the costs of carrying on a trade or business to earn revenue.
Expenses are the opposite of revenues.

• Examples of expenses:

• Assets
资产是指公司拥有并预期在未来带来收益的资源。
• An asset is a resource that a company owns with the expectation that it will provide
future benefits.

• Examples of assets:

• Liabilities
负债是公司的义务，与资产相对。
• Liabilities are a company’s obligations and are contra to assets.

• Examples of liabilities:

所有者权益（在企业中的资⾦/投资）
• Owners' equity
对于个体经营者，所有者权益可以⽤以下等式描述：
• For sole traders, owner's equity is described by the equation below:

4
 5. Accounting Equation

• Introduction
每笔商业交易都会对公司的财务状况产⽣影响，财务状况由公司的资产、负债和所有者 权益来衡量。资产、负债和所有者权益之间的关系由会计等式表示，该等式指出：
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:

5.1 Assets
实体因过去的交易⽽控制的现有经济资源。
• A present economic resource controlled by the entity as a result of past events.
经济资源是指具有产⽣经济利益潜⼒的权利
• An economic resource is a right that has the potential to produce economic benefits.

ü Current Assets
将在⼀年内消耗完毕且可以轻松转换为现⾦⽽不会⼤幅贬值的资产
• Assets which will be consumed within one year and could easily be converted to
cash without suffering substantial drop in value.

• Examples are:

ü Non-current Assets

• Non-current assets are those assets owned by a company that contributes to the
company's income and are not held for resale purposes.
⾮流动资产是指公司拥有的、有助于公司收⼊且不⽤于转售的资
• Non-current assets are durable in nature and are expected to keep providing
benefit for more than one year.
⾮流动资产具有耐⽤性，预计可持续提供⼀年以上的收益。
• Examples are:

5
5.2 Liabilities
负债是指实体的义务，其清偿可能导致资产（例如现⾦）的转移或使⽤。
• 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.
负债根据债权⼈允许的清偿债务的时间进⾏分类
• Liabilities are classified according to the time allowed by the creditor to settle the debt.

ü Current liabilities
流动负债是指12个⽉内到期的应付账款。
• Current liabilities represent the amount owed to trade payables due for payment
within 12 months.

• Examples are:

ü Non-current liabilities
⾮流动负债是指公司在未来12个⽉内⽆需偿还的债务
• Non-current liabilities are debt obligations of the company that is not due for
repayment within the next 12 months.

• Examples are:

5.3 Owners’ equity

所有者投⼊企业⽤于企业的资源
• The resources that are provided by the owner into the business, for use in the
business.
提取是指所有者为个⼈⽤途提取的资⾦（权益将减少）
• Drawings represents withdrawals made by the owner for personal use (equity will
reduce).
企业盈利时，权益将增加；企业亏损时，权益将减少
• Equity will increase when the business makes a profit; Equity will reduce when the
business makes a loss.

6
5.4 Worked example

Example 1:
Fill in the missing figures in the following table.

Assets Liabilities Equity

$35 000 $12 500

$44 400 $19 300

$67 300 $55 000

Example 2:

Effect
Example of transactions
Assets Liabilities Equity
Owner pays capital into the bank
($100,000)

Buy inventory by cheque ($50,000)

Buy inventory on credit ($50 000)

Sale of inventory on credit ($50 000)

Sale of inventory for cash ($50 000)

Pay creditor ($50 000)

Debtor pays money owing by cheque

($50 000)
Owner takes money out of the
business bank account for own use
($5 000)
Owner pays creditor from private
money outside the firm ($5000)

7
Example 3:

Jan 1 Celine set up a business to trade under the name of The Garment Shop. She
opened a business bank account and paid in $20 000 as capital.

2 The business purchased premises, $15 000, and paid by cheque.

3 The business purchased goods $3 000, on credit

4 The business sold goods, at the cost price of $1 000, on credit.

Show the accounting equation after each of the above transactions.

Owner’s
Assets Liabilities
equity
Stocks Debtors
Premises Vehicles Bank Cash Capital Creditors

Jan 1

8
Exercises

David Ham Restaurant has the following items in his statement of financial position as at 30
April 2016:

Capital RM20 900

Trade Payables RM 1 600
Fixtures RM 3 500
Motor Vehicles RM 4 200
Inventory RM 4 950
Trade Receivables RM 3 280
Cash at Bank RM 6 450
Cash in Hand RM 120

During the first week of May 2020, the following transactions took place:

a) He bought extra stock of goods 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 RM3 000 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 creditor

You are required to draw up a statement of financial position as at 7 May 2020 after the above
transactions have been completed.

9
 Assets Liabilities

Trade Trade
Fixtures Vehicles Inventory Bank Cash Capital
receivables payables

RM RM RM RM RM RM RM RM

1 May

a)

b)

c)

d)

e)

f)

g)

h)

10
 David Ham Restaurant
Statement of financial position as at 7 May 2020
RM RM RM

11
6. Financial Statements

a. Statement of profit or loss

• It also shows the profit or loss incurred over a specific accounting period, typically over
a fiscal year. Profit or loss for the year is determined by matching expenses against revenue.

• Accounting year

Beginning Ending
1 Jan 2020 31 Dec 2020
1 March 2019
1 May 2020

• Illustration exercise 1:

Statement of profit or loss for the year ended 31 December 2021

RM RM RM
Sales 36 000

Less: Purchases 5 000

Gross profit

Add: Other income

Commission received 250

Less: Expenses
Salaries and wages 20 000
Insurance 6 000

12
 • Illustration exercise 2:

Statement of profit or loss for the year ended 31 December 2021

RM RM RM
Sales 20 000

Less: Purchases 5 000

Gross profit

Add: Other income

Commission received 250

Less: Expenses
Salaries and wages 20 000
Insurance 6 000

Conclusion:

13
 b. Statement of financial position

• Assets, liabilities and owners’ equity of a company at a specific point in time are
shown in a statement of financial position.

• Illustration exercise:

Statement of financial position at 31 December 2016

RM RM RM
Non-current assets
Premises 45 000
Van 16 000
Shop fittings 18 000
79 000
Current assets
Inventory 1 000
Cash in hand 670
1 670
Total assets

Non-current liability
Bank loan 52 000

Current liability
Trade payables 890

What is the missing figure? What does it represent?

Note:

14
7. Capital and Revenue Expenditure and Receipts

a) 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.
• Examples are:

b) Capital receipts
• Income which is not earned out of the regular operations.
• Arise from the sale of non-current assets, capital being invested in the business by
owners, funds from outside lenders.
• Examples are:

c) 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.
• Examples are:

15
d) Revenue receipts
• Are receipts that arise from normal business activities.
• Examples are:

Exercise:

State whether each of the following items should be classified as revenue expenditure,
revenue receipt, capital expenditure or capital receipt.

(a) Purchase of premises

(b) Computer repair and maintenance costs

(c) Profit on the sale of an office building

(d) Revenue from sales

(e) Wages of the workers

(f) Cost of installing new machinery

(g) Interest earned from business resources

16
 TOPIC 2: BOOKS OF PRIME ENTRY

2.1 Introduction

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

•The various types of books of prime entry are the:

• Specialized Journals

• General Journal

• Cash Book

17
2.2 Cash Book

• A cash book is a book of prime entry used to record payments and receipts by cash and
cheques

• A cash book consists of the cash account and the bank account put together in one
book.

• There are two types of cash book namely the two-column cash book and the three
column cash book.

Two-column Cash Book

Date Particulars Cash Bank Date Particulars Cash Bank

Three-Column Cash Book

Dis. Dis.
Date Particulars Cash Bank Date Particulars Cash Bank
allowed received

18
2.2.1 Recording in a two-column cash book

May Transactions RM
1 Owner started business with cash 80 000
2 Paid shop rental by cash 3 000
4 Cash purchase of goods 30 000
5 Cash sales. The cash received was not bank in 35 000
6 Open bank account with cash 50 000
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 6 000
29 Owner withdrew cash from bank for office use-cash on hand 4 000
31 Paid cheque for purchase of tables for office use 3 000

Cash Book

Date Particulars Cash Bank Date Particulars Cash Bank

May May

19
2.2.2 Recording in a three-column cash book

July Transactions $
1 Owner deposited his savings into the business new bank account 90 000
3 Withdrew cash from bank for office use 3 000
8 Paid office rent with cheque 10 000
15 Purchased goods on credit from Isabella 60 000
16 Sold goods on credit to Wati Limited 50 000
17 Settled Isabella debt by cheque and received a 10% cash discount
19 Purchased a fax machine for office use by cheque 2 000
22 Cash purchases paid by cheque 15 000
26 Cash sales to Hashimo Partners – cheques were received 16 000
29 Wati paid by cheque in full settlement of its account. Discount allowed 5%
Cash received from cash sales 20 000
30 Purchased goods on credit from Isabella 120 000
30 Cash in the office was banked in 18 000
31 Paid off the amount owed to Isabella by cheque. Discount allowed 10%
31 Cash sales. 90% of the cash received was banked in 70 000

Three-Column Cash Book

Date Particulars Dis. Al Cash Bank Date Particulars Dis. Re Cash Bank

July July

20
2.3 General Journal

Used to record credit transactions which cannot be recorded in special journals such as:

• The account to be debited is always stated first before the one to be credited

• Every entry should have a suitable narrative.

• The layout of the journal can be shown:

The Journal

Date Particulars Debit (RM) Credit (RM)

Account A xx

Account B xx

(short description / narrative)

21
2.3.1 Worked Example

• Credit purchases of non-asset items

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

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)

• Recording stock withdrawals

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

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)

• Recording additional capital:

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

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)

22
 • Recording opening entries of an existing business:

1 April The balance of assets and liabilities are as follows:

Assets : Motor Vehicles - $30 000;
Inventory - $90 000;
Trade receivables - $12 000

Liabilities : Bank overdraft - $5 000;

Trade payables - $24 000

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

• Recording a newly established business

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

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

23
2.4 Specialized Journals

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

24
2.4.1 Purchases Journals
• A purchases journal is a record of all credit purchases.

• The source documents are the purchases invoices received.

• A typical purchases journal is as below:

Purchases Journal
Feb Particular Invoice No. RM
6 Celery Company AA2 198
17 Carrot & Company 213 D 100
27 Carrot & Company 219 D 298
29 Transferred to Purchases Account 596

• 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.

Double entry
Dr purchases account – GL
Cr Supplier account (individual) – Purchases ledger

GENERAL LEDGER
Purchases Account
Feb Particulars RM Feb Particulars RM
Various trade
29 596 29 Balance c/d 596
payables

March 1 Balance b/d 596

PURCHASES LEDGER
Celery Company
Feb Particulars RM Feb Particulars RM
29 Balance c/d 198 6 Purchases 198

March 1 Balance b/d 198

Carrot & Company

Feb Particulars RM Feb Particulars RM
29 Balance c/d 398 17 Purchases 100

27 Purchases 298

398 398
March 1 Balance b/d 398

25
2.4.2 Sales Journal

• 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

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

• 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 journal.

• Each individual customer’s ledger account in the sales ledger is debited with the value
of goods sold to them.

2.4.3 Sales Returns Journal

• Sales not accepted are returned by customers.

• 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.

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

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

26
Worked Example:
Sales Journal
July Particular Invoice No. RM
5 Compact Berhad ZZ112 40 000
12 Compact Berhad ZZ113 50 000
23 ABC Traders ZZ114 60 000
31 Transferred to sales account 150 000

Sales Returns Journal

July Particular Credit Note No. RM
9 Compact Berhad CN60 7 000
26 ABC Traders CN61 3 000
31 Transferred to sales return account 10 000

GENERAL LEDGER
Sales Account
July Particulars RM July Particulars RM
Various trade
31 150 000
receivables

Sales Returns Account

July Particulars RM July Particulars RM
Various trade
31 10 000
receivables

SALES LEDGER
Compact Berhad
July Particulars RM July Particulars RM
Sales returns/
5 sales 40 000 9 7 000
returns inwards
12 sales 50 000 31 Balance c/d 83 000
90 000 90 000

Aug 1 Balance b/d 83 000

ABC
July Particulars RM July Particulars RM
Sales returns/returns
23 sales 60 000 26 3 000
inwards
31 Balance c/d 57 000
60 000 60 000

Aug 1 Balance b/d 57 000

27
 TOPIC 3: DOUBLE ENTRY SYSTEM

3.1 Introduction

o 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.

o The two effects of an accounting entry are known as Debit and Credit.

o The double entry system is based on the principal that:

§ for every debit entry, there will always be an equal credit entry.
§ the sum of debits and the sum of the credits must be equal in value.

28
3.2 The Double Entry Rules
In deciding which account has to be debited and which account has to be credited, the
following rules of accounting are applied:
Debit Credit
Assets + (-)
Liabilities
(-) +
Owners’ Equity

Expenses √

Revenue √

Notes:

29
Complete the following table and indicate with a tick (✓) whether each account would have a
debit or credit balance.

DEA LER
DEBIT accounts CREDIT accounts
DRAWINGS LIABILITIES
EXPENSES EQUITY
ASSETS REVENUE

Debit balance Credit balance

Capital
Cash
Drawings
Bank overdraft
Machinery
Trade receivables
Trade payables
Inventory
Furniture & fittings
Bank loan
Salaries
Rent expense
Rent received
Sales
Sales returns
Purchases
Return outwards

30
3.3 Worked Example

Steps to record:
1. Identify double entry
2. Record in ledger account
3. Balance the ledger account
4. Record in Trial Balance

2020 Transactions Dr. Cr.

Suzana starts her firm with RM50 000 in cash

Aug 1

Purchase of machinery on credit from Nippon for

Aug 8 RM30 000
Suzana paid Nippon RM6 000 (assume by cash)
Aug 20

Suzana bought another machine costing RM11 000

Aug 25 from Nippon
Suzana introduces RM15 000 cash into her business
Aug 29 for additional capital

Cash Account

Capital Account

31
 Machinery Account

Nippon Account

3.4 Trial Balance

• 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.

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

• Suzana's trial balance at 31 August 2020 appears below.

Debit Credit
RM RM

32
3.5 Exercises

Exercise 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 Bank Capital
(i)
account as capital 21 500 21 500

(ii) Paid rent of RM500 with cheque

(iii) Bought office phone for RM75 with cheque

(iv) Bought RM75 of office supplies with cheque

Bought RM500 in parts for computer with

(v)
cheque

Bank charges of RM10 deducted from bank

(vi)
account

Owner invested another RM11 000 into firm’s

(vii)
bank account

Purchased car costing RM8 000 with cheque.

(viii)
The car is for business use

(ix) Bought RM700 office chair with cheque

Received RM100 electric bill. Paid bill with

(x)
cheque

Purchase goods RM20 000 for resale from Ali

(xi)
Bakar.

(xii) Cash purchases RM3 000

(xiii) Paid Ali Bakar RM12 000 with cheque

33
(xiv) Sold goods RM30 000 on credit to Mani More

Sold goods RM13 000 for cash. Cash received

(xv)
was deposited into bank account

(xvi) Received a cheque RM22 000 from Mani More

Owner withdraws goods costing RM4 000 for

(xvii)
personal use

Owner withdraws goods costing RM1 000 for

(xviii)
customer samples

Owner used company cheque RM800 to pay his

(xix)
house rent

Some goods costing RM3 500 was returned to

(xx)
Ali Bakar

Mani More returned some goods which was sold

(xxi)
to him for RM2 500

The company received RM50 000 from a 8%

(xxii)
bank loan

Six months interest of 8% on the bank loan was

(xxiii)
paid

The company repaid part of the bank loan RM5

(xxiv)
000

Sold the office chair costing RM700 at cost. A

(xxv)
cheque was received

34
Exercise 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 2020.

April Transactions Dr. Cr.

1 Started business with RM600 000 in the bank

3 Bought motor van paying by cheque RM40 000

Bought office fixtures of RM2 000 on credit
6
from Sam Suppliers
Bought goods costing RM160 000for resale on
7
credit from Big Book Store
Withdrew RM300 from business bank account
9
for office use
11 Paid Sam Suppliers a cheque RM400
Cash sales RM35 000. A cheque was received
15
and banked on the same day
Credit purchases costing RM80 000 from Big
19
Book Store
23 Paid Big Book Store by cheque RM100 000

28 Cash RM2 800 was received from sales

Bank Account

Capital Account

35
Motor Vehicles Account

Office Fixtures Account

Sam Suppliers

Purchases Account

Big Book Stores

36
 Cash Account

Sales Account

Henry Books Distributors

Trial Balance as at 30 April 2020
Dr. Cr.

Notes:

37
3.6 Accounting Concepts

• Introduction

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

• To maintain uniformity and consistency in preparing and maintaining accounting

records to provide reliable information.

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

A list of the major accounting concepts and principles is as below:

(a) Business Entity

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

(b) Principle of duality

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

• The term double entry is used to describe how these two aspects of a transaction are
recorded in the accounting records.

(c) Money Measurement

• Only transactions that are capable of being measured in monetary terms are
recognized in financial statements.

• Transactions which could not be expressed in terms of money would not be recorded.

38
(d) Going Concern

• 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.

• The concept provides a basis for reporting the value of assets in the statement of
financial position at net book value and not at closing-down value.

(e) Accounting Period Concept

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

• The usual accounting period is one calendar year or one financial year.

(f) Historical Cost

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

(g) Prudence

• The preparation of financial statements requires professional judgment where caution is

exercised in the adoption of policies and estimates of the values.

• Prudence requires that assets and income are not overstated whereas liabilities and
expenses are not understated

39
(h) Matching Concept / Accrual Basis

• Expenses are charged against revenue to ascertain profits of an accounting period.

Revenue 2024 – Expenses 2024 = Profit 2024

• The expenses and revenue must belong to the same accounting period

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

• Revenue must be recorded in the accounting period in which it is earned rather than
in the accounting period in which the revenue was or will be received.

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

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

• The consistency concept is important as it allows comparability of the financial

statements of a company.

(j) Materiality
• 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.

• 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.

40
Exercise:

Identify one accounting concept described by each of the following statement:

1. The owner buys himself groceries will not be recorded.

A company might not report a RM2 loss if its net income is RM5
2.
million, but it would report it if its net income is RM4,000.
A company that uses a fiscal year that starts on July 1 and ends
3.
on June 30 records all transactions from July 1 to June 30.
The motivational level and skills of the employees will not be
4
recorded in the financial statements.
A machine bought for a bargain at 50% less than what it is
5. worth, will still be recorded at the cost paid and not at the higher
value it may be worth.
The company will continue on long enough to carry out its
6.
objectives and commitments
A transaction is considered to have a giving and taking effect so
7. the purchase of stock for cash will reduce the cash amount in the
balance sheet and increase the stock of goods.
Keeping the depreciation rate consistent for the same assets
8.
every year.
When estimating future liabilities, a company should be
9. cautious and record a higher value if there is any doubt about
the future payment.
Businesses should show all the expenses related to their
10. revenues of a specified period even if the expenses were not paid
in that period.

41
 TOPIC 4: YEAR-END ADJUSTMENT

4.1 DEPRECIATION & DISPOSAL OF FIXED ASSETS

1 What is Depreciation?

• Depreciation is an estimate of the loss in value of a non-current asset over its expected
working life.

• The reduction in an asset’s value is caused by the passage of time, wear and tear and
obsolesce.

42
• Method of distributing costs of fixed assets over the life of the assets to the appropriate period.

2 Causes of depreciation

Physical deterioration
- This is the result of ‘wear and tear’ due to the normal usage of the non-current asset. It can
also be because the asset falls into a poor physical state due to rust, rot, decay and so on.

Economic reasons
- The non-current asset may become inadequate as it can no longer meet the needs of the
business. It can also be because the non-current asset has become obsolete as newer and
more efficient assets are now available.

Passage of time
- This arises where a non-current asset, for example a lease, has a fixed life of a set number
of years.

43
3 Two common methods to calculate depreciation:

i) Straight-Line Method

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

• This method spreads the cost of the fixed asset evenly over its useful life

Formula:
0.1- .2 !11(- − 4(1,5#$% 6$%#(
!""#$% '()*(+,$-,." =
7#89(* .2 (:)(+-(5 ;($*1 .2 #1(
Note: Scrap value / Residual value
- The remaining value of an asset after it had been fully depreciated

Example:

On 1 July 2021, Karina purchased fixtures costing $25 000 and paid by cheque. She estimated
that she would be able to use the fixtures for four years and then be able to sell them for $3
000.

Calculate the annual depreciation charge:

If Karina thought that after four years the fixtures would have no disposal value, the charge for
depreciation would be:

44
ii) Reducing Balance Method

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

• An accelerated method of depreciation where it results in higher depreciation expense in the

earlier years of ownership.

• The amount of depreciation reduces as the life of the asset progresses.

• Formula:

!"#$"%&'(&)* = % . /"( 0))1 2'34"

Note:
Net book value is the asset’s net value at the start of an accounting period.

/"( 5))1 6'34" = 7)8( − :%%4;43'("< <"#$"%&'(&)*

Accumulated Depreciation
Accumulated Depreciation Y1 = Depreciation Y1
Accumulated Depreciation Y2 = Depreciation of Y1+Y2
Accumulated Depreciation Y3 = Depreciation of Y1+Y2+Y3
Accumulated Depreciation Y4 = Depreciation of Y1+Y2+Y3+Y4

45
Example:

Karina’s financial year ends on 30 June.

On 1 July 2021, she purchased fixtures costing $25 000 and paid by cheque. She estimated that
she would be able to use the fixtures for four years and then be able to sell them for $3 000.

Calculate the depreciation for each of the four years of the fixtures’ working life using the
reducing balance method at the rate of 40% per annum.
$

46
Exercise:

On 1 January Year 1, Company Ah Fatt purchased an equipment at the cost of $130 000. The
equipment is estimated to have 5 years useful life and residual value of $5,000 at the end of the
5th year.

i) Straight-Line Method

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

47
4 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 (sold) or until the asset is fully depreciated.

Double Entry:
Debit: Statement of profit or loss (Expenses)

Credit: Accumulated Depreciation account

Example 1:
A company bought machinery for $100 000 in 2021. The depreciation rate is 10% per annum
using the straight-line method. Prepare relevant ledgers and financial statement extracts for
year 2021,2022,2023.

Workings:

Machinery Account

48
 Accumulated Depreciation Account

Statement of profit or loss (extract) for the year ended 31 December

$

49
Statement of financial position (extract) as at 31 December
$ $

50
Example 2:
A company bought motor vehicles for $200 000 in 2021. The depreciation rate is 20% per
annum using the reducing balance method. Prepare relevant ledgers and financial statement
extracts for year 2021,2022,2023.

Workings:

Motor Vehicles Account

Accumulated Depreciation Account

51
Statement of profit or loss (extract) for the year ended 31 December
$

Statement of financial position (extract) as at 31 December

$ $

52
Exercise

A company starts in business on 1 January 2021, the financial year end being 31 December.
You are to show:

(a) The machinery account.

(b) The provision for depreciation account.
(c) Statement of profit or loss for the year 2021, 2022, 2023
(d) The statement of financial position extracts for each of the years 2021, 2022, 2023

The equipment bought was:

2021 1 January 1 machine costing $800

2022 1 July 2 machines costing $1,200 each
1 October 1 machine costing $600

Depreciation is 10 per cent per annum using the straight line method, machines being
depreciated for the proportion of the year that they are owned.

Workings:

53
 Machinery Account

Accumulated Depreciation Account

Statement of profit or loss (extract) for the year ended 31 December

$

54
Statement of financial position (extract) as at 31 December
$ $

55
5 Accounting for Disposal of Fixed Assets

Fixed assets could be disposed in the following ways:

• A fixed asset is being scrapped or given away because it is obsolete or no longer in use, and
the asset has no resale value;
• A fixed asset is sold for cash or part-exchanged with another asset.

Formula:

!"#$/&'(( '$ *#(+'(", = .",/( 01'2//3( − 5/6 7''8 9",:/

Note 1: positive amount (Gain on disposal); negative amount (Loss on disposal)

Note 2: Sales Proceeds (selling price)
Note 3: Net Book Value =

Take note:
(Income) Gain on disposal: sales proceeds > net book value (remaining value of assets)
(Expense) Loss on disposal: sales proceeds < net book value

Worked Examples:
Example 1:

A machinery which was bought on 1 January 2019 at a cost of $15 000 and was depreciated at
the rate of 10% p.a under straight line method. The machinery was sold for $6 500 cash on 31
December 2021.

The accounting year of the business ends on 31st December each year.
Calculate the gain or loss on disposal of the machinery.

56
Example 2:
Universal Industries provided the following information:

i. Purchased a machine for $8 000 on 1 October 2019.

ii. Sold the machine for cash, $7000, on 31 March 2021.
iii. The policy of Universal Industries is to charge depreciation at the rate of 10% per
annum on cost using the straight line method. Depreciation on machinery is charged
from the date of purchase and up to the date of sale.
iv. All sales of fixed assets are recorded in a disposal account.
v. Universal Industries prepares final accounts on 31 March each year.

Calculate the gain or loss on disposal of the machine.

57
 4.2 BAD DEBTS & PROVISION FOR DOUBTFUL DEBTS

1 Bad Debts

• A debt which is uncollectible is a bad debt.

• When a debt is unlikely to be recover 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.

Accounting entries

Dr. Cr.
Bad debts (expenses) x
Trade Receivables (remove/minus) x

At the end of financial year:

Dr Statement of profit or loss (expenses)
Cr Bad debts

Example:
Amelia sold goods, $400, on credit to Bloom on 8 January 2021. After many attempts to
recover the amount due, Amelia wrote off Bloom accounts as bad debts on 31 December 2021.
Bloom

58
 Bad Debts

Statement of profit or loss (extract) for the year ended 31 December 20XX

59
2 Provision for Doubtful Debts
• An accounting practice that estimates the amount of money a business may not receive from
customers (receivables) in the future accounting periods.

• It’s also known as the allowance for doubtful accounts or bad debt provision.

• The provision for doubtful debts is determined after the trial balance is prepared.

Adjustments for provision for doubtful debts are needed for:

(i) Creating provision for doubtful debts for the first time; or
(ii) Increased provision for doubtful debts brought forward from previous period; or
(iii) Decreased provision for doubtful debts brought forward from previous period.

(i) Creating Provision for Doubtful Debts

• When a business determines its doubtful debts and want to make adjustments for the provision
of doubtful debts for the first time, the provision for doubtful debts is created for recording the
adjustments for its doubtful debts.
Accounting entries

Dr. Cr.
Statement of profit or loss
500
(EXPENSES)
Provision for doubtful debts 500

• The whole amount of the doubtful debts is entered in both the profit and loss account
and provision for doubtful debts account.

• The statement of financial position deduct the balance on the provision of doubtful debt
account from the trade receivables.

60
Example:
Sachin’s financial year ends on 31 December.
During the year ended 31 December 2021 he wrote off bad debts totalling $950.
On 31 December his trade receivables amounted to $25 000. He decided to create a provision
for doubtful debts of 4% of the trade receivables.

a) Write up the bad debts account and the provision for doubtful debts account in Sachin’s
nominal ledger for the year ended 31 December 2021.
b) Prepare an extract from Sachin’s Statement of profit or loss for the year ended 31 December
2021.
c) Prepare an extract from statement of financial position as at 31 December 2021.
Bad Debts

Provision for doubtful debts

Statement of profit or loss (extract) for the year ended 31 December 20XX

Statement of financial position (extract) as at 31 December 20XX

61
(ii) Increased Provision for Doubtful Debts
• The provision for doubtful debts will be increased when the doubtful debts determined for
the current period is more than the provision for doubtful debts of the previous period.

Last year 2017 1000 (trial balance)

This year 2018 1500 (additional information)

Accounting entries

Dr Cr
Statement of profit or loss
500
(EXPENSES)
Provision for doubtful debts 500

• Only the increased amount of the doubtful debts is entered in both the profit and loss account
and provision for doubtful debts account.

Example:
John’s financial year ends on 31 December.

During the year ended 31 December 2021, John wrote off debts totalling $990.

On 31 December 2020, John created a provision for doubtful debts of $1 000. On 31 December
2021 his trade receivables amounted to $28 000. He decided to maintain the provision for
doubtful debts at the rate of 4% of the trade receivables.

a) Write up the bad debts account and the provision for doubtful debts account in John’s
nominal ledger for the year ended 31 December 2021.
b) Prepare a relevant extract from John’s Statement of profit or loss for the year ended 31
December 2021.
c) Prepare a relevant extract from John’s statement of financial position at 31 December
2021.

62
 Bad Debts

Provision for doubtful debts

Statement of profit or loss (extract) for the year ended 31 December 20XX

Statement of financial position (extract) as at 31 December 20XX

63
(iii) Decreased Provision for Doubtful Debts

• The provision for doubtful debts will be decreased when the doubtful debts determined for
the current period is less than the provision for doubtful debts of the previous period.
Last year 2017 1000 (as per trial balance)
This year 2018 600 (additional information)

Accounting entries
Dr. Cr.
Provision for doubtful debts 400
Statement of profit or loss (other +400
income)

• Only the decreased amount of the doubtful debts is entered in both the profit and loss account
and provision for doubtful debts account.

Example:
Darren’s financial year ends on 31 December.
On 31 December 2020, Darren’s provision for doubtful debts amounted to $1120.
On 31 December 2021, his trade receivables amounted to $24 000. He decided to maintain the
provision for doubtful debts at the rate of 4% of the trade receivables.

a) Write up the provision for doubtful debts account in Darren’s nominal ledger for the
year ended 31 December 2021.

b) Prepare an extract from Darren’s Statement of profit or loss for the year ended 31
December 2021.

c) Prepare an extract from Darren’s statement of financial position at 31 December 2021.

64
 Provision for doubtful debts

Statement of profit or loss (extract) for the year ended 31 December 20XX

Statement of financial position (extract) as at 31 December 20XX

65
Exercise 1:
The following information was extracted from the books of Sabah Winds Limited on 31
December:
Year Trade Receivables ($)
2015 100 000
2016 120 000
2017 200 000
2018 150 000
2019 180 000

Additional information:
The company decided to create and maintain a provision for doubtful debts account of 10% of
trade receivables for the year 2015.
(a) Complete the table below
31 Creation,
December Provision for Increased or Account to be
Doubtful Debts (Decreased) in Debited ($) Credited ($)
($) Provision ($)
2015
2016
2017
2018
2019

(b) Prepare the provision for doubtful debts account, Statement of profit or loss (extract) for
year 2015 to 2019 and statement of financial position (extract) at the end of each financial year
Provision for doubtful debts

66
Statement of profit or loss (extract) for the year ended 31 December 20XX

67
Statement of financial position (extract) as at 31 December 20XX

68
Exercise 2:
• A trader decided to open a Provision for Doubtful Debts account in 2016. The provision was
to be 5% of outstanding debtors at each year end.
You are required to complete the table below and prepare the Provision for Doubtful Debts
account for the years 2016 to 2019 from the following information.

31 Provision for Doubtful Create / Increased /

Trade Debtors
December Debts (5%) (Decreased)
2016 170,000

2017 130,000

2018 160,000

2019 180,000

Provision for doubtful debts

69
Statement of profit or loss (extract) for the year ended 31 December 20XX

Statement of financial position (extract) as at 31 December 20XX

70
 4.3 ACCRUALS AND PREPAYMENTS

1 Accruals and Prepayment

Examples of accruals: Examples of prepayments:

• Interest incurred but not yet paid on • Payment for insurance coverage that
borrowings extends over two accounting periods.
• Rent owed, but not yet paid • Payment of rent of property, plant and
• Commission and royalties equipment in advance.
• Payment of conference fees, software
licences in advance.

71
2 Accrual basis of accounting

Record Record
revenue earned (not what we received) & revenue received &
expenses incurred (not what we paid) expenses paid

Profit for the year 2024 = Total revenue earned in 2024 – Total expenses incurred in 2024

• When calculating profits for a financial year, all expenses and all revenue of the same
financial year must be taken into consideration when calculating profits of the year.

The figures in the trial balance showed all the expenses paid and revenue received during
the year. The expenses paid might include prepaid expenses and the revenue received might
include revenue received in advance.

ADJUSTMENT ENTRIES
• To record expenses incurred and revenue earned during the year.

72
3 Recording accruals and prepayments

Statement of profit or loss (Expenses or Revenue)

• 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.

Statement of Financial Position (Assets or Liabilities)

• During the current year, some of the expenses incurred may not have been paid or some
expenses may have been paid in advance. Similarly, some income may still be outstanding
or may have been received in advance.

• These balances will be carried forward (balance c/d) to the following year.

Record in SOFP

Accrued expenses Expenses incurred but not yet paid Current Liabilities

Services delivered but not yet

Accrued revenue Current Assets
received income
Paid in advance for some future
Prepaid expenses Current Assets
services
Revenue received in Income received which relates to
Current Liabilities
advance / Prepaid revenue future services

73
Example 1:
Trial balance as at 31 December 2021
Dr Cr
Salaries 260 000
Rent 7 000

Additional information:
• Monthly salaries are $20 000
• The company has rented out a section of its premises for a monthly rent income of $1000.
Note:

74
Example 2:

Trial balance as at 31 December 2021

Dr Cr
Insurance 11 000
Sales commission 17 000
Rent 4 000

Additional information
(a) The annual insurance premium is $12 000.
(b) Sales commission is paid at 10% of total sales. The total sales for the year was $200 000.
(c) The company rented out a section of its premises for a monthly rent of $800 beginning 1
July 2021.
(d) The company has a 5% fixed deposit of $100 000. No interest for the year has been received
yet.

Workings:

75
Worked examples:

(a) Accrued expenses

During the year 2021, Harith Supplier's annual rent was $24 000. Harith Suppliers has paid
rent of $20 000 in 2021.

Rent Expense Account

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Statement of financial position (extract) as at 31 December 2021

$

76
(b) Prepaid expenses
Jose Brothers has paid $30 000 for insurance during 2021 of which $2000 was paid in advance
for insurance in 2022.

Insurance Account (expenses)

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Statement of financial position (extract) as at 31 December 2021

$

77
(c) Unearned revenue / Accrued revenue
Lorrin sublets a section of her shop to Dani for a rental of $1000 per month. At 31 December
2021 Dani owes one month's rent.

Rent Revenue account

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Statement of financial position (extract) as at 31 December 2021

$

78
(d) Revenue received in advance / Prepaid income
Total interest income received by ABC Limited in 2020 was $20 000. If $3 000 of interest
income received was for the year 2021.

Interest Income account

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Statement of financial position (extract) as at 31 December 2021

$

79
 5 FINANCIAL STATEMENT

The financial statements prepared for a sole proprietorship are the Statement of profit or loss
(trading account, profit and loss account) and the statement of financial position (balance sheet)
at the end of an accounting period.

5.1 Statement of profit or loss

o The Statement of profit or loss reports the net profit or net loss for a specific period of
time.

o It provides a company's stakeholders with details about its profitability and business
activities

o The Statement of profit or loss contains two sections:

• Trading account
• Profit and loss account

(i) Trading Account

• The purpose of preparing the trading account is to determine the gross profit or
gross loss of the business during an accounting period.

• To shows the income from sales and the direct costs of making those sales.

Gross Profit =

(ii) Profit & Loss Account

• The profit and loss account shows the calculation of profit for the year or loss of the
business for an accounting period.

• The profit for the year is the profit after all operating expenses and any other items of
income.

Profit for the year =

80
Specimen of Statement of profit or loss

Statement of profit or loss for the year ended .........................

RM RM RM
Sales 1000
Less: Sales returns 500
500
Less: Cost of sales
Opening inventory 10
Purchases 200
Less: Purchases returns 20
180
Add: Carriage inwards 10
Add: Direct wages 20
210
220
Less: Closing inventory 20
200
Gross profit 300

Add: Other income

Rent received 10
Interest received 10
Discounts received 10 30
330
Less: Expenses
Rent expense 20
Salaries 20
Insurance 20 60
Profit for the year 270

81
5.2 Statement of financial position

o A statement of financial position shows the assets, liabilities, and capital of a business,
summarizing a company’s financial health at a specific point in time.
o allow investors, lenders, and business owners to assess the company’s risk, liquidity, and
ability to generate returns.
o In a statement of financial position assets and liabilities are properly grouped and classified
under appropriate headings such as:

(i) Non-current assets

(ii) Current assets

(iii) Equity

Capital + profit for the year – drawings

(iv) Non-current liabilities

(v) Current liabilities

82
Specimen of a statement of financial position

Statement of financial position as at xxxxxxx

$ $ $
Accumulated Net Book
Cost
depreciation Value
Non-current Assets
Motor vehicles 50 000 20 000 30 000
Fixtures & fittings 60 000 30 000 30 000
110 000 50 000 60 000
Current Assets
Inventory 2 000
Trade receivables 5 000
Less: provision for doubtful debts 1 000 4 000
Cash at bank 6 000
Other receivables (prepaid expenses/accrued revenue) 1 000 13 000
Total assets 73 000

Financed by:
Capital 50 000
Add: Profit for the year 10 000
60 000
Less: Drawings 2 000
58 000
Non-current liabilities
10-year bank loan 5 000

Current liabilities
Trade payables 8 000
Bank Overdrafts 1 000
Other payables (accrued expenses/ prepaid revenue) 1 000 10 000
Total equity and liabilities 73 000

83
Exercise 1

The following trial balance was extracted from the books of a business, Eastern Winds for the
year ended 31st December 2020.

Debit Credit
$ $
Capital 50 000
Plants & machinery 18 000
Direct 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 overdrafts 4 000
Discounts 8 500
Commissions 1 500
Trade receivables 45 000
Trade payables 26 300
Bad debts 1 000
Stock on 1st January 2020 37 000
Advertising 600
Office expenses 2 700
Fixtures & fittings 4 000
Office stationery 400
Interest 2 000
Bank loan (repayable 2029) ______ 11 500
Total 350 800 350 800

The closing inventory on 31st December 2020 was valued at $28 000.

(a) Prepare an Statement of profit or loss for the year ended 31st December 2020.

(b) Prepare a statement of financial position as at 31st December 2020.

84
 $ $ $

85
 $ $ $

86
Exercise 2
Trial Balance at 31 August 2021
Dr Cr
Inventory 1 September 2020 8 200
Purchases and sales 26 000 40 900
Rent 4 400
Business rates 1 600
Sundry expenses 340
Motor vehicle at cost 9 000
Trade receivables and trade payables 1 160 2 100
Bank 1 500
Accumulated depreciation of motor vehicle 1 200
Capital 19 700
Drawings 11 700
63 900 63 900

At 31 August 2021, there was

a) Inventory valued at $9100

b) Accrued rent $400
c) Prepaid business rates of $300
d) The motor vehicle is to be depreciated at 20% of cost

Required:

Draw up the statement of profit or loss for the year ending 31 August 2021 together with a
statement of financial position as at 31 August 2021.

87
 $ $ $

88
 $ $ $

89
Exercise 3
The following trial balance was extracted from the books of R. Giggs at the close of business
on 28 February 2021.
Dr Cr
Purchases and sales 92,800 157,165
Cash at bank 4,100
Cash in hand 324
Capital account 1 March 2020 11,400
Drawings 17,100
Office furniture 2,900
Rent 3,400
Wages and salaries 31,400
Discounts 820 160
Accounts receivable and accounts payable 12,316 5,245
Inventory 1 March 2020 4,120
Allowance for doubtful debts 1 March 2020 405
Delivery van 3,750
Van running costs 615
Bad debts written off 730
174,375 174,375

Notes:

e) Inventory 28 February 2021 $2,400.

f) Wages and salaries accrued at 28 February 2021 $340.
g) Rent prepaid at 28 February 2021 $230.
h) Van running costs owing at 28 February 2021 $72.
i) Increase the allowance for doubtful debts by $91.
j) Provide for depreciation as follows: Office furniture $380; Delivery van $1,250.

Required:

Draw up the statement of profit or loss for the year ending 28 February 2021 together with a
statement of financial position as at 28 February 2021.

90
 $ $ $

91
 $ $ $

92
Exercise 4
From the following trial balance of John Brown, prepare a statement of profit or loss for the
year ending 31 December 2021, and a statement of financial position as at that date, taking
into consideration the adjustments shown below:

Trial Balance as at 31 December 2021

$ $
Sales 400,000
Purchases 350,000
Sales returns 5,000
Purchases returns 6,200
Opening inventory at 1 January 2021 100,000
Allowance for doubtful debts 800
Wages and salaries 30,000
Rates 6,000
Telephone 1,000
Shop fittings at cost 40,000
Van at cost 30,000
Accounts receivable and accounts payable 9,800 7,000
Bad debts 200
Capital 179,000
Bank balance 3,000
Drawings 18,000
593,000 593,000

i) Closing inventory at 31 December 2021 $120,000.

ii) Accrued wages $5,000.
iii) Rates prepaid $500.
iv) The allowance for doubtful debts to be Increased to 10 per cent of accounts receivable.
v) Telephone account outstanding $220.
vi) Depreciate shop fittings at 10 per cent per annum, and van at 20 per cent per annum, on
cost.

93
 $ $ $

94
 $ $ $

95
 TOPIC 6: CONTROL ACCOUNTS

6.1 Division of Ledgers

Ledger Notes

(a) Sales ledger Contains all trade receivables (credit customers) accounts

(b) Purchases ledger Contains all trade payables (credit suppliers) accounts

6.2 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

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

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

6.3 Reasons for having 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 debtors and creditors quickly when preparing the trial balance.

6.4 Limitations

(a) Control accounts may themselves contain errors

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

96
6.5 Other 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.

6.6 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

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
31

April
Balance b/d
1

97
6.7 Trade receivables control account – Details & Notes

Particulars Notes

(a) Debit balance Trade receivables are assets

(b) Credit balance Some trade receivables may have over-paid

Debit trade receivables control

(c)
account

Credit trade receivables

(d)
control account

Receipts from trade

(e) Dr. Bank; Cr. Trade receivables
receivables
(f) Contra / Set-off

Trade Receivables Control Account

August $ August $
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
x Discount allowed x
cheque
Balance c/d x Bad debts x
Purchases ledger
x
contra
_ Balance c/d x
x x
Sept. Sept.
1 Balance b/d x 1 Balance b/d x

98
6.8 Trade payables control account – details & notes

Particulars Notes

(a) Debit balance

(b) Credit balance

Debit trade payables control

(c)
account

Credit trade payables control

(d)
account

(e) Payment to trade payables

Trade Payables Control Account

August $ August $
1 Balance b/d x 1 Balance b/d x
31 Bank x 31 Purchases x
Purchases returns x Interest charged x
Discounts received x Balance c/d x
Sales ledger contra x
Balance c/d x _
x x

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

99
Exercise 1

Fatima Ayub is a trader. She maintains a full set of accounting records and prepares control
accounts for her sales ledger and purchases ledger at the end of every month. Fatima Ayub
provided the following information.

$
April 1 2021 Debit balances in purchases ledger 3 800
Credit balances in purchases ledger 426 000

April 30 Totals for the month

Cheques received from credit customers 534 000
Cheques paid to credit suppliers 370 500
Credit purchases 668 000
Cash purchases 35 500
Returns by credit customers 23 500
Returns to credit suppliers 24 300
Discount allowed 12 700
Discount received 9 500
Interest charged by supplier on overdue account 1 100
Contra entry 32 000

May 1 2021 Debit balances in purchases ledger 2 200

Select the relevant figures and prepare Fatima Ayub’s purchases ledger control account for
the month ended 30 April 2021.

Purchases Ledger Control Account

100
Exercise 2
Prepare a sales ledger control account from the following information:
2021 $
Mar 1 Debit balances 12 000

Totals for March

Sales journal 9 000
Cash and cheques received from debtors 11 000
Discount allowed 1 000
Debit balances in the sales ledger set off against credit 100
balances in purchases ledger

Apr 1 Debit balances ?

Credit balances 50

Sales Ledger Control Account

101
Exercise 3
Shweta provided the following information for the month of May 2021.

$
May 1
Sales ledger control account debit balance 1850
Sales ledger control account credit balance 115
Purchases ledger control account credit balance 2118

May 31 Totals for the month:

Sales journal 5360
Purchases journal 5110
Sales returns journal 134
Purchases returns journal 216
Cheques and bank transfers received from credit customers 4965
Cheques and bank transfers paid to credit suppliers 4508
Discount received from credit suppliers 92
Irrecoverable debt written off 35
Interest charged by credit supplier on overdue account 14
Contra entry 190

June 1
Sales ledger control account debit balance ?
Purchases ledger control account credit balance ?
Purchases ledger control account debit balance 135

Prepare Shweta’s sales ledger control account and purchases ledger control account for the
month of May 2021. Balance the accounts and bring down the balances on 1 June 2021.

102
 Sales Ledger Control Account

Purchases Ledger Control Account

103
 TOPIC 7: BANK RECONCILIATION STATEMENT

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

• 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.

7.2 Reasons why the cash book (bank balance) and the bank statement may differ

Cause of difference Explanation

Errors Errors in calculation, or in recording income or payment, are as likely

to have been made by yourself as the bank.

Bank charge or bank Bank might deduct interest on an overdraft or charges for its services,
interest (omission in which you are not informed about until you receive the bank
cash book) statement.

Timing differences (a) Although you own records show that some cash has been added
to your account, it has not been recognised by the bank.
(recorded but in
different periods) (b) Payments made by cheque and recoded, but not yet banked by
payee.

7.3 Importance of Bank Reconciliation

• Preparation of bank reconciliation helps in the identification of errors in the accounting

records of the company or the bank.

• 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

• Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of
a business.

104
7.4 Preparing a bank reconciliation statement

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

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

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

4. Update the cash book - All items not ticked in the bank statement will be adjusted in
the cash book.

5. Correct errors in the cash book (if any)

6. Prepare bank reconciliation statement - All items not ticked in the cash book will be
recorded in the bank reconciliation statement.

Bank reconciliation statement format:

(i) Start with updated cash book balance
(ii) Start with bank statement balance

105
Example:
On 2 March 2021, Mella received the following bank statement while her cash book was as
below:

Feb Dr ($) Cr ($) Balance ($)

1 Balance b/d 650 Cr
4 Monki People Limited 1500 2150 Cr
9 Sweetie 730 1420 Cr
14 Interest payable 12 1408 Cr
25 Credit transfer (dividends) 130 1538 Cr

Cash Book (Bank Column Only)

$ $
Feb 1 Balance b/d 650 Feb 7 Sweetie 730
3 Monki People Limited 1 500 14 Iron Rod Holdings 400
28 Ronaldo 200 Balance c/d 1220
2350 2350

March Balance b/d 1220

1

(i) Update the cash book for Mella on 28 February 2021. Balance the cash book on that date
and then prepare the bank reconciliation statement.

Cash Book (Bank Column Only)

$ $

106
(ii) Prepare the bank reconciliation

Format 1: Start with cash book balance

Bank Reconciliation Statement at 28 February 2021

$ $ $

Format 2: Start with bank statement

Bank Reconciliation Statement at 28 February 2021

$ $ $

107
Exercise 1:

Bank Statement

Date Cheque Dr Cr Balance

no.
June $ $ $
1 Balance b/d 2000 Cr
2 Cash 300 2300 Cr
5 Cheque 3211 700 1600 Cr
7 Cheque 3212 200 1400 Cr
11 Standing Orders – Star World 100 1300 Cr
15 Cheque 3215 600 700 Cr
19 Dividends (GH Ltd) 4000 4700 Cr
21 Cheque 3214 5000 300 Dr
27 Bank Charges 10 310 Dr
30 Deposit 1000 690 Cr

Cash Book (Bank Column Only)

Cheque
June $ June $
no.
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

7000 7000

July

1 Balance b/d 3100

Required:
a) Update the cash book and balance the cash book on that date.
b) Prepare the bank reconciliation statement.

108
 Cash Book (Bank Column Only)

Format 1: Bank Reconciliation Statement at ………………

$ $ $

Format 2: Bank Reconciliation Statement at ………………

$ $ $

109
Exercise 2:

The bank statement for R. Hood for the month of March 2021 is:

Dr Cr Balance
(payment) (receipt)
1 Balance 4,200 O/D
8 [Link] 184 4,384 O/D
16 Cheque 292 4,092 O/D
20 [Link] 160 4,252 O/D
21 Cheque 369 3,883 O/D
31 G. Frank: trader's credit 88 3,795 O/D
31 TYF: standing order 32 3,827 O/D
31 Bank charges 19 3,846 O/D

The cash book for March 2021 is:

Dr $ Cr $
16 [Link] 292 1 Balance b/d 4,200
21 J. Forker 369 6 T. Macleod 184
31 S. O'Hare 192 30 [Link] 160
31 Balance c/d 4,195 30 S. Porter 504
5,048 5,048

You are required to:

(a) Write the cash book up to date, and
(b) Draw up a bank reconciliation statement as on 31 March 2021.

110
111
 TOPIC 8: MANUFACTURING ACCOUNTS

8.1 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 trading profits
(iii) Statement of financial position to determine the financial position

8.2 Elements of Costs

o Costs which are incurred to make a product are named as manufacturing costs.

o Such costs are usually grouped into various categories or divided into elements. There are
three elements of cost:

• Material Cost:
This is the cost of material used for production purpose. Material is the substance
required from which a product is made.

• Labour Cost:
This is the cost, incurred to pay to the workforce for their services. The workforce
required to convert material into finished product is called labour.

• Expenses:
Costs of services required for production purpose.

112
o The three elements of costs can be further divided into direct and indirect costs:

(a) Material Cost

(i) Direct Material

• An integral part of the finished product and is easily identified with that
finished product.

• Example:
Computer

Furniture

(ii) Indirect Material

Minor materials used for ancillary(support) purposes and cannot be conveniently

identified with the finished product.

• Example:
Computer
Furniture

(b) Labour Cost

(i) Direct Labour

The wages paid to employees who directly work on the producing the product.
• Example:

(ii) Indirect Labour

The wages paid to other employees who do not work directly on a product.

• Example:

113
 (c) Expenses:

(i) Direct Expenses

Expenses which can be directly identified with the individual products.

• Example:

(ii) Indirect Expenses

Expenses which cannot be directly identified with the individual products.

• Example:

Summary
Material cost = Direct material cost + Indirect material cost

+ + +

Labour cost = Direct labour cost + Indirect labour cost

+ + +

Expenses = Direct expenses + Indirect expenses

Total costs = Direct cost/Prime cost + Indirect cost / Factory

Overhead

8.3 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 trading account 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.

114
Step 1: Compute prime cost (Total direct costs)
Prime costs contain the direct costs which are costs that are directly linked to
manufacturing products.

Step 2: Compute Factory Overheads (Total indirect costs)

Factory overhead contains all the other expenses associated with production. Such costs
are those costs which are not directly linked to the production process.

Step 3: Include Inventory of work-in-progress (WIP)

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

• Such inventory need 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.

Step 4: Cost of production

• Cost of production is prime cost plus factory overheads, adjusted for any work in
progress at the start and at the end of the year. It is the total cost of manufacturing the
goods completed.

115
Format of a manufacturing account

ABC Industries Limited

Manufacturing Account for the year ended ...............................
RM RM RM
Direct Materials
Opening stock of raw materials x
Add: Purchases of raw materials x
(-) Purchases returns of raw materials x
x
(+) Carriage inwards of raw materials x
(+) Import duties of raw materials x
x
x
x
Less: Closing stock of raw materials x
Costs of raw materials used / consumed x

Direct Labour
Factory wages x

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

Add: Factory Overheads

Factory salaries x
Factory rent & rates x
Factory indirect wages x
Factory building depreciation x
Machinery depreciation x
x
xxx
Add: Opening work in progress x
x
Less: Closing work in progress x
Cost of production xxx

116
 ABC Industries Limited
Statement of profit or loss for the year ended ...............................
RM RM RM

Sales of finished goods x

Less: Cost of goods sold

Opening stock of finished goods x

Cost of production (from manufacturing acc) xxx

Purchases of finished goods x

Less: Closing stock of finished goods x

Gross profit x

Add: Other Income

Commission received x

Discount received x

Less: Operating Expenses

Office salaries x

Advertising expenses x

Administration & distribution expenses x

Office utilities x

Profit for the year x

117
8.4 Worked Example:

Exercise 1

The following information was provided by the Kapoor Manufacturing Company on 30 April
2021:
$
Raw materials – Inventory 1 May 2020 14 900
Inventory 30 April 2021 15 300
Purchases 181 200
Carriage on purchases 3 300
Factory wages – Direct 166 100
Indirect 93 800
Royalties 10 000
Factory insurance 2 070
Factory rent and rates 2 930
Factory general expenses 6 350
Depreciation of factory machinery 9 500
Work in progress – Inventory 1 May 2020 8 790
Inventory 30 April 2021 8 640

Prepare the manufacturing account of the Kapoor Manufacturing Company for the year
ended 30 April 2021.

118
Manufacturing account for the year ended ……………….

119
Exercise 2
Sandar Manufacturing makes a single product. The following balances were extracted from
the books at the end of the financial year on 30 September 2020:

RM
Inventory at 1 October 2019:
Raw materials 17 500
Work in progress 24 000
Finished goods 50 000

Purchases of raw materials 82 600

Revenue 500 000
Carriage 12 000
Production wages 75 000
Office wages 35 000
Sundry office expenses 14 500
Production manager’s salary 20 500
Factory rent, rates and power 18 400
Royalties 9 000
General factory expenses 15 200
Premises maintenance 40 000
Factory machinery (at cost) 120 000
Factory machinery – provision for depreciation 70 000

Inventory at 30 September 2020:

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

Additional information at 30 September 2020:

• 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 2020. Clearly label the prime cost and cost of production.

120
 Sandar Manufacturing Limited
Manufacturing account for the year ended ……………….
RM RM

121
 Sandar Limited
Statement of profit or loss for the year ended ……………
RM RM

122
 TOPIC 9: BREAK-EVEN ANALYSIS
9.1 COST BEHAVIOUR

1 Introduction
The description of cost behaviors to changes in activity levels is grouped as:
(i) variable,
(ii) fixed, and
(iii) semi-variable costs.

2 Fixed costs
• Costs which do not vary with changes in output level.

• Examples:

Illustration 1 : ABC company rent its factory premises for RM8 000 per month
Production volume 10 000 units 20 000 units 30 000 units 50 000 units
Total fixed cost
Unit costs

Note:
1.

2.

Total cost (RM)

8 000

0 50 000 Activity level (units)

123
3 Variable costs
• Cost which vary in direct proportion to changes in output level.
• Variable costs will increase with each additional unit of output.
• Examples:

Illustration 1:
ABC Company produces calculators. Each unit produced requires a chip that costs RM2
Production volume 0 unit 1 000 units 2 000 units 8 000 units
Total variable cost
Unit costs

Illustration 2:
DEF company requires a casing costing RM5 for each of the product.
Production volume 300 units 600 units 1 200 units
Total variable cost
Unit costs

Notes:
1.

2.

Total cost (RM)

16 000

0 8 000 Activity level (units)

124
4 Exercise:
Are the following likely to be fixed or variable costs?
Cost of materials to pack product X into a box
The accountant’s annual professional accountancy membership
Annual salary of accountant
Wages of warehouse workers

125
 9.2 BREAK-EVEN ANALYSIS

1 Break-even

• Break-even occurs when there is no profit or loss.

• Break-even point results where sales and total costs are equal.

2 Uses of Break-Even Analysis

• To measure profits and losses at different levels of production and sales

• To predict the effect of changes in sales prices
• To forecast the effect on profitability when there are changes in costs

3 Break-even Formula

There are two formulas to determine the break-even point where either way, the result
would be the same.

a) Break-even point (units)

!"#$% '()*+ ,"-#-
Break even units = ,".#/(01#(". 2*/ 1.(#

where Contribution per unit = selling price – variable cost per unit

b) Break-even point (value)

Break even value = Break even units x selling price

!"#$% '()*+ ,"-#-

Break even value = !
,".#/(01#(". 3$%*- 4$#(" ( /$#(")
"

where
,".#/(01#(". 7*/ 1.(# ,".#/(01#(".
C/S ratio = 3*%%(.8 7/(9*
or 3$%*-

126
Worked example

ABC Company expects to sell 20 000 toys at RM5 each. The variable cost per unit is RM3 and
total fixed costs is RM10 000 per annum.

a) Contribution per unit

b) Break even point (units)

c) Break even point (value)

127
4 Target Profits or Target Sales Volume

a) Sales units
!"#$% '()*+ ,"-#- : 2/";(#
Sales units = ,".#/(01#(". 2*/ 1.(#

where Contribution per unit = selling price – variable cost per unit

b) Sales value

Sales value = Sales units x selling price

!"#$% '()*+ ,"-#- : 2/";(#

Sales value = !
,".#/(01#(". 3$%*- 4$#(" ( /$#(")
"

where
,".#/(01#(". 7*/ 1.(# ,".#/(01#(".
C/S ratio = or
3*%%(.8 7/(9* 3$%*-

Worked example:

DEF Company expects to sell 30 000 toys at RM8 each. The variable cost per unit is RM6 and
total fixed costs is RM20 000 per annum.

(a) Calculate the sales units needed to earn a profit of RM300 000

(b) Calculate the sales value needed to earn a profit of RM300 000

128
(c) Calculate the profit if the business decides to manufacture and sell 50 000 units.

129
5 Break-even charts

• The break-even chart is a graphical representation of costs at various levels of

activity.

• 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.

TR =
TC =
TVC =
FC =

• 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.

130
6 Limitation of break-even analysis

• It does not allow product mix and is usually calculated for a single product.

• Not all costs can be easily separated into variable or fixed costs.

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

• A breakeven chart may be time-consuming to prepare

• It assumes fixed cost are constant at all levels of output

• It assumes that variable cost per unit are the same at all level of output

• It ignores the uncertainty in the estimates of fixed cost and variable cost per unit

7 Exercise
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.
(a) Calculate the break-even point in units and in sales value; and
(b) Calculate the sales (units and value) required to achieve a target profit of RM30 000.

131
2. Bird Limited 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 overhead RM60 000 per annum

Calculate the break-even point in units and in revenue.

3. 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 Kingko a week. Calculate the weekly breakeven point in
units and in revenue.

132