Function of accounting
1. Recording
2. Classifying
3. Summarising
4. Communicating
Assets = Capital + Liabilities
Profit = Revenue - Expense
On Credit = taking ownership of an asset now but paying it later [未比錢，先攞貨]
Creditor = whom money is owned for assets or services [公司⽋佢錢] -> Account Payable = Liability
Drawing | + | - | = it deducts the amount of capital
Current Liability = pay within a year
Inventories / Stocks / Goods = current assets held for resale to make pro t
Cash purchase = for the purpose of resale -> purchase account
Credit purchase = account payable
Withdrawing good = Drawing | Purchases (-)
Debit note
Return outward Return inward
Credit note
Trade discount Vs Cash discount
Trade discount
• is the discount given to customer who buy in large quantities
• Suppliers o er trade discount to their customers in order to encourage bulk purchases
• It will not be recorded
Cash discount
• is the discount given to a debtor who pays within a certain period
• Suppliers o er cash discount to their customers in order to encourage early payment
• Required to be recorded
List price = not yet calculate the trade discount
Invoice price = net amount (deducted trade discount)
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Trial balance
• Used to check the accuracy of entries in the accounts and identify errors in the books
• Errors may exist even when the debit and credit balances are equal
• Functions
• Detect errors made in the recording of transaction by checking whether the totals of debit and credit
balances extracted from ledger accounts are equal
• Facilitate the preparation of nancial statements at the end of an accounting period
Suspense Account = temporary -> Di erence as per trial balance
Incorrect listing of Trial balance
[Link] balance of the commission income account of $5600 was omitted from the trial balance
Suspense 5600 (commission income)
No entry —
**因為做correction係改T account, 但係依家純粹trial balance抄錯，所以無野改**
2. Salaries of $5260 were listed as a credit balance in the trial balance
No entry
Suspense 10520
Product cost
• Costs to purchase or manufacture products which will be resold
• Only net purchase count = purchase - return outwards
• The costs to get those products in place and ready for sale
• Transport of goods : delivery cost / freight cost / carriage inwards
• Insurance for transportation
• Packaging cost
Gross Profit = Net sales - Cost of Goods Sold
(Net sales = sales - return inwards)
COGS = Opening Inventory + Product Cost - Closing Inventory
Period cost = expenses
Eg. Carriage outwards = delivering goods from the rm to customers
Net profit = GP + Other Revenue - Expenses
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Classification of ledger account
Personal
• Individuals and organisations having transactions with the rm
• Debtor / creditor
Impersonal
• Other than personal accounts
• Capital / drawing
Nominal
• Will be closed o at the end of an accounting cycle -> shown in the income statement
• Temporary account
• COGS / expenses / sales / other revenues
Real
• Will be carried forward to the next accounting cycle -> balance sheet
• Permanent account
• Assets / liabilities / capital
Trading : is prepared to calculate the gross pro t (same type with capital) | - | + |
Inventory (assets)
Trading - closing inventory (+ capital)
Pro t and loss : is prepared to calculate the net pro t (same type with capital)
Cash Accounting Vs Accrual Accounting
Cash
Revenues are recognised when received and expenses are recognised when paid
Accrual
Revenues are recognised when earned and expenses are recognised when incurred
Accrued expense [未付開⽀] = current liability
Prepaid expense [預付開⽀] = current assets
Accrued revenue [應計收益] = current assets
Unearned revenue [未獲收益] = current liability
eg. Rent of $6000 which had been prepaid at Rent
31/12 had not been brought down in the rent Suspense
account as an opening balance
Bad debts = account receivable that have been proved to be uncollectible -> 對 trade receivable
Bad debts Recovered = a debt that is paid either in whole / in part after it has been written o as
bad debt
-> 重開trade receivable 收錢
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Allowance for doubtful debt
= general allowance + speci c allowance
=( accounts receivable - speci c debt ) x % on general allowance + speci c debt
Expenditure
Capital
• Generates long term bene ts for an entity [Link] charges
• Purchase or production of non-current assets
• Extension or improvement to existing non-current assets
Revenue
• Generates short-term bene t
• Day-to-day operation of an entity eg.o ce rent wages and salaries
Depreciation
• Is the systematic allocation of the cost of a non-current asset over its useful life
• Physical deterioration : Wear and tear / Rust, rot, decay
• Economic factors : obsolescence / inadequacy /
• Time factors : depletion / amortisation (攤銷)
Straight-line method / on cost
= ( cost - estimated residual value ) / estimated useful life
= ( cost - estimated residual value ) x estimated depreciation rate
Residual value = disposal / scrap / salvage value
Reducing balance method / on net book value / on carrying amount
Net book value = cost - accumulated depreciation
= NBV x depreciation rate
Usage-based method
Units of output = ( cost - estimated residual value )
x ( output of the year / total expected output throughout useful life )
Operating hours = ( cost - estimated residual value )
x ( operating hours for the year / total expected operating hours )
Eg. 40% per annum on a reducing balance basis // cost = $ 103000
4 years = 103000 x ( 1 - 0.4 ) ^3 x 0.4 = $8899
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Disposal 【成舊錢走】
Accumulated depreciation
Cash
Non-current assets
Disposal (gain)
Disposal (gain)
Pro t and loss
Trade in allowance
= 舊機回收價
-> trade左之後值幾錢
Inventor y valuation
Weighted average cost method
Per unit = total cost of inventory / total units of inventory
Note : a sale will not a ect the weighted average cost of inventory
Opening inventory should also be count
Net realisable value
= selling price - expenses needed before completion of sales
Eg. Selling expenses, handling charges, transportation, repair
Sale or return basis
Received
We won’t record purchases and sales until they are sold // not count as closing inventory
Sent to customer
We won’t record sales unless the goods are sold or seller accept those goods // will count as
closing
Eg. Selling price $960 / cost $700 were recorded as sales
The customer had not stated an intention to buy or return the goods
= 扣 sales 加 inventory (未講話要)
Eg. Goods with cost $1275 included in the closing inventory , were written o as having no resale
value
= NRV = 0 -> 要扣翻$1275 inventory
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Free sample
Signi cant -> promotional
expense / 扣 purchases
Normal inventory loss
= Expected loss
• Damaged / deteriorated in quality
(long storage)
• Obsolete or out-of-date
• Market values decline
• Damage during transportation
-> mark down to net realisable value
-> 盤點後發現要起account改
Abnormal inventory loss
= Unexpected loss
• Destroyed in re / ooding / accidents
• Lost during burglary
-> should be record as an expense
Inventory loss
Purchase / trading / P&L
Trading -> Pro t and Loss -> Capital
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- made in two equal withdraw = withdraw same amount x 2
- Cash sale retained by partner = drawing (佢直接keep起左筆錢當係⾃⼰)
- Each partner was to be contribute cash(bank) amounting to 20% of the total liabilities of the
partnership
= 每個partner都要further contribute capital（cash at bank）
Books of original entries and ledgers
Journal -> Double entry -> Ledgers -> Trial balance -> Period end adjustment -> nancial
statement
1. Sales journal (credit sales)
2. Purchase journal (credit purchases)
3. Return inward journal
4. Return outward journal
5. Cash book
6. General journal (other than cash / cheques / goods )
1. Purchases / Account payable ledger
2. Sales / Account receivable ledger
3. General ledger (expense / capital / non-current assets) eg. Sales / Purchases
Reasons of sub-division of ledger
• To sub-divide the work on specialised basis for sta
• To provide useful information which is easily available from specialised parts of the ledger
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Cash book | + | - |
Banking ser vices ch.29
Standing order (定期⽀付指示)
Direct debit (直接⽀帳付款)
Credit transfer / direct credit
Dishonoured cheque
• Stale cheque 過期⽀票（6個⽉後）
• Postdated cheque 期票=未到期
Correction of error
• Error of commission 錯⼈名
• Error of original entry 錯數
• Error of omission
• Error of principle 錯account
• Complete reversal of entries
• Compensating error
Casting error = 錯單邊
Accounting Concept
Business Entity
A business is considered as a separate entity that distinguishable from its owner and all other
entities.
For drawing,
Therefore, transactions between the rm and the owner should also be recorded
For owners’ personal transaction,
Private transactions of the owner should not be recorded in the books of business
Eg.1 Takeover of business inventory by the owner should be recorded in the drawing account so
as to decrease the capital amount in purchases account in order to avoid overstating the cost of
goods sold.
Historical cost
Assets and expenses are entered into the books at their actual cost of acquisition or production
to the business. Cost is the exchange price agreed upon by the parties to the exchange. Market
value and list price are generally ignored.
Eg.1 Motor van list price $200 000 + discount $25 000
Amount to be recorded = 200 000 - 25 000 = $175 000
-> actual cost to the business = the net price after deducting discount
Eg.2 O ce equipment list price $45 000 -> special sale $35 000 // market value = $42 000
(recorded)
Subsequent changes in their market values and list price are generally ignored -> purchase cost
Going Concern
It assumes that an entity will continue to operate in the foreseeable future.
In particular, the nancial statements have been assumed that the entity has neither the intention
nor the need to liquidate or reduce its scale of operation signi cantly.
= non-current assets should valued at net realisable value / liquidation value
Eg.1 [2012 P1 Q6a] Equipment list price $56 000 -> bought for $48 000 in Feb 2012
Went bankrupt on 31 Mar 2012 + close business -> market value $38 000
Valuation at 31 Mar 2012 = $38 000
As the business discontinued its operation in the foreseeable future, assets should not be valued
at historical cost. They should be valued at their net realisable values = current market value
Realisation concept [ for revenue ]
It governs that revenues should only be recognised when the related services are provided or the
goods are delivered to customers, not when the monies are received.
Eg.1 [分期付款] The maintenance fees are received for two or three years’ service and the
company should recognise the service fee revenue on a timely basis over the respective service
period.
Maintenance fees received for service to be provided in the following years should be recorded
as a liability / deferred as unearned revenue.
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Accrual Concept [ for expenses ]
Under accrual concept, revenue and expenses are recognised and included in the nancial
statement, when they are earned or incurred, not when they are received or paid in cash.
Eg.1 Therefore, the expenses incurred in dec 2014 should be recorded as expenses in the
income statement of 2014, though it was still unpaid at the year end.
And the unpaid electricity should be credited to the accrued electricity expenses account to
represent an increase in current liability in 2014.
Eg.[HKAL2008P2Q3] $40000 paid by BQ supermarket is a prepayment of promotion expense and
should not be expensed in 2007.
The activities would only be launched in may 2008, which is the time when the expense is
actually incurred .
Matching Principle
It links revenue with its relevant expenses or cost in order to determine accounting pro t.
For cost of goods sold,
The cost of the sale can only be recorded when the goods are sold and the related sales revenue
is realised. [ COGS Vs Closing inventory ]
For depreciation,
Since the use of non-current assets contributes to the generation of revenue of the business and
the cost of the non-current assets should therefore be matched against the related sales revenue,
and allocated over its useful life on a systematic basis. And this is the depreciation expense for
the year.
Prudence
When choosing accounting alternatives, the best choice is the one that is least likely to overstate
the assets and pro ts.
For provision allowance
When there are expected loss or liabilities, provision have to be made immediately
For inventory valuation
The company should adopt the lower of cost or net realisable value in inventory valuation
Materiality
It refers to the impact of an item’s nature and size on the company’s nancial operation. Principle
states that if an item would not make a di erence to user’s decision making, it is justi able to
write the item o as an expense when it is incurred.
**justi able reason / signi cant in value x expenses**
Signi cant enough to in uence -> capitalised and depreciated
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Consistency
The accounting treatment of similar items should be the same in the accounting period, from one
period to another.
A change in accounting treatment is allowed when it will result in a more fair and true
presentation of the rm’s nancial position.
**di erent consumption pattern**
Money measurement
Only transaction capable of being expressed in monetary term should be included in the
accounting records of a business entity
(Quanti ed in terms of money)
Timeliness
A business should disclose the nancial information as soon as possible on a timely basis, so
that it can be used by users for decision making
Objectivity
The principle requires that accounting information be based on facts and be veri able. It should
be free from bias and subjective judgement. Neutrality is maintained.
(x own valuation / considered subjective / independent body)
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