Theory Notes AS Accounting 9706 - Financial

Daybooks
What is Irrecoverable debt?
when a costumer to whom goods were sold on credit basis, is unable to pay his debt then it
results into an expense for the business. Selling goods on credit basis involves this risk of
bad debt. Any amount of debt which becomes irrecoverable should be written off as
irrecoverable debt.

What is a Allowance for Irrecoverable debt?

A business must consider that some costumers might not pay the amount owed by them; these
debts are considered to be doubtful. Since the business does not know the exact amount of the
doubtful debts ( and also which costumer might not pay), an estimate for such amount is kept in a
provision for doubtful debt account ( this account is not an expense account, it’s a reduction in asset
from the statement of financial position).

How is the amount of provision estimated? ( Factors effecting it)

1. Age of Debts ( Since how long they owe us), higher the age more likely bad debts (so
high provision is kept If majority of the debts are owed for long)
2. Historical percentage of actual bad debts from previous years
3. Reputation of people who us money in the market
4. Nature of Business
5. Some specific debts may be identified and full amount of them is charged in
What is the difference between accounting treatment of Provision
for doubtful debts and the actual Bad debts?

The difference in accounting treatment is that the whole of bad debt is treated as an expense but
only the change in provision is treated as either an expense (if increasing) or an income ( if
decreasing). When we write off a bad debt, we remove the person from our books but in case of a
provision we don’t adjust the Trade Receivable account as a separate account is maintained.

What is Bad Debt Recovered?

This is when a debtor whose debt was previously written off , pays us back. This is treated as an
income in the year in which the debt is recovered . The accounting treatment is done in two steps - -
Make him or her your debtor (receivable ) as the debt has been written off previously and the
account of that costumer doesn’t exist in our books Debit : Name of Person(Trade receivable )
Credit: Bad debt recovered account Now record the entry to receive the money Debit: Bank Credit :
Name of person (Trade Receivable )

ACCOUNTING FOR NON CURRENT ASSETS

(Including Depreciation)
In the same way we can have Capital receipts and Revenue Receipts.
Capital Receipts would include money received from capital transactions e.g. taking a bank loan ,
selling a non current asset or additional capital introduced by the owners ( note this money coming
in not earned by the business from profits)

Revenue Receipts are incomes generated from day to day operations of a business ( taken to
income statement) e.g. Sale of goods , Interest received rent received

Depreciation
This is an expense recorded to allocate a non current asset cost over its useful life. Deprecation is
used in accounting to try to match the expense of an asset to the income that the asset helps the
business to earn. For example if a business buys a piece of equipment for $1 million and expects to
use it over a life of 10 years, it will be depreciated over 10 years.

Causes of Depreciation
1. Wear and tear
2. Change in technology/Fashion/Taste
3. Passage of time
4. Obsolescence

The Double Entry for Depreciation is :

Debit: Statement of profit and loss
Credit: Provision for Depreciation

Methods of Depreciation:
1. Straight Line :
An equal amount of deprecation is charged every year. It is always calculated on cost . In case of
scrap value (residual value) and life given use : (Cost –Scrap)/Life OR (Cost –Scrap)*rate

2. Reducing Balance Method:

In this deprecation for initial years in always higher then the later years. It is simply a percentage on
net book value (written down value) . Net Book value represents cost minus total deprecation till
date.
3. Revaluation Method: This is usually used for loose tools ( or any asset which can only be
valued collectively) . In this method at the end of the year the market value is estimated. A
numerical example best explains this

At the start of the year Loose Tools Valued at $5000

During the year Loose Tools purchased = $2000

Loose Tools Sold = $300

At the End Loose tools are worth $4500

Deprecation = 5000 + 2000 – 300- 4500 = 2200

Opening Value+ Purchased –Sold – Closing Value

Usually,
1. Sales are overstated with selling price, so we reduce the sales with the sales amount
2. Trade are overstated with selling price, so we reduce the Trade receivables with the
sales amount.
3. Closing inventory is understated with the cost amount, so we increase the Closing
inventory with cost value.
Values that you may ask to calculate;
1. Opening Capital:
Opening Capital= Opening assets (include bank balance) – opening liabilities
2. Credit sales: Make SLCA
3. Cash Sales: make cash and bank account
4. Credit purchase: Make Plca
Sources Of Finance:
1. Loans (Secured and Unsecured)

What it is: Borrowed money from a financial institution.

 Advantages:
1. Fixed repayment schedule aids budgeting.
2. Large amounts can be borrowed.
3. Secured loans have lower interest rates.
 Disadvantages:
1. Interest must be paid (even with no profits).
2. Collateral is at risk (secured loan).
3. Can affect cash flow due to fixed repayments.
2. Bank Overdrafts

What it is: Permission to withdraw more than the bank balance.

 Advantages:
1. Quick access to short-term funds.
2. Flexible – only pay interest on amount used.
3. Helps in covering temporary cash shortages.
 Disadvantages:
1. High interest rates.
2. Repayable on demand.
3. Limited amount available.

3. Payment by Instalments

What it is: Buying now, paying over time.

 Advantages:
1. Spreads the cost of expensive items.
2. Helps manage cash flow.
3. No need for large upfront payment.
 Disadvantages:
1. Total cost is higher due to interest.
2. Missed payments can lead to penalties.
3. Asset may not be fully owned until last payment.

4. Rental/Leasing

What it is: Paying to use assets without buying.

 Advantages:
1. No large capital needed.
2. Maintenance often included.
3. Easy to upgrade equipment.
 Disadvantages:
1. No ownership of the asset.
2. Long-term cost may be higher.
3. Bound by contract – hard to cancel early.

5. Trade Credit
What it is: Buying goods/services now, paying later.

 Advantages:
1. Improves cash flow.
2. No immediate cash needed.
3. Can sell goods before paying suppliers.
 Disadvantages:
1. May miss out on early payment discounts.
2. Overuse can hurt credit rating.
3. Can damage supplier relationships if misused.

6. Issue of Shares (Company)

What it is: Selling ownership in the business to raise capital.

 Advantages:
1. No interest or repayment required.
2. Can raise large amounts of capital.
3. Improves business credibility.
 Disadvantages:
1. Loss of control to shareholders.
2. Dividends may be expected.
3. Legal/formal procedures are costly.

7. Issue of Debentures (Company)

What it is: Long-term borrowing with fixed interest.

 Advantages:
1. Ownership is not diluted.
2. Fixed interest helps in planning.
3. Useful for large, long-term finance.
 Disadvantages:
1. Interest must be paid even if no profit.
2. Increases financial risk.
3. Repayment may be a burden in future.
 Speed – Faster recording and processing of transactions.
Accuracy – Reduces human errors in calculations.
Real-time information – Instant access to up-to-date financial data.
Automatic reports – Generates financial statements quickly.
Data security – Backups and passwords protect records.
Easy updates – Simple to correct or update entries.
Cost-effective – Reduces need for manual labour over time

 High initial cost – Buying software and hardware is expensive.

 Training needed – Staff must learn how to use the system.

 Risk of data loss – System failures or cyberattacks can cause data loss.

 Dependence on technology – Work stops if system crashes.

 Security threats – Risk of hacking or unauthorized access.

 Regular updates – Software needs maintenance and updates.

 COSTING
🔍 What is a Budgetary Control System?

A Budgetary Control System is a financial management tool that involves:

1. Preparing budgets
2. Comparing actual performance with budgeted performance
3. Taking corrective action to achieve organizational goals

🧾 Key Components of a Budgetary Control System

1. Budgeting

 Involves preparing detailed financial plans.

 Budgets can be prepared for income, expenses, cash, production, sales, etc.

2. Recording Actual Results

 Actual performance is recorded over time.

 Data may include actual sales, actual costs, etc.

3. Comparison (Variance Analysis)

 Compare budgeted figures with actual figures.

 Identify variances:
o Favourable (F) – actual is better than budget
o Adverse (A) – actual is worse than budget

4. Analysis and Action

 Understand the causes of variances.

 Management takes corrective action if needed.

✅ Advantages of Budgetary Control System (In Detail)

1. Improves Planning and Coordination

 Budgets force managers to think ahead and plan for future operations.
 Encourages coordination between departments (e.g., sales and production must align).
 Helps avoid bottlenecks, overstocking, or underproduction.

2. Sets Targets and Encourages Goal Orientation

 Clear financial and operational targets help employees focus on results.

 Creates motivation when targets are realistic and linked to rewards.
3. Aids in Performance Evaluation

 By comparing actual results with budgeted ones, management can:

o Identify which departments are performing well.
o Take corrective action in underperforming areas.

4. Improves Resource Allocation

 Budgets ensure resources (money, time, labor) are used efficiently.

 Prevents overspending and waste by setting spending limits.

5. Enhances Cost Control and Profitability

 Helps monitor and control costs regularly.

 Variance analysis helps identify areas where costs can be reduced.

❌ Disadvantages of Budgetary Control System (In Detail)

1. Time-Consuming and Costly

 Preparing detailed budgets requires significant time, effort, and staff.

 For small businesses, the cost of a full system might outweigh the benefits.

2. Based on Assumptions

 Budgets rely on forecasts and past data, which may not be accurate.
 Unexpected events (e.g., economic crisis, inflation, strikes) can make budgets useless.

3. Can Demotivate Staff

 Unrealistic or rigid budget targets can frustrate employees.

 Pressure to meet numbers may lead to stress or unethical behavior (e.g., cutting quality to
save costs).

4. Reduces Flexibility

 Departments may stick to the budget even when changing circumstances demand a
different approach.
 This can stop innovation or discourage risk-taking.

5. Short-Term Focus

 Too much emphasis on meeting budget targets may lead to:

o Ignoring long-term goals or quality.
o Underinvesting in future opportunities (like training or R&D).
Key Costing Terminologies
What is a Cost Centre?
Cost centre is the area or a department in a business for which cost are accumulated. There
are two main types of Cost Centres
• Production Cost Centre: Departments which are involved directly in production of a
product. For example, Moulding, Cutting or Assemble Department.
• Service Cost Centre: Departments in which production doesn’t take place but they
provide service to the production departments. For example: store Department or
Maintenance Department.

What is a Cost Unit?

Costs are always related to some object or function or service. For example, the cost of a
car, a haircut, a ton of coal etc. Such units are known as cost units and can be defined as
‘A unit of product or service in relation to which costs are determined’.
Cost unit may be units of production, e.g. kilos of cement, one chair ,one table OR may be
units of service, e.g. consulting hours, Patient nights, Kilowatt hour.

What is the difference between direct cost and variable cost?

The direct cost is directly related to a product and it can be easily traced to the item being
manufactured but it does not include any type of variable overheads. The variable cost
includes
all direct cost and variable overheads as well. For e.g. the variable part of the electricity.

What is a Sunk Cost?

This is an expenditure which has already been incurred and it has no importance in future
decision making since the cost has already been spent. For example, a business conducts a
feasibility study of buying a new machine and incurs an expense of $5 000. Now whether
the machine is brought or not, $5,000 has already been spent and cannot be recovered, so
we should not consider them in decision making. This cost is treated as an expense in the
profit and loss account for the year. Other example would be cost incurred on market
research before launching a new product.
What is Stepped Cost?
This is type of cost which is constant till a certain level of Activity (Relevant Range) but it will
increase significantly as the activity level increases. For example Rent is constant till the
factory maximum capacity is reached but then we need another factory to increase
production so the rent will double. If we plot this on a graph it will look like.
Over Absorption (absorbed overhead > actual overhead)
Reasons;
1. Actual overheads were less than budgeted
2. Actual production was more than budgeted

Under Absorption (absorbed overhead < actual overhead)

Reasons;
1. Actual overheads were more than budgeted
2. Actual production was less than budgeted

What are the problems with using pre-determined (Budgeted OAR) ?

Use of estimated data can lead to inaccurate costing and results in over or under absorption
of overheads. If the cost absorbed is too low (under absorbed) this will lead to an
understated cost which will effects profit of the business ( as our selling price based on
budgeted cost will be low). On the other hand if absorbed cost is too high (over absorbed)
this will overstate cost making the product uncompetitive and will reduce demand.
Just In Time
Rent =
$100 000, + F c
-

Units = 100

=. clunit = 100, 000 /100

=
$1000

unit =
5000
F
-
c lunit = 100 000/5009
.

=
20
Units 1
,
f
-
c/unit X
 Fact A
Rent
capacity
E - = 10 , 000
$50. 000 units

- Fact B

Rent >
-

cap = 10,000

& 50000
 Semi variable Cost

units cost

5005 $18000:

8000 $ 27000
3 - F -
c +V.

High low
Melhod

Step 1: Calculate v :
C/unit

/unit
change
v C .
= in cost

chang 2 in units

27000 -
18000
8000 -
5000

= $3 l unit

Step 2 Calculate Lotal Variable cost Units

any
on
:

5008 8000

T . V -
C = $3x5000 T-V . C = $3x8000
$15000 $24000
,

= =

Step 3 : calculate fixed cost

Total cost = T .
v .

c + T F . :
C

5000 8008
Total COSt = $15000 Total cost = 27008
T .
.
V C =
(5000) T.v .
c =
(400d)
T F
.
.
C = $3000 T F C
- -
= $3000
 m O S . .

-
E

O 1000 -
250 1000
250
units =>
758 Units
B even
.
 formula
key
1) Breakeven (units) = Total fixed cost
*
contribution per unit

*
contribution per unit =
selling price-variable cost per unit

2) Breakeven (revenue) Breakeven (units)

selling
= x price

3) contribution to sales ration : (CS ratio)

Total contribution x100 OR contribution per unit x100
Total Sales
selling price

4) Breakeven (revenue) using

4s ratio

= Total fixed cost

es ralio

5) Units to be sold profit

required to achieve
target
Total fixed
= cost +
Target profit
contribution per unit

6) Revenue required to be sold to achieve

target profit

Target profit (units) OR Total fixed cost + contribution

x
Selling price per unit

Is ratio

7)
Margin Of Safety
= Total unit sold-Breakeven Cita

8) (units)
MarginOfSafety Margin of
Safety selling
= x
present
 Total
10000 .
Revenue

9000
Total
Revenue 2000

Es Profit &

Total 7000
cost

600

5000
Breakeven

2000

3000 .
fixed
cost

2000 loss
-
-

1000

g id Loo 200 no so do too doo doo idod

Total output

maximum output = 1000 units

selling price
= $10
1000 10 000
max revenue = x =
10 ,

min 1 =
0x10 = 0

fixed cost $3000

Y
=

-c
v /unit = $4 Total cost at 0 units ?

min v C -
= Ounit x $4 = 0 F-c + -C
v = 3000 +O = 3000

max v =
C= 1000 0 + $4 = 4000
Total cost at 1000 units
Breakeven = T F - -

C Fc + V-c

C-D .
U 3000 + 4000 =
$7000
C P
. .
u = S .

p -V c .
= 10 4
-
= 6
3000
- =
500units
G
ACCOUNTING
CONCEPTS
 1. Business entity concept:
Owner and business are two separate entities and there transactions should be dealt
accordingly i.e separately

2. Money measurement concept:

A business should only record a transaction if it has a monetary value

3. Going concern concept:

An assumption that the business will continue to operate in future therefore stock should be
valued at cost and not on market value

4. Accounting period concept:

A balance sheet and profit and loss account should be prepared at regular intervals on the
basis of accounting year not necessarily calendar year

5. Historic/Accounting cost concept:

Assets should be valued at its purchase price and not its market price

6. Duality aspect concept:

Every transaction has an equal but an opposite effect i.e every debit has a credit entry

7. Realization concept:
Revenue can only be recognized once goods associated with that revenue have been delivered
to the customer and amount received therefore goods taken on sales or return basis are not
sales

8. Accrual concept:
Amount incurred should be recorded irrespective of the amount received or paid

9. Matching concept:
A business should match the expenses against the income it has earned

10. Prudence Concept:

A business should not overstate its assets and should not understate its liabilities
(depreciation and goodwill). A business should record all the anticipated losses and should
never record any gains until realized (PBD). Moreover, it also states that an asset should be
recorded at lower of cost or NRV (net realizable value)

11. Materiality Concept:

The element is material if changes in it brings changes in decisions

12. Consistency Concept:

Accounting principles and methods should be continued and not changed.
 13. Substance Over Form:
It means that the true nature and economic impact of a transaction should be reflected in
financial statements, rather than just following the legal or superficial aspects of the
transaction.

It means that when recording transactions, we should focus on the real financial impact (substance) rather
than just how it appears legally (form).

Example:
A business sells a machine but agrees to buy it back later. Legally, it looks like a sale, but in reality, the
business still controls and uses the machine. So, instead of recording it as a sale, it should be treated as a
loan.

This principle ensures that financial statements give a true and fair view of a company’s actual financial
position.
 Ratio Analysis
It is a method of evaluating a business's financial performance using key ratios. It helps
compare profitability, liquidity, efficiency, and financial position over time or with other
businesses.
How ratios are helpful to different stakeholders?
Investors – Use profitability and gearing ratios to assess returns and risk before investing.
Managers – Analyze efficiency and liquidity ratios to improve operations and decision-
making.
Creditors & Banks – Check liquidity and gearing ratios to assess the company’s ability to
repay loans.
Employees – Look at profitability to gauge job security and potential salary growth.
Government – Uses financial data to ensure tax compliance and assess industry health.
Suppliers – Review liquidity ratios to determine if the business can pay on time.

Advantages of Ratio Analysis

1. Helps in Performance Evaluation

o Ratios allow businesses to assess profitability, liquidity, and efficiency over
time.
2. Comparison with Competitors
o Businesses can compare their financial health with industry benchmarks and
competitors.
3. Identifies Strengths and Weaknesses
o Highlights areas where the business is performing well and where
improvements are needed.
4. Simplifies Financial Statements
o Converts complex financial data into easy-to-understand percentages and
ratios.
5. Aids Decision-Making
o Helps management make informed financial and strategic decisions.
6. Useful for Investors and Lenders
o Investors use ratios to assess a company's profitability, while banks and
creditors use them to evaluate creditworthiness.
Disadvantages of Ratio Analysis

1. Ignores Qualitative Factors

o Ratios only focus on numbers and do not consider management quality, employee
skills, or market conditions.
2. Historical Data Limitation
o Ratios are based on past financial statements, which may not reflect future
performance.
3. Different Accounting Policies
o Companies use different accounting methods (e.g., depreciation, inventory
valuation), making comparisons difficult.
4. Industry Differences
o Ratios vary by industry, so direct comparisons may be misleading.
5. Manipulation Risk
o Companies can manipulate financial statements to make ratios look better (e.g.,
delaying expenses).
6. Inflation Impact
o Inflation affects financial statements, making ratios less accurate over time.
1. Profitability Ratios
Definition: Measure how efficiently a business generates profit from revenue and capital.

i) Gross Profit Margin (%)

Formula:

Interpretation:
Shows the percentage of revenue left after deducting the cost of sales. A higher margin means
better control over direct costs.
Example:
If Gross Profit = $50,000 and Revenue = $200,000:

How to Improve:
 Increase selling prices.
 Reduce production costs or find cheaper suppliers.

ii) Mark-up (%)

Formula:

Interpretation:
Shows how much profit is added to the cost of goods before setting the selling price.
Example:
If Gross Profit = $50,000 and Cost of Sales = $100,000:

How to Improve:
 Reduce purchase costs.
 Purchases in bulk to avail trade discounts

iii) Profit Margin (%)

Formula:

Interpretation:
Indicates the percentage of revenue that remains as profit after all expenses.
Example:
If Profit for the Year = $20,000 and Revenue = $200,000:

How to Improve:
 Reduce administrative and selling expenses.
 Increase sales while keeping costs and expenses stable.
iv) Return on Capital Employed (ROCE) (%)
Formula:

Where Capital Employed = Issued Shares + Reserves + Non-Current Liabilities.

OR
Capital Employed= All Assets (Non-current assets + current assets) – Current Liabilities
Interpretation:
Measures how efficiently a business uses its capital to generate profit.
Example:
If Profit from Operations = $50,000 and Capital Employed = $500,000:

How to Improve:
 Invest in profitable projects.
 Better utilisation of resources (capital)

v) Expenses to Revenue Ratio (%)

Formula:

Interpretation:
Shows the percentage of revenue spent on total expenses.
How to Improve:
 Cut unnecessary expenses.
 Increase revenue without increasing costs.
vi) Operating Expenses to Revenue Ratio (%)
Formula:

Interpretation:
Indicates how much of the revenue is spent on operating costs like rent, wages, and utilities.
How to Improve:
 Reduce fixed costs like rent.
 Improve operational efficiency.

2. Liquidity Ratios
Definition: Measure a business’s ability to pay short-term liabilities.

i) Current Ratio
Formula:

Interpretation:
Shows if a company has enough short-term assets to cover short-term debts. A ratio of 2:1 is
considered ideal.
How to Improve:
 Increase current assets (e.g., cash reserves).
 Reduce short-term liabilities.
ii) Acid Test Ratio
Formula:

Interpretation:
More strict than the current ratio, as it excludes inventory, which may take time to convert into
cash.
How to Improve:
 Maintain more cash reserves.
 Reduce reliance on inventory.

3. Efficiency Ratios
Definition: Measure how efficiently a business manages assets and liabilities.

i) Non-Current Asset Turnover (Times)

Formula:

Interpretation:
Shows how efficiently a company uses fixed assets to generate revenue.
How to Improve:
 Utilize assets more effectively.
 Invest in revenue-generating assets.

ii) Trade Receivables Turnover (Days)

Formula:
Interpretation:
Measures how long it takes to collect debts from customers. Lower days indicate faster
collection.
How to Improve:
 Offer discounts for early payments.
 Enforce strict credit policies.
 Charge interest on late payments

iii) Trade Payables Turnover (Days)

Formula:

Interpretation:
Shows how long a company takes to pay suppliers. Longer payment periods improve cash flow.
How to Improve:
 Negotiate better payment terms with suppliers.

iv) Inventory Turnover (Days)

Formula:

Average Inventory: (Opening inventory + closing inventory)/2

Cost of sales: Opening inventory + Purchases - closing inventory
Interpretation:
Measures how many days inventory stays in stock before being sold.
How to Improve:
 Improve stock management.
 Avoid overstocking.
v) Rate of Inventory Turnover (Times)
Formula:

Interpretation:
Shows how many times a business sells and replaces inventory in a year. Higher turnover
indicates efficiency.
How to Improve:
 Reduce slow-moving stock.
 Increase sales efforts.
 Sole Trader

A business controlled
owned and
by single owner

BENEFITS DRAW BACKS

>
-
Owner will keep >
-
Owner will have the

all the profit burden of business

running
>
-
Owner will have >
-
will have to
year all

complete control over loss

business
>
- lack of funds
> More
privacy
-

unlimited
liability
>
-

> &
Easy less
costly
-

to
Setup
 EXPENSES

of
Day business
> t
day operating
cost
-

>
-
Debit Nature
Paid of $500
by
>
cheare
wages
-

Dr Cr

500
wages
Bank 508

EXPENSES

① Prepaid Expenses
② Accrued Expense
>
-
The expense has not >
-
The has been
expense
been incurred but the incurred but the

Payment has been made

payment has not been

in advance made
yet
Current Asset
+ Other Receivable
> > Current
liability
Other
Payable
-
-
-

EXPENSE (PAAD)
Prepaid Balance Bld XXX Accrued Balance Bld XXX

Bank Xxx Statement of Profit & loss 1 XX

Accrued Balance old nun

Prepaid Balance ca XX

XXX XXX
 Income
of
>
Earning the business
-

>
- Credit Nature
Rent received $1000 cheque
by
-

Dr Cr

Bank XXX

Rent Receivable XXX

Income

① Accrued Income ② Prepaid income

>
- When the services has >
- When the services has

been provided or the Not been provided but

income has been , the has been
payment
earned

but He received
not
payment has in advance.
been received

Current Asset -
> Other Receivable Current
liability Other
Payable
-> >
- ->

INCOME (ADDA)
Accrued Balance Bld XXX Prepaid Balance Bld XXX

Statement ofProfit loss Xxx Bank XXX

Prepaid Balance old XXx Accrued Balance old XXX

XXX XXX
 EXPENSES - ACCRUAL CONCERT

-
Expenses incurred should be recorded

irrespective of the amount paid

Income - Realisation
Concept.

Income earned should be recorded in the

statement of profit & loss Irrespective of

the amount received
.
 INVENTORY VALUATION

Inventory that
> the have
goods
-

are

produced or purchased with the intention

to resell unsold
yet
are .
,

Inventory valuation

Inventory of cost
>
-

should be valued at lower

and Net Realisable value (NRV)

Selling
NRV = sell
price-cost to

e.g ;
cost = $1200
$1500
selling price =

$400
repairing
=

at what value recorded?

inventory
will be

Selling
NRV= sell
price-cost to

= 1500 -
400

= $1100
compare with cost + $1200

Inventory & $1100 (The lower amount)

 Markup Vs
Margin
Markup :

- Profit that is added >

-
cost = 1000

to the cost profit = 20 %

1000 x 20 % = $200

(100k+ xy)
100% + Xy =

Selling price = 1000 + 200

$1200
Cost +
Markup = Sale =

(Profit)

in of cost 100 %
markup always equal
case is to
=
) ,

cost = 100 %

3Cost $1000
cost => $1000 + 100 % e o

Markup =) $200 + 20 % - 120 %

S Price =
. $1200+> 120 %

X = 120% X1000

100 %

X = $1208
 Margin :

The difference between

selling and the
>
price
-

cost of product

(100y . -

)
xY
. = 100 % -
XY

Cost Sales
Margin
= -

example=
Grolla for
Toyota selling
Rs
Companyis
3, 000,000.

The 20 %· Find out it's cost

.
margin

Selling Price = 3 000 000

, ,

Margin
= 20%

cost = 3

Margin (Profit) Selling Margin

>
-
price x

3 , 000 000 , X 20%

= Rs 600 000
,

Cost Sales
Margin
= -

= 3, 000 000,
- 600 00 ,

=
Rs 2 400 , 000
,
 CONVERSION

1) Markup 2)
>
-
Margin Margin &
Markup

Markup X100
Margin X100

Markup Margin
100 % + 100 % -

g
e e
g;
-

; -

Markup 25% 20%

=
Margin =

? ?
Margin Markup
= =

25 % 20 % X100
X108

100% +25% 100%- 20 %

20 % Markup 25 %
Margin
=
=
 example :

cost= $200 000 ,

15 %
margin
=

selling price =?

selling price =
cost +
Markup (profit)

Markup;
Margin
>
- XI00

100%
Margin
-

= 15% X100

100 % -
15 %

= 17 65 %
. e
Markup

Markup (profit) = cost x Markup

= 200,000 x 17 65 %
.

= $35300
(

(Profit)
Selling price =

=
cost
200 000
,
+

+
Markup
35300

= $235 300
,
 SALE Or RETURN BASIS
Sometimes the
goods are sold to customer with

an option keep the return them .

goods
or

Goods
sell
J

Mr Saif -
Mr
wagar
option If the will resold
goods
: be

wagar then
by will
Mr he make a
,

Mr
Paymentgoods. ,
otherwise , water will

example :
ABC has sold to Mr Ahmed
company
worth
goods
$50000 on a sale or relin basis. This $50 000
, is

recorded The markup of 25 %

company
as revenue . uses

Data:

Revenue overstated $50 000

by
>
- ,

Trade Receivable > overstated $50 ,000

by
-

Inventory > understated

by
? (cost
missing)
selling price >
- $50 000,

cost e$ ?

25 %
Markup -
 Step 1:

Markup
Margin
+

markup XIOD

100% +markup
25 % X 100

100% +25 %

= 20 %
Margin
Step 2:
Calculate Cost

Cost Sales (profit)

Margin
= -

Sales
Margin = x
Margin rate
= 50,000 x 20 %

= 10,000

Cost = 50 000
,
-
10, 000

cost $40 000 understated $40000

Inventory
=
>
-

by
, ,

X X X

Another Method to calculate COST

Cost + Markup (Profit) =

Sales Cost = X

$50 000
* + 0 25x Markup (profit) costrate
.
= ,
=

125x = $50 000

, = XX 25 %

x = 50 ,
000/1 25 : = 0 25.
x

X- Cost = $40 000,

Basics Of Accounting

Prepared
by :

Bir Saifullah
 Nature Of Accounting ELEMENTS

1 Assets: Resources owned and controlled by a business

Examples;

Non Current Current Assets

Assets
: Land &
Building iv)
ii) v)
Inventory
Machinery
Trade Receivable

iii) Motor Vehicle vi) Cash

vii) Bank

2) Liabilities to
Obligation other entities
:
pay
Example;

N on current Liabilities current Liabilities

i) Loan ii) Bank overdraft

iii) Trade
payables
 Nature Of ACCOUNTING ELEMENTS

ELEMENT NATURE

Debit credit

1) Assets (Debit naure) Increase Decrease

2) Liabilities (Credit valure ( Decrease Increase

3) Capital (credit valure ( Decrease Increase

3) i) (Debit Nature)
Drawings Increase Decrease

Resources
Resources
Eital Business
Areaving

4) Expenses (Debit Nature) Increase Decrease

5) Income (Credit Native ( Decrease Increase

2000 + lich

Liab )pay
casht creditor s

fixwire
Bank

GoodsA CreditorT

Cash ↑ Capital ↑

Cash ↑ Walker ↑

Ban
Goods ↓ creditor

Premisesa
10 , 000

Good
8 008
,
 Inventory :

Goods that are purchased with the intention

of resell but remain unsold we
of
by
end period
accounting

INVENTORY

1) Increase 2) Decrease

i) > When
-
Purchase ii) When we sale
goods
more
goods Cr Nature
= Sales +

=
Purchases >
- Dr Nature

ii) Whenwe
goods ii) The goods that

that
sold
were
previously were

Previouslyneed is
were returned Purcha

by
a customer supplies

= Return Inwards - Dr Nature => Return Outward

↓
er Nature
 DOUBLE ENTRX :

Double effects
givingwo
involves
to
entrytransaction
system
the Debit effect
namely
each
andte credit effect

Date Detail Dr Cr

($) (s)

Example :

The owner introduces $500 cash into the

July
business On I

Asset (Cash) + 500 - Dr

↑ 500
Capital - Cr

Dav Detail Dr er

July CashCapital
I 500
500
Date Details Dr (E) cr(E)
Bank 5000
July
1

Cash 1000

Capital GOOD

Stationary
2 75

Bank 75

3 Purchases (Goods &) 2 100

,

T-Smart (Trade 1) 2100

payables
u Cash 340

Sales (Goods 2) 340

5 Insurance 298

Cash 298
Date Details Dr(E) cr(E)
7 Top
Computer
J Hott
:
700

8
Electricalank
y
32

32

(Trade Receivables ) 630

10
(Biggins
*

Sales 638

T Smart (Trade
11
Payables a) 550
.

Rehirn outward (Goods +) 558

218
Wages
in

Cash 210

17 Rent 225

Bank 225

20 Bank 400
C (Trade 1) 400
Biggins Receivables
.

21 JoHott 700

Bank 700
Date Details Dr Er

=
23 S 125
takonary
News Ltd 125

25 FoTank (Trade Receivable 1) 645

Sales (Goods 1) 645

31 News Ltd 125

Bank 125
 FINANCIAL STATEMENTS

1) Statement of 2) Statement of
Profit & Loss financial Position
(Income statement) (Balance Sneet)

- Helps1 Calculate - It shows a business's

Profit or loss for financial position on

a
specific period. specific date.

Profit =
Revenue> Expenses >
-
It includes;
loss =
Expenses > Revenue
1) Assets
- It include;
1) Revenue 2) Liabilities

-
2) Cost
Refer
of
to
Goods

dire
sold
cost
:

of
3) Capital (owner's
equity)
producing or
purchasing goods
that Assets Capital
a business = +
Liability
3) Other Income

4) Expenses
 Statement of Profit Es loss
$ $
net
Revenue I sales
P
less Return
:
inwards (sales return) Uxx 2xx

Cost of Goods sold

Opening Inventory
2xx

Purchases It

Carriage inward xix

less : Return Outward (Purchase return) (axx)

less :
Drawings of
goods (uxu)
KIT

Gexx) Gezexe)
less:
Closing inventory
Gross Profit ziz

otherIncome:
Gain on disposal of Non Current Asset XXI

Decrease in allowance for doubtful debt size

(Rent commission)
Any other income ,
RIx

KIx

Expenses :

Wages Bill
KUK

Utility xxx

Rent zise

Heat E
light
In

Interest zix

Salary
Insurance
siz

ziz

Any
-

other expense unz 2x2

Profit/loss XXX/(xxx)
 Income STATEMENT
$ $
Sales 190576
&

cost of Sold
goods
Purchases 119832

(2408)
less
Closing inventory
:

DoTh24)
Gross Profit 83152
(

Expenses

Salary
Motor
56527

2416
Expense
Rent 1894
Insurance 372
General expenses
25

2T
Profit
&
 STATEMENT Of FINANCIAL POSITION
$ $ $
Non Current Assels :

(cost)
Land
Building
LE B PFD
& xxx

Grzz) I

Motor Vehicle (Cost) 2xx

M Veh
.
PfC Gexx) size

xxT

Current Assets

inventory (closing
Trade Receivable
inventory) xRX
XXX

less : Provision for Doubtful debt freur) zii

Other Receivable XXX

Bank XXX

Cash XXX XXX

Total Assely XXX

Capital & Liabilities

Capital :

Opening Capital XXX

Add Profit for the XXX

year
:

less : loss for He (Xxx)

year
XXX

(xxx)
less:
Drawings
Closing Capital XXX
 $ $ $
Non Current Liabilities
Bank loan XXX

Current Liabilities
Trade

Other
Payables XXX

Payables XXX

Short term Can XXX

Bank overdraft XXX

XXX

Total Capital & Liabilities XXX

 State of financial Position .

$ $ $
Non Current Assets
Premises 95420
Motor vehicles 16594
(

1/2014

Current Assets
Inventory
Trade Receivables (Debtors
12408
26740
Bank 16519

Cash 342
56009
Total Asselj 168023
Capual
--

Opening
Add Profit
:
Capital 138066

21858
3

159924 &

less :
Drawings (425)
151499
Y

Current Liabilities
Trade
Payables 16524
Total Capital E Liabilities 168023
Y