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Acc week 5

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  • 1. Introduction to the Trial Balance, Trading and Profit and Loss Accounts, and the Balance Sheet Week 5
  • 2. In Your Textbook...
    • Roshayani Arshad, et al. (2007), Financial Accounting An Introduction , 2 nd Edition, Malaysia, McGraw Hill.
    • Chapter 4: Accounting Cycle
    • (pp. 54 – 65)
  • 3. Flowchart of Accounting Records Source Documents Journals Trading, Profit & Loss Acc Balance Sheet Ledgers Trial Balance
  • 4.
    • You’ve learnt that under double entry bookkeeping
      • for each debit entry there is a credit entry
      • for each credit entry there is a debit entry
    Let’s see if you can remember the basics of double entry. What is the double entry for the following transaction: (a) Purchase of a new van for RM9,000 which was paid in full by cheque. Dr. Cr. (b) Goods which cost RM40 taken out by the owner for her own use. Dr. Cr. Motor Vehicle - Van RM9,000 Bank RM9,000 Drawings Purchases RM40 RM40
  • 5. Recap
    • All the items recorded in all the accounts on the debit side should equal in total all the items recorded on the credit side of the accounts.
    • In order to check that there is a matching credit entry for every debit entry, we prepare something called a Trial Balance .
  • 6. Trial Balance
    • A Trial Balance is a list of all ledger accounts with balances at a particular date.
    • All accounts with debit balances will be listed in one column and those with credit balances will be listed in the second column.
  • 7. Determining the Balance
    • At the end of each month, quarter-year, half-year or one year, all the accounts are balanced to determine whether they have debit or credit balances.
    Accounts with debit balances Accounts with credit balances Asset Liability Expenses Capital Drawings Revenue
  • 8. Purpose of Trial Balance
    • A test of the equality of the debit and credit balances in the ledger, i.e. it checks the mathematical accuracy of the double-entry rules used.
    • Helps to facilitate the preparation of the financial statements.
  • 9. Trial Balance: Example Quickpower Trading Trial Balance as at 5 th February 2006 Account Title Debit ($) Credit ($) Cash in Hand 4,900 Cash at Bank 55,400 Debtors 4,000 Stock 18,000 Fixtures and Fittings 10,000 Creditors 9,000 Bank Loan 30,000 Capital 50,000 Drawings 100 Sales 3,500 Electricity Expense 100 93,000 93,000
  • 10. Lecture Exercise
    • From the following list of balances extracted from the ledger of Wen on 31 Dec 02, prepare a Trial Balance as at that date.
    RM RM Loan 30,000 Carriage 2,000 Cash in hand 400 Creditors 5,425 Cash at bank 10,800 Sales 12,400 Capital 18,000 Purchases 9,400 Drawings 300 Return outwards 275 Motor vehicle 28,500 Wages 5,000 Debtors 6,100 Rent & rates 3,600
  • 11. Trading and Profit and Loss Accounts
  • 12. Flowchart of Accounting Records Source Documents Journals Trading, Profit & Loss Acc Balance Sheet Ledgers Trial Balance
  • 13. Gross Profit
    • A trader buys goods at a certain price and resells them at a higher price to earn profit = gross profit.
    • Derived from the difference between the selling price and the cost price of the good.
    • Expenses incurred in running the business have not been taken into account yet.
    • Gross Profit = Sales – Cost of Goods Sold
  • 14. Preparation of the Trading Account
    • Revenue and expenses affect the profits of a business.
    • Their accounts are closed and balances transferred to the Trading and Profit and Loss Accounts for the calculation of profits.
    • Accounts affecting the calculation of gross profit are transferred to the Trading Account.
    • Accounts affecting the calculation of net profit are transferred to the Profit and Loss Account.
  • 15. Dr Sales Account Cr 2002 $ 2002 $ Jul 31 Transfer to Trading 5,680 Jul 31 Balance 5,680 Dr Purchases Account Cr Jul 31 Balance $3,900 Jul 31 Transfer to Trading $3,900 Dr Returns Outwards Account Cr Jul 31 Transfer to Trading $150 Jul 15 Lin & Co $150 Dr Returns Inwards Account Cr Jul 22 A. Huang $450 Jul 31 Transfer to Trading $450
  • 16. Closing Stock
    • Goods that remain unsold at the end of the accounting period.
    • Recorded in the books as an asset.
    • To record the closing stock, a Stock Account is debited with amount of goods in hand.
  • 17. Opening Stock
    • The closing stock of one accounting period will become the opening stock of the next accounting period.
    • This is done by balancing the Stock Account and bringing down its balance to the next period.
  • 18. Additional Cost on Purchases
    • Carriage Inwards – cost of transport borne by the buyer.
    • Duty on Purchases – import duties levied on goods imported and excise duties imposed on locally manufactured goods.
    • Wages on Purchases – wages which form part of the cost of preparing the goods or getting them ready for resale.
    • Other purchase expenses: packing & grading expenses, insurance on purchases, inward freight.
  • 19. Trading Account: Example
    • On 31 December 2002, the books of B. Wu show the following balances:
    • $
    • Stock, 1 January 2002 980
    • Purchases 12,950
    • Sales 10,590
    • Returns inwards 340
    • Returns outwards 480
    • Carriage inwards 120
    • Duty on purchases 150
    • The closing stock is valued at $680.
  • 20. Dr Trading Account for the year ended 31 Dec 2002 (horizontal) Cr $ $ $ $ Opening stock 980 Sales 10,590 Purchases 12,950 Less Return Inwards 340 Less Return Outwards 480 10,250 12,470 Gross loss 2,790 Add Carriage Inwards 120 Duty on purchase 150 12,740 Cost of goods available for sale 13,720 Less Closing stock 680 Cost of goods sold 13,040 13,040 13,040
  • 21. Trading Account for the year ended 31 Dec 2002 (vertical) RM RM RM Sales 10,590 Less: Return inwards 340 10,250 Less: Cost of goods sold Opening stock 980 Add: Purchases 12,950 Less: Return outwards 480 13,450 Add: Carriage inwards 120 Duty on purchases 150 270 Cost of goods available for sales 13,720 Less: Closing stock 680 13,040 Gross loss (2,790)
  • 22. Lecture Exercise
    • Using the information given below, prepare the Trading Account for the year ended 31 December 2002.
    • Purchases 26,850
    • Sales 39,640
    • Returns: Sales 250
    • Purchases 400
    • Closing stock 2,630
    (Gross Profit $15,570)
  • 23. Dr Trading Account for the year ended 31 Dec 2008 Cr Purchases 26,850 RM RM Less return o/wards 400 Less closing stock 2,630 Cost of Goods available for sale 26,450 Sales Less Return inwards 250 39,640 Gross profit 15,57 0 Cost of Goods sold 23,820 RM 39,390 39,390
  • 24.  
  • 25. Lecture Exercise
    • Using the information given below, prepare the Trading Account for the year ended 31 December 2002.
    • Purchases 34,750
    • Expenses on purchases:
    • Duty 1,460
    • Freight 1,650
    • Sales 43,800
    • Returns: Sales 145
    • Purchases 95
    • Stock: Opening 4,215 Closing 8,370
    (Gross Profit $10,045)