Problem based learning (repaired) (autosaved) (2)


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Problem based learning (repaired) (autosaved) (2)

  1. 1. Page 1ContentsPageIntroduction of Single Entry and IncompleteRecord2Business’ Problem 3Solutions:i. Disadvantagesii. Accounting Conceptsiii. Method of Depreciationiv. Statement of Comprehensive Incomev. Statement of Financial Position44-66-78-1011
  2. 2. Page 2Single Entry and Incomplete RecordAccording to Carter ‘Single Entry system is a method or a variety of methods, employed for therecording of transactions, which ignore the two-fold aspect and consequently fails to provide thebusinessman with the information necessary for him to be able to ascertain the position’Single Entry and Incomplete Record is one of the major problems that most businesses mayencounter in managing their accounts.However, they are still some business that practicingsingle entry system since it has many advantages:1) It is the simplest method of recording account’s transactions.2) Do not need to hire a qualified staff and it will reduce the cost as well.3) There are only a few assets and liabilities involved. Hence, it is totally applicable forsmall businesses.4) Flexible.Basically, all businesses supposed to record their transaction in an appropriate way; based ondouble entry system. However, there are several small businesses that do not have recordedtheir transactions based on that system. Thus, it will affect the whole accounting records whichthey are not able to prepare trial balance and financial statement; Statement of Comprehensiveincome and Statement of Financial Position. Apart from that, they also do not able to provide acomplete set of final accounts without further analysis of the existence records. It is due to lackof knowledge and expertise in accounting system as well as experience.Sometimes, the owners of the business cannot differentiate the business account from theirpersonal transactions that may cause haywire in their business account. For example, they donot record the drawings that being made from business account and it is totally contradict toentity concept. In addition, for large business, they may have a complete records of theirtransaction, however it still have a chance of being destroyed, lost or misplaced. Thus, it willresult in incomplete records.
  3. 3. Page 3Business’ ProblemZaki is operating his own business and he acts as a sole trader which he currently runs thebusiness on his own without any partners. Usually, this type of business is exists in the form ofsmall businesses only. Sole proprietorship is a type of organization that has only one owner,unlimited liability, the owner owns all the profit and as well as incur all the debts. However, dueto his lackness of knowledge in managing business’ accounts, he does not know on how toprepare a proper standard accounting records. Normally, this kind of organization may have thesame problem in managing and recording their business transactions. The reason is becausethey have no expertise in accounting area as well as experience. Therefore, most smallbusiness will face a similar problem; single entry and incomplete records.Hence, Zaki has decided to get a professional in preparing his financial statement sothat he would be able to determine his profit or loss on that year. Thus, by ensuring theaccountant could manage his accounts, he has provided some information regarding histransactions that occur on that period.Through the information given, it is clearly informed that Zaki just started the business bycommenced his business with several assets; cash in hand amounted RM 2,000, bankamounted RM 8,000, and non-current assets which amounted RM 50,000. Besides that, he alsoprovides the information regarding his business’ transactions during that period. However, afterbeing analyzed, it is not completed yet since there is a lot of missing information. For example,he did not mention about his total purchases, sales and others.Therefore, it is the responsibility of professional accountant in ensuring that theaccurate financial statement is being prepared that may help Zaki in making further decision forhis business in future.Disadvantages of keeping incomplete records
  4. 4. Page 4As mentioned earlier, there are several problems that business may incur in dealing withkeeping incomplete records along the business’ transactions. Plus, it also may increase the costbecause the owner has to hire a professional accountant to set up a proper system of recording.The other disadvantages are as follows:1. A great deal of useful information may be lost. Certain transactions may not beaccounted for and there is also no continuity in the recording of financial and other usefulinformation.2. Difficulty in determining and assessing net profit or loss and net worth of the business asdetails are not readily available.3. Under this system only partial and incomplete record is maintained because two foldaspects of transactions are generally ignored.4. Trial Balance cannot be extracted to test the arithmetical accuracy of the records, due tolack of information in double entry of each transaction.5. There is possible to prepare a balance sheet/statement of Financial Position sinceinformation on the assets and owner’s liabilities may be incomplete.Five accounting concepts1) Duality ConceptThrough the information given by Zaki about his business transaction during the year of 2010,there are five accounting concepts that are applicable in Zaki’s business. Most importantly isduality concept. This concept is explaining the basic foundation of accounting records. It isassume that all transaction occur in a year has a dual effect.Beside that, there are two aspect ofaccounting which one represented by asset of the business and the other by claim againstthem. The concept states that these two aspects are always equal to each other.Simply saying,each transaction must have an effect in both debit and credit side. This concept is totally againstthe concept of single entry which it just record only one entry on each transaction. Thus, singleentry may unreliable for preparing financial statement.2) Historical Cost Concept
  5. 5. Page 5Historical concept is the concept where each business should assume the cost of each asset isgoing to be valued on the historical cost (the cost incurred during the asset purchased) not onthe market value and this is the basis for valuation of the assets . It is important to ensure thatthe cost is remain constant as before and do not vary. If the business taking market value for hisasset, then his cost of asset may be vary from day to day due to the economic condition.3) Materiality ConceptEach business is assuming to record all transaction from purchasing goods, acquiring assets orcapital and others into specific account. However, all businesses are advised to differentiatebetween material and non-material. Materiality concept brings meaning the reporting ofsignificant accounting information is known as the application of the materiality concept, thedistinction between significant and insignificant information depends on the size of theenterprise. The prepare of the financial statement needs to make certain judgement indetermining the significant of the information to be reported. These include the nature of theinformation, amount of an item and effect on the result which will be reported. While the smallamount items should not be recorded. The example is stationary that amount RM 0.20 is notaffected the whole accounting.4) Monetary terms conceptIn monetary terms, it is clearly shown that all business transaction should be valued based onRinggit Malaysia (RM). It is contradicted to barter system that is likely to be practiced in the pastwhich nowdays most agree to the monetary value of the transaction. Basically, this concept isapplicable to each business either small or large business. Since technology has improved anda lot of new innovative idea has been created, people more trusted in value of money ratherthan in terms of exchange goods.5) Periodicity Concept
  6. 6. Page 6Periodicity concept is applicable to Zaki business as well as other businesses. Itis the concept which justifies the profit on those transactions at a specific period.The lifeof a business is divided into specified periods of time for the purpose of preparingfinancial statement. With the assumption that the business will continue to operateindefinite period of time, it is not possible to wait until the end of the life of the entity tomeasure its performance. Therefore, in measuring our business performance, thebusiness owner has to decide on the accounting period that might be use in preparingthe financial reports. The period may be in monthly, a half-yearly, a full year, or any otherlength if time depending on the volume and nature of the business.Therefore, Zaki isapplying one whole year for his accounting period in order to calculate the profit thatmanage to acquired.Depreciation methodIn the Statement of Comprehensive Income, cost of fixed asset must be charged andlisted down under expenses in order to determine the pattern of economic use of the asset.Currently, Zaki is using straight line method of depreciation policy which charged 10%per annum on cost, yearly basis on both types of his non-current assets; Motor Vehicle andOffice Equipment. Out of other methods of depreciation, straight line method is the simplest andmost commonly being used by calculating the depreciation based on acquisition price of anasset throughout its useful life. Basically, this type of method will charge the same amount ofdepreciation value every year until the value shown for the asset has reduced from the originalcost to the salvage value.However, Zaki is advised to use another method which may give more advantages to him.Thus, the method suggested is reducing balance method or also known as declining balancemethod. Basically, reducing balance method charges its asset’s depreciation at a higher rate inthe earlier years of an asset.
  7. 7. Page 7Why reducing balance method is being chosen rather than any other methods?I. It is easy to understand and simple to implement.II. Reducing balance method equalizes the yearly burden on profit and loss account inrespect of both depreciation and repairs. The amount of depreciation goes ondecreasing while the expenses on repairs goes on increasing, so that the total chargeagainst revenue over different years remains more or less the same.III. It is acceptable for income tax purposes.IV. Reducing balance method matches the cost and revenue of the business.The differences between straight-line method and reducing balance method:Straight Line Method Reducing Balance MethodThe method calculates the depreciationfor an asset in a specific period time.The method calculates the depreciation forprovisional rate of an asset.Depreciation is charged on fixed assetwith fixed rate.Depreciation is charged on the amount offixed asset after deducting previous yeardepreciation.The amount of the depreciation willequal in the first year or end of theyear.Depreciation expense under reducingbalance method progressively declinesover the assets useful life.It has a salvage value as well as theasset’s useful life.It has no salvage value and useful life.
  8. 8. Page 8ACCOUNTS RECEIVABLE a/cParticulars Amount Particulars Amount2012 RM 2012 RMCredit Sales 30,000 Return Inward 4,000Total Receipts 20,000Balance c/d 6,00030,000 30,0002013 Balance b/d 6,000ACCOUNTS PAYABLE a/cParticulars Amount Particulars Amount2012 RM 2012 RMReturn Outward 6,000 Credit Purchases 48,000Discount Received 3,000Total Payment 38,000Balance c/d 1,00048,000 48,0002013 Balance b/d 1,000
  9. 9. Page 9CASH a/cParticulars Amount Particulars Amount2012 RM 2012 RMBalance b/d 2,000 Total Payment 20,000Total Receipt 120,000 Balance c/d 120,000122,000 122,0002013 Balance b/d 120,000BANK a/cParticulars Amount Particulars Amount2012 RM 2012 RMBalance b/d 8,000 Total Payments 123,000Total Receipts 20,000Loan 50,000Balance c/d 45,000123,000 123,0002013 Balance b/d 45,000
  10. 10. Page10ZAKISTATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 2012RM RM RMSales 150,000Less return inward 4,000Net Sales 146,000Less: Cost of Goods SoldPurchases 80,000Less return outward 60,000Cost of Available Goods for Sale 74,000Less Closing inventory 20,000Cost of goods sales 54,000GROSS PROFIT 92,000Add: RevenueDiscount received 3,000Total Income 95,000Less: Operating ExpensesSalary 38,500Utilities 280Rental 12,000Repair of Motor Vehicles 1,000Depreciation : Office Equipment 1,400: Motor Vehicles 3,600Interest on Loan 1,667 58,447NET PROFIT 36,553
  11. 11. Page11ZAKISTATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012COST ACC. DEP NBVRM RM RMNON-CURRENTASSETMotor Vehicle 36,000 3,600 32,400Office Equipment 14,000 1,400 12,60045,000CURRENTASSETClosing inventory 20,000Accounts Receivable 6,000Cash 120,000Prepaid Rent 3,000 149,000194,000FINANCED BY:OWNER;SEQUITYOpening Capital 60,000Add: Net Profit 36,55396,553Less: Drawings 2,800Closing Inventory 93,753NON-CURRENTLIABILITYLoan 50,000CURRENTLIABILITYAccounts Payable 1,000Accrued Salary 2,500Accrued Utilities 80Accrued Interest onLoan 1,667Bank Overdraft 45,000 50,247194,000
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