The document contains notes for an O level accounting course. It discusses the accounting cycle which involves recording transactions, posting to ledgers, extracting a trial balance, and making closing entries and adjustments. It specifically covers bad debts and provisions for doubtful debts, explaining how to account for actual bad debts written off compared to changes in the provision for doubtful debts.
Introduction
Meaning and definition of financial management;
Approaches to financial management;
Scope of financial management;
Functions of financial management;
Corporate objectives:
Profit Maximization and
Wealth Maximization
Other objectives
Social implications of corporate objectives
Concept of cash flow
Time value of money
Objective of today’s session:
Purchasing system and procedure.
Audit objective.
Audit procedure.
Audit program.
Cash purchases.
Audit findings and reporting.
Fundamentals of Accounting / Introduction of AccountingAfzalur Rahman
1.01 Meaning and Definition of Accounting
1.02 Attributes (Characteristics) of Accounting
1.03 Functions of Accounting
1.04 Accounting Process
1.05 Book Keeping
1.06 Objectives of Accounting
1.07 Advantages of Accounting
1.08 Limitations of Accounting
1.09 Users of Accounting Information
1.10 Systems of Accounting
1.11 Basis of Accounting
Introduction
Meaning and definition of financial management;
Approaches to financial management;
Scope of financial management;
Functions of financial management;
Corporate objectives:
Profit Maximization and
Wealth Maximization
Other objectives
Social implications of corporate objectives
Concept of cash flow
Time value of money
Objective of today’s session:
Purchasing system and procedure.
Audit objective.
Audit procedure.
Audit program.
Cash purchases.
Audit findings and reporting.
Fundamentals of Accounting / Introduction of AccountingAfzalur Rahman
1.01 Meaning and Definition of Accounting
1.02 Attributes (Characteristics) of Accounting
1.03 Functions of Accounting
1.04 Accounting Process
1.05 Book Keeping
1.06 Objectives of Accounting
1.07 Advantages of Accounting
1.08 Limitations of Accounting
1.09 Users of Accounting Information
1.10 Systems of Accounting
1.11 Basis of Accounting
Fundamentals of accounting showcased the basic approach to understanding and managing accounting systems in a simplified manner. Personnel in accounting and financial reporting roles would find the presentation a practice and refresher material for successful bookkeeping and financial reports.
5.01 Meaning of an Account
5.02 Meaning of Debit and Credit
5.03 Classification of Accounts
5.04 Significance of Debit and credit in Accounts
5.05 Journal
5.05.01 Steps and Rules of Journalising
5.05.02 Totaling and Carry Forward.
5.05.03 Simple and Compound Journal Entries
5.06 Opening Entry
5.07 Sub-division of Journal
5.08 Ledger
5.08.01 Meaning
5.08.02 Form of a Ledger
5.08.03 Mechanics of Posting
5.08.04 Balancing of Ledger Accounts
This course discusses basic concepts of accounting.
Course Objectives: (i) Help the participants to become intelligent users of accounting information (a) Understand the basic accounting and financial terminology. (b) Understand how events affect firm value (c) Understand how financial transactions are recorded. (d) Make the participants’ comfortable looking through financial statements (ii) Develop the ability in participants’ to use financial statements to assess a company’s performance.
Course Fee: Free of Cost
What you'll learn
• Understand need and importance of Accounting
• Understand Book Keeping, Objectives and Advantages
• Understand Accounting Process, Accounting Cycle,
• Understand Users of Accounting Information
• Understand Branches of Accounting
• Understand Basic Accounting Terms
• Understand Accounting Assumptions, Concepts and Principles
• Understand Rules of Accounting
• Understand Journal, Ledger, Trial Balance and Final Accounts Preparation
In detail view of Everyday session topic covers:
This is a comprehensive course, covering each and every topic in detail. In this course, you will learn Fundamentals of Accounting, step by step covering the following:
What Is Accounting?
Features of Accounting?
Book Keeping & Accounting
Users of Financial Statements
Branches of Accounting
Objective And Limitation of Accountancy
Terms in Accounting
This document briefly describes each and every stage of accounting cycle with appropriate rules. rules followed are based on type of account.it also includes the proforma of journal,ledger,trail balance, final account statements.
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LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
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1. Introduction and Key Concepts of Sustainability
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3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
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Transcript
1. ACCOUNTING CYCLE The Accounting Cycle is a
series of steps, which are repeated every reporting period. The process starts with making
accounting entries for each transaction and goes through closing the books. This Involves
recording transactions in the daybooks, posting them to ledger, extracting a trial balance and
finally drawing up financial statements. Step 1: Recording Transactions in Daybooks
Each transaction is recorded first in one of the following daybook ( book of original entry)
according to the nature of the transaction. 1. All goods sold on Credit ( Credit Sales)
….> Sales Daybook 2. All goods purchased on Credit (Credit Purchases) ….> Purchases
Daybook 3. All goods sold on credit but now returned by costumers ..> Sales Return
(Inwards) Daybook 4. All goods purchased on credit but now returned to suppliers…>
Purchases Return Daybook The above four daybooks only record credit transactions related
to movement in inventory. There are no accounts maintained inside the daybooks. It Just
contains Date, Name, Source document number and Amount. 5. All transactions which
relate to receipts and payments through cash or cheque ..> Cashbook Cash and Bank
accounts are made inside the cashbook hence it also serves the purpose of ledger. 6. All
other transactions …..> General Journal In this we actually write the double entry of
only those transactions which cannot be recorded in the above five daybooks. To name a
few - ‐ Non Current Assets Purchased or Sold on Credit - ‐ Writing off Bad debts - ‐ Entries
for Provisions of doubtful debts and depreciation - ‐ Adjustments for Prepaid and Owings
- ‐ Correction of Errors
2. Step 2: Posting Transactions In Ledgers A ledger is a book which contains accounts (
the actual T Accounts guys). There are three types of Ledgers. In each type we have
different type of accounts. Sales Ledger: This contains accounts of credit costumers (
people to who we sell goods on credit) – Trader Receivables At the end of the year
all the account balances in the sales ledger are listed in a schedule which is called list of
Trade receivables. This shows the individual account balances( closing) and also the total
debtors which goes into the trail balance. Purchase Ledger: This contains accounts of
credit suppliers ( people from whom we buy goods on credit) – Trader Payables At the
end of the year all the account balances in the purchase ledger are listed in a schedule
which is called list of Trade Payables. This shows the individual account balances( closing)
and also the total creditors which goes into the trail balance. General Ledger: This
contains all the other accounts. Like all expenses ,incomes ,provisions (literally all other
accounts) Please remember Sales and Purchases accounts are in the General Ledger cause
they are not our costumers or suppliers . Once all the transactions are posted all the
accounts are balanced via inserting a balance C/d in all accounts. Step 3 : Extracting a
Trial Balance All the closing balances in the General Ledger along with the figure of total
trade receivables and payables are listed in a trail balance. Debit balances and Credit
Balances are listed separately side by side. The Sum of all Debits should be equal to sum
of all credit balances. The trail balances is used to check the completion of the double
entry. The trail balance will balance because - ‐ For each debit entry there is a credit entry
( vice versa) - ‐ The sum of all debit entries is equal to the sum of credit entries
3. Step 4: Closing Entries with Year end Adjustments ( Details in following pages) After
making the trail balance we also have to adjust for certain items. Remember only Incomes
and Expenses are taken into account while calculating profit. These accounts are closed by
transferring them to the income statement ( the Profit and Loss Account). This process is
called Closing Entries. Some common adjustments are - ‐ Expenses and Incomes are adjusted
for prepaid (advance) and accruals(Owings) - ‐ Non Current Assets are depreciated - ‐
Provision for doubtful debt is adjusted - ‐ Closing inventory is valued by physical stock take
and it is adjusted in calculating cost of goods sold and also for Balance Sheet - ‐
Adjustments for goods withdrawn by owner or Stock Losses Step 5 : Final Accounts: An
income statement and Balance Sheet is drawn which ends the Accounting Cycle. Now by
looking at Income Statement owner can check his Profit and by looking at the Balance
Sheet he can check his Net worth of the Business.
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ADJUSTMENTS IN DETAIL BAD DEBTS AND PROVISION FOR
DOUBTFUL(BAD) DEBTS What is a bad 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 bad debt. Debit: Bad Debts
Credit : Person Who is Bad :>/Trade receivable What is a Provision for bad
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 balance sheet). Provision is created to
reduce profit now for an expense which might happen in future. This is done to be
pessimistic , in Accounting we call this being prudent or the Prudence Concept.
4. A business usually keeps a general provision ( an estimated % of the all debtors), but it
is also possible to make a specific provision against a highly doubtful debt. Specific
provision mean the whole amount due by a particular debtor is added to the provision.
For example Trade Receivables At End= 60000 Case 1: Only General Provision of 5% ..
> provision = 5% of 60000 = $3000 How is the amount of provision estimated? (
Factors effecting it) - ‐ 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) - ‐ Historical percentage of actual bad debts from previous years - ‐ Reputation of
people who us money in the market - ‐ Nature of Business - ‐ Some specific debts may be
identified and full amount of them is charged in provision. What is the difference between
accounting treatment of Provision for doubtful debts and the actual Bad debts? The
Journal entry for provision: To create / Increase Debit : Profit and Loss
Credit : Provision for doubtful Debts To Decrease Debit :
Provision for doubtful debts Credit : Profit and Loss 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 debtor from our books but in
case of a provision we don’t adjust the debtor account as a separate account is
maintained.
5. 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(debtor)
Credit: Bad debt recovered account - ‐ Now record the entry to receive the money
Debit: Bank Credit : Name of person (debtor) ACCOUNTING FOR
NON CURRENT ASSETS Whenever we spend money we call it expenditure. The
expenditure can be divided in two Capital Expenditure Revenue Expenditure Any
expenditure incurred on buying new non- ‐current asset. We take this to balance Sheet Any
day to day expense to run the business. We take this to income statement Usually one
off (doesn’t happen on daily basis) Its recurring in nature ( we have to do it again and
again) Includes initial expenses incurred till we start using the asset e.g. Installation,
delivery charges Usually occurs after we start using the asset Increases the value of
earning capability of the asset e.g. Adding a Safety device Maintains the value or earning
capability of the asset. E.g. Repainting or Repair 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
If these expenditures and receipts are treated in the wrong way then both income
statement and balance sheet will be wrong.
6. 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 . Every accounting year, the company will expense $100000
(assuming straight line , which will be matched with the money that the equipment helps to
make each year. The Double Entry for Depreciation is : Debit : Profit and Loss
Account ( Income Statement) Credit : Provision for Depreciation Methods of
Depreciation: 1. Straight Line : An equal amount of deprecation is charged
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every year. It is always calculated on cost . In case of scrap value (residual value) and
life given use : Cost –Scrap/Life 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
7. Which Method is best to use? It depends on the nature of Non Current Asset Straight
Line method is appropriate for assets like office furniture and fittings (which are used
evenly through out the year useful life, and the efficiency of them doesn’t fall by great
amount in initial years) Reducing Balance Method is appropriate for assets like machinery
or van. Since these assets are more efficient when new, more depreciation is charged in
initial years. As the asset gets old it looses efficiency and so we charge less deprecation.
Another way to look at it is that the maintenance and repairs of asset will increase in later
years so to maintain the overall expense it makes sense to charge more depreciation in
initial years when maintenance is low and then reduce it as maintenance increases. How
to record disposal of Asset: Disposal of means getting ride of the fixed asset . it can be
sold or may be stolen or just discarded. Usually there are 4 entries to record sale of asset
1. Remove the Cost of the Asset Sold Debit : Disposal Credit: Asset 2. Remove
the Total Deprecation Debit : Provision for Depreciation Credit : Disposal 3. Record
the Selling Price Debit: Bank Credit : Disposal If exchanged then Debit :
Asset Credit Disposal 4. Close the Disposal Account Close with income
statement .
8. All of this can be done in one single entry without using disposal For example Cost
of Asset Sold = 50000 Net book Value = 30000 Sold For 28000 Note : total
depreciation is 20000 as NBV is 30000 We can do Bank 28000
Prov for Depn 20000 Loss 2000
Asset 50000 If sold for $31000 then Bank 31000 Prov
for Depn 20000 Asset 50000
Gain 1000 Adjusting Entries To Adjust
expenses Prepaid : Debit : Prepaid Expense ( its an asset) Credit : Expense
(reduces expense) Owing/Accrual Debit : Expense
(increases expense) Credit : Owing Expense ( it is a liability)
9. To adjust Incomes: Prepaid: Debit: Income (as the income reduces because it’s
prepaid) Credit: Prepaid Income (because it’s a current liability) Owing/Due Debit:
Owing Income (because it’s an asset) Credit: Income (as the income increases)
To adjust closing stock Overstated: Debit: Trading account (or simply Profit and Los)
Credit: Closing stock Understated: Debit: Closing sock Credit: Trading account
(or simply Profit and Loss) To adjust Opening stock Overstated: Debit: Opening
Capital Credit: Trading account (or simply Profit and Loss) Understated: Debit:
Trading account (or simply Profit and Loss) Credit: Opening Capital This is because
opening stock has opposite relation with profits. So if understated profits are overstated and
we need to reduce them (debit: Trading account). Also opening stock of this year was
closing stock of last year so we need to amend the opening capital.
10. Concept of Sale or Return basis: If we send goods on sale or return basis which
means goods can be returned by the customer if not sold. When goods are send nothing
is recorded, just a memorandum is kept. These goods should not be included in sales and
should be included in closing stock (since they belong to us). If this is recorded as sales
and not included in closing stock, then we need to: • Correct sales: Cancel them Debit:
Sales Credit: Debtor • Correct Closing Stock which is understated Note: We won’t
have to correct the stock if the goods were included in closing sock.
11. BANK RECONCILIATION STATEMENTS Cashbook is owner’s record (Debit means +
balance, Credit means – balance) Bank statement is bank’s record (Credit means + balance,
Debit means – balance) Some entries which are recorded in the bank statement but not in
the cashbook: For these, we will have to correct the cashbook 1. Credit transfer (Bank
Giro): Money deposited by customer directly in the bank account (We should add it to
cashbook balance) 2. Standing order/ Direct Debit: Money paid to supplier directly by the
bank. (We should subtract this from cashbook balance) 3. Bank Charges/ Interest Charged:
Money deducted directly by the Bank. (We should subtract this from cashbook balance) 4.
Interest Received/ Dividends Received: Money added to the bank account in form of interest
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or dividend (We should ad it to the cashbook balance) 5. Dishonored Cheque: A cheque
received from customer but not acknowledged by the bank (We should subtract this from
cashbook balance because we need to cancel the entry made when the cheque was
received). Some entries which are recorded in the cashbook but not on the bank
statement. For this, we will have to correct the bank statement: 1. Unpresented Cheque:
Cheques written by us to a creditor but not yet presented to the bank for payment, so the
bank has not deducted money from our account. (We should subtract this from bank
statement balance) 2. Uncredited Cheque (Lodgments): Cheques received by us but not yet
deposited in the bank, so the bank has not increased the bank balance. (We should add
this to the bank statement balance) FOR MCQ’s remember Balance as per Bank
statement + Uncredited Cheques – Unpresented Cheques = Balance as per corrected
Cashbook. If balance as per corrected cashbook is given in the question, simply ignores
the entries which will affect the cashbook balance. If there is an overdraft (for either
cashbook or bank statement), take it as a negative figure in the equation.
12. CONTROL ACCOUNTS What is the difference between Sales Ledger and Salas Ledger
Control Account? Sales ledger is where we make individual accounts of credit customers.
It is part of double entry system and it gives details of amounts owing by each customer.
A list of debtors is extracted from the sales ledger, which gives the figure of debtors for
the trial balance. Sales ledger control account on the other hand is the total debtors
account in the general ledger. It is not part of the double entry system. It I often referred
as total debtors account. All the entries recorded here are totals taken from daybooks e.g.
Sales figure is the total of the sales daybook, discount allowed is total discount allowed
from the discount allowed account or the column in the cashbook. USES OF CONTROL
ACCOUNT 1. Helps to prevent fraud 2. Helps to detect errors 3. Quickly provide figures
of total debtors and creditor. LIMITATIONS OF CONTROL ACCOUNT 1. Cant trace error
of omission 2. Cant trace error of original entry RECONCILIATION OF CONTROL
ACOUNT In these types of questions, two sets of balances of debtors or creditors are
known. One is from the control account and the other is from the sales ledger (or list of
debtors). They will also give you several errors and you will have to reconcile both the
balances. Errors can be classified as: 1. If an error is made in the personal (individual)
debtors account, than it will only affect the sales ledger (list) balances. E.g. Sales made
not posted to debtor’s account, this means we should increase the debtor balances in the
ledger. 2. If an error is made in any total figure of the daybook, it will effect only the
control account balance, e.g. Sales daybook undercast, Total sales understated so add it to
control account balance. 3. If an entry is completely omitted from the books, it will affect
both the balances. E.g. A sales invoice completely omitted from the books, add it to both
balances. 4. If an entry is originally recorded in the daybook with the wrong amount, it
will affect both the balances, as the total will also be wrong. E.g. A sales invoice of $500
was originally recorded as $600, this means the total sales are overstated and also the
individual account of the customer has been debited with $600. We should subtract $100
from both. 5. If a balance is omitted from the list of debtors, it will only affect the sales
ledger (list) balance. It cannot affect control account balance.
13. ERRORS AND SUSPENSE Error not affecting the Trial Balance: 1. Error of complete
omission: When nothing has been recorded in the books. To correct this, simply record the
transaction. 2. Error of original entry: Where correct double entry is passed but with the
wrong amount. To correct this, adjust for the difference. 3. Error of principal: Where a
wrong type of account has been debited or credited instead. For example, we have debited
Rent instead of Motor Van. 4. Error of commission: Where a wrong account but of same
type (usually debtors or creditors) has been debited or credited instead. For example, we
have credited Mr. A instead of Mr. B. 5. Error of complete reversal: Where a completely
opposite entry is passed with the right amount. To correct this, pass the correct entry
with double amounts. 6. Compensating error: Where one error compensates for other. Like a
debit item (say purchase) and a credit item (say sales) are both undercast with same
amounts. (don’t worry about this too much :P) All the above errors do not affect the
Trial Balance because in all situations the total debits are equal to total credits. Errors can
be made which can lead to disagreement of the trial balance. This is when either we have
only debited something and forgot to credit (Incomplete double entry) or we have debited
something with a correct amount and credited the other with the wrong amount (Incorrect
double entry). And it can also happen if any daybook is over or under cast. E.g. Sales
daybook is undercast. In these situations Suspense account comes into the picture. Since
sales daybook is undercast, this means only the total sales were wrong (understated), so
we need to amend the sales accounts. Debit: Suspense Credit: Sales Also
sometimes an error is made in the list of debtors or creditors. Like a debit balance is
excluded from the list of debtors. This makes the debtors figure in the trial balance
understated. Logically we should Debit: Debtors Credit: Suspense But guys do
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you realize that only the list of debtors is wrong (which is not an account), so we should
Debit: NO DEBIT ENTRY Credit: Suspense What if there is still balance left in
the suspense account? This means all the errors are still not found. If the balance comes
on the debit side, then treat it as a current asset in the balance sheet, if it comes on the
credit side then treat it as a current liability.
14. INCOMPLETE RECORDS: Remember Net profit can be calculated using the following
formula. If a question says make a trading profit and loss account, than this doesn’t apply.
Only when it says to calculate net profit or make a statement showing net profit.
Opening Capital + Additional Capital + Net profit – Drawings = Closing Capital (I really
hope you can solve for net profit), don’t memorize the formula, it’s the financed by
section. For the final account questions (where the trading, profit and loss account and
a balance sheet is required), always make the following accounts. (By always, I mean
always). 1. Sales ledger control account (If business only deals in cash sales, then don’t)
2. Purchase ledger control account 3. Bank account (if it is already given in the question,
then it’s okay) 4. Cash account (only make this when the question gives cash balances)
Once you have filled in your accounts, and then move to the Final accounts. Don’t panic if
it doesn’t balance, because marks are for working. Don’t spend your entire lifetime on this
question. NEVER NEVER NEVER forget depreciation. They will usually give you net book
values at start and end. Depreciation = Opening NBV + Purchase of assets – Sale of
assets (at NBV) – Closing NBV Also make expense accounts or adjust for prepaid and
owings directly. But show all working. In your financed by section, you will need
opening capital. This will come from Opening Assets – Opening Liabilities. Don’t forget to
include the opening balance of the bank account in your calculation (like other idiots). On
the following pages, I have given few exercises. Try to fill in the missing figures.
MARGINS AND MARK- ‐UPS These are tools used in conjunction with trading account to
compute the missing figures of sales, figures or stocks. If either of these percentages is
given, it is a sign that we are expected to compute the missing figures by using the
trading account technique.
15. MARGINS Represent Gross Profit as a percentage of selling price. Example: A
company sells its goods at a selling price of $80. Its profits are set at 20% no selling
price. Profits will be $80 x 20% = $16 By using trading account format, we can
determine the cost of goods sold as: $ Sales 80 Less: Cost of goods sold (balancing
figure) (64) Profit 16_ MARK- ‐UP Represent Gross profit as a percentage of cost.
Its application is like margin, that if we get one of the trading figures, we will be able to
compute the others. Let us assume that the information we have from the above example
is that a company sells goods, which cost $64. Its profit on cost is 25%. Profits would
be computed as follows: Profits = $64 x 25% = $16. By using trading account
format, we can determine sales as: $ Sales (balancing figure) 80 Less: Cost of goods
sold (64) Profit 16_ Try to use Sales – Cost = Profit If Mark up if given
Profit is a % of Cost and IF margin is given Profit is a % of Sales For eg. Sales =
80000 Cost = ? Margin = 25% Sales – Cost = Profit 80000- ‐ x = 25 % of 80000
Cost = 60000
16. But if Sales = 80000 Cost = ? Markup =25% Sales – Cost = Profit 80000- ‐ x
= 25 % of X Cost = 64000 NON- ‐PROFIT ORGANIZATION (CLUBS AND
SOCITIES) The non- ‐profit organization is with a view of providing services to its
members. The aim is not to make profits out of trading activities, but to increase to
welfare of members through social interaction and other activities. A club is owned by all
the members collectively and since there is no single owner, there are no DRAWINGS.
TERMINOLOGY DIFFERENCE Non- ‐profit organizations Normal trading Businesses Receipts
and Payments Account Bank Account Income and Expenditure Account Trading, Profit and
Loss Account Surplus Profit Deficit Loss Accumulated Funds Capital Why is a
Receipts and Payments Account unsatisfactory for the members? The receipts and
Payments account does not provide information to the members relating to 1. Assets owned
by the club 2. Liabilities owed by the club 3. Surplus or Deficit 4. Depreciation of fixed
assets 5. Performance of the club 6. Financial position of the club. In order to make the
income and expenditure account, you will need to determine the incomes separately.
Incomes may include: - ‐ Refreshment Profit/Bar profit (make a separate account to calculate
net profit from this) - ‐ Annual subscription (separate subscription account for this)
17. - ‐ Gain on disposal. - ‐ Interest on deposit account or investment account. - ‐ Profits from
different events (say Dinner dance) - ‐ Life Subscription (don’t mix this with Annual
Subscription) - ‐ Donations (only day to day) Check debit side of Receipts and Payments
account for anything else. What is the difference between receipts and payments account
and Income and Expenditure account? Receipts and Payment account Income and
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Expenditure account It shows balance of bank at start and end It shows Surplus of
Deficit for the year It records money coming in and going out It records Incomes and
expenses incurred It considers all type of money coming including capital receipts, e.g.
Long term donations and all type of money going out, e.g. Purchase of fixed asset It
considers only revenue incomes and expenditure. It is an alternative name for cashbook It
is an alternative name for profit and Loss What is a donation and what are two
accounting treatments for it? An amount received by a club which the club does not have
to pay back. This includes donations, gifts, legacy and grants. If donation is for a day
to day expenditure or will remain with the club only for a short period then it should be
treated as an income in the income and expenditure account. If donation is for purpose
of capital expenditure on long term assets, then it is shown as a special fund in the
balance sheet. (Financed by section added it to accumulated funds). What is life
subscription (Life membership or admission fees)? All of these are treated in the same way.
The club receives money for subscription for the entire life of the member. This is put in
a separate life membership account. Every year an amount of it is transferred to the
income and expenditure account (this will be given in the question), e.g. the amount of
money received from this life membership scheme is $300 and club decides to transfer
20% every year. This would mean that $60 (20% of $300) is transferred to income and
expenditure account and the remainder $240 should go to the balance sheet as a long term
liability. If the life membership fund already has a balance, let’s say $2 000 and we have
received $500 during the year and club transfers 10% year. This would mean we would
show 250 (10% of 2 500) as an income and the remainder 2 250 (2 500 – 250) as a
long term liability.
18. PARTNERSHIP ACCOUNTS A partnership is defined by the Partnership Act 1890 as a
relationship, which exists between two or more persons who carry business with a view of
profit. CHARACTERISTICS OF PARTNERSHIP • Partners are jointly and severally liable
for the debts of the partnership. They have unlimited liabilities for the debts of the
partnership. • The minimum number of partners is usually two and maximum number is
twenty, with exception of banks, where the maximum number is fixed at ten and some
professional practices where there is no maximum number. • All partners usually participate
in the running of their business. • There is usually a written partnership agreement. THE
PARTNERSHIP AGREEMENT The partnership agreement is a written agreement which
sets up the terms of the partnership, especially the financial arrangements between the
partners. The contents of the partnership agreement can vary from one partnership to
another. A standard Partnership Agreement may include the following items: 1. The name of
the firm, business type and duration 2. Capital contribution. 3. Profit sharing ratios. 4.
Interest on Capital. 5. Partners’ salaries. 6. Drawings. 7. Interest on drawings. 8.
Arrangements in case of dissolution, death or retirement of partners. 9. Arrangement for
settling disputes. In absence of a formal agreement between the partners, certain rules laid
down by the Partnership Act 1890 are presumed to apply. These are: 1. Residual profits
are shared equally between the partners. 2. There are no partners’ salaries. 3. No interest is
charged on drawings made by the partners 4. Partners receive no interest on capital
invested in the business. 5. Partners are entitled to interest of 5% per annum on any loans
they advance to the business in excess of their agreed capital.
19. CHANGES IN THE PARTNERSHIP A change in partnership is when the agreement
has to be changed between the partners due to - ‐ Admission of a new partner - ‐
Retirement of an existing partner - ‐ Or simply change in profit sharing ratio. Whenever
there is a change in a partnership, partners are allowed to revalue their assets and also
attach a value of goodwill to the business. For this purpose, they make a revaluation
account. In revaluation account we simply record the gains or losses on each asset due
to revaluation. We can also include the goodwill in this account on the credit (gain) side.
This account is then closed by transferring the balance to partners’ capital account in the
old profit sharing ratio. Two situations for Goodwill: 1. If partners decide to keep the
goodwill, then we will show the amount of goodwill in the balance sheet. (No other entry
needs to be made if we already included the goodwill in the revaluation account). 2. If
partners decide to write off the goodwill then we will write off the entire goodwill from
the capital account (debit side) in the new profit sharing ratio. Goodwill will not be shown
in the balance sheet in this case.
20. ADVANTAGES OF PARTNERSHIP OVER SOLE TRADER 1. Additional capital from
other partners, and also easier to get loans. 2. Additional expertise. 3. Additional management
time. 4. Risk (losses) is shared. DISADVANTAGES OF PARTNERSHIOP OVER A
SOLE TRADER 1. Profit are shared 2. Possibility of disputes 3. Loss of control What
is a current account? Majority of partnership keep a fixed capital account, whenever they
have fixed capital accounts, they will have to maintain a current account for each partner.
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By fixed capital account, we mean that all the appropriation and drawings will pass through
a temporary capital account (current account), only additional investment by a partner will
be recorded in the capital account. This gives information relating to long term and short
term aspects separately. This also helps to determine the investment made by partner in the
business. Some partnerships also maintain a fluctuating capital account; in this case they
will not maintain a current account. All the transactions will pass through the capital
account. What is total share of profit? This is different than just the remaining share of
profit which we get at the end of appropriation account. Total share of profit means out
of this year’s net profit, how much profit goes to a particular partner. As we know
interest on capital and salary etc are deducted from net profit only so they also constitute
as part of profit. Hence, total share of profit is: Interest on capital + Salary +
Remaining share of Profit – Interest on drawings
21. LIMITED COMPANIES Limited companies are business organizations, whose owners’
liabilities are limited to their capital contributed or guarantees made. CHARACTERISTICS
OF LIMITED COMPANIES 1. Separate legal entity: A company is regarded as a separate
person from its owners and managers. As a result, it can sue or be sued, it can own
property. This concept is often referred to as veil of incorporation. 2. Limited liability:
Shareholders’ liability is limited to what they have paid for shares. 3. Perpetual succession:
Unlike partnership and sole trader, a company does not cease to exist on the death or
retirement of any of the owners. Owners can buy and sell their shares without affecting
the running of the business. 4. Number of members: There is no limit as to the number
of members 5. Capital: Company’s capital is raised through the issuance of shares 6. Profit
distribution: Profits are distributed to members through dividends. 7. Retained profits: The
retained profits are capitalized are reserves. 8. Legislation: Companies are highly regulated.
They are required to comply with the requirements of Company’s ACT as well as Financial
Reporting Standards. ADVANTAGES OF OPERATING AS A LIMITED COMPANY: 1.
The liability of the shareholders is limited. Therefore, in case of company going bankrupt,
the individual assets of the owners will not be used to meet the company’s debts. Only
shareholders who have only partly paid for their shares can be forced to pay the balance
owing on the shares, but nothing else. 2. There is a formal separation between the
ownership and management of the business. This helps in clearly identifying the responsible
persons. 3. Ownership is vastly shared by many people, hence diversifying risk, and funds
become available is substantial amounts. 4. Shares in the business can be transferred
relatively easily. DISADVANTAGES: 1. Formation costs are normally very high. 2.
Companies are highly regulated. 3. Running costs are also very high i.e. preparation and
submission of annual returns, audit fees etc. 4. Profit distribution is also subject to some
restrictions. Not all surpluses from the business transactions can be distributed back to the
shareholders. 5. Company accounts must be available for inspection to the public.
22. There are two types of limited companies: 1. Public limited companies: a- ‐ They have
the abbreviation Plc of public limited company at the end of their names b- ‐ Their minimum
allotted share is required to be £50 000. c- ‐ They can invite the general public to subscribe
for their shares d- ‐ Their shares may be traded in the stock exchange i.e. they can be
quoted with the stock exchange. 2. Private limited companies: a- ‐ They have the
abbreviation ‘Ltd’ for limited at the end of their names. b- ‐ They are not allowed to invite
general public for the subscription of their share capital. COMPANY FINANCE As is a
case with sole traders and partnerships, companies also have two main sources of finance,
namely; capital and liabilities. The difference is on naming and classification of these terms.
When the company is formed, it normally issues shares to be subscribed by the potential
members. People who subscribe and buy company’s shares are known as shareholders, and
they become the legal owners of the company depending in the proportion and type of
shares they hold. They receive dividends as return on their invested capital. Dividends are,
therefore, appropriations of the profits. On the other hand, the company can borrow funds
from other people who are not owners. The main form of company borrowings is by
issuing debenture, which is a written acknowledgement of a loan to a company, given
under the company’s seal. The debenture holders are not owners of the company but they
are liabilities. Debenture holders receive a fixed percentage of interest on the loan amount.
Debenture interest is a business expense, which must be paid when is due. Other forms of
borrowings include trade creditors and bank overdrafts. The difference between
shareholders and debenture holders can be analyzed in terms of: 1. Ownership; and 2.
Return on investment (Debenture holders will get it even if the company makes losses)
SHARE CAPITAL Share capital is normally of two types: 1. Ordinary share capital; and 2.
Preference share capital
23. Their difference is summarized in the table below: Aspect Ordinary shares Preference
shares Voting power Carry a vote Limited or no voting power Dividends 1. Vary
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between one year to another, depending on the profit for the period. 2. Rank after
preference shareholders. 3. Not cumulative. 1. Fixed percentage of the nominal value. 2.
Cumulative. If not paid in the year of low or no profits, it is carried forward to the next
years. 3. They may be non- ‐cumulative. Liquidation (Company closing down) Entitled to
surplus assets on liquidation, after all liabilities and preference shareholders have been paid.
Whatever is left, go to Ordinary shareholders. 1. Priority of payment before ordinary
shareholders, but after all other liabilities. 2. Not entitled to surplus assets on liquidation.
SHARE CAPITAL STRUCTURE Authorized share capital: the maximum share capital that
the company is empowered to issue per its memorandum of association. It is sometimes
called as registered capital. Issued share capital: The total nominal value of share capital
that has actually been issued to the shareholders. Called- ‐up capital: This is a part of
issued capital that the company has already asked the shareholders to pay. Normally when
the company issues shares, it does not require its shareholders to pay the full price on
spot. Rather it calls the installments from time to time. It is the amount that is included in
the balance sheet. Paid- ‐up capital: This is the total amount of the money already
collected from the shareholders to date. Dividend is paid on this. Uncalled capital: This
is the part of issued capital, which the company has not yet requested its shareholders to
pay for. Dividends: According to the new law, we only subtract the amount of dividends
paid from profit. Dividends which are announced are ignored.
24. DEBENTURES A debenture is a document containing details of a loan made to a
company. The loan may be secured on the assets of the company, when it is known as a
mortgage debenture. If the security for the loan is on certain specified assets of the
company, the debenture is said to be secured by a fixed charge on the assets. If the
assets are not specified, but the security is on the assets as they may exist from time to
time, it is known as a floating charge on the assets. An unsecured debenture is known as a
simple or naked debenture. Debentures holders are not members of the company in the
same way as shareholders are, and debentures must not be confused with the share capital
and reserves in the balance sheet.
25. RESERVES The net assets of the company are represented with capital and reserves.
While capital represents the claim that owners have because of the number if shares they
own, reserves represent the claim that owners have because of the wealth created by the
company over the years but not distributed to them. There are two main types of
reserves: Revenue Reserve The reserves which arise from profit (Trading activities of the
company). These are transferred from the Appropriation account. Examples include General
Reserve and Retained Profit (Profit and Loss). Dividends can only be paid to the amount
of revenue reserve on the balance sheet. i.e. the maximum dividend possible is the sum of
both revenue reserves. Capital Reserve These are reserves which the company is required
to set up by law and cannot be distributed as dividends. They normally arise out of capital
transactions. These include Share Premium and Revaluation Reserve. Share Premium Share
premium occurs when a company issues shares at a price above its nominal (par) value.
This excess of share price over nominal value is what is known as share premium. What
are the uses of Share Premium? 1. Issue Bonus Shares 2. Write off Formation
(Preliminary Expenses) 3. Write off Goodwill. What are the different Types of Preference
Shares? 1. Non- ‐cumulative Preference shares: In case company doesn’t pay enough
profits, these shareholders will get no dividends in the year and that amount of dividend
will never be given. 2. Cumulative Preference Shares: In case company doesn’t have enough
profits, these shareholders will get no dividend in the year and that amount of dividend will
be carried forward to next year, when the company makes enough profit, the entire
amount will be payable as dividend. 3. Participating Preference Shares: These shareholders
have limited voting right, i.e. they can participate in the decision making.
26. STOCK VALUATION Remember stock is valued at lower of cost or net realisable
value (N.R.V). This is basically the current market value of the stock after deducting any
repair cost. This is application of the prudence concept. E.g. If a piece of stock costing
$40 is damaged. Now it can be sold for $48 but only if $10 of repair is undertaken. This
means the NRV of stock is 38 (48 – 10). Since NRV (38) is lower than the cost (40),
we should value it as 38. It lets say the NRV was $41, then than the stock would have
been valued at $40. Assumptions in Stock Valuations FIFO Advantages 1. Good
representation of sound storekeeping as oldest stock is issued first. 2. Stock is shown close
to the current market value (because it is valued at most recent price) 3. This method is
acceptable by accounting regulations Disadvantages 1. In inflation stock is valued the highest
and it overstates profit 2. Since the value of stock issued fluctuates, this will lead to a
different cost for an identical unit. LIFO Advantages 1. In inflation stock is valued at the
lowest and it understates profit (Prudence concept) 2. Cost of goods sold is close to the
current market value. Disadvantages 1. Not acceptable by accounting regulations 2. Since
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the value of stock issued fluctuates, this will lead to a different cost for an identical unit.
3. Closing stock is not valued at most recent price. 4. LIFO periodic is unrealistic AVCO
Advantages 1. Since the value of stock issued does not fluctuate, this will lead to a same
cost for an identical unit. 2. This method is acceptable by accounting regulations.
Disadvantages 1. Difficult to calculate. 2. Average price does not represents the true value of
stock
27. ACCOUNTING CONCEPTS TABLE/SUMMARY/SNAPSHOT OF ACCOUNTING
CONCEPTS/CONVENTION Accounting period Concept Also known as Time Period
where business operation can be divided into specific period of time such as month, a
quarter or a year (accounting period) Final accounts are prepared at the end of the
accounting period, i.e. one year. Internal accounts can be prepared monthly, quarterly or
half yearly. Accrual Concept / Matching Requires all revenues and expenses to be
taken into account for the period in which they are earned and incurred when determining
the profit / (loss) of the business. The net profit / (loss) is the difference between the
revenue EARNED and the expenses INCURRED and not the difference between the revenue
RECEIVED and expenses PAID. Business Entity Also known as Accounting Entity
convention which states that the business is an entity or body separate from its owner.
Therefore business records should be separated and distinct from personal records of
business owner. Consistency Concept According to this convention, accounting practices
should remain unchanged from one period to another. For example, if depreciation is
charged on fixed assets according to a particular method, it should be done year after
year. This is necessary for purpose of comparison. Dual Aspect Concept Double entry
system. For every debit, there is a credit entry of an equal amount. Going Concern
Concept The business will follow accounting concepts and methods on the assumption
that business will continue its operation to the foreseeable future or for an indefinite period
of time. Historical Cost Concept Business should report its activities or economic
events at their actual costs. For example, fixed assets are recorded at their cost in
account except for land which can be revalued due to appreciation
28. Materiality Concept The accountant should attach importance to material details and
ignore insignificant details otherwise accounting will be burdened with minute details. Only
items that are deemed significant for a given size of operation. Money Measurement
Concept Also known as Monetary unit. Transactions related to the business, and having
money value are recorded in the books of accounts. Events or transactions which cannot
be expressed in term of money do not find a place in the books of accounts.
Objectivity and Subjectivity Objectivity is following rules of the industry and based on
objective evidence and subjectivity is to follow one’s own rules and methods. Prudence /
Conservatism Concept Take into account unrealized losses, not unrealized profits/gains.
Assets should not be over- ‐valued, liabilities under- ‐valued. Provisions are example of
prudence or conservatism concept. Also under this prudence/conservatism concept,
stock/inventory is value at lower of cost or market value. This concept guides accountants
to choose option that minimize the possibility of overstating an asset or income.
Substance Over Form Real substance takes over legal form namely we consider the
economic or accounting point of view rather than the legal point of view in recording
transactions. Realization Concept Revenue is recognized when goods are sold either for
cash or credit namely the debtor accepts the goods or services and the responsibility to
pay for them. RATIOS PROFITABILITY GROSS PROFIT MARGIN (
Gross Profit x 100 ) Net Sales While the gross profit is a dollar amount,
the gross profit margin is expressed as a percentage of net sales. The Gross Profit Margin
illustrates the profit a company makes after paying off its Cost of Goods sold. The Gross
Profit Margin shows how efficient the management is in using its labour and raw materials
in the process of production (In case of a trader, how efficient the management is in
purchasing the good). There are two key ways for you to improve your gross profit
margin. First, you can increase your process. Second, you can decrease the costs of the
goods. Once you calculate the gross profit margin of a firm, compare it with industry
standards or with the ratio of last year. For example, it does not make sense to compare
the profit margin of a software company (typically 90%) with that of an airline company
(5%).
29. Reasons for this ratio to go UP (opposite for down) 1. Increase in selling price per unit
2. Decrease in purchase price per unit due to lower quality of goods or a different
supplier. 3. Decrease in purchase price per unit due to bulk (trade) discounts. 4. Extensive
advertising raising sales volume (units) along with selling price. 5. Understatement of opening
stock. 6. Overstatement of closing stock. 7. Decrease in carriage inwards/Duties (trading
expenses) 8. Change in Sales Mix (maybe we are selling some new products which give a
higher margin). NET PROFIT MARGIN ( Net Profit x 100 ) Net Sales
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Net profit margin tells you exactly how the management and operations of a business are
performing. Net Profit Margin compares the net profit of a firm with total sales achieved.
The main difference between GP Margin and NP Margin are the overhead expenses
(Expenses and loss). In some businesses Gross Margin is very high but Net Margin is low
due to high expenses, e.g. Software Company will have high Research expenses. Reasons
for this ratio to go UP (opposite for down) All the reasons for GP margin apply here.
Additionally 1. Increase in cash discounts from suppliers 2. A decrease in overhead expenses
3. Increase in other incomes like gain on disposal, Rent Received etc. Return on Capital
Employed (ROCE) This is the key profitability ratio since it calculates return on amount
invested in the business. If this ratio is high, this means more profitability (In exam if
ROCE is higher for any firm it is better than the other firm irrespective of GP and NP
Margin). This return is important as it can be compared to other businesses and potential
investment or even the Interest rate offered by the bank. If ROCE is lower than the bank
interest then the owner should shoot himself. This ratio can go up if profits increase and
capital employed remains the same. Also if Capital employed decreases, this ratio might go
up. Operating Profit_ x 100 Capital Employed Net Profit before
Interest and Tax
30. Return on Total Assets This shows how much profit is generated on total assets
(Fixed and Current). The ratio is considered and indicator of how effectively a company is
using its assets to generate profits. Operating Profit_ x 100 Total Assets
Return on Shareholders’ Funds: Since all the capital employed is not provided by the
shareholders, this specifically calculates the return to the shareholders (It’s almost the same
thing as ROCE) Net Profit after Tax x 100 Shareholders Funds O.S.C +
P.S.C + RESERVES NOTE: Capital Employed = Fixed Assets + Current Assets –
Current Liabilities OR = Ordinary Share Capital + Preference Share Capital +
Reserves + Long- ‐term Liabilities LIQUIDITY AND FINANCIAL As we know a firm has
to have different liquidity. In other words they have to be able to meet their day to day
payments. It is no good having your money tied up or invested so that you haven’t enough
money to meet your bills! Current assets and liabilities are an important part of this
liquidity and so to measure the firms liquidity situation we can work out a ratio. The
current ratio is worked out by dividing the current assets by the current liabilities.
CURRENT RATIO = Current assets _ Current liabilities
31. The figure should always be above 1 or the form does not have enough assets to meet
its liabilities and is therefore technically insolvent. However, a figure close to 1 would be a
little close for a firm as they would only just be able to meet their liabilities and so a
figure of between 1.5 and 2 is generally considered being desirable. A figure of 2 means
that they can meet their liabilities twice over and so is safe for them. If the figure is any
bigger than this then the firm may be tying too much of their money in a form that is
not earning them anything. If the current ratio is bigger than 2 they should therefore
perhaps consider investing some for a longer period to earn them more. However, the
current assets also include the firm’s stock. If the firm has a high level of stock, it may
mean one of the two things, 1. Sales are booming and they’re producing a lot to keep up
with demand. 2. They can’t sell all they’re producing and it’s piling up in the warehouse!
If the second of these is true then stock may not be a very useful current asset, and
even if they could sell it isn’t as liquid as cash in the bank, and so a better measure of
liquidity is the ACID TEST (or QUICK) RATIO. This excludes stock from the current
assets, but is otherwise the same as the current ratio. ACID TEST RATIO = Current
assets – stock Current liabilities Ideally this figure should also be above 1 for
the firm to be comfortable. That would mean that they can meet all their liabilities without
having to pay any of their stock. This would make potential investors feel more
comfortable about their liquidity. If the figure is far below 1, they may begin to get
worried about their firm’s ability to meet its debts. Rate of Stock Turnover It shows
the number of times, on average, that the business will sell its stock in a given period of
time. It basically gives an indication of how well the stock has been managed. A high ratio
is desirable because the quicker the stock is turned over, more profit can be generated. A
low ratio indicates that stocks are kept for a longer period of time (which is not good).
Cost of Goods Sold = ____ Times Average Stock
32. Stock Days: This is Rate of stock turnover in days. Lower the better. Average
Stock x 365 = ____ Days Cost of Goods Sold Debtor Days: Shows how
long it takes on average to recover the money from debtors. Lower the better.
Average Debtors x 365 = ____ Days Credit Sales Creditor Days:
(Creditor Payment Period) Shows how long it takes on average to payback the creditors.
Higher the better. Average Creditors x 365 = ____ Days Credit
Purchases Working Capital Cycle: (Only for MCQ). (Lower the better) Stock Days +
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Debtor Days – Creditor Days = ____ Days Note: Average Stock = Opening +
Closing 2 Utilization Ratios (All higher the better) Total Asset utilization
(Total Asset Turnover) Shows how much sales are being generated on Total Assets.
Higher ratio indicates better utilization of Total Assets. Net Sales = ____ Times
Total Assets
33. Fixed Asset Utilization (Fixed Asset Turnover) Shows how much sales are being
generated on Fixed Assets. Higher ratio indicates better utilization of Fixed Assets.
Net Sales = ____ Times Fixed Assets Working Capital Utilization (Working Capital
Turnover) Sows how much sales are being generated on Working Capital. Higher ratio
indicates better utilization of Working Capital. Net Sales = ____
Times Working Capital Advantages of Ratios 1. Shows a trend 2. Helps to compare a
single firm over a two years (time – series) 3. Helps to compare to similar firms over a
particular year. 4. Helps in making decisions Disadvantages (Limitations): 1. A ratio on its
own is isolated (We need to compare it with some figures) 2. Depends upon the reliability
of the information from which ratios are calculated. 3. Different industries will have
different ideal ratios. 4. Different companies have different accounting policies. E.g. Method
of depreciation used. 5. Ratios do not take inflation into account. 6. Ratios can ever
simplify a situation so can be misleading. 7. Outside influences can affect ratios e.g. world
economy, trade cycles. 8. After calculating ratios we still have to analyze them in order to
derive a conclusion. How to Comment: Usually in CIE they assign 2 marks for comment
on each ratio. One mark is for indicating if the ratio is better or worse (not higher or
lower). The second mark is to explain the importance or the reason of the change in ratio.
For e.g. If Gross Profit Margin was 40% and now its 50%, you should say that the
Gross profit Margin has improved (rather than increased) and this may be due to an
increase in selling price or a decrease in cost of goods sold (depending upon the question).
Also remember that the liquidity and utilization ratios should be close to industry average.
Too less or too much liquidity is bad!
34. At the end of your answer, always give a conclusion • When comparing a single firm
over two years then do mention performance of which year is better. (In terms of
profitability and liquidity) • When comparing two different firms over the same year do
mention performance of which firm is better. (In terms of profitability and liquidity). If
the question says evaluate profitability then use (GP Margin, NP Margin and ROCE) If the
question says evaluate liquidity, use (Current Ratio, Acid Test and Rate of Stock Turnover)
If the question says evaluate the performance it means both profitability and liquidity.
Best ways: 3 – Profitability 2 – Liquidity 1 – Utilization
35. ALL THE SMALL THINGS. Financial Accounting - ‐ Written down value or net book
value means after depreciation. - ‐ Only assets and expenses have debit balances, all the
other things in the world will have a credit balance. - ‐ Sales invoice would mean good
sold on credit. - ‐ If bad debt is inside the trial balance then it means that it has already
been subtracted from the Debtors. - ‐ Everything outside the Trial Balance has to come
TWICE. - ‐ Provision for depreciation is a Contra Asset Account. It is NOT AN EXPENSE,
since its balance is brought down. - ‐ All the balance c/d go to the Balance Sheet. - ‐ All
the expenses and incomes are in the Profit and Loss a/c. - ‐ Revenue = Sales. - ‐ When it
is NOT specified how you bought Machinery, you make it BANK! Automatically. - ‐ If
NOTHING is specified about the policy of Depreciation, then you account for it
MONTHLY. - ‐ Every Asset has an Opening Debit balance and Closing Credit balance. - ‐
Every Liability has an Opening Credit balance and closing Debit balance. - ‐ The Amount of
Loan interest still owing and not paid (which was to be paid this year) comes in the
Current Liabilities. - ‐ Departmental Account: If given with prepayment any expenses, then we
SHOULD FIRST ADJUST the accruals and prepayments, and then divide them into % of
EACH department. - ‐ Control Account is not part of the double entry. It is THE THIRD
ENTRY. - ‐ List price is the price WITHOUT deducting TRADE DISCOUNT. - ‐ Set off
always reduces the Control Account! - ‐ Credit Notes received = Return Outwards - ‐ Credit
Notes sent = Return Inwards - ‐ BAD DEBTS recovered comes on the debit side of the
Sales Ledger Control Account (S.L.C.A) and even on the credit side. - ‐ Whenever you
receive a cheque from BANK marked ‘REFER TO DRAWER’ then it is CHEQUE
DISHONOURED - ‐ FIX NET PROFIT: In the Journal, if the account goes in the N.P, then
if something is being CREDITED it will INCREASE N.P, or if it DEBITED, then it will
DECREASE N.P. - ‐ To find the opening balance in the Suspense LEAVE THE FIRST two
lines empty. - ‐ The amount of stationery used, goes in the Profit and Loss as an expense.
- ‐ Sundry Expense means miscellaneous expenses. - ‐ Whatever goes in the Profit and Loss is
REVENUE EXPENDITURE. - ‐ Whatever goes in the BALANCE SHEET is CAPITAL
EXPENDITURE.
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36. - ‐ CAPITAL EMPLOYED (Sole Trader) = CAPITAL OWNED – LONG- ‐TERM LOAN.
- ‐ CAPITAL OWNED (Sole trader) = Assets – Liabilities. - ‐ CAPITAL EMPLOYED
(COMPANY) = OSC + PSC + RESERVES (share premium, Retain profits, all reserves) +
Long Term Liabilities. - ‐ REFUND FROM Supplier is recorded on the Credit side of the
Purchase Ledger Control Account. - ‐ In closing Assets, you write the Bet Book Value
(N.B.V) - ‐ DRAWINGS ARE Neither AN Asset NOR A LIABILITY. - ‐ If they ask you to
make a STATEMENT TO find Profit or Loss, then just make that financed by (Opening
capital + Net Profit (x) + Capital Introduced – Drawings = Capital at end) - ‐ If they say
make final accounts, then make Profit and Loss and Balance Sheet. - ‐ Closing Stock has a
direct relation with profit. If closing stock is overstated, profit will be overstated. - ‐
Opening stock has an inverse relation with profit. If opening stock is overstated, profit will
be understated. - ‐ Goods sent on sale or return basis should not be counted as sake unless
accepted by the customer. Infact they should be included in the stock. - ‐ If no account is
wrong, like there is an error in the list of debtors then we only correct it through
suspense account (its only one entry, e.g. Debit: Suspense, Credit: – ) - ‐ We only double
the amount if it is written on the wrong side of the account. - ‐ Club accounts will never
have drawings. - ‐ If we find purchases of control account we will still have to subtract
return outwards. - ‐ Unpresented cheques are payment by us. - ‐ Uncredited cheques are
receipts by us (also called LODGMENTS). - ‐ If you can’t find the average debtors or
stock or creditors, use closing figure instead of instead of average. - ‐ If nothing is
specified, we can assume all sales and purchases are on credit basis. - ‐ Provision for bad
debt is a separate account. We can record the provision in debtors account, net debtors
mean after deducting provision. - ‐ We only take the change in provision in the Pnl. - ‐
Cashbook is both a daybook and a ledger. - ‐ We only record credit sales and purchases in
the Sales and Purchase Daybook, cash and bank transactions are in the cashbook. - ‐ If a
daybook is overcast only that amount will be wrong. E.g. if Sales daybook is undercast,
this means only the Sales account is wrong. - ‐ If profit is given inside the trial balance,
the stock should be closing stock (because we don’t need the opening stock). - ‐ Similarly
if depreciation for the year is inside the trial balance, the provision for depreciation would
already include this year’s depreciation. - ‐ Long term donations are in the balance sheet of
clubs and short term are incomes. - ‐ Gross profit ratio will not change because of sales
volume (number of units), but net profit ratio will increase.
37. - ‐ In trading account we show stock of finished goods at transfer value. In balance
sheet, they should be recorded at cost. - ‐ Indirect Material, Indirect Labour, Depreciation of
plant and machinery will always be Factory Overheads. - ‐ Administration and selling goes in
the profit and loss account. - ‐ Net Assets = Assets – Liabilities, but in some cases CIE
uses Net Assets as Capital Employed which is Assets – Current Liabilities. - ‐ Sale or
Purchase is recorded when the goods are accepted not when the invoice is sent or the
payment is made. - ‐ If only net book values are available Depreciation for the year =
Opening Net Book Value + Purchase of Asset – Sale of Asset (Nbv) – Closing Net book
value. - ‐ In most question they don’t mention depreciation, that doesn’t mean there is no
depreciation, use the above formula to determine. (Don’t forget the depreciation like idiots).
- ‐ Accumulated funds at start or Capital at start = Opening Asset – Opening Liabilities
(please don’t forget the opening balance of bank account). - ‐ Cash banked will come on
the debit side of bank and credit side of cash account. - ‐ Subscription owing is an asset
and prepaid is a liability. - ‐ Loan is as long term liability unless payable within one year. If
nothing is written, assume long term. - ‐ POOP is for expenses. - ‐ OPPO is for incomes.
- ‐ Net realizable value = current selling price – any expenses (repairs) - ‐ We always ignore
replacement cost in stock valuation. - ‐ Perpetual methods are those where we make a table.
- ‐ Markup is on cost (cost is 100) - ‐ Margin is on sales (Sales is 100)
38. EXAM TIPS PAPER 1 You have 60 minutes of 30 mcqs. 2 minutes for each.
First only attempt those questions which you are 100% sure of and skip others. Read the
MCQ carefully, because CIE likes to play around. Now spend time on these questions.
If you are stuck try to eliminate the most obvious wrong answer. 5- ‐6 questions are
theoretical, at least read them thrice. Sometimes it’s best to use the answer to check if
it’s wrong or right. If you see something in the answer choice which you haven’t heard
of (that can never be the answer). Please don’t leave it blank. Take an educated guess.
There is no negative marking. PAPER 2 Always attempt the question which you know
the best out of all. This will give you confidence and save time. You will end up spending
time and getting it wrong if you do the toughest one first. Don’t panic, usually in every
paper one question is tricky. Do it at last. You won’t get any award if you balance the
balance sheet. If the balance sheet is off by a large amount, that doesn’t mean everything
is wrong, might be a single big figure which you have missed. DON’T WASTE YOUR
TIME. Remember you don’t have to get 90 on 90. Go for the maximum. HOPE THIS
HELPS
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