Chapter 1

The Accounting equation

Assets= Capital + Liabilities

Debit Credit Credit

Double Entry

The left-hand side the debit side, while the right-hand the credit side.

Voucher – Cash Book – Ledger – Trial Balance – Profit and Loss – Balance Sheet

Chapter 2

Accounting Record

Data Source > Book of Prime Entry > Ledger Accounts > Trial Balance > Financial Statements

Types of source documents

 Quotation
 Purchase Order
 Sale Order
 Dispatch note (Goods Dispatch Note GDN)
 Goods received note (GRN)
 Statements
 Invoice
 Credit note
 Debit note
 Remittance advice
 Receipt

Types of Accounts

1. Personal Account (transaction with person or institution)

2. Impersonal Account > Real account (tangible & intangible), Nominal Account (income, gain, losses or
expenses)

All expense & Losses > Debit

All income & gain > Credit

Books of prime entry

Book of prime entry Transaction Type

Sale day book Credits sales
Purchase day book Credits purchases
Sale returns day book Return of goods sold on credit
Purchase returns day book Return of all goods bought on credit
Cash book All bank transactions
Petty Cash book All small cash transactions
The journal All transactions not recorded elsewhere

The Journal

- Year-end adjustments
- Depreciation charge for the year
- Irrecoverable debt written off
- Record of the movement in the allowance for receivables
- Accruals and prepayments
- Closing inventory
- Acquisitions and disposals of non-current assets
- Opening balances for statement of financial position items
- Correction of errors

Presentation of a journal

Non-current Assets > Debit

Payables > Credit

To record the non-current asset, purchase on credit.

Ledger account

Transaction occur > Effect recorded in Ledger accounts > Ledger accounts balance off > Trial Balance >
YE adjustment and ledger accounts closed off > Financial Statements

PEARLS

Purchase, Expenses, Assets > Debit (increase in)

Revenues, Liabilities, Shareholder’s equity/Capital > Credit (increase in)

Chapter 3

Inventory - Goods for resales (Assets)

Purchase, Sale Return (Return Inward) > Debit

Sale, Purchase Return (Return Outward) > Credit

Inventory in the Financial Statements

1. Statement of financial position; it is included as a current asset

2. Statement of profit or loss

The opening and closing inventory have direct impact on cost of sales and therefore profits.

Cost of Sale = (Opening Inventory+ Purchases) - Closing Inventory

Gross Profit or Loss = Revenue – Cost of sale

(Statement of profit or loss)

Year-end inventory adjustments

1. Opening Inventories brought forward in the inventory account are transferred to the

trading account.

cost of sale (profit or loss) > Debit

Inventory assets (SOFP) > Credit

2. Closing Inventories in the nominal ledger at the end of an accounting period.

an inventory account > Debit

the trading account > Credit

Inventory Assets (SOFP) > Debit

cost of sales (Profit or Loss) > Credit

Inventory is included in the statements of financial position at the lower of cost/Net Realisable value.

Cost

(1) Purchase (Purchase price> plus, Import duties and other taxes> plus, Transport, handling and any
other cost directly attributable to the finished goods, services and materials> less, Trade discounts,
rebates and other similar amounts)

(2) Costs of conversion (Costs directly related to the units of production, Fixed and variable production
overheads that are incurred in converting materials into finished goods)

Fixed production overheads – indirect costs of production that remain relatively constant

regardless of the volume of production, e.g. the cost of factory management and administration.

Variable production overheads - indirect costs of production that vary directly, or nearly

directly, with the volume of production, e.g. indirect materials and labour.

(3) Other costs incurred in bringing the inventories to their present location and condition, e.g. carriage
inwards

Costs which must be excluded from cost of inventory are;

 Selling costs
 Storage costs
 Administrative overheads

Net Realisable value (Fair Value Less Cost to Sale) - net selling proceeds after all costs have been
deducted.

NRV= Estimated Selling Price – (Estimated Cost of completion+ Estimated selling and distribution
costs)

NRV might be lower than cost when goods are slow moving, damages or obsolete.

Chapter 4

Profit or Loss Account

Expenses loss, Drawing > Debit

Income, Profit > Credit

Double Entry for Revenue

Cash Sale - Cash A/C Dr

Sale A/C Cr

Credit Sale- Receivable A/C Dr

Sale A/C Cr

Double Entry for other Income

Cash/Bank A/C (or) Rent Receivable A/C (Increase in asset) > Debit

Income A/C (increase in income) > Credit

Drawings

relevant in sole traderships and partnerships. the company for their personal use, this should be

accounted for as a director’s loan, which they must repay in accordance with an agreed

repayment schedule.

Cash Drawing

Drawing A/C (Increase the drawing) - Debit

Cash and Bank (Decrease the assets) - Credit

Goods Drawing

Drawing A/C (Increase the drawing) - Debit

Purchase A/C (Decrease the assets) – Credit

Discount

- trade discount > reduction in the list price of goods, often given in return for bulk purchase
orders.
- cash (or settlement) discount > reduction in the amount payable in return for payment in cash,
or within an agreed period.

Accounting for Discounts

Trade discount is not shown in the main financial statements; however, cash discount and

other types of discounts are shown in books of accounts.

Trade discounts

Trad discounts received - the cost of purchases in the trading account will be stated at gross cost minus
discount (ie it will be stated at the invoiced amount).

Purchase > Debit

Trade payable > Credit

Trade discounts allowed should be deducted from the gross sales price.

Trade Receivables > Debit

Sale (Income) > Credit

Cash or settlement discounts

A cash/settlement discount allowed - an additional expense for the business. If the customer
subsequently does not take up the discount, the discount is then recorded as revenue.

Discount Allowed (increased expenses) > Debit

Trade Receivable (reduced receivable) > Credit

Cash/settlement discounts received are included as other income of the period.

Account Payable > Debit

Discount Received > Credit

Sales tax - an indirect tax levied on the sale of goods and services.

- a cumulative tax, collected at various stages during the life of goods or services.

 value-added tax “VAT”

 goods and services tax “GST”
 commercial tax “CT” in Myanmar

Invoices and bills show any sales tax charged separately.

sales tax does not affect the statement of profit or loss, unless it is irrecoverable
Input and output sales tax

If output sales tax exceeds input sales tax, the business pays the difference in tax to the authorities.

If output sales tax is less than input sales tax in a period, the tax authorities will refund the difference to
the business.

Output sales tax - Sales tax charged (or collected) on goods and services sold by a business.

Input sales tax - Sales tax paid (or suffered) on goods and services bought by a business.

Tax paid by other “out”

Tax paid by business ‘in”

A sales tax registered trader must carry out the following tasks.

(a) Charge sales tax on the goods and services sold at the rate prescribed by the Government. This is
output sales tax.

(b) Pay sales tax on goods and services purchased from other businesses. This is input sales tax.

(c) Pay to the tax authorities the difference between the sales tax collected on sales and the sales tax
paid to suppliers for purchases. Payments are made at prescribed intervals.

Irrecoverable sales tax

regarded as part of the cost of the items purchased and included in the statement of profit or loss
charge or in the statement of financial position as appropriate.

Amounts inclusive and exclusive of tax

The gross amount of a sale or purchase is the amount inclusive of sales tax

The net amount of a sale or purchase is the amount exclusive of sales tax.

Accounting for sales tax

Statement of profit or loss

Sales tax charged on sales is collected by the business on behalf of the tax authorities. It

does not form part of the revenue of the business.

Cash or trade receivables > DEBIT

Sales > CREDIT
Sales tax control account (output sales tax) > CREDIT

If input sales tax is recoverable, the cost of purchases should exclude the sales tax and be

recorded net of tax.

Purchases > DEBIT

Sales tax control account (input sales tax recoverable) > DEBIT

Trade payables > CREDIT

If the input sales tax is not recoverable (irrecoverable), the cost of purchases must include the tax.

Purchases Sale
Statements of profit or loss Irrecoverable- Sale Tax Included Exclude sales tax
Recoverable- Sale Tax exclude

Sales tax in the cash book, sales day book and purchase day book

a business makes a credit sale the total amount invoiced, including sales tax > sales day book

a business is invoiced by a supplier the total amount payable, including sales tax > purchase day book

output sales tax from the cash sale > credited to the sales tax payables in the ledger accounts

input sales tax from cash purchases > debited to the sales tax payable

trade receivables and trade payables shown inclusive of sales tax, as the statement of financial
position must reflect the total amount due from receivables and due to payables.

Payable for sales tax

An outstanding payable for sales tax will appear as a current liability in the statement of financial
position

The sales tax paid to the authorities each quarter = recoverable input sales tax on purchases - output
sales tax on sales.

Chapter 5

Non-current asset – long-term, not acquired for resale, tangible or intangible, generate income directly
or indirectly, not liquid assets (i.e., not easily and quickly converted into cash without a significant loss in
value).

Current assets - trade receivables and inventories.

Total of carrying amounts = Assets at cost - Accumulated depreciation

listed in the asset register (from the non-current asset (from the ledger account)
cost ledger account)
Errors
 Assets have been stolen, damaged or scrapped (for nil proceeds)
 Assets are obsolete
  There are new assets, not yet recorded in the register
 There have been enhancements not yet recorded in the register
 There are errors in the register
Recognition in the accounts - incorporation of the asset in the business’s accounts. Depends on two
criteria.
(a) It is probable that future economic benefits associated with the asset will flow to the entity
(b) The cost of the asset to the entity can be measured reliably
Initial measurement
Non-current asset- cost > DEBIT
Cash (or payable, if a credit transaction) > CREDIT
Subsequent expenditure - added to the carrying amount when it is probable that future economic
benefits. In excess of the originally assessed standard of performance of the existing asset will flow to
the enterprise
subsequent expenditure on an asset improves on these condition
(a) Modification of an item of plant to extend its useful life, including increased capacity
(b) Upgrade of machine parts to improve the quality of output
(c) Adoption of a new production process leading to large reductions in operating costs. Normal repairs
and maintenance on property, plant and equipment items merely maintain or restore value; they do not
improve or increase it, so such costs are recognised as an expense when incurred.
Depreciation - arises from the accrual’s assumption.
- The measure of the cost or revalued amount of the economic benefits of the tangible
noncurrent asset that has been consumed during the period.
- to reflect the cost of using a noncurrent asset.
- matches the cost of using a noncurrent asset to the revenues generated by that asset over its
useful life.
-Charged against profit (Record the depreciation charge as an expense in the income statement to
match to the revenue generated by the noncurrent asset)
-Deducted from the value of the non-current asset in the statement of financial position (Reduce the
statement of financial position value of the noncurrent asset by cumulative depreciation to reflect the
wearing out)
Straightline method
Depreciation charge = (Cost – Residual value)/Useful life
Or
Cost x Depreciation rate %
Residual value: the estimated disposal value of the asset at the end of its useful life.
Useful life: the estimated number of years during which the business will use the asset.
Reducing balance method
Depreciation charge = Net book value (NBV) x Depreciation rate %
NBV: original cost of the noncurrent asset less accumulated depreciation on the asset to date.
NBV= Cost – Accumulated (or) Provision for Depreciation A/C
Double Entry for Depreciation
Depreciation Expenses A/C (IS) > DEBIT
Accumulated Depreciation A/C(SFP) > CREDIT
The depreciation expense account - an income statement account – not cumulative.
The accumulated depreciation account - a statement of financial position account - cumulative - reflects
all depreciation to date- shown as a reduction against the cost of noncurrent assets.
Assets bought/sold in the period
depreciation could be accounted for:
• provide a full year’s depreciation in the year of acquisition and none in the year of disposal
• monthly or prorate depreciation, based on the exact number of months that the asset has been
owned.
Ledger entries for depreciation
- The balance on the statement of financial position depreciation account is the total
accumulated depreciation. This is always a credit balance brought forward in the ledger
account for depreciation.
- The non-current asset accounts are unaffected by depreciation. Non-current assets are
recorded in these accounts at cost (or, if they are revalued, at their revalued amount).
- In the statement of financial position of the business, the total balance on the accumulated
depreciation account is set against the value of non-current asset accounts (ie non-current
assets at cost or revalued amount) to derive the carrying amount of the non-current assets.
Non-current asset revaluation
When a non-current asset is revalued, depreciation is charged on the revalued amount. when an item
of property, plant and equipment is revalued, the whole class of assets to which it belongs should be
revalued at the same time to prevent selective revaluation of certain assets and to avoid disclosing a
mixture of costs and values from different dates in the financial statements.
- the gain on revaluation cannot go to the statement of profit or loss. it is recognized as other
comprehensive income.
- gain is transferred to a revaluation surplus (sometimes called a revaluation reserve), part of
capital in the statement of financial position.
Excess depreciation – The difference between the new depreciation charge based on the revalued
carrying amount and the old depreciation charge based on the original cost of the asset.
 - The consequence of the revaluation is a higher annual depreciation charge.
- allows entities to transfer an amount equal to the excess depreciation from the revaluation
surplus to retained earnings in the equity section of the statement of financial position
Revaluation surplus (SOFP) > DEBIT
Retained earnings (SOFP) > CREDIT
Revaluation downwards - recognized as an expense
Non-current asset disposals = the net sale price of the asset - its carrying amount at the time of
disposal.
When non-current assets are disposed of, there will be a profit or loss on disposal. As it is a capital item
being sold, the profit or loss will be a capital gain or a capital loss. These gains or losses are reported in
the income and expenses part of the statement of profit or loss of the business, after gross profit. They
are commonly referred to as profit on disposal of non-current assets; or loss on Disposal.
A profit is made when the sale price exceeds the carrying amount, and a loss is made when
the sale price is less than the carrying amount.
The profit or loss on disposal = The sale price of the asset - The carrying amount of the asset at the
time of sale.
(b) The following items must appear in the disposal of non-current assets account.
(i) The value of the asset (at cost, or revalued amount*)
(ii) The accumulated depreciation up to the date of sale
(iii) The sale price of the asset

Disposal of non-current asset account > DEBIT

Non-current asset account with the cost of the asset disposed of > CREDIT

Accumulated depreciation account > DEBIT

Disposal of non-current asset account with the accumulated depreciation on the asset as at the date of
sale. > CREDIT

Receivable account or cash book > DEBIT

Disposal of non-current asset account with the sale price of the asset > CREDIT

The sale is not recorded in a sales account, but in the disposal of non-current asset account.
the effect of these entries is to remove the asset, and its accumulated depreciation, from the
statement of financial position.
The balance on the disposal account is the profit or loss on disposal and the corresponding double entry
is recorded in the profit or loss account.
Double entry for Disposal of non-curent assets
Original Cost of the assets
DEBIT Disposal A/C
CREDIT Non-Current Asssets A/C
The accumulated Depreciation provided to date
DEBIT Accumulated Depreciation (or) Provision for Depreciation A/C
CREDIT Disposal A/C
The sale proceeds
DEBIT BANK/Cash A/C
CREDIT Disposal A/C
Loss on Sale
DEBIT profit or loss A/C
CREDIT Disposal A/C
Profit on Sale
Debit Disposal A/C
Credit Profit or Loss A/C

Chapter 6
Accrued expenses (accruals) are expenses which have not been paid for. are shown in the statement of
financial position as a liability. An accrual can be an estimated amount. incurred in period, not
recorded
Prepaid expenses (prepayments) are expenses which have already been paid but relate to a future
accounting period. Therefore, should not be charged against profit until a later period. shown in the
statement of financial position as an asset. recorded in period, not incurred until next period
Accrued Income are income that has been earned during an accounting period but not received by the
end of it.
Advance Received/Income are income that has been received before period time. This account is
reverse of Accrual Income Account.
Difference between accruals and trade payables
Accruals generally represent liabilities to pay for goods or services that have been received in a period,
but that have not yet been invoiced for by the suppliers. Some companies use goods received notes
(GRNs).
Trade payables are liabilities to pay for goods or services received in a period that have been invoiced
for by the suppliers.
Double entry for accruals and prepayments
Accrued Expenses - Liabilities - Credit balances
Prepaid Expenses - Assets - Debit Balances

Accrued Income - Assets - Debit balances

Receive in advance - Liabilities - Credit balances

Advance Income Received Account is the reverse of Accrual Income Account.

DEBIT Interest Income Account
CREDIT Advance Income Account (transfer to B/S under Current Liabilities)
Reversing accruals and prepayments in subsequent periods
with all prepayments and accruals, the double entry will be reversed in the following period to avoid
recording twice.
Prepayments of income (deferred or unearned income)
The income the recipient has not yet earned and could be repayable. the treatment is to exclude the
prepaid income from the statement of profit or loss.
Effect on profit and net assets
Effect on Income Effect on profit Effect on
assets/liabilities
Accruals Increases expenses Reduces profit Increases liabilities
Prepayments Reduces expenses Increases profit Increases assets
Prepayments of income Reduces income Reduces profit Increases liabilities

Chapter 7
Petty Cash Book
a cash book to pay small items of expenses. cash float or petty cash account. The cash float can also be
the resting place for occasional small receipts. kept in an imprest system. Imprest system where a
restore is made of the total paid out in the period.
Rule of entry
(1) Main cash book paid to petty cash book
DEBIT Petty Cash Book
CREDIT Main cash book
(2) Expense paid by petty cash
DEBIT EXPENSES Account
CREDIT Petty cash
Imprest System
the amount of money in petty cash is kept at an agreed sum or float. Expense items are recorded on
vouchers as they occur.
The total float is replenished regularly by means of a cash payment from the bank account into petty
cash. The amount of the top-up into petty cash will be the total of the voucher payments since the
previous top-up.
Bank Reconciliations - comparison of a bank statement with the cash book.
Bank reconciliations is differences between the cash book and the bank statement arise for three
reasons.
Errors – usually in the cash book
Omissions – such as bank charges not posted in the cash book
Timing differences – such as unpresented cheques
The bank statement
sent by a bank to its customers itemising the balance on the account at the beginning of the period,
receipts into the account and payments from the account during the period, and the balance at the end
of the period.

Bank Statement & Cash Book

The balance shown by the bank statement should be the same as the cash book balance on the same
date.

differences between the cash book and the bank statement

Errors in calculation, or recording income and payments.

Bank charges or bank interest

Timing differences

Chapter 8
TRIAL BALANCE - a first step in preparing the financial statements (a statement of profit or loss and a
statement of financial position)
to check that for every debit entry made, an equal credit entry has been made. to test the accuracy of
the double entry bookkeeping. Total debits should equal total credits.

Limitations

it will not:

• identify errors such as mispostings to the wrong account or a double entry for the wrong amount

• identify where errors have been made, or what those errors are.

will not disclose the following types of errors.

(a) The complete omission of a transaction, because neither a debit nor a credit is made

(b) The posting of a debit or credit to the correct side of the ledger, but to a wrong account

(c) Compensating errors

(d) Errors of principle

The trial balance should reveal errors

(a) One-sided entries

(b) Where an entry has been posted as a credit to one account and a credit to a second account and no
debit entry has been made (or two debits and no credits)

The Statement of Profit or Loss

A profit or loss ledger account is opened up to gather all items relating to income and expenses.

Cost of Sale = (Opening Inventory+ Purchases) - Closing Inventory

Gross Profit or Loss = Revenue – Cost of sale

Net Profit= (Sales-sales return) + (Gross Profit – Expenses)

The Statement of Financial Position

They become opening balances for the next accounting period and indicate the value of the assets and
liabilities at the end of one period and the beginning of the next.

When a statement of financial position is drawn up for an accounting period, it ought to show the
capital at the start of the accounting period and the capital at the end of the accounting period. The
opening trial balance for the next period is the closing statement of financial position for the previous
period.