Accounting Resource O Level

Table of Contents
Chapter 1. Accounting Principles and Policies ................................................. 1

1.1 Accounting Principles .................................................................................................. 1
1.2 Accounting Policies ..................................................................................................... 6
Chapter 2. Business Documents and Books of Prime Entry ............................. 7

2.1 Business Documents .................................................................................................... 7
2.2 Books of Prime Entry ................................................................................................... 8
2.2.1 Trade discounts and Cash discounts ....................................................... 9
2.2.2 General Journal ..................................................................................... 10
2.2.3 Special Journals .................................................................................... 10
2.2.4 Cash book .............................................................................................. 11
2.2.5 Petty Cash Book..................................................................................... 12
Chapter 3. Trial Balance ................................................................................. 14

3.1 List of Errors Not Affecting Trial Balance ................................................................ 15
Chapter 4. Correction of Errors ...................................................................... 16

4.1 Suspense Account....................................................................................................... 16
4.2 Correcting Profit for the year .................................................................................... 17
Chapter 5. Bank Reconciliation ...................................................................... 18
Chapter 6. Trade receivables and Trade payables .......................................... 21

6.1 Control Accounts ....................................................................................................... 21
6.2 Trade receivables and Sales Ledger Control Account .............................................. 22
6.3 Trade payables and Purchases Ledger Control Account .......................................... 24
Chapter 7. Capital and Revenue Expenditure and Receipts ............................ 26

7.1 Capital expenditure ................................................................................................... 26
7.2 Revenue expenditure .................................................................................................. 27
7.2.1 Exception to capital expenditure rule.................................................... 27
7.3 Capital receipts .......................................................................................................... 28
7.4 Revenue receipts ........................................................................................................ 28
Chapter 8. Accounting for Depreciation ........................................................ 29

8.1 Depreciation .............................................................................................................. 29
8.1.1 Depreciation policy ...............................................................................30
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8.1.2 Straight-line method of depreciation .....................................................31
8.1.3 Reducing-balance method of depreciation ............................................33
8.1.4 Revaluation method of depreciation ......................................................35
8.2 Sales of non-current assets ........................................................................................ 36
Chapter 9. Other Payables and Other Receivables......................................... 38

9.1 Recording Accrued and Prepaid Expenses................................................................ 38
9.2 Recording Accrued and Prepaid Income ................................................................... 39
Chapter 10. Irrecoverable Debts and Provision for doubtful debts .............. 40
10.1 Irrecoverable debts ............................................................................................... 40
10.2 Recovery of irrecoverable debts ........................................................................... 41
10.3 Provision for doubtful debts .................................................................................. 42
Chapter 11. Valuation of Inventory .............................................................. 45
Chapter 12. Sole Traders .............................................................................. 46

12.1 Advantages and Disadvantages of Sole Traders .................................................. 46
12.2 Difference between Trading Business and Service Business .................................... 46
12.3 Income Statement .................................................................................................. 47
12.3.1 Trading business .......................................................................47
12.3.2 Service business ........................................................................48
12.4 Statement of Financial Position ............................................................................ 49
12.5 Equity Accounts..................................................................................................... 50
12.5.1 Drawings accounts ...................................................................50
12.5.2 Capital accounts .......................................................................50
Chapter 13. Partnerships ............................................................................... 52

13.1 Advantages and Disadvantages of Partnership .................................................... 52
13.2 Partnership Agreement ......................................................................................... 52
13.3 Accounting for Partners' Transactions ................................................................. 53
13.3.1 Interest on Capital ....................................................................53
13.3.2 Interest on Drawings ................................................................53
13.3.3 Partners' Salary / Bonuses / Commissions ...............................54
13.3.4 Loan from Partners ...................................................................54
13.3.5 Interest on Loan from Partners ................................................55
13.4 Appropriation account .......................................................................................... 56
13.5 Capital account ..................................................................................................... 58
13.6 Current account .................................................................................................... 59
13.7 Presentation of Partners' Equity in Statement of Financial Position ....................... 60
Chapter 14. Limited Company ..................................................................... 61

14.1 Advantages and Disadvantages ............................................................................ 61
14.2 Types of Capital .................................................................................................... 61
14.2.1 Issued, Called-up, Paid-up Share Capital ................................61
14.2.2 Preference Shares Capital ........................................................62
14.2.3 Ordinary Shares Capital ...........................................................63
14.2.4 General Reserves ......................................................................63
14.2.5 Retained Earnings .....................................................................64
14.2.6 Debentures (Loan Capital) .......................................................64
14.3 Income Statement of Limited Company ................................................................ 65
14.4 Statement of Changes in Equity ............................................................................ 65
14.5 Statement of Financial Position ............................................................................ 65
Chapter 15. Clubs and Societies ................................................................... 66

15.1 Receipts and Payments Accounts .......................................................................... 66
15.2 Income and Expenditure Accounts ........................................................................ 67
15.3 Statements of Financial Position .......................................................................... 68
15.3.1 Accumulated Fund ....................................................................68
Chapter 16. Manufacturing Accounts ........................................................... 69

16.1 Direct And Indirect Costs ..................................................................................... 69
16.2 Manufacturing Account......................................................................................... 70
16.3 Income statement ................................................................................................... 72
16.4 Statements of financial position ............................................................................ 72
Chapter 17. Incomplete Records ................................................................... 73

17.1 Changes in Capital Method .................................................................................. 73
17.2 Statement of Affairs ............................................................................................... 75
17.3 Account Analysis Method ...................................................................................... 77
17.3.1 Determining Sales ..................................................................... 77
17.3.2 Determining Total Purchases ................................................... 77
17.3.3 Determining Cost of Sales ........................................................ 77
17.3.4 Determining Depreciation ........................................................ 78
17.3.5 Determining Operating Expenses ............................................. 78
17.3.6 Determining Other Income ....................................................... 78
17.4 Ratio Analysis Method .......................................................................................... 81
VI
Chapter 18. Analysis and Interpretation ....................................................... 82
18.1 Liquidity Analysis .................................................................................................. 82
18.2 Profitability Analysis............................................................................................. 86
Chapter 1. Accounting Principles and Policies
1.1 Accounting Principles
1. Duality principle states that all aspects of an accounting transaction are
recognised. It is the fundamental of accounting and underlying basis for
double entry accounting system.
2. Money Measurement principle states that only transactions measured in

monetary terms are recorded.
Good
business
relationship
Good with
business
customer and
location
supplier
Hardworking
staffs
Unable to measure in dollar ($) value

Therefore, cannot be recorded in business
books
3. Business Entity principles states that owner and business are separate entities.
Therefore,
Business transactions are recorded in business books
Transactions between business and owner are recorded in Equity accounts:
Capital account: Owner contribut es assets

Busines
s
Drawings ws assets
Owner withdra
account: Busines
s
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4. Consistency principle states that a business is to use the same accounting
methods and procedures from period to period to enable
meaningful comparison over time.
Example where concept is applied:

Depreciation of non-current assets. Assuming a business decides
to adopt reducing-balance method for depreciating Motor Vehicles.
Year 1 Year 2 Year 3 Year ∞
Depreciatio Reducin Reducin Reducin Reducin

n method g- g- g- g-
balance balance balance balance
5. Prudence principle states that a business must not overstate its profits /
assets and understate its losses / liabilities when choosing
alternatives accounting treatments.
Topic Applicatio
n
Depreciation of Non-current assets are reported at net book value

Non-current in the Statement of Financial Position.
assets
.... must not overstate its non-current asset and
understate its depreciation expenses .....
Provision for Trade receivables are reported at net trade

Doubtful receivables in the Statement of Financial Position.
Debts
.... must not overstate its trade receivables and
understate its debts that are deemed uncollectible.....
Inventor Inventory are valued at lower of cost and net

y realisable value.
6. Matching principle states that expenses incurred must be matched against
income earned within the same period to determine the profit or
loss for that period.
Topic Applicatio
n
Depreciation of Depreciation is recorded as an expense in Income

Non-current Statement.
assets
.... depreciation expense must be matched against
income that non-current assets helped to generate
.....
Provision for Doubtful debts are recorded as an expense in

Doubtful Income Statement.
Debts
.... loss from debts estimated to be uncollectible must
be matched against sales earned from trade
receivables .....
Other payables All income and expenses are adjusted for any
& Other prepayment or accrual.
receivables
.... all business expenses must be matched
against all income generated by the business
.....
7. Historic Cost principle states that transactions are to be recorded at the

original purchase price based on source documents.
NOW 5 YEARS LATER
Purchase car at $80,000 Car is worth $40,000
Statement of financial Statement of financial

position position
Non-current asset Cost Non-current asset Cost
Motor vehicles $80,000 Motor vehicles $80,000
8. Materiality principle states that a transaction or an item is considered
material if it makes a difference to decision-making.
The value of a transaction or an item is compared to the size and nature of

the business to determine if it is material.
Value of
business
$1,000,000
Cost of
basket Cost of basket
Revenue
$10 is not material
expenditur
to
e
decision-making
This concept is asked in conjunction with questions on Capital and

Revenue Expenditure.
Example:
Transaction Type of
expenditure
Purchase motor vehicle Capital
Pay for road tax Revenue
9. Going Concern principle states that a business is assumed to operate

indefinitely.
Examples where concept is applied:

Credit transactions:
Suppliers are confident that the business will continue to exist after
goods are delivered though money has yet to be received.
Long-term borrowings:
Bank is confident that the business continues to exist in the future to
repay the loan.
10. Realisation principle states that business incomes should be regarded as

earned when the legal title to goods or services are passed from
the seller to the buyer.
11. Accounting Period principle states that the life of a business is divided
into equal time periods known as financial period or
accounting period.
This explains the need to prepare Income Statement and Statement of

financial position at the end of every accounting period.
12 months 12 months 12 months 12 months 12 months
Prepar Prepar Prepar

e e e The cycle continues.....
final final final
statement statement statement
s s s
1.2 Accounting Policies
1. Comparability
financial information is comparable with similar information with same
business or another accounting period
2. Relevance
Financial information
must be provided in time for financial decisions to be made
can be used to confirm or correct prior expectations about past
events is able to help form, revise or confirm expectations about
the future
3. Reliability
Financial statements are
depended upon by users as being a true representation of the underlying
transactions and events
independently
verifiable free from
bias
free from significant errors
prepared with suitable caution on judgements and estimates
4. Understandability
financial statements provides clear information that can be understood
by the users
Chapter 2. Business Documents and Books of
Prime Entry
2.1 Business Documents
Business documents are sources of information which proofs that a
transaction occurred.
Transactions Business documents
Business Transactions / Uses

documents
1. Invoices Credit purchases and sales
2. Credit note Returning of goods by credit customers or to credit supplier
3. Debit note When an original invoice to a credit customer or from a

credit supplier is undercharged
4. Receipt Cash purchases and sales; acknowledgement of payment
5. Payment voucher Record payment to creditors
6. Petty cash Record payment through petty cash

voucher
7. Cheque Portion of cheques that are kept by the payers
counterfoil
8. Bank statement Deposits or payments through the business bank account
9. Paying-in slip Deposit slip for depositing cheques or cash into the bank
2.2 Books of Prime Entry
Also known as Day Books / Books of Original Entry / Journals
The first books of entry where a business records its transactions
Transactions Business documents Journals
Types of Books of Prime Entry:
Books of prime entry Transactions recorded
1. Sales Journal Credit sales of goods
2. Sales Return Journal Returning of goods by credit customers
3. Purchase Journal Credit purchase of goods
4. Purchase Return Journal Returning of goods to credit suppliers
5. Cash Book Cash and Bank transactions
6. Petty Cash Book Petty cash transactions
7. General Journal All transactions not recorded in the above journals
2.2.1 Trade discounts and Cash discounts
Trade discounts
Discounts given to encourage customers to buy in
bulk No double-entry for trade discounts
Example:
Company Y sold goods on credit to customer Z at a list price of $500 less
10% trade discounts.
*Common error
Debit trade receivables
Answer:
$450 Debit discount $50
Net price of goods sold = 500 x 90% = $450
Credit sales $500
Debit Trade receivables - customer Z $450
Credit Sales
$450
Cash discounts
Discounts given to encourage customers to pay
promptly Cash discounts are recorded as follows:
Discount given to trade receivables:
Debit Discount allowed
Credit Trade receivables
Example:
Trade receivables X paid $500 owing by cheque after deducting
5% cash discount.
Answer:
Debit Discount allowed (500 x 5%) $25
Debit Bank (500 - 25) $475
Credit Trade receivables X $50
0
Discount received from trade
payables:
Debit Trade payables
Credit Discount received
Example:
Paid $800 owed to trade payables Y by cheque after 10% cash discount.
Answer:
Debit Trade payables Y $800
Credit Discount received (800 x 10%)
$80
Credit Bank (800 - 80)
$720
2.2.2 General Journal
Format:
General Journal
Dat Particulars Debit Credit
e
Transactio Account to debit Amount
n Date Account to credit Amount
[ Narration ]
Notes:
A transaction can have more than one debit account or credit
account Total amount debited must be equal to total amount
credited
Narration is a short description of the transaction
2.2.3 Special Journals

Features:
Transactions of similar nature are recorded together
Only total amount in a special journal is posted to the General Ledger
Advantages / Purposes:
Enable easy retrieval of information
Avoids overcrowding in the General
Ledger Increase efficiency and
productivity
Types Double-entry
1. Sales Journal Debit Sales ledger control

Credit Sales
2. Sales Return Journal Debit Sales Return

Credit Sales ledger control
3. Purchase Journal Debit Purchases

Credit Purchase ledger
control
4. Purchase Return Journal Debit Purchase ledger control
Credit Purchase Return
2.2.4 Cash book
Interpreting 3-column Cash Book
Debit Cash Book Credi

t
Discoun Discoun
Date Particular Cas Bank Date Particulars Cas Bank
t t
s h h
Allowe Receive
d d
20X1 $ $ $ 20X1 $ $ $
Jan 1 Bal b/d 100 500 Jan 8 Ace Ltd 20 260
6 Sales 50 15 Drawing 80
20 Mac Ltd 15 60 20 Purchases 130
28 Bank 200 28 Cash 200
31 Bal c/d 30 31 Bal c/d 270
15 350 590 20 350 590
Feb 1 Bal b/d 270 Feb 1 Bal b/d 30
Cash discount Cash discount received

given to trade from trade payables
receivable
Debit Discount allowed Debit Trade payable
Credit Trade receivable Credit Discount
received
To calculate cash discount in percentage,

15
Mac 100  20%
Ltd: 15  60 
On Jan 28, $200 was debited to Cash account and credited from Bank
account. This represent withdrawal of funds from bank account for office
use.
Balance b/d on Feb 1,
Cash account $270 Dr [ Current asset ]
Bank account $30 Cr [ Current liability - Bank overdraft ]
Only Bank account can have a credit balance.
2.2.5 Petty Cash Book
Petty cash are small amount of cash kept in the office to pay for minor
recurring expenditures.
Petty Cash Book is used to record transactions involving petty cash funds.
Imprest System is a system for maintaining the petty

cash fund. Key features:
a fixed sum called imprest amount or float is maintained
petty cash fund is reimbursed after making approved payments
Advantages
provides internal control
avoid overcrowding of the Cash Book
Double- entry:
Set up petty cash fund: Debit Petty cash
Credit Bank or Cash
Reimburse petty cash Debit Expenses

funds:
Credit Bank or Cash
Interpreting Petty Cash Book:
Petty Cash Book
Analysis of payments
Total Total
Receipt Date Particulars Payment Stationer Trave Postag Sundr
s s y l e y
$ 20X1 $ $ $ $ $
100 Jan 1 Cash
5 Newspaper 10 10
15 Pens 15 15
18 Eraser 2 2
20 Stamps 3 3
25 Cab fare 16 16
28 Drinks 25 25
71 17 16 3 35
31 Balance c/d 29
100 10
0
29 Feb 1 Balance b/d
71 Bank
Amount paid = $(17 + 16 + 3 + 35) =

$71
Bal b/d + Amount reimbursed Amount paid = Amount Reimbursed
= Imprest amount
Double-entry for reimbursement of petty cash fund on 1 February 20X1:

Debit Stationery expenses $17
Travel expenses $16
Postage expenses $3
Sundry expenses $35
Credit Bank $71
Chapter 3. Trial Balance
Business Trial
Transaction Journal Ledge
s document s r Balanc
s e
Definition:
Trial Balance is a list of the ending balances of all accounts at a given date.
Purpose:
Check arithmetic accuracy of the accounts
Aid in preparation of the financial statements, namely Income
Statement and Statement of Financial Position
Limitation:
A balanced trial balance does not mean that the entries in the accounts
contains no errors. There are errors that are not revealed by a trial balance.
Format:
Trial Balance as at "state the date here"
Particulars Debit Credi
t
$ $
Asset accounts X
Liabilities accounts X
Expenses accounts X
Income accounts X
Drawings X
Capital X
Purchases X
Purchases Returns X
Sales X
Sales Returns X
Provision for depreciation X
Provision for doubtful debts X
Irrecoverable debts X
Irrecoverable debts recovered X
XXX XXX
3.1 List of Errors Not Affecting Trial Balance
Type of Errors Interpretation Example
Error of Omission Transaction not recorded Paid rent $500 by

cheque. This was not
recorded in the books.
Error of Original Entry Wrong amount was Payment of rent $500 by

recorded cheque was recorded in
the books as $50.
Error of Commission Recorded in wrong accounts Payment of rent $500

within the same account was recorded to the
type wages account.
Error of Principle Recorded in wrong accounts Purchase of stationery

under different account type $300 was recorded to the
fixtures account.
Compensating error An error on the debit side Both sales and discount
of an account is offset by allowed accounts are
an error of the same overcast by $150.
amount on the credit side
of another account
Error of Recorded on the wrong Payment of rent $500 by

Complete Reversal side of both accounts cheque was wrongly
(Amount must multiply by 2) credited to the rent
account and debited to the
bank account.
Chapter 4. Correction of Errors
4.1 Suspense Account
Purpose:
To temporarily balance a trial balance until the errors are discovered and
corrected. To facilitate the preparation of draft financial statements
Recording in Suspense Account

Only errors affecting the balancing of the trial balance are corrected in the
Suspense account
Balances in Suspense
account: Debit
balance: Asset
Credit balance: Liability
Example:
The totals of Company K's trial balance on 30 June 20X2 did not agree.
There was a shortage of $500 on the credit side. This was entered in a
suspense account.
The following errors were later discovered.
(a) Goods of $250 returned by customer was omitted from the sales return
account.
(b) Payment of $1,000 for wages was erroneously recorded to the stationery
account.
(c) Interest of $120 received from the bank was debited to the interest account.
(d) Purchase of a printer for $500 was debited to the general expense account.
(e) A sales of $690 was recorded in the sales account as $960.
(f) Purchases of goods amounting to $80 was not recorded.
Answer:
Suspense A/C
Date Details Debit Date Details Credi
t
20X2 $ 20X2 $
Jun 30 Sales return (a) 250 Jun Bal b/d 500
30
Sales (e) 270 Interest (c) 240
Purchases (f) 80
Bal c/d 140
740 740
July 1 Bal b/d 140
4.2 Correcting Profit for the year
Statement of Corrected Profit or Loss:
Statement of corrected profit or loss for the year ended “state the date
here”
$
Profit / Loss for the year before correction X
X
Add: Errors that understate profit X
Expense overstated or income understated
Less: Errors that overstate profit (X
)
Expense understated or income overstated
Corrected profit / loss for the year X

X
Example:
Continuing from previous example, the following errors were discovered:
(a) Goods of $250 returned by customer was omitted from the sales return account.
(b) Payment of $1,000 for wages was erroneously recorded to the stationery
account.
(c) Interest of $120 received from the bank was debited to the interest account.
(d) Purchase of a printer for $500 was debited to the general expense account.
(e) A sales of $690 was recorded in the sales account as $960.
(f) Purchases of goods amounting to $80 was not recorded.
Profit for the year ended 30 June 20X2 was $6 000.
Answer:
Statement of corrected profit for the year ended 30 June
20X2
$ $
Profit for the year before correction 6,00
0
Add:
(c) Interest income understated [ 120 x 2 ] 24
0
(d) General expense overstated 50 740
0
Less:
(a) Sales return understated 25
0
(e) Sales overstated [ 960 - 690 ] 27
0
(f) Purchases understated 80 600
Corrected profit for the year 6,14
0
Chapter 5. Bank Reconciliation
Purpose:
Determine accurate bank balance
Identify errors in the bank statement and Bank
account Deterrence against fraud
Difference between Bank Account and Bank Statement:
Bank Bank
account statement
Prepared by Prepared by
business bank
represents money represents money

own owing
by business to business by bank
Asse Liabilit
t y
Debit (+) Credit Debit (-) Credit

(-) (+)
As such, a debit balance in the Bank account is represented by a credit

balance in the bank statement.
Steps to bank reconciliation:

1. Cancel similar transactions in the Bank account and bank
statement. Debit in Bank account cancel against Credit in
bank statement Credit in Bank account cancel against
Debit in bank statement
Bank A/C
Date Details Cheque Debit Date Details Cheque Credi
t
$ $
Statement
Bank
Date Particulars Debit Credit Balance
$ $ $
(Payment (Deposit)
)
2. Update Bank account
(a) Correct any errors found in Bank account
(b) Record transactions not cancelled in bank statement
Example:
Bank A/C
Dat Details Cheque Debit Date Details Chequ Credit
e e
July $ July $
6 Fence Ltd 2,100 1 Bal b/d 730
16 Max Print (a) 10 5 Rent 0023 600
30 Sales error 300 9 Purchases 0024 1,400
31 Bal c/d 1,070 17 Drawings 0025 150
28 Mary's 0026 600
Cafe
3,480 3,480
Aug
1 Bal b/d 1,070
Starting balance in updated Bank
account Bank Statement

Date Particulars Debit Credit Balance
July $ $ $
1 Bal b/d 200 Dr
2 Cheque 0020 IGNORE!! 530 730 Dr
7 Cheque 0023 60 1 330 Dr
0
8 Cash 2 100 770 Cr
12 Cheque 0024 1 400 630 Dr
(b )
13 Returned cheque 2 100 2 730 Dr
18 Deposit 10 2 630 Dr
0
20 Cheque 0025 (b ) 150 2 780 Dr
31 Bank charges 160 (b) 2 940 Dr
Note:
31 Credit transfer: Dividends 50 2 440 Dr
Amount received from Max Printing is correctly recorded 0
in the bank statement.
Answer:
Updated Bank A/C
Dat Details Chequ Debit Date Details Chequ Credit
e e e
July $ July $
31 Max Print (a) 90 31 Bal b/d 1,070
Dividend (b) 500 Fence Ltd (b) 2,100
Bal c/d 2,740 Bank (b) 160
charge
3,330 3,330
Aug
1 Bal b/d 2,740
3. Prepare bank reconciliation statement
(a) Record any errors found in bank statement
(b) Record transactions not cancelled in Bank account
Bank
Date Chequ Dr A/C Date Cheque Cr
Detail ee $ Detail $
s s
Deposits not credited Cheques not presented
Continue from the previous example:

Bank reconciliation statement as at 31 July
20XX
$
Balance per updated Bank account 2,740 Cr
Add cheques not yet presented:
Mary's Cafe 600
2,140
Less deposit not yet credited:
Sales 300
Balance per bank statement 2,440 Dr
Alternative presentation of bank reconciliation statement
Bank reconciliation statement as at 31 July

20XX
$
Balance per bank statement 2,440 Dr
Less cheques not yet presented:
Mary's Cafe 600
3,040
Add deposit not yet credited:
Sales 300
Balance per updated Bank account 2,740 Cr
Chapter 6. Trade receivables and Trade payables
6.1 Control Accounts
Sales ledger control account (also known as Trade receivable control
account) is a summary of the sales ledger.
Purchase ledger control account (also known as Trade payable control
account) is a summary of the purchase ledger.
Purpose / Advantages
Independent check on the accuracy of postings in the sales and purchases
ledgers Avoid overcrowding in the General Ledger with voluminous details
Deter and detect errors
Provide total amount of trade receivables and trade payables
Contra or Offset transaction

refers to a transfer of amount owing between a trade receivables who is
also a trade payable.
Double-entry:
Debit Purchases ledger
control
Credit Sales ledger control
6.2 Trade receivables and Sales Ledger Control Account
Trade receivables are customers who bought goods from the business on credit.
Recorded Recorded in
in Sales General
Ledger Ledger
Trade
receivables
account
Sales
Trade ledger
receivables
control
account account
Trade
receivables
account
Format for Trade receivables account AND Sales Ledger control account:
Trade receivables A/C OR Sales Ledger Control A/C
t
$ $
Bal b/d XX Sales returns X
Sales X Cash / Bank X
Bank (dishonoured cheque) X Discount allowed X
Discount allowed X Irrecoverable debts X
(withdrawn)
Other charges - X Purchase ledger X
interest; delivery control (contra)
Bal c/d XX
XXX XXX
Transactions affecting trade receivables accounts:
Books of Business
Transactions Account
Prime Entry Document
Credit sales Sales Journal Invoice Sales
Undercharging General Debit note Sales

Journal
Sales
Return of goods Credit note Sales return
Return
Journal
Payment received Cash Book Receipt Cash / Bank
Discount given Cash Book Receipt Discount allowed
Court papers
Write off debts General Irrecoverable debts
Journal / lawyer's
letter
Returned cheque Cash Book Bank Bank
statement
Discount Cash Book Bank Discount allowed
withdrawn statement
Other charges General Invoice Depends on the
Journal charges
Contra General Receipt Purchases ledger
Journal control
6.3 Trade payables and Purchases Ledger Control Account
Trade payables are suppliers who supply goods to the business on credit.
Recorded in Recorded in
Purchase General
Ledger Ledger
Trade
payables
account
Purchase
Trade s ledger
payables control
account account
Trade
payables
account
Format for Trade payables account AND Purchases ledger control account:
Trade payable A/C OR Purchases Ledger Control A/C
t
$ $
Purchases Returns X Bal b/d XX
Cash / Bank X Purchases X
Discount received X Other charges - X
interest; delivery
Sales ledger control (contra) X
Bal c/d XX
XXX XXX
Transactions affecting trade payables accounts:
Books of Business
Transactions Account
Prime Document
Entry
Credit Purchase Invoice Purchases
purchases Journal
Undercharging General Journal Debit note Purchases
Purchase
Return of goods Credit note Purchases
Return
Returns
Journal
Payment Cash Book Payment Cash / Bank

voucher
Discount Cash Book Payment Discount received
received voucher
*Depends on
Other charges General Journal Invoice
the
charges
Contra General Journal Receipt Sales ledger
control
Chapter 7. Capital and Revenue Expenditure and
Receipts
7.1 Capital expenditure
Definition:
is the cost of acquiring asset and improving or extending non-current
asset benefit will last for more than one accounting period
recorded as non-current assets
Cost of Asset:
Original purchase price + all cost required to bring asset to usable state
Double-entry:
Debit Non-current asset
Credit Cash / Bank / Other payable
Example:
Company X purchase a piece of machinery from Great Machinery Ltd on credit at
list price of $50,000 less 10% discount. Also included in the invoice were the
following costs:
Installation of machinery
$2,00
0 2 years warranty $450
Yearly maintenance $1,200
Answer:
Cost of asset ( 50,000 x 90% + 2,000 = $47,000
= )
Original Expense required to
purchase price bring asset to usable
state
Debit Plant & machinery $47,000

Credit Other payable - Great Machinery Ltd
$47,000
7.2 Revenue expenditure
Definition:
is the purchase of goods for resale or services to run a business on a daily
basis
benefit last less than one accounting period
Recorded as current asset or expenses
Cost of expenditure = Original amount incurred
Double-entry:
Debit Expense
Credit Cash / Bank / Other payable
Example:
Continued from the above scenario for capital expenditure...
Answer:
Warranty and maintenance are considered yearly expenditure,
therefore Cost of expenditure = 450 + 1,200 = $1,650
Debit Maintenance expense $1,650

Credit Other payable - Great Machinery Ltd
$1,650
7.2.1 Exception to capital expenditure rule

Materiality concept states that a transaction or an item is considered
material if it makes a difference to decision-making.
Example:
Company X has a capital of $1 million. Recently, it paid $6 for a waste paper
basket for office use.
Answer:
Though the waste paper basket can last the business for more than one
accounting period, the amount of $6 is insignificant compared to the overall
worth of the business.
Instead of being considered as a capital expenditure, the waste paper
basket is considered as revenue expenditure.
7.3 Capital receipts
Definition:
income obtained from investment and financing activities of the
business
benefit will last for more than one accounting period
recorded as non-current liabilities or capital
Examples:
Issuance of shares
Capital contribution from owner
Loan from financial institutions /
banks Government grants
7.4 Revenue receipts

Definition:
income obtained through normal business
operations
benefit last within one accounting period
recorded as income
Examples:
Sales of goods
Discount
received
Interest income
Dividend income
Chapter 8. Accounting for Depreciation
8.1 Depreciation
Definition:
Depreciation:
Allocation of the original cost of a non-current asset over its useful life
Represent the loss of value of a non-current asset for each accounting period
Provision for depreciation or Accumulated depreciation:

Total depreciation of a non-current asset to-
date
Contra asset
Credit account
Book value:
Original cost of a non-current asset less its accumulated depreciation
Non-current assets are valued at net book value according to the Prudence
concept
Cause of depreciation:
1. Wear and tear
2. Obsolescence
3. Passage of time
4. Legal limit
5. Depletion
8.1.1 Depreciation policy
Calculation of depreciation in
Depreciation policy
Year of Year of Sale
Purchase
Full year depreciation in

the year of purchase and 12 months No
none in the year of sale depreciation
Full year depreciation in

the year of purchase and 12 months 12 months
year of sale
No depreciation in the From start of

No
year of purchase depreciation accounting period to
date of sale
Depreciation is From date of purchase From start of

charged from date of to end of accounting accounting period to
transaction period date of sale
Question did not From date of purchase From start of

specify any of the to end of accounting accounting period to
above period date of sale
8.1.2 Straight-line method of depreciation
Formula:
( Cost - Scrap
value) OR Cost × Rate of depreciation
Useful life (%)
Effect on Profit for the year:

Depreciation expenses remains constant over the asset's
useful life
Effect on profit for the year is constant
Example:
Company Z bought some cupboards for $8,000 on 1 March 20X1 and paid by
cheque. The scrap value of these cupboards is estimated at $500 after 5
years of usage.
On 1 May 20X2, the company bought a new set of tables for $3,600 by
cheque. These tables will be depreciated at 20% per annum on cost.
Prepare the Fixtures & Fittings account and Provision for depreciation of
fixtures & fittings account for the years ended 30 June 20X1 and 20X2.
Answer:
Fixtures & Fittings A/C
Date Details Debit Date Details Credit
20X1 $ 20X1 $
Mar 1 Bank 8,000 Jun Bal c/d 8,000
30
July 1 Bal b/d 8,000
20X2 20X2
May 1 Bank 3,600 Jun Bal c/d 11,600
30
11,60 11,600
0
0
8000  500   4
 12
(a) Depreciation for 30 June 20X1:  = $500
 5 
8000  500    2 
(b) Depreciation for 30 June 20X2:   
 3600  20%    = $1,620
 5   12
Provision for depreciation A/C
t
20X1 $ 20X1 $
Jun 30 Bal c/d 500 Jun 30 Income statement (a) 500
July 1 Bal b/d 500
20X2 20X2
Jun 30 Bal c/d 2,120 Jun 30 Income statement (b) 1,620
2,12 2,120
0
Income Statement for the year ended 30 June 20X2

(extract)
$
Less expenses:
Provision for depreciation of fixtures & fittings 1,620
Statement of Financial Position at 30 June 20X2

(extract)
Accumulated
Cost Book
depreciation Value
$ $ $
Non-current asset:
Fixtures & fittings 11,600 2,120 9,480
8.1.3 Reducing-balance method of depreciation
Formula:
( Cost - Accumulated depreciation ) × Rate of depreciation (%)
Effect on Profit for the year:

Depreciation expenses decreases over the asset's useful life
Profit for the year increases as depreciation expenses decreases
Example:
Company X paid a cheque of $80,000 for a car on 1 March 20X1. On 1 May
20X2, the company purchased a delivery van for $130,000 on credit.
The company depreciates motor vehicle at 10% per annum using the reducing-
balance method. A full year depreciation is charged in the year of purchase.
Prepare the Motor vehicle account and Provision for depreciation of motor
vehicle account for the years ended 30 June 20X1 and 20X2.
Answer:
Motor Vehicles A/C
20X1 $ 20X1 $
Mar 1 Bank 80,000 Jun Bal c/d 80,000
30
20X2 20X2
May 1 Other payable 130,00 Jun Bal c/d 130,000
0 30
210,00 210,000
0
(a) Depreciation for 30 June 20X1: 80000 10%= $8,000
(b) Depreciation for 30 June  80000  8000  10%  130000 10%  = $20,200
20X2:
20X1 $ 20X1 $
Jun 30 Bal c/d 8,000 Jun Income statement 8,000
30 (a)
20X2 20X2
Jun 30 Bal c/d 28,200 Jun Income statement 20,200
30 (b)
28,200 28,200
Income Statement for the year ended 30 June 20X2

(extract)
$
Less expenses:
Provision for depreciation of motor vehicles 20,200
Statement of Financial Position at 30 June 20X2

(extract)
Accumulated
Cost Book
depreciation Value
$ $ $
Non-current asset:
Motor vehicles 210,000 28,200 181,800
8.1.4 Revaluation method of depreciation
Formula:
Value of asset Value of asset
Purchases Disposal
at start of + during the year - during the year - at end of
accounting accounting
year year
Example:
Machinery was valued on 1 January 20X1 as $25,000. During the year, the
company sold an old piece of machinery costing $5,000 and purchased a new
set for $13,000. On 31 December 20X1, machinery was valued at $28,000.
Prepare the Provision for depreciation of machinery account for the year
ended 31 December 20X1.
Answer:
Depreciation: 25,000 + 13,000 - 5,000 - 28,000 = $5,000

t
20X1 $ 20X1 $
Dec Bal c/d 5,000 Dec 31 Income statement 5,000
31
20X2
Jan 1 Bal b/d 5,000
Income Statement for the year ended 31 December 20X1

(extract)
$
Less expenses:
Provision for depreciation of machinery 5,000
8.2 Sales of non-current assets
Determining Gain or Loss on sales:
Loss on sales of non-current asset
( Cost - Provision for depreciation ) Selling price
Gain on sales of non-current asset

( Cost - Provision for depreciation ) Selling price
Components in the Disposal of non-current asset account:

Disposal of non-current asset A/C
t
$ $
Cost of non-current X Provision for X
asset depreciation
Cash / Bank /
OR other receivables X
Income statement - Profit X Income statement - Loss X
Recording Disposal of non-current asset in Income Statement:

Income Statement
(extract)
$
Other Income:
Profit on disposal XX
Expenses:
Loss on disposal XX
Example:
Company Y had the following balances on 1 July 20X2: Machinery
$130,000 and Provision for depreciation of machinery $50,000
On 1 April 20X3, one of the machines bought in May 20X1 was sold on credit for
$15,000. This machine was previously purchased for $60,000.
It is the business policy to charge a full year’s depreciation in the year of

purchase and none in the year of sale. Machinery are depreciated at an annual
rate of 20% using the reducing-balance method.
Record the disposal in the Machinery account, Provision for depreciation of

machinery account and Disposal account.
Answer:
Machinery A/C
20X2 $ 20X3 $
July 1 Bal b/d 130,000 Apr 1 Disposal 60,000
*Common error
recording selling price of
$15,000 instead of cost
Depreciation for machinery sold:

Year ended 30 June 20X1: 60,000 x 20% = $12,000
Year ended 30 June 20X2: (60,000 - 12,000) x 20% = $9,600
Total depreciation = $12,000 + $9,600 = $21,600

20X3 $ 20X2 $
Apr 1 Disposal 21,600 July 1 Bal b/d 50,000
Disposal A/C
20X3 $ 20X3 $
Apr 1 Machinery 60,000 Apr 1 Provision for 21,600
depreciation
Other receivables 15,000
Income statement 23,400
60,000 60,000
Chapter 9. Other Payables and Other Receivables
9.1 Recording Accrued and Prepaid Expenses
Expense
Accounts
Debit (+) Credit (-)
Balance b/d [Prepaid expense] Balance b/d [Accrued expense]
Cash/Bank/Other payable [Expense Income statement [Expense incurred]

paid]
Balance c/d [Accrued expense] Balance c/d [Prepaid expense]
Recording in Statement of Financial Position:

Prepaid expense : Current asset > Other
receivables
Accrued expense : Current liability > Other

payables
Example:
Company Z has a balance of $3,000 in its prepaid rent account on 1 January
20X1. On 1 July 20X1, $12,000 rent was paid by cheque. The premise was
rented at $1,200 per month. Prepare Rent Expense account for the year ended
31 December 20X1.
Answer:
Rent Expense A/C
20X1 $ 20X1 $
Jan 1 Balance b/d 3,000 Dec Income statement 14,400
31
1200 12 months
Jul 1 Bank 12,000 Dec Balance c/d 600
31
15,000 15,000
20X2
Jan 1 Balance b/d 600

(extract)
$
Less expenses:
Rent expense 14,400
Statement of financial position at 31 December 20X1
(extract)
$
Current asset
Other receivables 600
9.2 Recording Accrued and Prepaid Income
Income
Accounts
Debit (-) Credit (+)
Balance b/d [Accrued income] Balance b/d [Prepaid

income]
Cash/Bank/Other
Income statement [Income
earned] receivable [Income
received]
Balance c/d [Prepaid expense] Balance c/d [Accrued
income]
Recording in Statement of Financial Position:

Prepaid income : Current
liability
Accrued income : Current asset
Example:
Company Z was owed $500 interest for the year ended 31 December 20X1. On 30
June 20X2, the company received a cheque of $2,000. At the end of the accounting
period,
$800 of interest income remains outstanding. Prepare Interest Income account
for the year ended 31 December 20X2.
Answer:
Interest Income A/C
20X2 $ 20X2 $
Jan 1 Balance b/d 500 Jun Bank 2,000
30
Dec Income statement 2,300 Dec Balance c/d 800
31 31
2,800 2,800
20X3
Jan 1 Balance b/d 800

(extract)
$
Other income:
Interest income 2,300
(extract)
$
Current asset:
Prepaid interest income 800
Chapter 10. Irrecoverable Debts and Provision for
doubtful debts
10.1 Irrecoverable debts
Definition:
Debts that are confirmed not collectible from trade
receivables
Expense
Debit account
Double-entry:
Debit Irrecoverable debts
Credit Trade receivables
Example:
On 1 January 20X1, a trade receivable owing $600 has been declared bankrupt.
The debt is to be written off as irrecoverable.
Answer:
Trade receivables A/C
20X1 $ 20X1 $
Jan 1 Bal b/d 600 Jan 1 Irrecoverable debt 600
Irrecoverable debt A/C

20X1 $ 20X1 $
Jan 1 Trade receivables 600 Jan 1 Income statement 600
Income Statement
(extract)
$
Expenses:
Irrecoverable debts 600
10.2 Recovery of irrecoverable debts
Definition:
Debts that are previously written off as irrecoverable was subsequently
recovered
Income
Credit account
Double-entry:
Debit Cash / Bank
Credit Irrecoverable debts recovered
Example:
On 1 January 20X1, a debt of $600 owed by a trade receivables was written off
as irrecoverable. On 1 July 20X1, the trade receivable returned to repay the
debt of $600 by cash.
Answer:
Cash A/C
20X1 $ $
July 1 Irrecoverable 600
debt recovered
Irrecoverable debt recovered A/C

20X1 $ 20X1 $
July 1 Income statement 600 July 1 Cash 600
Income Statement
(extract)
$
Other Income:
Irrecoverable debts recovered 600
10.3 Provision for doubtful debts
Definition:
Provision for debts that are deemed uncollectible based on reasonable
estimation
Contra-asset
Credit account
Calculating Provision for doubtful debts:

Trade receivables at end of accounting period × Rate of provision for doubtful debts
(%)
Double-entry:
Creating Provision for doubtful debts:
Debit Income statement Expense
Credit Provision for doubtful debts
Adjusting an Increase in Provision for doubtful debts
Debit Income statement Expense

Credit Provision for doubtful debts
Adjusting a Decrease in Provision for doubtful debts
Debit Provision for doubtful debts Income

Credit Income statement
Presentation in Income Statement:

Income Statement (extract)
$
Other Income:
Decrease in provision for doubtful debts
Expenses:
Increase in provision for doubtful debt
Presentation in Statement of Financial Position:

Statement of Financial Position
(extract)
$
Current assets:
Trade receivables
Less Provision for doubtful debt
Example 1: Creating Provision for doubtful debts
Company X decides to create a provision for doubtful debts at 5% of its trade
receivable. For the year ended 31 December 20X1, trade receivable was
$20,000.
Answer:
Provision for doubtful debts for 31 Dec 20X1 = $20,000 X 5% = $1,000
Provision for doubtful debt A/C

20X1 $ 20X1 $
Dec 31 Bal c/d 1,000 Dec Income statement 1,000
31
20X2
Jan 1 Bal b/d 1,000
Example 2: Increase in Provision for doubtful debts

Continuing from Example 1, Company X's trade receivables amounted to
$34,000 for the year ended 31 December 20X2. Provision for doubtful debts is
maintained at 5% on trade receivables.
Answer:
Provision for doubtful debts for 31 Dec 20X2 = $34,000 X 5% = $1,700

20X2 $ 20X2 $
Dec 31 Bal c/d 1,700 Jan 1 Bal b/d 1,000
Dec Income statement 700
31
1,700 1,700
20X3
Jan 1 Bal b/d 1,700
Example 3: Decrease in Provision for doubtful debts
Continuing from Example 1, Company X's trade receivables amounted to
$16,000 for the year ended 31 December 20X2. Provision for doubtful debts is
maintained at 5% on trade receivables.
Answer:
Provision for doubtful debts for 31 Dec 20X2 = $16,000 X 5% = $800

20X2 $ 20X2 $
Dec Income statement 200 Jan 1 Bal b/d 1,000
31
Dec Bal c/d 800
31
1,000 1,000
20X3
Jan 1 Bal b/d 800
Income Statement for the year ended 31 Dec 20X2

(extract)
$
Other Income:
Decrease in provision for doubtful debts 200
Statement of Financial Position at 31 Dec 20X2

(extract)
$ $
Current asset:
Trade receivable 16,000
Less: Provision for doubtful debts (800)
15,200
Chapter 11.Valuation of Inventory
Inventory is valued at the lower of cost and net realisable value. This is in
accordance to the Prudence concept.
Effect of Incorrect Valuation of Inventory

Inventory is Overvalued
Profit Owner' Asset
Effect on Gross profit valuatio
for the s
year Equity n
Current period Overstated Overstated Overstated Overstated
Next period Understated Understated No effect No effect
Inventory is Undervalued
Profit Owner's
Effect on Gross profit Asset
for the Equity
year valuation
Current period Understated Understated Understated Understated
Next period Overstated Overstated No effect No effect
Chapter 12.Sole Traders
12.1 Advantages and Disadvantages of Sole Traders
Advantages
Easy and less expensive to set up and maintain
Owner has full control over the management of the business
Disadvantages
Owner may lose more than his/her investment in the business if the
business fails Banks and financial institutions may be less willing to lend
More difficult for ownership to be transferred
12.2 Difference between Trading Business and Service Business

Trading business
Earns its profit through the buying and selling of
goods Assets includes unsold inventory
Service business
Earns its revenue through the provision of services to
customers Do not hold any inventory
12.3 Income Statement
Income statement measures the profitability of a company for a specified time
period, at regular intervals.
12.3.1 Trading business

“Name of company”
Income Statement for the year ended
“date”
$ $
Revenue XX
Less Sales Returns ( XX )
XX
Opening inventory XX
Purchases XX
Carriage inwards XX
XX Trading
Purchases Returns (XX) portion
XX
Drawings of goods (XX)
XX
Closing inventory (XX
)
Cost of sales ( XX )
Gross profit XXX
Net revenue > Cost of sales = Gross profit

Net revenue < Cost of sales = Gross
loss
Other Incomes:
Irrecoverable debt recovered XX
Profit on disposal XX
Decrease in provision for doubtful debts XX XXX
Profit &
Expenses: Loss
portion
Irrecoverable debts (X)
Loss on disposal (X)
Provision for depreciation of non-current asset (X)
Increase in provision for doubtful debts (X) (XXX)
Profit for the year XXX
( Gross profit + Other income ) > Expenses = Profit

( Gross profit + Other income ) < Expenses = Loss
12.3.2 Service business
Income Statement for the year ended
“date”
$ $
Revenue XXX
Other Incomes:
Irrecoverable debt recovered X
X
Profit on disposal X
X
Decrease in provision for doubtful debts X XXX
X
Expenses:
Irrecoverable debts (XX)
Loss on disposal (XX)
Provision for depreciation of non-current asset (XX)
Increase in provision for doubtful debts (XX) (XXX)
Profit for the year XXX
( Revenue + Other income ) > Expenses = Profit

( Revenue + Other income ) < Expenses = Loss
12.4 Statement of Financial Position
Measures the financial position of a company at a given date.
Statement of Financial Position at
“date”
$ $ $
Provision for Book
Cost Depreciation value
Non-current Assets
Fixtures & Fittings XX XX XX
Motor vehicles XX XX XX
Office equipment XX XX XX
Premises / Buildings XX XX XX
Plant & Machinery XX XX XX
XX XX XXX
X X
Intangible Assets
Goodwill XX
Copyrights XX XXX
Current Assets
Trade receivables XX
Less: Provision for doubtful debts (XX)
XX
Inventory (Not applicable for service business) XX
Other receivables (prepaid expense/accrued XX
income)
Petty cash XX
Cash / Bank XX XXX
Total Assets XXX
Owner's Equity
Capital XX
Add: Profit for the year (OR Less: Loss for the XX
year)
Less: Drawings XX
XX
Non-current liabilities
Loans or Mortgages XX
Current liabilities
Trade payables XX
Other payables (accrued expenses / prepaid XX
income)
Bank overdrafts XX XX
Total equity and liabilities XXX
12.5 Equity Accounts
12.5.1 Drawings accounts
Assets that the owner withdraws from the business for personal use are
recorded in the drawings account.
Drawings A/C
t
$ $
Cash / Bank X
Purchases [ drawing of X Capital A/C XX
goods ]
XX XX
12.5.2 Capital accounts

Personal assets that the owner brings into the business are recorded in the
capital account.
Capital A/C
t
$ $
Drawings A/C X Balance b/d X
X X
Income
X Cash / Bank X
statement
Assets / Expenses X
Loss for the year
XX Income statement X
Balance c/d
XXX Profit for the year XXX
Example:
On 1 January 20X1, John, a sole trader has a balance of $6,000 in his capital
account.
During the year, the following transactions took place:

1. Withdrew goods worth $300 for personal use on 1 March 20X1.
2. Took stationery valued $60 for use at home on 1 May 20X1.
3. On 1 April 20X1, paid $2,500 using personal cheque for a computer to be
used in office.
4. Withdraw $200 from the business bank as personal allowances on 1 August
20X1.
5. Deposited $2,000 cash into business bank account on 1 November 20X1.
Profit for the year amounted to $5,000.
Answer:
Drawings
A/C
20X1 $ 20X1 $
Mar 1 Purchases 300 Dec Capital 560
31
May 1 Stationery 60
Aug 1 Bank 200
560 560
Capital A/C
20X1 $ 20X1 $
Dec Drawings 560 Jan 1 Bal b/d 6,000
31
Bal c/d 14,94 Apr 1 Office equipment 2,500
0
Nov 1 Bank 2,000
Dec 31 Income statement 5,000
15,50 15,50
0 0
20X2
Jan 1 Bal b/d 14,940
Chapter 13.Partnerships
13.1 Advantages and Disadvantages of Partnership
Advantages
Bigger pool of capital
Combined skills and experiences of partners
Sharing of business tasks or duties between partners
Disadvantages
Disagreements due to conflicting views of partners
All partners are held responsible for contractual losses of the business
Partners can be forced to pay partnership debts with their personal assets
13.2 Partnership Agreement

Purpose
To specify matters of concern to the partners so that all partners are clear on
how the partnership operates to avoid future disputes.
Contents of partnership agreement

Contribution of capital
Appropriation of profits / losses
Drawings of assets for personal
use Interest chargeable on
drawings
Interest payable on
capital Partners’ salary
Interest chargeable on loans from partners
13.3 Accounting for Partners' Transactions
13.3.1 Interest on Capital
To compensate any partner who has contributed more capital than the other
partners
Calculation
Interest on capital = Capital x Rate (% per annum) x Time (year)
Example:
The balances in the partners' Capital accounts on 1 January 20X1 are: $30,000
for partner A and $45,000 for partner B. On 1 June 20X2, partner B contributed
additional capital of $12,000 into the business bank account. Interest on capital is
at 8% per annum.
Answer:
On 31 December 20X1, interest on capital for:
Partner A = 30,000 x 8% = $2,400
Partner B = (45,000 x 8%) + (12,000 x 8% x 7/12 months) = $4,160
Effect on Current account and Profit

Partners' current account: Increases
Profit available for allocation: Decreases
13.3.2 Interest on Drawings

To discourage the withdrawal of cash or goods by the partners so as to keep
its assets for business opportunities
Calculation
Interest on drawings = Drawings x Rate (% per annum) x Time (year)
Example:
On 1 January 20X1, partner A withdraw goods costing $2,000. On 1 July 20X1,
partner B withdrew cash $1,500 from the business. Interest on drawings is at
10% per annum.
Answer:
On 31 December 20X1, interest on
drawings for: Partner A = 2,000 x 10% =
$200
Partner B = 1,500 x 10% x 6/12 months = $75

Partners' current account: Decrease
Profit available for allocation: Increases
13.3.3 Partners' Salary / Bonuses / Commissions
Provides compensation to partners who has contributed time and effort to operate
the business
Accounting Treatment
Not a business expense but an entitlement of the
partner If unpaid, credited to partner's current account
If paid, do not need to record in partner's current account
Example:
Partner B is allowed an annual salary of $8,000. The business paid him $3,000
on 1 May 20X1. The balance amount remains outstanding at 31 December
20X1.
Answer:
Debit Appropriation account $8,000
Credit Cash / Bank $3,000
Credit Current a/c - Partner $5,000
B

Partners' current account: Increases
Profit available for allocation: Decreases
13.3.4 Loan from Partners

Treated the same way as loan from external parties. Therefore, it is
considered a business liability
Recorded in Statement of Financial Position as a liability
Example:
Partner A provided a loan of $15,000 to the business on 1 September 20X1.
Answer:
Debit Bank $15,000
Credit Loan from Partner A $15,000

Partners' current account: No effect
Profit available for allocation: No effect
13.3.5 Interest on Loan from Partners
To provide a return on the funds loaned to the business by the partner
Calculation
Interest on loan = Loan x Rate (% per annum) x Time (year)
Business expense in the Income Statement
If unpaid, credited to partner's current account
If paid, do not need to record in partner's current account
Example:
Partner A provided a loan of $15,000 to the business on 1 September 20X1.
Interest on loan is charged at 5% per annum. Half the interest is paid to the
partner while the balance amount remains owing at 31 December 20X1.
Answer:
On 31 December 20X1,
interest on loan = 15,000 x 5% x 4/12 months = $250
Debit Interest expense $250

Credit Bank $125
Credit Current a/c - Partner A $125

Partners' current account: Increases (if not paid)
Profit available for allocation: Decreases as Profit for the year decreases
13.4 Appropriation account
Purpose
To determine the final profit or loss for allocation to all partners after taking into
account interest on capital, interest on drawings, partners' salary, bonus or
commission.
Calculation of Profit Available for Distribution to Partners

Profit for the year + Interest on drawings
- Interest on capital
- Partners' salary / bonus /
commission
Format:
Appropriation Account for the year ended “date”
$ $
Profit for the year X (A)
Interest on drawings
Partner A X
1
Partner B X XX (B)
2
XX (A+B)
X
Interest on capital
Partner A X
1
Partner B X XX (C)
2
Partners' salary
Partner A X
1
Partner B X XX (D)
2
XX (A+B) - C -
X D
Share of profit
Partner A [(A+B) - C - D] x profit sharing ratio X
1
Partner B [(A+B) - C - D] x profit sharing ratio X XX
2 X
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Example:
A and B are business partners. The balances in the partners' Capital accounts
on 1 January 20X1 are: $30,000 for partner A and $45,000 for partner B.
Total drawings made by the partners for the year are: $2,000 for partner A and
$3,000 for partner B.
Their partnership agreement states the following:

1. Interest on capital is at 8% per annum
2. Partner B is paid a monthly salary of $600
3. Interest on drawings is at 10% per annum
4. Partner A provided a loan of $15,000 to the business. Interest on loan is
charged at 5% per annum
5. Profits or losses are to be shared between A and B in the ratio of 3:2
Profit for the year ended 31 December 20X1 before interest on loan is $20,000
Answer:
Appropriation Account for the year ended 31 December
20X1
$ $
Profit for the year [20,000 - (15,000 x 5%)] 19,250
Interest on drawings
Partner A (2,000 x 10%) 200
Partner B (3,000 x 10%) 300 500
19,750
Interest on capital
Partner A (30,000 x 8%) 2,400
Partner B (45,000 x 8%) 3,600 6,000
Partners' salary
Partner B (600 x 12 months) 7,200
6,550
Share of profit
Partner A 6,550 x 3/5 3,930
Partner B 6,550 x 2/5 2,620 6,550
13.5 Capital account
Records capital contribution or withdrawal by each partner. It shows the total
capital invested in the business by the partner.
Format:
Capital A/C
$ $
Cash / Bank / etc X Balance b/d X
Cash / Bank X
Capital
withdrawn
Additional capital contributed
Example:
A and B are business partners. The balances in the partners' Capital accounts
on 1 January 20X1 are: $30,000 for partner A and $45,000 for partner B.
On 1 June 20X1, partner B contributed additional capital of $12,000 which

was deposited into the business bank account; while partner A transferred
$15,000 of his capital into loan for the business. The business closes its
books on 31 December.
Answer:
Capital A/C
Date Details A B Date Details A B
20X1 $ $ 20X1 $ $
Jun 1 Loan 15,000 Jan 1 Balance b/d 30,000 45,000
Dec Balance c/d 15,000 57,000 Jun 1 Bank 12,000
31
30,000 57,000 30,000 57,000
20X2
Jan 1 Balance b/d 15,000 57,000
13.6 Current account
Records the profits or losses allocated to a partner and the amount of profit
withdrawn by the partner. The closing balance of the Current account shows
how much profits that was undrawn or overdrawn by the partner.
Format:
Current A/C
$ $
Drawings X Balance b/d X
Interest on drawings X Interest on capital X
Salary X
Interest on loan X
Share of losses X OR Share of profits X
Example:
Using figures from example on Appropriation account The balances in the
partners'
Current accounts on 1 January 20X1 are: $3,000 for partner A and $4,000 for
partner B.
Answer:
Current A/C
Date Details A B Date Details A B
20X1 $ $ 20X1 $ $
Dec Drawings 2,000 3,000 Jan 1 Balance b/d 3,000 4,000
31
Int. on drawings 200 300 Dec Int. on capital 2,400 3,600
31
Balance c/d 7,880 14,120 Salary 7,200
Interest on loan 750
Share of profit 3,930 2,620
10,08 17,420 10,08 17,42
0 0 0
20X2
Jan 1 Balance b/d 7,880 14,120
13.7 Presentation of Partners' Equity in Statement of Financial Position
Format:
Statement of financial position at “date”
$ $
Capital Account
Partner A X
1
Partner B X XX
2
Current Account
Partner A X
1
Partner B X XX
2
Total Partners' Equity XX
X
Example:
Using figures from example on Capital and Current accounts....
Answer:
$ $
Capital Account
Partner A 15,000
Partner B 57,000 72,000
Current Account
Partner A 7,880
Partner B 14,120 22,000
Total Partners' Equity 94,000
Chapter 14.Limited Company
14.1 Advantages and Disadvantages
Advantages
Large amount of capital can be
raised Business is managed by
professionals
Disadvantages
Expensive and complicated to start
Has to comply with more rules and
regulations High administration cost
14.2 Types of Capital

14.2.1 Issued, Called-up, Paid-up Share Capital
Issued share capital
Amount of share capital issued to shareholders
Called-up capital
The amount of issued share capital that the company has requested for
payments from the shareholders
Paid-up capital
The amount of called-up share capital that the company has actually received
the payment from shareholders.
Example:
Z Ltd issued 500,000 shares of $1 per share on 1 January 20X1. Shareholders
were asked to pay 50% of the sum immediately. The balance 50% are due 1
March 20X2. By 1 March 20X1, holders of 400,000 shares paid the amount due.
Answer:
On 31 December 20X1,
Issued share capital = 500,000 x $1 =
$500,000 Called-up capital = 500,000 x ($1 x
50%) = $250,000 Paid-up capital = 400,000 x
$0.50 = $200,000
14.2.2 Preference Shares Capital
Definition:
Preference shares are shares that a company issued to its shareholders
where a fixed rate of dividend is payable.
Characteristic:
No voting rights at shareholders' meetings
Dividend are paid before ordinary shareholders
Upon company's closure, preference shareholders are paid after outside
liabilities and before ordinary shareholders
Preference share dividend are recorded as expenses in Income Statement
Calculation:
Preference share capital = Total preference shares issued x Unit share price
Example: Issued 300,000 4% preference shares of $1 each
Preference share capital = 300,000 x $1 =
$300,000
Preference share dividend = Preference share capital x Rate of dividend

Example: Issued 300,000 4% preference shares of $1
each Preference share dividend = $300,000 x
4% = $12,000
Redeemable preference shares

Has a maturity date on which the company will repay the capital amount to the
preference shareholders and discontinue the dividend payment thereon.
Non-redeemable preference shares

Do not have a maturity date, and therefore are also known as perpetual
preference share
14.2.3 Ordinary Shares Capital
Definition:
Ordinary shares are equity shares that a company issued to its
shareholders where dividend payable vary according to the profits of the
company.
Characteristic:
Voting rights at shareholders' meetings
Dividend are paid after preference shareholders
Upon company's closure, are paid after outside liabilities and
preference shareholders
Ordinary share dividend are deducted from Profit for the year
Calculation:
Ordinary share capital = Total ordinary shares issued x Unit share price
Example: Issued 200,000 ordinary shares at $0.40 each
Ordinary share capital = 200,000 x $0.40 =
$80,000
Ordinary share dividend = Ordinary share capital x Rate of dividend

Example: Dividend of 5% was proposed
Ordinary share dividend = $80,000 x 5% = $4,000
OR
Ordinary share dividend = Total ordinary shares issued x Dividend per share
Example: Dividend of $0.02 per share was proposed
Ordinary share dividend = 200,000 x $0.02 = $4,000
14.2.4 General Reserves

Definition:
A portion of profit for the year that was reserved for the future development of the
company.
Calculation:
Beginning balance + Transfer during the year = Ending balance
14.2.5 Retained Earnings
Definition:
Is an accumulation of balances of profit after distribution of dividend and
transfer to general reserves since the beginning of the company's operation.
Calculation:
Beginning + Profit for the year
Balance
- Transfer to general reserve
- Ordinary share dividend proposed /
paid
Example 1:
On 1 July 20X1, Company X Ltd had 200,000 ordinary shares of $0.40 each;
and retained earnings of $60,000. On 15 June 20X2, dividend was proposed at
$0.02 per ordinary share. Profit for the year ended 30 June 20X2 amounted to
$150,000. $6,000 was transferred to the general reserves.
Answer:
Retained earnings on 30 June 20X2
= $60,000 + $150,000 - $6,000 - ($200,000 x $0.02) = $200,000
14.2.6 Debentures (Loan Capital)

Definition:
Long-term loan that carry a fixed rate of interest which is payable whether or
not the company makes a profit.
Characteristic:
Not members of the company, therefore no voting rights at shareholders'
meetings Interest on debentures are paid before paying shareholders
dividend
Upon company's closure, debenture holders are paid before any
capital shareholders
Interest on debentures are recorded as expenses in Income Statement
Debentures are recorded in the Statement of financial position as non-
current liabilities
14.3 Income Statement of Limited Company
Prepare the Income Statement for a limited company as you would for a sole trader
with the following additional expenses:
Income Statement for the year ended “date”

(Extract)
$
Expenses:
Interest on debentures X
Preference share dividend X
14.4 Statement of Changes in Equity

Prepared to explain how profit for the year was divided.
"Name of company"
Statement of Changes in Equity for the year ended
"date"
Ordinar Genera Retaine
Total
y l d
Shares Reserv Earning
es s
$ $ $ $
Balance at (beginning of year "date") X X X XXX
Profit for the year X X
Transfer to general reserves X (X) -
Interim dividend paid (X) (X)
Final dividend paid (X) (X)
Balance at (end of year "date") XX XX XX XXX
14.5 Statement of Financial Position

Prepare the Statement of financial position for a limited company as you
would for a sole trader except the Equity section.
Statement of financial position at “date”

(Extract)
$
Capital & Reserves
Preference shares of $x each X
X
Ordinary share of $x each X
X
General reserves X
X
Retained earnings X
X
Shareholders' funds X
X
Chapter 15.Clubs and Societies
15.1 Receipts and Payments Accounts
A summary of the Cash Book
Records all money received and paid
No distinction between cash and bank transactions
No distinction between capital / revenue expenditure and capital /
revenue receipts
No adjustments for prepayments and
accruals Exclude non-monetary
transactions
Debit account
Debit balance - Current Asset
Credit balance - Current Liability
Example:
On 1 July 20X1, Z Sports Club had $20,000 in the bank and $3,000 cash.
For the year ended 30 June 20X2, the club had the following receipts and
payments:
$
Subscriptions received 10,850
Competition entrance fees received 800
Proceed from shop sales 4,000
Competition prizes 200
Purchase of new motor vehicle 30,000
Wages - Sport coaches 2,700
Shop assistants 1,800
General expense 1,000
Rent 3,500
Answer:
Receipts and Payments Account for the year ended 30 June 20X2
Date Receipts Debit Date Payments Credit
20X1 $ 20X2 $
July 1 Bal b/d 23,000 Jun Purchase motor vehicle 30,000
30
20X2 Wages - Sport coaches 2,700
Jun 30 Subscription 10,850 Wages - Shop assistant 1,800
Competition fees 800 General expense 1,000
Proceed from shop 4,000 Competition prizes 200
Bal c/d 550 Rent 3,500
39,200 39,200
Jul 1 Bal b/d 550
15.2 Income and Expenditure Accounts
Prepared in the same principle as the Income Statement of a sole
trader Income > Expenditure = Surplus for the year
Income < Expenditure = Deficit for the year
Fund-raising activity: income and expenses for that activity are set off
against each other to determine profit or loss on that
activity
Example:
Z Sports Club had the following receipts and payments for the year ended 30 June
20X2:
$
Subscriptions received 10,850
Competition entrance fees received 800
Proceed from shop sales 4,000
Competition prizes 200
Purchase of new motor vehicle 30,000
Shop assistants 1,800
General expense 1,000
Rent 3,500
Profit from the club's shop was $500 and motor vehicle is to be depreciated at
10% per annum.
Answer:
Income and Expenditure Account for the year ended 30 June
20X2
$ $
Income
Subscription 10,850
Profit from shop 500
Competition: entrance fees 800
cost of prizes 200 600
11,950
Expenditure
General expenses 1,000
Rent 3,500
Depreciation of motor vehicle 3,000 10,200
Surplus for the year 1,750
15.3 Statements of Financial Position
Prepared in the same principle as the Statement of Financial Position of a sole
trader Owner's Equity is replaced with Accumulated Fund
No Drawings
Format:
Statement of Financial Position at “date”
(Extract)
$
Accumulated Fund
Opening balance X
X
Add: Surplus for the year (OR Less: Deficit for the year) X
X
X
15.3.1 Accumulated Fund

Definition:
Capital fund accumulated within the organisation from surpluses obtained from
running the club.
Calculation:
Accumulated fund = Assets - Liabilities
Chapter 16.Manufacturing Accounts
16.1 Direct And Indirect Costs
Direct Material
Raw material required to make finished
goods Calculation:
Opening inventory of raw material + Purchases of raw material
+ Carriage Inwards of raw material - Closing inventory of raw material
Direct Labour
Wages of people directly involved in producing the finished goods
Prime Cost
Total direct cost of producing the finished
goods Calculation:
Direct Material + Direct Labour + Direct Expense
Factory Overheads
Indirect factory expenses
Costs involved in operating the factory which cannot be directly linked with the
manufacturing of the finished goods
Examples:
Wages of factory
supervisor Rent of factory
Depreciation of machinery
16.2 Manufacturing Account
Purpose:
To calculate the total cost of manufacturing the finished goods
Production Cost of Completed Goods:

Work in Progress
Goods which are partly completed at the end of the financial
year To be excluded from cost of production
Cost of production is calculated

as: Prime cost + Factory
overheads
+ Opening work in progress - Closing work in progress
Format:
Manufacturing Account for the year ended "date"
$ $
Cost of material consumed
Opening inventory of raw material X
Purchases of raw material X
Carriage inwards of raw material X
X
X
Less Closing inventory of raw material (X) X
X
Direct wages X
X
Direct expenses X
X
Prime Cost X
X
Factory overheads
Indirect wages X
Rent and rates X
Depreciation of machinery X
Etc X XX
X
X
Add Opening work in progress X
X
X
Less Closing work in progress X
Production cost of finished goods X
X
Example:
Company X Manufacturer supplied the following balances and information for
the year ended 31 May 20X2:
1 June 20X1 31 May 20X2
$ $
Inventory of raw materials 40,000 43,000
Inventory of finished goods 80,000 62,000
Work in progress 20,000 18,000
For the year ended 31 May 20X2,

$
Purchases of raw materials 550,000
Purchase of finished goods 16,000
Wages - factory workers 52,000
factory managers 36,000
Depreciation of machinery 8,000
Rent - factory 60,000
Answer:
Manufacturing Account for the year ended 31 May 20X2
$ $
Cost of material consumed
Opening inventory of raw material 40,000
Purchases of raw material 550,000
590,000
Less Closing inventory of raw material 43,000 547,000
Direct wages 52,000
Prime Cost 599,000
Factory overheads
Indirect wages 36,000
Rent 60,000
Depreciation of machinery 8,000 104,000
703,000
Add Opening work in progress 20,000
723,000
Less Closing work in progress 18,000
Production cost of finished goods 705,000
16.3 Income statement
Prepared in the same principle as the Income Statement of a sole trader
except the following in the calculation of Cost of Sales:
Income Statement
(extract)
$
Opening inventory of finished goods X
Production cost of completed goods X
Purchases of finished goods X
XX
Closing inventory of finished goods (X)
Cost of sales X
16.4 Statements of financial position

Prepared in the same principle as the Statement of Financial Position of a sole
trader
Statement of Financial Position

(extract)
$ $
Current asset:
Inventories - raw materials X
work in progress X
finished goods X X
X
Chapter 17.Incomplete Records
17.1 Changes in Capital Method
Profit or loss for the year is determined by calculating the change in an owner's
equity.
Calculation of profit or loss for the year ended “state the date
here”
$
Ending capital X
X
Add: Drawings X
Less: Additional capital (X)
Less: Beginning capital (X)
Profit or (loss) for the year XX
Example:
John started a trading business on 1 July 20X1 with a delivery van worth
$50,000 and cash of $18,000 deposited in the business bank account.
The following information relates to his first year of trading:

(a) Withdrew $500 per month from 1 January 20X2 from the business bank
account for personal use.
(b) Took goods costing $1,200 for home use.
(c) Paid $8,000 for office rent from his personal bank account.
(d) Sold his personal investment previously bought at $12,000 for
$18,000, and deposited the profit into the business bank account.
(e) Assets and liabilities balances as at 30 June 20X2 were:
$
Office equipment 4,000
Bank Overdraft 7,500
Motor vehicles 50,000
Accrued Commission income 500
Inventory 8,900
Trade receivables 16,400
Trade payables 7,800
Accrued Rent expense 2 000
Additional information to be taken into account:

1. Depreciation is to be provided on motor vehicle at 10% per annum on
net book value.
Answer:
Calculation of profit or loss for the year ended 30 June 20X2
$
Ending capital * 56,500
Add: Drawings [ ( $500 x 6 months ) + $1,200 ] 4,200
Less: Additional capital [ $8,000 + $6,000 ] (14,000)
Less: Beginning capital [ $18,000 + $50,000 ] (68,000)
Loss for the year (21,300)
* Ending capital = Total assets - Total liabilities

Total assets = 4,000 + 50,000 + 8,900 + 16,400 - (50,000 x
10%)
= $74,300
Total liabilities = 7,500 + 500 + 7,800 + 2,000
= $17,800
Ending capital = 74,300 - 17,800
= $56,500
17.2 Statement of Affairs
Is similar to a Statement of Financial Position except that it is prepared without
the use of double entry recording rules.
Format:
Statement of Affairs at
“date”
$ $ $
Accumulate Boo
Cos d k
t Depreciatio valu
n e
Non-current Assets
List down all non-current assets XX XX XX
: XX XX XX
: XX XX XX
XXX XXX XXX
Current Assets
Trade receivables XX
Less: Provision for doubtful debts (XX) XX
Inventory (Not applicable for service business) XX
Other receivables (prepaid expense/accrued XX
income)
Petty cash XX
Cash / Bank XX
XX
Current liabilities
Trade payables XX
Other payables (accrued expenses / prepaid XX
income)
Bank overdrafts XX XX
Net current assets (current assets - current liabilities) XX
(non-current assets + net current assets) XXX
Financed by
Capital
Balance XXX
XXX
Format for Statement of Affairs Including Calculation of Profit for the year
Statement of Affairs at “date” (Extract)

$ $ $
Financed by
Capital
Opening balance XX
Add: Additional capital XX
Add: Profit for the year (OR Less: Loss for the year) XX
XX
Less: Drawings (XX)
XXX
17.3 Account Analysis Method
Profit or loss for the year is determined by reconstructing various ledger
accounts to determine the missing information on income and expenses.
17.3.1 Determining Sales

Total Sales Cash + Credit sales
= sales
Obtain Prepare
from Cash Sales
Book ledger
control
account
Net Sales Total sales - Sales

= return
17.3.2 Determining Total Purchases
Total Purchases Cash + Credit

= purchases purchases
Obtain Prepare
from Cash Purchases
Book ledger control
account
Net Purchases Total purchases - Purchases

= return
17.3.3 Determining Cost of Sales
Opening Total Other Cost Purchase Closing

inventory
+ purchase
+ of - s - Drawings - inventory
s Purchases Return
17.3.4 Determining Depreciation
Beginning New asset Sale of Ending

Net book
+ purchased
- non-current
- Net book
value asset value
17.3.5 Determining Operating Expenses
Opening Opening Current Curren

Expens
es
+ Prepaid - Accrued - period + t
balance balance Prepaid period
Paid
Accrue
d
17.3.6 Determining Other Income
Opening Opening Current Current

Income
Receive
+ Prepaid - Accrued - period + period
balance balance Prepaid Accrued
d
Example:
The following information pertains to the year ended 30 June 20X2:
(a) Extract from the Bank Account:

20X2 $ 20X2 $
Jun 30 Trade receivables 5,000 Jun Trade payables 3,250
30
Sales 1,800 Purchases 1,500
Rent 2,000
General expense 700
Fixtures 4,000
(b) Extract from Balance Sheet:

1 July 30 June
20X1 20X2
$ $
Inventory 4,500 2,800
Fixtures 2,000 5,000
Trade receivables 3,000 4,500
Trade payables 1,200 1,100
Prepaid rent 200 350
Accrued general expense 90 150
(c) During the year,

(i) Credit note received amounted to $400
(ii) Credit note issued amounted to $600
(iii) Debts written off was $200
(iv) Owner withdraw goods amounting to $600 for personal use
For the year ended 30 June 20X2, calculate the followings:

1. Net sales
2. Total inventory purchased
3. Cost of sales
4. Total expenses
5. Profit or loss for the year
Answer:
1. Cash sales = $1,800
Constructing the Sales ledger control account, we
have 3,000 + Credit sales - 5,000 - 200 - 600 =
4,500
Therefore, credit sales = $7,300
Total sales = 1,800 + 7,300 =
$9,100 Net sales = 9,100 - 600
= $8,500
2. Cash purchase = $1,500

Constructing the Purchases ledger control account, we
have 1,200 + Credit purchase - 3,250 - 400 = 1,100
Therefore, credit purchase = $3,550
Total inventory purchased = 1,500 + 3,550 = $5,050
3. Cost of sales = 4,500 + 5,050 - 400 - 600 - 2,800 = $5,750
4. Total expenses
= Rent expense + General expense + Depreciation of fixtures + Irrecoverable
debts
= (2,000 + 200 - 350) + (700 - 90 + 150) + (2,000 + 4,000 - 5,000) + 200
= $3,810
5. Loss for the year = Gross profit + Other income - Expenses

= (8,500 - 5,750) - 3,810
= - $1,060
17.4 Ratio Analysis Method
Key financial information necessary to derived at the profit or loss for the
year is determined by calculating a group of financial ratios that relates to
one another.
Gross Profit
1. Gross margin 100% = x %
= Revenue
Gross Profit
2. Mark-up on cost 100% = x %
= Cost of Sales
Example:
Mark-up of 20% unit cost $1 + markup $0.20 = unit selling price $1.20
Profit for the year

3. Profit margin= 100% = x %
Revenue
Cost of Sales
4. Rate of Inventory = x times
turnover= Average Inventory
Beginning inventory + Ending inventory

Average
inventory= 2
Chapter 18.Analysis and Interpretation
18.1 Liquidity Analysis
Liquidity measures the ability of a business to repay current debts and fund
its daily business operation.
1. Working Capital
refers to the excess of current assets over current liabilities.
Formula:
Working capital = Current Assets - Current Liabilities
Analysis:
Current asset increase , Working capital
increase Current asset decrease , Working
capital decrease Current liability increase ,
Working capital decrease Current liability
decrease , Working capital increase
Effects of insufficient working capital:

 Unable to repay debts on time
 Unable to enjoy cash discounts
 Unable to purchase goods on credit
 Unable to enjoy bulk discount
 Difficulty in retaining staffs
 Lose the trust of customers
Improving working capital:

 Owner may inject more capital
 Take up a long-term loan
 Sell excess non-current assets
2. Current ratio (or working capital ratio)
measures the ability of a business to pay its short-term debts using its
current assets.
Formula:
Current asset
Current ratio=  x :1
Current liability
Analysis:
Example:
(a) Current ratio = 1:1
means the business has $1 of current assets to pay every $1 of
current debt. Therefore, business is liquid.
(b) Current ratio = 0.8:1

means the business has $0.80 of current assets to pay every $1 of
current debt; Or
means the business can only fulfill 80% of its current debts with its
current assets. Therefore, business is not liquid.
3. Liquid ratio (or acid test ratio)

measures the ability of a business to pay its short-term debts using its
quick (or immediate) assets.
Formula:
Current asset  Inventory
Quick ratio  x :1
= Current liability
Analysis:
Example:
(a) Quick ratio = 1:1
means the business has $1 of quick assets to pay every $1 of current debt.
Therefore, business is liquid.
(b) Quick ratio = 0.8:1

means the business has $0.80 of quick assets to pay every $1 of current
debt
Or
means the business can only fulfill 80% of its current debts with is quick
assets. Therefore, business is not liquid.
4. Rate of Inventory Turnover
measures the rate at which a business sell and replenishes its inventory
during the financial year.
Formula:
Cost of Goods Sold
Rate of Inventory = x times
Turnover= Average Inventory
Beginning inventory + Ending inventory

Average
inventory= 2
Analysis:
Example:
Inventory turnover rate of 4 times means the business replenishes its
inventory 4 times a year or every 3 months.
High inventory turnover rate means business is selling its inventory quickly.
Low inventory turnover rate means business is unable to sell its
inventory quickly and is holding too much stock.
Effect of inventory on liquidity and profitability:
High inventory level Low inventory level
Cash is tied up causing liquid Unable to meet customer

ratio to decrease demand resulting in lost sales
which leads to:
Increase in expenses which
decrease in profit for the
reduces profit for the year due
to: year lesser cash
High storage and Increase in cost of sales which

handling cost reduces profit for the year due
Obsolescence to:
Theft frequent replenishing
which results in high cost
of purchase
Improving inventory management:

Increase sales of inventory
by reducing selling
price
giving trade discounts or special
promotions advertising to raise brand
awareness
5. Trade receivables turnover
measures the average time (days) a business takes to collect from
its credit customers during the financial year.
It indicates how efficient a business is in managing its trade receivables.
Formula:
Trade receivables
Trade receivables  365  x days
turnover = Credit sales
Analysis:
Example:
Trade receivable turnover of 30 days means the business takes an
average of 30 days to collect from its credit customers.
High trade receivables turnover

(days) Not efficient in collecting
its debts Lead to cash flow
problem
6. Trade payables turnover

measures the average time (days) a business takes to pay its credit
suppliers during the financial year.
It indicates how well a business manages its cash outflow.
Formula:
Trade payables
Trade payables  365  x days
turnover= Credit purchases
Analysis:
Example:
Trade payable turnover of 30 days means the business takes an average of
30 days to repay its trade payables.
High trade payable turnover

(days) Advantages:
increase business' working
capital free short-term cash
flow
Disadvantages:
suppliers may not want to offer trade credit or extend further credit
line business loses out on cash discount
18.2 Profitability Analysis
Profitability measures the ability of a business to generate enough income to
cover its expenses.
Purpose of profitability analysis:

Identify areas to improve revenue
Identify areas to improve operating efficiency
Allow investors to determine their return on investments
Ratios used to measure profitability:

Gross Profit
1. Gross 100% = x %
margin= Revenue
Analysis:
Gross margin of 10% means for every $1 of net sales revenue earned, the
business earns $0.10 of gross profit.
A high / increase in gross margin suggest:

 High / increase in selling price
 Low / decrease in cost price
Gross Profit
2. Mark-up= 100% = x %
Cost of Sales
Analysis:
Mark-up of 10% means for every $1 cost, the business earns $0.10 of gross
profit.
A high / increase in mark-up on cost suggest:

 High / Increase in selling price
 Loss of quantity sold if inventory turnover rate decrease
Profit for the year
3. Profit margin= 100% = x %
Revenue
Analysis:
Profit margin of 10% means the business earns a profit of $0.10 on every
$1 of net sales revenue earned.
A high / increase in profit margin suggest:

 Increase in gross profit
 Decrease in expenses
Net Profit before Interest

4. Return on capital employed 100% = x %
(ROCE) = Capital Employed
Capital Employed = Issued shares + Reserves + Non-current liabilities
Analysis:
Return on capital employed of 10% means for every $1 of capital invested
into the business, the business generates a profit of $0.10.
A high / increase in return on capital employed suggest:

 Business is profitable
 High return on investment
Analysis:
Scenario Possible reasons / analysis
1. Gross margin  Increase in quantity sold

Inventory turnover rate  Low selling price or
 High cost price
2. Gross  Increase in selling price

margin  Decrease in quantity sold
Mark-up  Lower sales
3. Gross  Decrease in gross profit

margin  Higher percentage decrease in
expenses
Profit
margin
4. Profit margin  Profit earned is low compared to

Return on capital employed the high amount of capital
invested
 Business is worth investing if
profit continues on an
increasing trend
Improving profitability:
Source for cheaper supplier to reduce cost of purchase of
inventory Hold promotion to increase sales
Increase product variety to attract more
customers Source for other income
Reduce expenses through cost cutting measures

Accounting Resource O Level

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Accounting Resource O Level

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Table of Contents

Chapter 1. Accounting Principles and Policies ................................................. 1

Chapter 2. Business Documents and Books of Prime Entry ............................. 7

Chapter 3. Trial Balance ................................................................................. 14

Chapter 4. Correction of Errors ...................................................................... 16

Chapter 5. Bank Reconciliation ...................................................................... 18

Chapter 6. Trade receivables and Trade payables .......................................... 21

Chapter 7. Capital and Revenue Expenditure and Receipts ............................ 26

Chapter 8. Accounting for Depreciation ........................................................ 29

Chapter 9. Other Payables and Other Receivables......................................... 38

Chapter 11. Valuation of Inventory .............................................................. 45

Chapter 12. Sole Traders .............................................................................. 46

Chapter 13. Partnerships ............................................................................... 52

Chapter 14. Limited Company ..................................................................... 61

Chapter 15. Clubs and Societies ................................................................... 66

Chapter 16. Manufacturing Accounts ........................................................... 69

Chapter 17. Incomplete Records ................................................................... 73

2. Money Measurement principle states that only transactions measured in

Unable to measure in dollar ($) value

Capital account: Owner contribut es assets

Example where concept is applied:

Year 1 Year 2 Year 3 Year ∞

Depreciatio Reducin Reducin Reducin Reducin

Depreciation of Non-current assets are reported at net book value

Provision for Trade receivables are reported at net trade

Inventor Inventory are valued at lower of cost and net

Depreciation of Depreciation is recorded as an expense in Income

Provision for Doubtful debts are recorded as an expense in

7. Historic Cost principle states that transactions are to be recorded at the

Statement of financial Statement of financial

The value of a transaction or an item is compared to the size and nature of

This concept is asked in conjunction with questions on Capital and

9. Going Concern principle states that a business is assumed to operate

Examples where concept is applied:

10. Realisation principle states that business incomes should be regarded as

This explains the need to prepare Income Statement and Statement of

12 months 12 months 12 months 12 months 12 months

Prepar Prepar Prepar

Transactions Business documents

Business Transactions / Uses

2. Credit note Returning of goods by credit customers or to credit supplier

3. Debit note When an original invoice to a credit customer or from a

4. Receipt Cash purchases and sales; acknowledgement of payment

5. Payment voucher Record payment to creditors

6. Petty cash Record payment through petty cash

Transactions Business documents Journals

Types of Books of Prime Entry:

Books of prime entry Transactions recorded

1. Sales Journal Credit sales of goods

2. Sales Return Journal Returning of goods by credit customers

3. Purchase Journal Credit purchase of goods

4. Purchase Return Journal Returning of goods to credit suppliers

5. Cash Book Cash and Bank transactions

6. Petty Cash Book Petty cash transactions

7. General Journal All transactions not recorded in the above journals

2.2.3 Special Journals

1. Sales Journal Debit Sales ledger control

2. Sales Return Journal Debit Sales Return

3. Purchase Journal Debit Purchases

Debit Cash Book Credi

Cash discount Cash discount received

To calculate cash discount in percentage,