1

2
Sole Trader’s Financial Statements

Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $ Cost Accumulated Net Book
Sale /Revenue xxx Depreciation Value
Less: Sale return (Return inward) (xx) $ $ $
Net Sale xxx Non Current Asset:
Less: Cost of Sale Building xxx xxx xxx
Opening Inventory xxx Motor vehicle xxx xxx xxx
Purchase ( xxx—goods drawings) xxx xxx xxx xxx
Less: Purchase return (Return outward) (xx) Current Asset:
Add: Carriage inward xxx xxx Closing inventory xxx
xxx Trade receivable xxx
Less: Closing Inventory (xx) (xx) Less: Provision for doubtful debts (xx) xxx
Gross Profit xxx Cash at bank xxx
Add: Income Cash in hand xxx
Discount Received xxx Other receivable: (P:E ; A: I) xxx xxx
Commission received xxx xxx
Rent received xxx
Capital xxx
Profit on disposal of Non Current Asset xxx
Add: Profit for the year xxx
Provision for doubtful debts (decrease) xxx xxx
Less: Drawings (Cash drawings + Goods drawings) (xx)
Less: Expenses
xxx
Discount Allowed xx
Non Current Liabilities:
Carriage outward xx
Bank Loan xxx
Electricity, Water charges, Insurance, Rent xx
Current Liabilities:
Provision for depreciation of NCA xx
Trade payables xxx
Provision for doubtful debts (increase) xx
Bank overdraft xxx
Loss on disposal of NCA xx
Other payable: (A: E ; P : I) xxx xxx
Administration expenses (xxxx + accrual) xx
xxx
Selling and distribution expenses (xxxxx - prepaid) xx (xxx)
P:E—Prepaid: Expenses A:I—Accrual: Income
Profit for the year xxx 3
A:E-Accrual: Expenses P:I– Prepaid: Income
Partnership’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $ $ $ $
Sale /Revenue xxx Non Current Asset: xxx
Cost of Sale (xx) Current Asset: xxx
Gross Profit xxx
xxx
Less: Expenses (xx)
Capital Account: A xxx
Loan interest to partners
B xxx
Profit for the year xxx Current Account: A (xxx)
Add: Interest on Drawing B xxx
A (Drawing x %) xxx
xxx
B (Drawing x %) xxx xxx
Non Current Liabilities: xxx
xxx
Current Liabilities: xxx
Less: Interest on Capital
xxx
A (Capital x %) xxx
B (Capital x %) xxx Partners’ Current Account
Less: Partners’ salary Date Detail A B Date Detail A B
A xxx 2019 $ $ 2019 $ $
B - (xxx) Jan 1 Balance b/d xxx Jan 1 Balance b/d xxx
xxx Drawing xxx xxx Dec 31 Interest on capital xxx xxx
Residual Profit / Profit to be shared: Interest on drawing xxx xxx Partners’ salary xxx -
A (5000 x 1/2) xxx Trans: to capital Interest on loan xx -
B (5000 x 1/2) xxx (xxx) Residual loss xxx xxx Residual profit xxx xxx
- Dec 31 Balance c/d xxx Dec 31 Balance c/d xxx
Partners’ Capital Account xxx xxx xxx xxx
Date Detail A B Date Detail A B 2020 2020
$ $ 2019 $ $ Jan 1 Balance b/d xxx Jan 1 Balance b/d xxx
Jan 1 Balance b/d xx xx
Dec 31 Balance c/d xx xx Dec 31 Bank (additional capital) xx xx
Partner owed to the business Partner owed by the business
xx xx xx xx
Asset Liability
Jan 1 Balance b/d xx xx 4
Partnership’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $
$ $ $
Sale /Revenue xxx Non Current Asset
Cost of Sale (xx)
Gross Profit xxx Current Asset
Less: Expenses (xx) xxx
A B Total
Loan interest to partners
$ $ $
Profit for the year xxx Capital Account xx xx xxx
Add: Interest on Drawing
A (Drawing x %) xxx Current Account:
B (Drawing x %) xxx xxx Opening balance xx (xx)
Interest on capital xx xx
xxx
Partner's salary xx -
Less: Interest on Capital
Residual profit xx xx
A (Capital x %) xxx xxx xxx
B (Capital x %) xxx Drawing xx xx
Less: Partners’ salary Interest on drawing xx xx
Residual loss xx xx
A xxx
xxx xxx
B - (xxx)
Closing balance xx (xx) xxx
xxx xxx
Residual Profit / Profit to be shared: Non Current Liabilities xxx
A (5000 x 1/2) xxx
Current liabilities xxx
B (5000 x 1/2) xxx (xxx)
xxx
-
Partners’ Capital Account
Date Detail A B Date Detail A B
$ $ 2019 $ $
Jan 1 Balance b/d xx xx
Dec 31 Balance c/d xx xx Dec 31 Bank (additional capital) xx xx
xx xx xx xx
Jan 1 Balance b/d xx xx 5
Limited Company’s Financial Statements
Income Statement for the year ended 31 December 2019 Statement of Financial Position at 31 December 2019
$ $ $ $ $
Sale /Revenue xxx Non Current Asset: xxx
Less: Cost of Sale (xx) Current Asset: xxx
Gross Profit xxx xxx
Add: Income xxx Capital & Reserve:
Less: Expenses (xxx)
Ordinary Share Capital xx
Operating Profit (PBIT– Profit before interest and tax) xxx Preference Share Capital xx
Less: Finance Charges Share premium xx
Debenture interest/ Loan interest xxx Retained earning / profit xx
Preference share dividend xxx (xxx)
General reserve xx
Profit for the year (PAT– Profit after tax) xxx xxx
Non Current Liabilities:
Statement of Changes in Equity for the year ended 31 December 2019
% Debenture xx
Current Liabilities: xxx
Ordinary
Share Retained General xxx
Share Total
Premium Earning Reserve
Capital
No. of shares x Price per share = Share Capital
$ $ $ $ $

Opening Balance xx xx xx xx xxxx

Dividend = no. of shares x dividend rate per share (e.g $0.05 per share)
+ Profit for the year - - xx - xx
Dividend = Share capital x dividend rate %
- Ordinary share dividend :

Paid/ Final dividend for last year (xx) (xx)

Profit Margin = Profit after tax x 100
Paid/ Interim dividend for this year (xx) (xx) Revenue
- Transfer to general reserve - - (xx) xxx -
Return on Capital Employed = Profit before interest and tax x 100
+ New share issues xx xx - - xxx Capital employed

Closing Balance xxx xxx xxx xxx xxx 6

Manufacturing’s Financial Statements Income Statement for the year ended 31 December 2019
$ $ $
Manufacturing Account for the year ended 31 December 2019
Sale /Revenue Xxx
$ $
Less: Cost of Sale
Cost of Raw Material Consumed :
Opening Inventory of Finished goods Xx
Opening inventory of Raw material xx
Purchase of Finished goods xx
Purchase of Raw material xx
Less: purchase return of finished goods (xx)
Less: Purchase return of Raw material (xx)
Add: carriage inward of finished goods xx xxx
Add: Carriage inward of Raw material xx xxx
Production cost of Finished goods xxx
Closing inventory of Raw material (xx)
Less: Closing Inventory (xx) (xx)
xxx
Gross Profit xxx
Add: Direct expenses
Add: Manufacturing profit xxx
Direct wages / labour (operation salary) xx
Less: Expenses
Direct expenses / Royalities xx
Depreciation of office xx
xx
Rent (office %) xx
Prime Cost xxx
Insurance (office %) xx xx
Add: Production Overhead/Indirect cost/ Factory overhead
Profit for the year xxx
Factory wages (Supervisor salary) xx
Electricity (+ accrual ; - prepaid) xx Statement of Financial Position at 31 December 2019
Rental (Factory %) xx $ $
Insurance (Factory %) xx Non Current Asset: xxx
Depreciation of Machinery xx Current Asset:
Depreciation of Tools xx Closing inventory: Raw material xxx
Work in progress xxx
xx Finished goods xxx xxx
Add: Opening inventory of Work in progress xx xxx
Less: Closing inventory of Work in progress (xx) Capital xxx
xxx
Non current liabilities: xxx
Production cost of Finished Goods / Cost of production xxx Current liabilities: xxx
Add: Manufacturing profit ( cost of production x %) xxx xxx
Transfer to income statement xxx 7
Club and Societies’s Financial Statements Bar Trading/Refreshment/ Shop/ Cafe Account
Accumulated fund at 1 Jan 2019
$ $
$ $
Sale/ Revenue/ Cash taking xxxx
Assets: Club house (cost - acc. Depn:) xx
Less: Cost of sale
Cash at bank xx
Subscription in arrear xx Opening inventory xx

Other receivable xx xxx Purchase (payment to supplier+ c/d—b/d) xxx

Lia: Trade payables xx Less: Closing inventory (xx) (xxx)
Subscription in advance xx xxx
Other payables xx Less: bar expense
Loans xx (xx)
Wages (Bar) xx
Accumulated fund at 1 Jan 2019 xxx
Rental fees ( bar %) xx

(xx)

Profit from bar/ Refreshment / Shop / Café xxx

Subscription Account Income and Expenditure account for the year ended 31 Dec 2019
2019 $ 2019 $ $ $
Jan 1 Balance b/d (arrear) xx Jan 1 Balance b/d (advance) xx Income:
Dec 31 Income & Expenditure Dec 31 Bank/ Receipt & Payment A/c xx Subscription for the year xxx
?
(Subscription for the year) (Subscription received) Profit from bar /Refreshment/ Shop/ Café xxx

Dec 31 Irrecoverable debt xxx Donations xxx

Dec 31 Balance c/d (advance) xx Dec 31 Balance c/d (arrear) xx xxx

xxx xxx Expenditure:

Depn: of club house xxx
Jan 1 Balance b/d (arrear) xx Jan 1 Balance b/d (advance) xx
Wages (Club) xxx
Rent (Club %) xxx
Electricity xxx
*Loss from bar
Irrecoverable debt xxx
Surplus/ Deficit for the year xxx
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 Club and Societies’s Financial Statements Receipt and Payment Account
Statement of Financial Position at 31 December 2019 (Bank account) (Cash Basic)
$ $ $ 2022 $ 2022 $
Non current asset: xx 1-Jan Balance b/d xxx 1-Jan Balance b/d (overdraft) xx

Current asset:
31-Dec Subscription receipt xxx 31-Dec Loan (repayment) xx
Closing inventory xx
Loan interest xx
Cash at bank xx
Other receivable xx Loan xx Purchase of NCA xx
Subscription in arrear xx Sale proceed of NCA xx Repair to NCA xx
xx
xxx Tournament receipt xx Tournament expenses xx
Other expenses xx
Accumulated funds xx
Add: Surplus / Less: Deficit xx 31-Dec Balance c/d (overdraft) xx 31-Dec Balance c/d xxx
xx xxxx xxxx
2023 2023
Non current lia: xx
1-Jan Balance b/d xx 1-Jan Balance b/d (overdraft) xx
Current lia:
Trade payable xx
Other payable xx
Subscription in advance xx
xx
xxx

Trading Business Service Business

$ $ $ $ Trading Business Club and Societies
Sale /Fees receipt
(Profit making organization) (Non-Profit making organization)
Sale xx from clients xx
Less: Cost of sale Cash book Receipt and Payment account
Opening inventory xx
Purchase xx Income Statement Income and Expenditure account
Closing inventory (xx) (xx)
Gross profit xx Profit for the year Surplus for the year
Add: Income xx Add: Income xx
Loss for the year Deficit / excess for the year
Less: Expenses Less: Expenses
xx xx Capital Accumulated Funds
xx (xx) xx (xx)
Profit for the year xxx Profit for the year xxx 9
Bank Reconciliation Statements Bank Statement A copy of a customer’s bank account, sent to the customer at regular
intervals.
Step (1) Tick (compare)
It includes items that are not recorded by the business.
Step (2) Cash book (Bank column only)
Bank • A statement prepared by business at regular intervals
Date $ Date $ reconciliation statement • To check the balance of the cash book and the balance of bank
31 Dec Bal b/d 31 Dec Bal b/d (overdraft) statement
Standing order
Credit transfer Direct debit
Advantages/Reason for preparing Bank Reconciliation Statement
1. Obtain the correct bank balance
by credit customer 2. Identify the errors in the bank statement/ bank account in the cash book
Dishonoured cheque 3. Assist/ helps in discovering fraud
Bank interest Bank interest 4. Identify amounts that not credited yet/ that not presented yet
Bank charges
Why the bank statement balance is on the opposite side to that shown in the cash book?
Error Error
* The bank statement is a copy of the account of the business as it appears in the books of the
31 Dec Bal c/d 31 Dec Bal c/d
bank. The bank statement is prepared from the viewpoint of the bank.
* The bank account in the cash book is prepared from the viewpoint of the business.
1 Jan Bal b/d 1 Jan Bal b/d
Dishonoured cheque A cheque which has been returned unpaid by the bank.
(SOFP: CA) (SOFP: CL) Reason for Dishonoured cheque
• Drawer has insufficient funds in accounts.
Step (3) Bank Reconciliation Statement • Incomplete cheque/ Out of date/Cheque unsigned/ Amount in words and figures disagree
$
Balance as per Cash Book xxx Dr.bal Reason for difference between cash book balance and bank statement balance
Add: Unpresented cheque xxx • Items on bank statement not shown in cash book
(accept individual items, bank charges, bank interest, etc.)
Less: Uncredited cheque (xx) • Items in cash book not on bank statement
Balance as per Bank Statement xxx Cr. bal (accept individual items, cheques not yet presented, etc.)
Alternatively; • Errors in cash book or made by bank (accept only one type of error)
• Dishonoured cheques
Bank Reconciliation Statement
$
Balance as per Bank Statement (xxx)
Add: Uncredited cheque xxx
Less: Unpresented cheque (xx)
Balance as per Cash Book xxx
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Standing order A bank's customer gives instructions for the automatic Unpresented Cheque that have not been cleared by the bank and have not yet been
payment to another organisation of a fixed amount at regular cheque recorded on a business's bank statement.
intervals. (Timing difference)
Direct debit Authority is given to a bank by one of its customers to make Uncredited deposits Amounts paid into a business's bank statement but which have not yet
payments on its behalf to another organisation. The amount (Timing difference) been recorded on the bank statement as credit entries.
paid will be the sum requested by that organisation up to a
specified limit.
Credit transfer The automatic transfer of funds into a business's bank account
by one of the business's customers.

Bank charges Payments deducted automatically from a current account at

regular intervals as a reward to the bank for operating the
account.

Capital Expenditure Money spend on acquiring, improving and installing Revenue Expenditure Money spend on the running on a business on a day to day basis.
non-current assets.

E.g Purchase of NCA, Legal costs, Installation cost, Cost of carriage on NCA, E.g Wages, Insurance, Rent
Upgrades to existing NCA
Capital Receipt Amount received which do not from part of day to day Revenue Receipts Amount received in the day to day trading activities and other
trading activities. items of income.

E.g Receipt of loan, Additional capital, Proceeds of sale of NCA E.g Sales, Commission received, Interest received, Rent received

Why does the distinction between capital and revenue matter?

Revenue receipts and expenditure directly affect a business’ income statement and so if item are wrongly classified, the business’ profit or loss will be inaccurate.
On the other hand, capital receipts and expenditure directly affect a business’s statement of financial position. If items are wrongly classified/recorded a statement of financial
position could show incorrect totals for assets, liabilities and capital.

Errors in end of year financial statement can have serious consequences. Any inaccuracies in profit, capital or asset values could mislead those who depend on these figures
and result in poor decision making.
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Sale ledger control account A technique for checking the arithmetical accuracy of Advantages/Benefits of maintaining Sale Ledger Control Accounts
the sale ledger • Helps to prove arithmetical accuracy of Sale ledger
Purchase ledger control account A technique for checking the arithmetical accuracy of • Helps to reduce fraud
the purchase ledger • Can locate errors/ assist in the location of errors
• Easy access to total trade receivables figures/ provide total of trade receivable
amount
• Quicker production of financial statements/ provide SOFP to prepare
Sale Ledger Control Account
• Provide a summary of transaction relating to trade receivables
(Total Trade Receivable Account) Disadvantages of control accounts
• Compensating errors and errors of original entry in the business documents will be
2019 $ 2019 $
carried through
Jan 1 Balance b/d xxx Jan 1 Balance b/d (minor) xxx • Errors of omission will not be revealed
Dec 31 Credit sale xxx Dec 31 Sale return xxx • Errors of commission will not be revealed
Interest charged xxx Cash / Bank xxx Reason for preparing Trade Payable Control Account
Refund to customers xxx Discount allowed xxx • Provides the total of trade payables which can be used to prepare the financial
statements.
Dishonoured cheque xxx Irrecoverable debt xxx
• Helps to prevent fraud as the control accounts are normally produced by a different
Contra xxx person to those who produced the subsidiary ledger accounts.
Dec 31 Balance c/d (minor) xxx Dec 31 Balance c/d xxx Reason for a credit balance on Sale Ledger Control Account
xxx xxx • Overpayment by a credit customer of the amount owing
2020 2020
• Credit customer failing to deduct available cash discount
• Credit customer returning goods after settling the account
Jan 1 Balance b/d xxx Jan 1 Balance b/d (minor) xxx
• Credit customer making payment in advance
Purchase Ledger Control Account
Contra entry (control account)
(Total Trade Payable Account)
Reason: When a business deals with another business or organization as both a customer
2019 $ 2019 $ and a supplier, the balance of the two accounts are set off against one another to find the
Jan 1 Balance b/d (minor) xxx Jan 1 Balance b/d xxx net balance.
Dec 31 Purchase return xxx Dec 31 Credit purchase xxx (the entry is made when a sale ledger account is set off against a purchase ledger control
Cash / Bank xxx Interest charged account of the same person/business. Same person is the buyer and seller.)

Discount received xxx Refund from suppliers Xxx Meaning: a contra entry is an entry which appears in the purchase ledger control account
Contra xxx
(debit side) and also in the sale ledger control account (credit side)

Dec 31 Balance c/d xxx Dec 31 Balance c/d (minor) xxx Contra entry (cash book)
xxx xxx The transfer of cash to the bank, or the withdrawal of cash from the bank.
2020 2020 These transactions result in both the debit entry and credit entry for the transaction being
Jan 1 Balance b/d (minor) xxx Jan 1 Balance b/d xxx recorded in the cash book columns. 12
Accrual and Prepayment Inventory Account
Income Current Asset b/d—Dr 2019 $ 2019 $

c/d—Cr Jan 1 Balance b/d xxx Dec 31 Income Statement xxx

Accrual
(Opening inventory)
Expense Current Lia
(Arrear, outstanding, Dec 31 Income Statement xxx Dec 31 Balance c/d xxx
unpaid, due, owed) (Closing inventory)
Income * Current Lia b/d—Cr
xxx xxx
Prepaid c/d—Dr
2020

(in advance) Expense Current Asset Jan 1 Balance b/d xxx

Income Account
Trial balance at 31 December 2022 Trial balance at 31 December 2022
2019 $ 2019 $ Dr Cr Dr Cr
Jan 1 Balance b/d (Accrual) xxx Jan 1 Balance b/d (Prepaid) xxx $ $ $ $
Mar 31 Bank xxx
Dec 31 Income statement ? Jun 30 Bank xxx
Sale 10,000 Gross profit 3,000
Sep 30 Bank xxx Purchase 8,000
Dec 31 Balance c/d (Prepaid) xxx Dec 31 Balance c/d (Accrual) xxx Inventory at Inventory at
1 January 2022 2,000 31 December 2022 3,000
xxx xxx
2020 2020
Jan 1 Balance b/d (Accrual) xxx Jan 1 Balance b/d (Prepaid) xxx
Additional information:
Expense Account Inventory at 31 December 2022 valued $ 3,000
2019 $ 2019 $
Jan 1 Balance b/d (Prepaid) xxx Jan 1 Balance b/d (Accrual) xxx
Mar 31 Bank xxx
Jun 30 Bank xxx Dec 31 Income Statement ??
Sep 30 Bank xxx
Dec 31 Balance c/d (Accrual) xxx Dec 31 Balance c/d (Prepaid) xxx
xxx xxx
2020 2020
Jan 1 Balance b/d (Prepaid) xxx Jan 1 Balance b/d (Accrual) xxx 13
Depreciation of Non Current Asset Full year depreciation Straight line method Reducing balance method
$ $
2016 1-Jan cost 1,000 1,000
Depreciation method: 31-Dec Depn: (1000x10%) (100) (1000x10%) (100)
1 Straight line method = Cost - Residual value 2017 1-Jan NBV 900 900
useful life 31-Dec Depn: (100) (900x10%) (90)
= Cost x % 2018 1-Jan NBV 800 810
31-Dec Depn: (100) (810x10%) (81)
2 Reducing balance method = 700 729
Year 1 Cost x %
Year 2 Net book value x % Monthly depreciation / Straight line method Reducing balance method
(Cost - Acc.depn:) x % Date of purchase $ $
2016 1-Oct cost 1,000 1,000
3 Revaluation method = Opening + Additional - Closing 31-Dec Depn: (1000x10%x3/12) (250) (1000x10%x3/12) (250)
balance balance 2017 1-Jan NBV 750 750
31-Dec Depn: (1000x10%) (100) (750x10%) (75)
2018 1-Jan NBV 650 675
31-Dec Depn: (100) (675x10%) (68)
550 607

Straight line method: 10 % on Cost Reducing balance method: 10% on Net Book Value Revaluation Method
Provision for depn: of NCA Provision for depn: of NCA Small Tools A/c
$ $ $ $ 2019 $ $
2019 2019 1-Jan bal b/d 1000
31-Dec I/S 100 31-Dec I/S 100 31-Dec I/S 100
31-Dec bal c/d 100 (1000*10%) 31-Dec bal c/d 100 (1000*10%) 31-Dec Bal c/d 900
100 100 100 100 1000 1000
2020 2020 2020
1-Jan bal b/d 100 1-Jan bal b/d 100 1-Jan Bal b/d 900
31-Dec I/S 100 31-Dec I/S 90 1-Jun Bank 200 31-Dec I/S 200
31-Dec bal c/d 200 31-Dec bal c/d 190 (1000-100)*10% 31-Dec Bal c/d 800
200 200 190 190 1100 1000
2021 2021 2021
1-Jan bal b/d 200 1-Jan bal b/d 190 1-Jan bal b/d 800
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Disposal of Non Current Asset Irrecoverable debts and Provision for doubtful debt
Non Current Asset Account Trade receivable Account
2019 $ 2019 $ 2019 $ 2019 $
Jan 1 Balance b/d xx Jan 1 Balance b/d xx Dec 31 Irrecoverable debt xx
Jan_Dec Cash/ Bank xx Jan_Dec Disposal xx Dec 31 Balance c/d xx
Dec 31 Balance c/d xx xx xx

xx xx 2020

2020 Jan 1 Balance b/d xx

Jan 1 Balance b/d xx

Provision for depreciation of Non Current Asset Account Irrecoverable Debt Account
2019 $ 2019 $ 2019 $ 2019 $
Jan 1 Balance b/d xx Dec 31 Trade receivable xx Dec 31 Income statement: xx
Jan_Dec Disposal xx Dec 31 Income statement xx expense
(Depn: for the year) xx xx
Dec 31 Balance c/d xx Recovery of debt Account
xx xx 2019 $ 2019 $
2020 Dec 31 Income statement: Xx Dec 31 Cash/Bank xx

Jan 1 Balance b/d xx Income

Disposal of Non current asset Account xx xx

Provision for doubtful debt Account

2019 $ 2019 $
2019 $ 2019 $
Jan_Dec Non current asset xx Jan_Dec Provision for depn: xx
Jan 1 Balance b/d xx
Jan_Dec Cash/Bank/ Receivable xx
(trade receivable x %)
(Sale proceed)
Dec 31 I/S: Income xxx Dec 31 I/S: Expense xx
Dec 31 I/S: Profit ??? Dec 31 I/S: Loss ???
Dec 31 Balance c/d xx
xx xx
(Remaining

trade receivable x %)
xx xx
Depn: for the year = [ ( Cost - Disposal ) - ( Acc.depn: - Disposal) ] x %
Jan 1 Balance b/d xxx
(RBM) Cost Acc.depn: 15
 Profitability Ratio Liquidity Ratio Income statement ratio Statement of financial position ratio

1. Gross profit margin 1. Current ratio (Working capital ratio) 1. Gross profit margin 1. Current ratio

2. Gross profit mark up 2. Liquid/Quick/Acid test ratio 2. Gross profit mark up 2. Liquid ratio

3. Profit to revenue margin 3. Trade receivable collection period 3. Profit to revenue margin 3. Trade receivable turnover

4. Return on Capital Employed (ROCE) (Debt collection period) 4. Rate of inventory turnover 4. Trade payable turnover
4. Trade payable payment period 5. Return on capital employed (ROCE)
5. Rate of inventory turnover

Profitability Ratio Liquidity Ratio

1. Gross Profit margin Gross profit x 100 1. Current ratio /Working capital ratio Current Asset
Revenue (2:1, Ideal, Benchmark) Current Lia:

2. Gross profit mark-up Gross profit x 100 2. Quick ratio / Liquid / Acid test ratio Current Asset - Inventory
Cost of sale Current Lia:

3. Profit margin Profit for the year (PAT) x 100 3. Trade receivable collection period Trade receivable x 365
Revenue (Trade receivable turnover days) Credit Sale
4. Return on Capital Employed (ROCE) Profit for the year (PBIT) x 100 4. Trade payable payment period Trade payable x 365
Capital Employed (Trade payable turnover Credit Purchase

Capital Employed Closing Capital + Non-Current Lia: • Sole Trader >>> Capital employed = Closing capital + Non current lia:

• Partnership>>> Capital employed = Capital account + Current account + NCL

• Company >>> > Capital employed = Closing capital & reserve + NCL

5. Rate of Inventory turnover Cost of sale

(in times) Average inventory Working Capital Ratio = Current Asset / Current Lia:

Rate of Inventory turnover Average inventory x 365 Working Capital = Current Asset—Current Lia:

(in days) Cost of sale

16
 Accounting Principles Stakeholders Interested

In order to calculate a true and fair profit, income for a financial

1 Owner • To assess the business is going well
1 Accrual (Matching) year is matched exactly with expenses that relate to that
accounting year whether paid or not. • To determine for additional capital
An accounting principle that required that where there is doubt, 2 Manager • To compare results with previous year
asset and profit values are understated rather than overstated,
and that losses and liabilities are overstated rather than • To compare with other business
understated.
• To assess the post performance
2 Prudence
Inventory valuation • To see where improvements can be make/ take remedial action
Lower of Cost and Net Realisable Value (NRV)
• To compare with budgets and forecasts
Cost = Purchase price + Carriage inward
3 Credit supplier • Check on liquidity position of the business
NRV = Expected selling price—selling cost
• Check the likelihood of the account being paid
All transactions should be recorded using original cost of
3 Historic cost • Check the trade payable payment period
purchase
• To help determine the credit period/ limit/ the length of credit
Financial statements should not take account of items which are allowed
4 Materiality
trivial or which may be misleading
4 Customer • Check on likelihood of supplies being continued

Accounting policies should be carried out in the same way year 5 Employee • to see if the business is likely to continue operating
5 Consistency
on year.
• To access job security

A business's transactions and the owner's private transactions are • To assess likelihood of wages increases
6 Business entity
recorded separately in a business's accounting system. 6 Bank/lender • Check on security for overdraft/ loan to check collateral in case of
bankruptcy
Every transaction has two aspects leading to the making of two
7 Duality • Check the ability of the business to repay any loan/overdraft when
entries for each transaction in the accounting system.
due

In accounting, only transactions that have a definite monetary • Check the ability of the business to pay any interest when due
8 Money measurement
value are recorded. 7 Investors • To see the returns of the business for their investments

While a business continues to trade, assets are valued at cost less

9 Going concern depreciation. When a business ceases to trade, assets are valued 8 Government/ • Check the likelihood of the tax amount of the business.
at their realisable value.
tax authority
A sale occurs when the customers pays or when an invoice is
10 Realisation
issued for the goods and services. 17
 Sole Trader (Sole Proprietor) Partnership Limited company
Person 1 owner 2~20 partners unlimited shareholders

Advantages easy set up sharing loss/ responsibilities Better access to capital

Quick decision making better decision making Separate legal entity
complete control/all profits to owner additional finance available Limited liability of owners

Disadvantage difficulty raising capital /financing sharing profit costly and complicated set up
no check and balance on decisions taken Unlimited Liability Public disclosure of accounts
Unlimited Liability disagreement may occur Limited role of shareholders

Income Statement for the year ended 31 Dec 2021 Income Statement for the year ended 31 Dec 2021 Income Statement for the year ended 31 Dec 2021
$ $ $ $ $ $
Revenue Revenue Revenue
Cost of sale Cost of sale Cost of sale
Gross profit Gross profit Gross profit
Add: Income Add: Income Add: Income
Less: Expenses Less: Expenses Less: Expenses
Profit for the year Operation Profit (PBIT)
Add: Interest on drawing
Less: Interest on capital Less: Finance charges
Less: Partner's salary
Profit for the year Residual profit Profit for the year (PAT)

Statement of financial position at 31 Dec 2021 Statement of financial position at 31 Dec 2021 Statement of financial position at 31 Dec 2021
$ $ $ $ $ $
Non Current Asset Non Current Asset Non Current Asset
Current Asset Current Asset Current Asset

Capital Capital account: Capital and Reserve:

Add: Profit for the year Ordinary share capital
Less: Drawing Current account: Preference share capital
Retained earning/profit
General reserve

Non Current Lia: Non Current Lia: Non Current Lia:

Current Lia: Current Lia: Current Lia:
18
 Bookkeeping—Bookkeeper Accounting—Accountant
Source of Documents >> Books of Prime Entry >> Ledgers >> Trial Balance >> Financial Statements
1. Invoice 1. Purchase Journal 1. Purchase Ledger Purposes/ Reason of 1. Income Statement
2. Debit note 2. Sale Journal 2. Sale Ledger Trial Balance 2. Statement of Changes in Equity
3. Credit note 3. Purchase Return 3. General Ledger • A list of the balance of all 3. Statement of Financial Position
4. Statement of account Journal (nominal ledger) the ledgers accounts 4. Statement of Cash Flow
4. Sale Return Journal at a particular date
5. Till rolls 5. Disclosure
• To check arithmetical
6. Cash receipts 5. Cash Book
accuracy of the double entry
7. Copy of cash receipt 6. Petty Cash Book
system
8. Paying in slip counterfoil 7. General Journal
9. Bank statement
10. Cheque
11. Cheque counterfoil
12. Cash vourcher/ petty cash
vourcher

Books of Prime entry Books of original entry:

1 Purchase Journal Purchase of Inventory on credit from credit supplier • a book in which transactions are recorded before being entered in the ledger.
• this is where transactions are listed prior to being posted to the double entry records.
2 Sale Journal Sale of Inventory on credit to credit customer
3 Purchase Return Journal Return of Inventory to credit supplier Reason for using Books of Original Entry
4 Sale Return Journal Return of Inventory from credit customer
• Reduces the no. of entries in the ledger
5 Cash book Purchase/Sale of Inventory/NCA by cash or cheque
Receipt/Payment of income and expenses • Helps to gather and summarizes the accounting info:
• Helps in preparation of control accounts.
6 Petty Cash book Payment of small expenditure
• Group together similar types of transactions
7 General Journal 1. Opening entries • Allow work to be divided between several people
2. Purchase/Sale of NCA on credit • To see as a list of transactions.
3. Correction of errors
4. Year end transfer
5. Non regular transactions/Special entries
(e.g. Irrecoverable debt, Disposal)
Reason for dividing the ledger into three sections
Ledgers 1. Work can be shared among several people (division of work)
2. Easier for reference as same type of accounts are kept together
1 Purchase Ledger Trade payables Accounts
(locate details of transactions)
2 Sale Ledger Trade receivable Accounts 1. Easier to introduce checking procedures.
3 General Ledger (nominal ledger) Other than above. 2. Reduce possibility of fraud 19
 Source of document Books of original entry (Prime entry)
1 Invoice issued Sale day book
2 Invoice received Purchase day book
3 Debit note issued/ received No record
4 Credit note issued Sale return day book
5 Credit not received Purchase return day book
6 Statement of account issued/received No record. All the facts are already recorded before.
7 Till rolls Cash book (cash sale)
8 Cash receipt Cash book (payment of purchase/expenses)
9 Copy of cash receipt Cash book (Cash sale)
10 Pay in slip counterfoil Cash book (deposit to the bank account)
11 Bank Statement Cash book (Receipt or Payment of the cash book doesn’t record yet)
12 Cheque Cash book (Receipt of sale / income)
13 Cheque counterfoil Cash book (Payment of purchase / expenses)
14 Cash vourcher/ petty cash vourcher Petty cash book (Payment of expenses)

Supplier Sale Customer

Invoice
Sale Journal Purchase Journal
 Record
Return

 No Record Debit note

Sale Return Journal Purchase Return Journal

Record Credit note

At the end of month

 No Record Statement of account

20
What is Accounting? The selecting, classifying and summarizing of financial information in a way that provides owners of a business with useful information
to help them assess performance and plan future activity.
What is Bookkeeping? The recording of financial information, particularly transactions, in a systematic way.

Assets: resources with a monetary value that are owned by Liabilities: amount owed by a business to other Capital: the investment made by the owner of the
the business or amounts that are owed to the business. business, organisations or individuals. business. This is called ‘equity’ also.

Source documents Written documents that provide information from which accounting records can be prepared. They provide evidence that particular
transactions took place.
Purchase invoice The source document that provides information about goods purchased on credit and the amount due.

Purchase journal the book of prime entry used to record purchases of goods on credit. The information required to prepare this journal is taken from
purchase invoices.
Purchase ledger a part of the double entry system that is used to keep the personal accounts of trade payables.

Sale invoice the source document that provides information about goods sold on credit and the amount due.

Sale journal the book of prime entry used to record sales of goods on credit. The information required to prepare this book of prime entry is taken
from sales invoices
Sale ledger a part of the double entry system that is used to keep the personal accounts of trade receivables.

Nominal ledger (General ledger) A part of the double entry system that is used to keep all of the accounts, other than those for trade payables and trade receivables.

Debit note A source document used by a purchaser to notify the seller that goods are being returned and the amount that should be deducted
from the amount due.
Purpose of Debit note • Issued by the customer to request a reduction in an invoice.
• To notify the supplier of an overcharge/goods being returned/ faulty goods
Credit note The source document that records the amount to be deducted from a previous invoice to avoid a business being overcharged.
• for damaged goods/ faulty goods
• Goods returned
• Correction of overcharged
21
 Purchase return journal The book of prime entry used to list in date order details shown on credit notes relating to goods returned to suppliers.
Sale return journal The book of prime entry used to list in date order details shown on copies of credit notes relating to goods returned by customers.
Statement of account A summary of transaction that have taken place between a supplier and a credit customer. The statement provides a means of checking
the accuracy of accounts and of reminding customers how much they owe.
Purpose of statement of account
• to inform the buyer/customer of the amount due
• To provide a summary of the transaction for the month/period
• To allow buyer to check his records
Statement of account did not record in the ledger. Why?
• The statement is a summary of the transactions which have already been recorded in the accounting records.
Remittance advice To inform the supplier of the transaction being settled.

Ledger The book in which all financial accounts are kept.

There are three types of ledger.
1) Purchase ledger (in which Trade payables accounts)
2) Sale ledger (in which Trade receivables accounts)
3) Nominal ledger/ General ledger (other accounts)
Reason for dividing the ledger into three sections
1. Work can be shared among several people (division of work)
2. Easier for reference as same type of accounts are kept together (locate details of transactions)
3. Easier to introduce checking procedures.
4. Reduce possibility of fraud

Double entry bookkeeping System Trial Balance : To check arithmetical accuracy of the double entry/ the ledger

Advantages: • Enables easier preparing of financial statements / easy reference Advantages: Ensure the arithmetical accuracy of the entries in the books as
both sides must be equal.
• Enables to check arithmetic accuracy of the financial records/
to locate errors Disadvantages: However, it does not identify all the types of errors.

• Provides check and balance to minimize possibility of fraud/

to prevent fraud

• Facilitates easier decision making/ easier for reference /

easier comparison/ better understanding of finances.
Disadvantages: • May be complex and harder to understand for non accountant
• Time consuming/ may be costly to set up
• Not all errors will be identified 22
General Journal A book of prime entry used to make the first record of transactions that it would not be appropriate to record in other
books of prime entry.
Purpose of the narratives in the Journal / • To explain the reasons for the entries which are to be made in the ledger
Useful of Narration in Journal • It is impossible to remember the reason for every entry/ useful because it may be necessary to recall the reason
• Transaction to be understood
• Journal entries sometimes involve 'out of ordinary' transaction/ non regular transactions. e.g disposal
• Can contain a reference to any prime documents

Cash book A book of prime entry in which all cash and bank transactions are recorded.
Cash book is books of original entry and also part of the double entry. Why?
It is a book of prime entry because it is written up from business documents.
It is part of the double entry system as it acts as ledger accounts for cash and bank.

Explain why there can never be a credit balance on the cash account?
• Cash is a physical asset so it is impossible to pay out more cash than is available.

Petty cash Small cash payments

Petty cash book The book of prime entry used to make the first record of petty cash payment/expenditure.
Imprest System At any time the amount paid out from the float plus remaining cash must equal the fixed amount of float.
Float money = Amount paid out from float + Remaining cash
$100 = $80 + $20
Reason for using petty cash book / • To control/limit small expenditures of the business by using imprest system
Advantages of using Petty cash book • To train the junior staffs/ allow the chief cashier to delegate some of work/ provides training for junior staffs.
• To reduce work load in a main cash book / to reduce the no. of entries in main cash book
• To remove small amount of cash payments from the main cash book
• Can help to reduce fraud
• The cash remaining and the vourchers received should equal the imprest

23
Discount Trade discount—a reduction in price given as a reward for buying in large quantities.
Cash discount—a reduction in the amount paid by credit customers, or to credit suppliers, when accounts are settled
within an agreed time limit (credit period)
Reason for Trade Discount 1. For buying in bulk
2. In the same trade/ same line of activity
3. Loyal/ regular customer
Reason for Cash discount To encourage trade receivable to pay promptly before an agreed time limit

Trade discount Cash discount State why it was necessary to deduct trade discount on the credit note.

Is given for bulk buying Is given for prompt payment * The amount on the credit note must equal the amount originally charged for
those goods, so trade discount must deducted from the list price.
Is calculated on the cost Is calculated on the amount due
* Trade discount was deducted on invoice or when purchased.
Is deducted on invoice and no record in the ledger Is recorded in the ledger

Trial Balance
• To check arithmetical accuracy of the double entry/ of the ledgers
• A summary of all the accounts in a business’s books of account which provides a check on the accuracy of the double entry.
Income Statement
• an end of financial period statement that shows a business’s gross profit and profit for that period (usually a year)
Statement of financial position
• a statement that shows an organization’s assets, liabilities and capital at a particular date, which is prepared at the end of a financial period.
Gross profit - the difference between the income from sale and the expenditure on goods sold.
Profit for the year - the difference between a business’ income (sales) and expenditure (purchase and expenses)

Reason for produce Income Statement

• To calculate the profit for the year
• To assess of the improvement of business
• To provide the calculation of ratios
• For comparison purposes
• To indicate where corrective action is needed
• To assist planning
• To provided required info to tax authorities
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 Error doesn't revealed by trial balance (Trial balance agree) Error revealed by trial balance (Trial balance disagree)

1. Error of Principle When item is entered in wrong class of account 1. Addition error Incorrect additions in any journal
2. Error of Commission Correct amount, wrong person/ account (overcasting or undercasting)
same class of account 2. Partial omission Making an entry on only one side of the account
(single entry)
3. Error of Omission Transaction is completely omitted
3. Entries do not match Entering a different amount on the debit side from the
4. Error of Original entry When an item is entered using incorrect amount amount on the credit side
e.g. $260>> $26; $100>>$1000 4. Error in writing up the trial balance
5. Complete reversal of entries Correct amount but wrong side of both accounts
5. Account balances are not picked up to the trial balance

6. Compensating errors Two or more errors are cancelled off by two other Reason for opening Suspense Account
errors • To balance the trial balance
Error of transposition When a number is recorded backward on both • Because there are errors on the trial balance
• To allow draft financial statement to be prepared
sides. E.g $123>>$132

Drawings
Double entry for Cash drawings
Drawings—Dr
Cash/Bank—Cr
Double entry for Goods drawings
Drawings— Dr
Purchase—Cr 25
Cause of depreciation 1. Physical deterioration/ wear and tear/ usage/ rust/ erosion/ rot and decay
2. Economical factor/ obsolescence
3. Time factor/ passage of time
4. Depletion / Technological factor
Reason for charging depn: • to spread the cost of the asset over its useful life to avoid the profit overstating
• To match the cost against the revenue of the years which benefit from the use of the asset.
• To recognise that most non-current assets lose value with the passage of time.
Depreciation Method 1. Straight line method
2. Reducing balance method
3. Revaluation method
Straight line method Where the annual depreciation charge is based on the cost of Easier to calculate/ only one calculation needed
(Equal instalment method) non current asset and is the same amount each year. Suitable when lose equal value each year
Depn: = Cost x % ; (Cost—Residual value) x % Suitable when annual usage is the same
Depn: = (Cost—Residual value) / useful life ; Should not change method without good reason/ apply consistency
Reducing balance method Where the annual depreciation charge is based on the value of Has to be recalculate each year
(Diminishing balance method) the non current asset at the beginning of the year under review. Suitable when lose more value in early years
Depn: = Net Book Value x % Shows a more realistic book value
Depn: = (Cost—Acc.depn:) x % Matches cost more closely with revenue
Unable to compare with previous accounts

Revaluation method Where the annual depreciation charge is based on comparing the estimated value of a group of non current assets at the end of
a financial year with the value at the beginning of the financial year.
Depn: = Opening balance of NCA+ Purchase of NCA—Closing balance of NCA
Reason: Straight line method • Principle of Materiality - not practical/ too many items/ too difficult/ too costly to depreciate each item separately.
could not used for hand tools • Do not depreciate by an equal amount each year
• May be certain amount of loss of tools each year.
Reason: Reducing Balance • More depn: is charged in the early years of its life.
method is appropriated for • Most of the benefit of the asset is gained in the early years.
Delivery vehicle. • The net book value is more likely to relate to the amount which will be realised on sale.
• The vehicle may become out of date quickly depending on the vehicle type.
• As repair costs are likely to be minimal in the early years, the overall charge to the income statement each year is more likely to be
fairly constant if the reducing balance method is used.
Reason for using
Revaluation method Low value items which are not easy to depreciate separately/ Not practical to keep detailed records of such assets.
26
Bad debt (Irrecoverable debt) An amount owing to a business which will not be paid by credit customer
Recovery of debts When a credit customer pays some or all of the debt previously written off as a bad debt.
Provision for doubtful debt an amount set aside from profits to take account of the likelihood that some trade receivable will not pay the amount due and so will reduce
the value of this asset on SOFP.
How maintaining a provision for doubtful debt as an application of prudence principle?
1. Ensures that the profit for the year is not overstated by anticipating losses.
2. Ensures that trade receivable are shown at a realistic level in SOFP.

How maintaining a provision for doubtful debt as an application of accrual principle?

1. In order to calculate a true and fair profit, income for a financial year is matched against with expenses that relate to that accounting year
whether paid or not.
2. The sale for which a business is unlikely to be paid are regarded as an expense of the year in which those sales are made.
To reduce the possibility of bad debts Credit Control Policy
1. Offering cash discount for prompt payment
Advantages: 1. cash received earlier
2. Charge interest on overdue account
2. Reduces the possibility of irrecoverable debts
3. Refuse further supply until the outstanding amount is paid
4. Reduce credit sale 3. May reduce bank overdraft interest charges

5. Issue invoices and monthly statement of account Disadvantages: 1. may lose customers/ may reduce sales
6. Introduce/ improve credit control 2. Will increases administration costs/ may reduce profit for the year
7. Obtain reference from new credit customers 3. May damage relationship with customers
8. Fix credit limit to each customers
Accrual Expenses—An amount owing for expenses at the end of a financial period
Prepaid Expenses—The payment of an expenses in advance of the accounting year to which it relates.

Other receivable—Term used on a statement of financial position to include prepaid expenses and income accrued.
Other payable—Term used on a statement of financial position to include accrued expenses and income prepaid.
Difference between Prepaid expenses are the advance payments for goods and services that are to be used up in the future and are classified as an
Prepaids and Accruals asset on the balance sheet, while expense accruals are liabilities, amounts that have been incurred but have not been paid by a
period's end.
Evaluate: It is necessary to account for other receivable and other payable. Why?
This is an application of the accrual concept.
To apply the concept, it is necessary to transfer to the income statement only the amounts covered by that period.
This allows a more meaningful comparison of financial statements year on year and allows the business to present a true and fair view of its financial position.
It is necessary to account for other receivable and other payable to present a more accurate view of profit and loss and / or current asset and current liability.
27
Partnership agreement Do not have agreement
1. Rate of Interest on drawing 1. No interest on drawing
2. Rate of Interest on capital 2. No interest on capital
3. Partner's salary 3. No partner's salary
4. Capital contribution 4. Profit and loss sharing equally
5. Profit and loss sharing ratio 5. 5% loan interest (Partner’s loan)
Advantages of being Partners rather than Sole Trader Disadvantages of being Partners rather than Sole Trader
1. Share losses 1. Share profit
2. Share responsibilities 2. Decision must be recognised by all partners
3. Share risk 3. Decision may be take longer to implement
4. Share decision making 4. One partner's action can blind other partner
5. Additional finance available 5. Disagreement may occur
6. Additional skill and experience available 6. All partners are responsible for all the debts of the business.
Each partner has both a current and a capital account. Why?
1. To keep a separate record of capital introduced/ be able to calculate the interest on capital
2. To allow easy comparison of drawing and profit shares
3. To see if partner has overdrawn on profit allocation

One Personal benefit to partnership if it is transform to Company limited.

The members of limited liability company have limited liability and their personal
assets are not at risk is the business fails.

Reason for partnership agreement; The credit balance of current account meant_
• To avoid misunderstanding and disagreement in the future • The partnership owes to the partners

State the debit balance of Partner's current Account.

• The amount owes the partnership

Reason for charging interest on drawing Reason for charging interest on capital
• To discourage partners from taking drawing • To reward the partners for their investment
• To reduce the level of drawing • To encourage for more capital introduced

Reason for partner salary included in the partnership agreement

• To compensate partner for extra workload
• To reward partner for extra skills 28
 Authorised share capital the maximum amount of share capital that a limited company
Public Limited company (PLC) Private Limited Company (Ltd) may issue.
 Shares are sold on the stock exchange  Shares are sold private investors Issued share capital the amount of share capital that has actually been issued by a
 Has unlimited number of shareholders  No minimum or maxi has 2 to no fixed limited company.
 Publishes full report and accounts number of shareholders but usually 50
Called up share capital the part of the issued share capital of a company for which
 Information disclosed in limited
payment has been requested.
Paid-up share capital the part of the called-up share capital of a company for which
payment has been received.

Ordinary shares Preference shares Debentures

1 Reward/ Return Dividend Dividend Interest
2 Rate Variable Fixed Fixed
3 Voting Right have No No
4 Member of the company Yes/ owner of the company Yes/ but cannot influence the running of the company No
5 Dividend/Interest payment after Preference before Ordinary before Ordinary and Preference
6 Winding up after Preference before Ordinary before Ordinary and Preference
7 Risk Risk taker Non risk taker non risk taker

Features of Ordinary shares Features of Preference shares Features of Debentures

1. Ordinary shareholders are members of the company 1. Carry a fixed rate of dividend 1. Debentures are long term loans.
2. Ordinary shares carry voting rights. 2. Dividend may not be paid if there is not enough 2. Debentures holders are not members of the
3. Ordinary shares dividend is a share of profit profit company
4. Ordinary share dividend is variable 3. Dividend is paid before ordinary share dividend 3. Debentures do not carry voting rights
5. Ordinary share dividend is paid after any dividend on 4. Preference shareholders are members of the 4. Debentures carry a fixed rate of interest
preference shares. company 5. Debentures are often secured on the assets of the
6. Ordinary shareholders are repaid last in the event of a 5. Do not usually carry voting rights company.
winding up. 6. Capital is repaid before ordinary share capital in a 6. Debenture holders are repaid before the
winding up. shareholders in the event of a winding up.
7. Preference shares are not secured on the assets
of the company.

29
Shareholders : Owner of the share capital of a limited liability company Raw material • Goods were purchased for converting into finished goods

Limited liability: the liability of shareholders of the debts of the company is • Resources needed to make finished goods
limited to the amount they agreed to pay for their shares
Limited liability company is a separate legal identity from its shareholders.
Work in progress • Goods which are partly made

In the event of winding up, Finished goods • Completed products which are waiting for sale
1. Trade payable
2. Loan/ Debenture
3. Preference shareholders Direct cost Manufacturing costs that are attributable to a single product,
4. Ordinary shareholders particularly direct materials and direct labour.

Indirect cost Manufacturing costs that cannot be attributed to one product

How General Reserve has arisen?
Transfer made in the SOCIE from retained earning.

Explain why the company create the General Reserve

Prime cost Total cost of direct material, direct labour and direct expenses
• For reinvestment in the business
• To plough back profits Cost of raw material The direct cost of raw materials used during a financial year
• To set aside profit for dividend in future consumed
If there is not enough actual cash available to pay a dividend
Factory overhead The total of indirect cost.
If use the general reserve for raising the necessary funds. (Production overhead)
Should not be accepted.
Because General Reserve is not necessarily represented by actual money. Manufacturing account The first part of the end of year financial statement of a manu-
facturing organization that shows the total cost of producing
If request the bank overdraft for raising finance. goods.
Should not be accepted
Because Bank overdraft not appropriate for long term borrowings
Reason for purchasing 1. Cheaper price than make
Reason why limited company retained some profit each year. finished goods 2. Production cannot meet up with the demand
• In situations where there is not enough cash to pay dividend 3. Cannot manufacture those particular item themselves.
• To retain cash within the business rather than using it for dividends
• To use in future when the profits may be low or there may be loss.
Reason for calculating 1. To set prices
Reasons why the directors decide that the total dividend should be less than the cost of production 2. To compare the cost of production and the cost of buying
profit for the year. the product.
1. Insufficient funds /cash to pay more than profit
2. To retain cash/profit for reinvestment into the business
30
 Ordinary shares Preference Shares Debentures Bank loan
Advantages Shares are permanent capital/ do not Prior claim on the profit of the business. Will not dilute their stake in the Easier to obtain funds
have to repaid company

Dividend vary according to the profit Reduction in profit available for ordinary Will not dilute their voting power May be repaid early
shareholders

Shares could be sold to new or existing Prior claim on the assets of the business If expansion profitable, potential
shareholders in a event of winding up. for higher dividend as debenture
holders received fixed interest
Prior claim on the assets of the
company in winding up

Disadvantages Dilution of ownership of the company / Dividend must be paid whether there is Interest on debenture must be Fixed rate of interest need to
Less control of existing shareholders profit or not paid whether there is profit or not paid each year

Less chances of claim on the assets of the Prior claim on the assets of the company Funds have to be available when Interest would be payable
company in the event of winding up after Debenture in the event of winding repayment is due. irrespective of profit
up
New shares rank equally with existing Annual profit reduced because of Must be repaid in full in a fixed
ordinary share with regards to dividend interest period

New shares rank equally with existing Reduced profit available for ordi- Security would have to be
ordinary share with regards to repayment nary shareholders provided
in a winding up
It may take longer to raise the funds/
It may not be easy to sell the shares

Increased dividend may have to paid

All the shares need to be sold in order to

raise the required amount

31
 Receipt and Payment account Income and Expenditure account

Define: An annual summary of a club’s cash book Define: An annual summary that shows whether a club mad a surplus or a deficit.

showing opening and closing balance show surplus and deficit for the year

contain capital receipt and capital expenditure

contain revenue receipt and revenue expenditure contain revenue items only

no adjustments for accrual and prepayment (cash basis) make adjustments for accrual and prepayment (accrual basis)

doesn’t contain non cash items include non cash items (e.g. depreciation)

Treasurer the individual appointed by the members of a club or society to

Subscription—amount paid by members of a club/ society to use the facilities
manage its financial affairs. provided by the club.
Accumulated fund the total of a club’s surpluses over a period of years.
It is equivalent of business’s capital.
Advise the club treasurer whether or not club members should be required to pay
How the accumulated funds has arisen? their subscriptions by direct debit.
It is the total of the surpluses made by the club less all the deficits since the start of
the club. Advantages
• Irrecoverable debts would be minimised particularly if the direct debits were
set up for the start of the year
Members of the club has suggested that any surplus should be distributed among
• The timing of cash receipts from members will be known
the members.
• Administration costs may be reduced
No, The members of the club have not invested any capital. They are not owner/
shareholders.
Disadvantages
So, there can be no profit/dividend which represent a return on the among invested.
• Members may prefer to choose their own method of payment
• They may prefer to pay their subscription at a time of their choosing
• Some members may decide not to renew their membership
Suggest one way the club could raise the necessary finance.
1. Long term loan
2. Mortgage Suggest to improve café profit.
3. Sponsorship 1. Increase selling price
4. Grants 2. Find cheaper suppliers
5. Donations 3. Reduce expenses
32
Difference between Margin and Mark up
Margin : is the gross profit measured as a percentage of selling price. What is measured by Rate of Inventory Turnover
Mark up : is the gross profit measured as a percentage of cost price. • The no. of times the inventory is sold and replaced in the financial year.
To improve % of profit to revenue
1. Increase gross profit margin Reason for Rate of Inventory turnover is higher
2. Increase selling price • High sale activity
3. Reduce Cost of sale • Lower closing inventory
4. Reduce/ control of admin and selling expenses • Different type of goods
5. Increase other income • Foods is a necessity/ Foods sells quicker than toys
Suggest what is measured by ROCE
1. The profit earned for every $100 used in the business Reason for Rate of Inventory Turnover lower
2. It shows how efficiently the capital is being employed • Lower sale activity (obsolete/ damaged inventory)
3. Profit received as a % of capital employed • High closing inventory level
State one reason why the directors would wish to know the ROCE. • Cost of sale decreased
• To compare with other business • Cheaper suppliers/ lower purchase price
• To compare with rate of finance cost on debentures
Reason for higher ROCE (similar business) To reduce the cost of sale
• Higher profit for the year • buy in bulk to get trade discount

• Lower capital employed • Looking for cheaper supplier

Reason for lower ROCE

• lower profit for the year / lower sale To reduce the cost of production ( apart from using lower quality of material)

• The company is not making the most effective use of their capital • Buy in bulk to get trade discount
employed
• Looking for cheaper supplier
Explain why the difference between gross profit margin and
• Reduce production overhead
Profit margin is an indication of the efficiency of the business.
The difference between the two percentage represents the percentage
of expenses to revenue. The lower the percentage the more efficiently
the expenses are being controlled.
33
Working Capital Current Ratio (Working Capital Ratio) Quick ratio / Acid test ratio/ Liquid ratio
The difference between Current asset and Current • it is measure the excess of Current asset over Current Liquid assets in relation to current liabilities. Liquid assets are
liabilities liability. all of a business’s current assets excluding inventories.
(Working capital =Current asset—Current liabilities) • It measures the margin of safety between CA and CL
Two ways to improve Working Capital To improve Current ratio To improve quick ratio (acid test ratio).
1. Introduce additional capital/ 1. introduce addition capital/ new partner 1. Introduce additional capital
admit another partner 2. Reduce drawing/ control cash outflow 2. Reduce drawings
2. Sell surplus of NCA 3. Sell surplus of NCA 3. Sell surplus non-current assets
3. Reduce cash drawing 4. Obtain bank loan 4. Obtain long-term loan
4. Obtain bank loan
5. Increase sale/ profit 30 April 2016 30 April 2017 Explain why calculate the quick ratio as well as current ratio
Current ratio 1.85:1 1.68:1 • Inventory is not included in quick ratio as it is not regarded
Two possible problems if working capital is Quick ratio 1.01:1 0.78:1 as a liquid asset.
inadequate
• Quick ratio shows the ability of the business to pay
Two reasons for the change in current ratio
1. Cannot meet debts when they fall due immediate
1. Change from positive bank balance to overdraft
2. Cannot take advantage of cash discounts/ Explain why the quick ratio is more reliable than the current
business opportunities as they arise 2. Increase level of inventory ratio as an indicator of the liquidity.

3. Impossible to obtain further supplies on credit 3. Purchase of NCA Quick ratio does not include the inventory
Inventory is the least liquid asset—a buyer has to be found and then
4. Cannot replace inventory 4. Repayment of long term loan
the money collected (or)
5. Cannot meet day to day expenses 5. Increase in drawing The quick ratio shows whether the business would have any surplus
6. Decrease in Trade receivable/ credit sale liquid funds if all the current liabilities were paid immediately from the
6. May not able to take cash drawings
liquid assets
7. Increase in current lia/ Bank overdraft

Selling inventory at cost price would increase quick ratio but would not effect current ratio.
Current ratio: no change as inventory decrease and trade receivable/bank increase by the same amount.
Quick ratio: increase as inventory decrease does not effect liquid assets but increase in trade receivable/ bank
does affect the liquid assets.

34
Suggest to reduce Collection period
• Offering cash discount for prompt payments Business allows credit customers a cash discount 2% (within 30 days).

• Charge interest on overdue amount Proposal: offer cash discount 3% (within 21 days)

• Improve credit control Future Liquidity

• Issues invoices and statement of account regularly 1. If trade receivables take up the offer business will receive the money earlier
• Refuse further supplies until outstanding balance is paid 2. This money could then be used within the business 9 days earlier
• Invoice discounting and debt financing
3. Will received a lower amount than previously
Collection date is increased than allowed period Future Profit for the year
Advantage:
1. Profit for the year will decrease because of the extra cash discount
1. Do not have to allow cash discount
2. This policy may reduce bad debts so may increase profit.
2. May charge interest on overdue account
Disadvantage:
1. Have to wait long for the money
2. Increase risk of bad debts Receivable days more than Payables days
Problem may face if trade payable period is unsatisfactory • Reduce liquidity
• May find difficult to pay trade payables/ to pay running expenses
• It might be difficult to obtain credit in future
• May lead to overdraft
• Might get poor credit rating/ reputation
• Cannot take advantage of business opportunities when they arise
• Relationship with supplier will be worse
• May not be able to take advantage of cash discount from suppliers.
Payable day is less than allowed period

Advantage:
1. obtain discount received
2. Better relationship with supplier
Disadvantage: Day 1 Day 15 Day 20 Day 30
1. may find difficult to pay running expenses
2. May not be take advantage of business opportunities when it is arise.
3. Deprived of use money for other things earlier 35
 2016 2017 31 Dec 2015 31 Dec 2016 Allowed period
Collection period 28 days 38 days Collection period 34 days 28 days 30 days
Payment period 22 days 30 days Payment period 41 days 38 days 40 days
• The company had to wait longer to receive the money from Trade Reasons for changes in collection period
receivables
• Increase in rate of cash discount
• Delay in receiving money may be the reason why company took
longer to pay Trade payables • Improvement in credit control
• Company would not qualify for cash discount • Introduction of interest charged on overdue account
• Company would not have to allow discount • Refusal of further supplies until outstanding balance cleared.
• Company may be charged for late payment Effects for changes in payment period
• Company may charge interest on late receipt.
• Cash discount will be received

2017 2018 Allowed • No/less interest charged on late payments

• Improve relationship with suppliers

Trade receivable 32 days 28 days 30 days
• Reduction in liquid funds earlier
collection period
• Deprived of use money for other things earlier
• Risk of bad debt is reduced by prompt payment
• Allows funds to be available for payment of trade Credit suppliers are proposing to reduce the credit period to 30 days
payments or running costs Two effects

Business is proposing customers to pay cash instead of offering credit • If credit customer continue to pay before 30 days the money received
terms. can be used to pay the credit supplier.
Suggest effects of this proposal. • Will not have the use of money from credit customers as long as pre-
• Eliminates possibility of bad debts viously, before it is required to pay the credit suppliers.

• Improve cash flow/ better liquidity • If the credit customers delay paying, the business will have to use the
• Customers may go to other agencies where credit terms available/ existing money to pay the credit suppliers
sale decrease
• If the business unable to pay the credit suppliers within 30 days no
• Reduce provision for doubtful debts cash discount will be received.
• Trade receivables will reduce/ not exist.
36
 Comparing with other business
International Accounting Standards (IAS) • Should compare with a business in the same trade.
A set rules and guidelines that business in many countries must follow in producing
financial statements.
• Should compare with a business of approximately the same size
• Should compare with a business of the same type (sole trader)
Accounting Policies • The financial statements may be for one year, which will not show trends.
1. Comparability - when it can be compared with other periods.
2. Relevant - when it affects business decisions • The financial statements may be for one year which is not a typical year.
3. Reliability - when it is free from error and bias • The businesses may apply different accounting policies.
4. Understandability - when it can be understood by the users
• The statements do not show non-monetary factors
Comparability • It may not be possible to obtain all the information needed to make compari-
• They can identify similarities with the financial statements of other business. sons.
• Financial statement can be compared with similar business/ year to year.
• Accounting policies should be applied consistently so that financial statement
can be compared from year to year Business wishes to compare the results with those of a similar business and was able
to obtain the financial statements of a business in the same trade.
Relevance
• Financial statements must provide information in time for financial decision to
be made. State how Historical Cost may be regarded as a limitation of financial statements
• They can be sure that information in the financial statement is up to date. • Transaction are recorded at actual cost/ purchase price.
• Information is relevant if it is capable of influencing the decisions being made. • It is difficult to compare transactions taking place at different time.
• Information must be available in time for decisions to be taken.
• Relevant information helps the directors to evaluate past, present and future How Non Financial Factors may be regarded as a limitation of financial statements
events. • Only information which was be expressed in monetary terms is recorded.
Many important factors which affect the business are not recorded.
Reliability
• Financial information is reliable only.
• If it can be depended on to represent actual events
• If it is free from error/ bias
• Financial statement must be prepared in such a way as to ensure they present a
true and fair view of the financial position.
• They can use the financial statement in decision making
•
Understandability
• A financial report must be capable/grasp of being understood by the users of
that report.
State how IAS help to achieve understandability?
• by narrowing areas of difference in financial statements.
37
 Money measurement principles
Explain how providing for Depreciation of NCA is an application of the principle of Accrual
(Matching)? • Non monetary items cannot be recorded

• The loss in value of NCA during the year is set against the revenue of the same period. • Money is widely used/ understood unit of measure

• The cost of NCA is spread over the year which benefit from the use of the assets. • Transaction are traditionally recorded in money terms

Explain how charging Depreciation of NCA is an example of the application of the • Subjectivity/ personal opinion is avoided
Prudence principle? • Easier to make comparison year on year/ with other business
• Ensure that NCA are shown at more realistic value. Explain how the realisation principle is applied to the recording of credit sales.
• Ensure that the profit for the year is not overstated.  revenue is regarded as being earned when title to the goods is passed.
 The profit on sales is not recognized until it is earned.

How maintain a provision for doubtful debts is an application of the principle of Accrual  Profit is recognized when earned not when payment is received.
(Matching)?  Profit is earned when the sale is completed/ legal title passes

 in order to calculate a true and fair profit, income for a financial year is matched  No profit is recognized when goods are ordered.
exactly with expenses that relate to that accounting year whether paid or not. Reasons why business did not record calculator as a non-current asset
 The sale for which a business is unlikely to be paid are regarded as an expenses of the  The principle of materiality was applied
year in which those sales are made.
 The cost of the calculator was an immaterial amount
Explain how the prudence principle is applied to the maintenance of provision for
doubtful debts.  The cost of recording the calculator as a non current asset would have
outweighed the benefit.
 to ensure that profits/ trade receivable are not overstated.
 The amount of depreciation would be insignificant.
 To ensure that trade receivable are shown at a realistic amount in the statement of
financial position.  The calculator may not last over 12 months.
 Profits and assets are reduced when the provision for doubtful debts is increase/ 22FM20 Interest bearing account [From business bank account]
profit and assets are increased when the provision is reduced.
Advantages: It would reduce cash sitting idle in business bank A/c
The level of Trade receivable and Trade payable suggest that there will be
future net cash flow.
Interest would be earned on the amount transaction.
Disadvantages: It may not be possible to withdrawn money from the deposit a/c without
giving notice.
Cash may not be available if business decides to draw the full amount to
which she is entitled at the end of the year.
Will decrease working capital/ will reduce liquidity
38
Business may be considering other uses for the cash
Credit transfer /Direct debit Apply for Bank loan
Advantages:
 do not need to keep as much cash on the business premises. Advantages: Disadvantages
 Less risk of theft or fraud • Loan interest may be lower than overdraft • loan will have to be repaid
 Do not have to have face to face meeting to pay/ Time saving interest • Loan interest will have to be paid
Disadvantages: • No interest on overdraft to pay • Early repayment may not be allowed
 no source documents immediately available • Have a longer time to repay a loan • The bank may require security
 May be easier/ more suitable to uses cheques • May improve relationship with bank
 May increase bank charges • Bank balance would be improved/ liquidity
would be improved
Interest charges on overdue accounts
Advantages: Reason for taking bank overdraft • Bank overdraft is not suitable for long term
 will encourage customers to pay earlier 1. High level of drawing/ trade receivable borrowing.
 May increase liquidity / cash flow amount • Bank may require overdraft to be repaid at short
 May reduce administration cost/ time. 2. Lack of expenditure control notice.
3. To improve cashflow/ liquidity
Disadvantages: 4. To meet short term debts • Interest may be more than that on a loan
 good relationships with customers will be damaged 5. To be able to take advantages of business
 May lose customers/ sales may reduce • Overdraft facility may be withdrawn at a short
opportunities as they arise
 May incur extra costs to attract customer/ advertising/ marketing notice.

Advantages for Salary increase

1. improve motivation and commitment may Introduce partners
improve 1. more commitment than employee
2. Business would not need to consult the 2. Decision making would be shared.
employee before making decision 3. Introduce capital
Source of finance 3. Disagreement about decision would not 4. Risk/responsibilities would be shared
1. Internal or External Source of finances arise
2. Short term or Long term source of finances 4. No changes for structure of the business.

Internal External Short-term finance Long-term finance

1. Retained profit 1. Issue of shares 1. Overdrafts 1. Bank loans
2. Sale of existing assets 2. Bank loans 2. Trade credit 2. Issue of shares
3. Sale of inventory 3. Selling debentures 3. Factoring debt 3. Debentures
4. Owners saving 4. Factoring of debts 4. Hire purchase
5. Grants and subsides 5. Long term loans or debt finance
6. Microfinance 6. Leasing 39
 Statement of affair at opening date
$ $ Incomplete Records
Assets at opening date
Motor van xxx
Inventory xxx Cash Sale >>> Cash book (Debit side)
Trade receivable xxx Total Sale = +
Credit sale >>> Trade receivable Account
Bank xxx
xxx $ $
Other receivable
Bal b/d
xxx
Credit sale ??? Sale return
Less: Liabilities at opening date
Bank loan xxx Bank (receipt)
Trade payable xxx Discount allowed
Other payable xxx Bal c/d
Bank overdraft xxx (xxx)
Capital at opening date xxx Bal b/d

Credit sale = Bank (receipt) + c/d - b/d + Sale return + Discount allowed
Statement of affair at closing date
$ $
Assets at closing date Cash purchase >>> Cash book (Credit side)
Motor van xxx Total Purchase = +
Inventory xxx Credit purchase >>> Trade payable Account
Trade receivable xxx $ $
Bank xxx Bal b/d
xxx Pur.return Credit purchase ??
Other receivable
Bank
xxx
(payment)
Less: Liabilities at closing date
Discount received
Bank loan xxx
Bal c/d
Trade payable xxx
Other payable xxx
Bank overdraft xxx (xxx) Bal b/d
Capital at closing date xxx
Credit purchase = Bank (payment) + c/d - b/d + Pur.return + Discount received

Opening + Additional + Profit - Drawings = Closing

Capital Capital for the year Capital

Profit = Closing - Opening - Additional + Drawings

for the year Capital Capital Capital
40