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hk

Introduction
to Double Entry
Accounting ()
Reference:
Chapter 1 6 (p. 1 58)
1

P.1

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(A) Introduction to
Accounting

Bookkeeping () vs. Accounting ()

Bookkeeping:
records

the accounting data in the books.

Accounting:
provides

important information to the owners and

managers of a firm.
records data; classifying and summarises data;
communicates information.

Users of accounting information:

Internal:

owners, managers, employees.

External: lenders, suppliers, customers, competitors,
government, the public.

P.2

(B) Accounting Equation

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Assets ()
Capital ()
Liabilities ()
(Resources
= (Resources + (Resources
in the
supplied by
supplied by
business)
the owner)
outsiders)
e.g.
Assets
Bank
Cash
Machinery
Fixtures
Stock
Debtors
Motor Vehicles
Land
Building

Capital
Capital:
Chan
Capital:
Lee

Liabilities
Creditors
Bank overdraft
Bank loan
Loan: Cheung

P.3

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Assets = Liabilities + Capital

After making profit:
Assets = Liabilities + Capital + Profit (Income Expenses)
Examples of Income
Sales,
Rental income,
Commission received,
Interest received,
Returns outwards

Examples of Expenses
Purchases, Rent
Commission,
Interest expenses,
Electricity,
Wages and salaries,
Depreciation,
Returns inwards

P.4

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After drawings by the sole proprietor (owner):

Assets = Liabilities + Capital + Profit - Drawings

Definition of Drawings ()
The sole proprietor may take cash, stock or
other assets from the business for private use.

P.5

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Class work and Homework

Accounting

equation (p. 14-16)

Class work: Ex. 2.6, 2.8, 2.10, 2.11,2.13

Homework: Ex. 2.7X, 2.9X, 2.12X,2.15X

P.6

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(C) The Double Entry System

Definition
Every transaction are entered into two T-accounts,
one in debit (Dr.) side and the other in the credit
(Cr.) side.

Format of a T-account:
Name of the T-account
Date Particular

Dr

Date Particular

Cr
7

P.7

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5-steps (RC3D) for the double entry system:

1. Recognize the names of accounts
2. Classify the types of accounts (assets, liabilities,
capital, income, expenses or drawings)
3. Decide the increase or decrease of the accounts
4. Decide the debit or credit of the accounts
5. Draw up the T-accounts

Examples to apply the 5-steps:

On January 1, 2008, Chan started the business
with $1000 cash.

P.8

Cash

Assets

Increase

Dr.

Dr. Cash

Capital:
Chan

Capital

Increase

Cr.

Cr. Capital:
Chan

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Dr. Cr.
Assets

Dr.

Liabilities

2008

Capital

Jan 1 Capital: Chan 1000

Incomes

Expenses +

Drawings

Dr.
2008

Cash
$

Cr.

2008

Capital: Chan
$

Cr.

2008

Jan 1 Cash

1000

P.9

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Class work and Homework

Double entry system

Supplementary Exercises (Worksheet)
Assets, liabilities and capital (p.25-27)
Class

work: Ex. 3.6, 3.8-3.10

Homework: Ex. 3.7X, 3.11X, 3.12X

The treatment of stock (p.37-40)

Class

work: Ex. 4.5, 4.8-4.10

Homework: Ex. 4.6X, 4,7X, 4.12X, 4.13X

Revenue and expenses (p.48-50)

Class

work: Ex. 5.6, 5.8, 5.10

Homework: Ex.
10

P.10

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(D) Balancing the Account

Close (balance-off) the accounts at the

end of each month.
For examination, it may close the accounts
at the end of the year.
5 steps to balance-off an accounts:
1. Add the totals of debit and credit.
2. Find the difference between debit and credit.
(The difference
Balance c/d)
3. Enter the Balance c/d on the side with smaller
total.
4. Enter the totals on both sides at the same level.
5. Bring the Balance c/d to the opposite side as
Balance b/d on the first day of next month.
11

P.11

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Class work and Homework

Balancing-off

Supplementary Exercises (Worksheet)

Double

entry system and balancing-off)

Class

work: Ex. 7.6, 7.7, 7.9

Homework: Ex. 7.8X, 7.10X

12

P.12

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Final Accounts
References
Chapter 7 to 10 (P. 59-113)

P.13

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Trial Balance ()
A trial balance is a list of debit balances and
credit balances in the books of accounts
The total of debit balances and the total of
credit balances are equal. If not, errors are
needed to identitied.
Trial balance is the basis for preparing final
accounts (Trading and profit and loss A/C;
Balance Sheet).
P.14

Examples of Trial Balance

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Leungs Company
Trial Balance
for the year ended 31 December, 2008
$

Sales
Returns inwards
Stock as at 1 January, 2008
Purchases
Returns outwards
Carriages inwards
Rental income
Commission received
Rent
Commission
Electricity
Rates

1010
10
100
530
20
10
100
50
120
30
150
50

P.15

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Land and building

Office Furniture
Fittings
Office equipment
Machinery
Motor vehicles
Debtors
Bank
Cash
Creditors
Bank overdraft
Capital
Drawings
Bank loan
LoanMr. Cheung

1000
700
500
500
1000
500
1500
400
80
1000
500
3000
100
1000
600
7280

Stock as at 31 December, 2008 is $120

7280
P.16

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B Trading A/C
Gross profit:
Net Sales>Cost of sales

Function:
Calculate the gross profit or gross loss.

Net SalesCost of goods sold Gross profit /

Gross loss
Net Sales =
Sales Returns
inwards

Cost of goods sold =

Opening stock
(Net Purchases+Carriage inwards)
- Closing stock

Net Purchases =
Purchases Returns
outwards

Gross loss:
Cost of sales>Net sales
P.17

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Put the above formulas () into a

statement, a Trading A/C is formed.
Trading A/c has vertical form and
horizontal form.

P.18

Examples of vertical form

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Leungs Company
Trading A/C
for the year ended 31 December, 2008
$
$

Sales
LessReturns inwards
Net Sales
LessCost of goods sold
Stock as at 1 January,2006
AddPurchases
530
LessReturns outwards 20
Net purchases
510
AddCarriage inwards
10

1010
10
1000
100

520
620
LessStock as at 31 December, 2006 120
Gross profit

500
500
P.19

Examples of horizontal formT form

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Leungs Company
Trading A/C
for the year ended 31 December, 2008
$ $
$
Opening Stock
AddPurchases

100
530
LessReturns outwards 20
Net purchases
510
AddCarriage inwards 10 520
620
LessClosing stock
120
Cost of goods sold
500
Gross profit c/d
500
1000

Sales
1010
LessReturns inwards 10
Net Sales
1000

1000
P.20

Profit and loss A/C

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Functions: calculate the net profit / net loss.

Net profit:
Gross profit+Income>Expenses

Gross profitOther incomeExpensesNet profit / Net loss

Other income=
rental income + commission income+

Net loss:
Expenses>Gross profit+Income

Expenses=rent and rates+commission

+electricity+

P.21

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Put the above formulas () into a

statement, a Profit and loss A/C is
formed.
Trading A/c has vertical form and
horizontal form.

P.22

10

Vertical form

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Leungs Company
Profit and loss
for the year ended 31 December, 2008
$
$
Gross profit
500
Add Rental income
100
Commission income
50
650
LessExpenses
Rent
120
Commission
30
Electricity
150
Rates
50
350
Net Profit
300
P.23

11

Examples of horizontal form (T form)

Leungs Company
Profit and loss A/C
for the year ended 31 December, 2006
$
$
Rent
120 Gross profit b/d 500
Commission
30 Rental income 100
Electricity
150 Commission income 50
Rates
50
Net profit
300
650
650

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P.24

12

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D Balance Sheet
Balance sheet is a statement to record
the balances of assets, liabilities and
capital at the end of the accounting period.
Assets*Liabilities**Capital***
*AssetsNon-current assetsCurrent assets
**LiabilitiesCurrent liabilitiesLong-term liabilities
***Capital:
Opening capitalNet profitCapitalClosing capital
P.25

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D1 Non-current Assets
Non-current assets have a long life and
are to be used in the business.
The non-current assets is not bought
for resale.
E.g. Land and building, Furniture,
Fixtures and fitting, Office equipment,
Machinery, Motor vehicles
P.26

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Non-current assets are listed in the

order of permanency in the Balance
Sheet are as follows:

Non-current assets
Land and building
Furniture
Fixtures and fittings
Office equipment
Machinery
Motor vehicles
P.27

15

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D2 Current assets
Current assets are likely to be
converted into cash in the short term
(i.e. within 1 year) or items having a
short life.
E.g. Stock, Debtors, Prepayment, Bank,
Petty cash, Cash

P.28

16

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Current assets are listed starting the

most difficult to be turned into cash,
and the last one is Cash:
Current assets
Stock
Debtors
Prepayment
Bank
Cash
P.29

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D3 Long-term Liabilities
Long-term liabilities do not have to
have in the near future (i.e. longer than
1 year)
e.g. Bank loan, Loan: Mr. Cheung,
Debentures

P.30

18

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D4 Current liabilities
Current liabilities are to be paid in the
near future (i.e. within 1 year).
e.g.Creditors, Accruals, Bank
overdraft
Current assetsCurrent liabilitiesWorking Capital

P.31

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Balance Sheet has vertical form and

horizontal form.
The format of vertical is as follows:

P.32

20

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Leungs Company
Balance Sheet
as at 31 December, 2008
$
$
Non-current assets
Land and building
1000
Furnitures
700
Fixtures and fittings
500
Office equipment
500
Machinery
1000
Motor vehicles
500

4200

P.33

21

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Current assets
Stock
Debtors
Bank
Cash
LessCurrent liabilities
Debtors
Bank overdraft
Working capital

120
1500
400
80

2100

1000
500

1500
600
4800
P.34
22

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Capital
Capital as at 1 January, 2008
AddNet profit
LessDrawings
Capital as at 31 December, 2008
Long-term Liabilities
Bank loan
LoanMr. Cheung
500

$
3000
400
3400
100
3300
1000
1500
P.35
4800
23

Horizontal form T form

Leungs Company
Balance Sheet
As at 31 December, 2006
$
$
$
$
Fixed assets
Capital
Land and buildings 1000
Capital as at 1 January, 2008 3000
Furniture
700
AddNet profit
300
Fixtures and fittings 500
3300
Office equipment
500
LessDrawings
100
Machinery
1000
Capital as at 31 December, 2008 3200
Motor vehicles
500
4200 Long-term Liabilities
Current assets
Bank loan
1000
Stock
120
Loan-Mr. Cheung 600
1600
Debtors
1500
Current Liabilities
Bank
400
Creditors
1000
Cash
80
2100
Bank overdraft 500 1500
6300
6300

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P.36

24

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Books of Original Entry ()

and Ledgers ()
References
Chapter 11-14, 19

P.37

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A Introduction
Books to record all the T accounts.
The expansion of the business,
transactions increasethe numbers
of T accounts are numerous.
Thus the T accounts are classified
into 3 Ledgers and 7 Books (Books
of Original Entry).
P.38

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Books of Original Entry

1 Sales Journal ( Day Book)
2 Purchases Journal (Day Book)
3 Returns Inwards Journal (Day Book)
4 Returns Outwards Journal (Day Book)
5 Cash BookExplain later
6 Petty Cash BookExplain later
7 JournalExplain later
P.39

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Transactions

Classifying the transactions

Credit Credit Returns

Sales Purchases Inwards

Cash and
cheque
Returns receipts
Outwards
and
payment

Others

Returns Returns
Sales Purchases Inwards Outwards Cash Book/
Petty Cash Journal
Journal
Journal
Book
Journal
Journal

p. 116

Posting to the double entry

accounts in the ledgers
Sales ledger
Purchases ledger
General ledger

P.40

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Ledgers

3 kinds of ledgers
Sales ledgerrecords each debtors T A/C
Purchases ledgerrecords each creditors T A/C
General ledger records the rest of the accounts,
such as expenses, Fixed assets, capital, etc.

P.41

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D Sales Journal and Sales Ledger

D1 Sales Journal
Record all credit sales
There is no debit items in Sales A/C, so
the Sales A/C transforms to a
statement(), i.e, Sales Journal.

P.42

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Examples of Sales Journal

The credit sales transactions in January, 2008 of
Green Co. are as follow
Jan 5, sold $500 goods on credit to Rabbit Co.
and offered 1% trade discounts* to Rabbit Co.
Jan 15, sold $100 goods on credit to Pepper Co.
If Pepper Co. pays the debt within 1 month,
Pepper can enjoy 2% cash discounts**
Jan 28, sold $500 goods to Pump Co. and
offered 1% trade discounts. If Pump Co. pays
the debt within 1 weeks, Pump can enjoy 2%
Cash discounts.
You are required to prepare
The Sales Journal to record the above transaction.
P.43
7

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*Trade discount:

offered to customers to attract largequantity transactions.

Directly deducted from the list price, no
double entry is required.

**Cash discounts:

Encourage the early repayment of debts

The entry is recorded at the time of
repayment of debts.
P.44

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2008
Jan 5
15
28
31

Sales Journal
Particular
Inv. No. $
Rabbit Co
495
Pepper Co
100
Pump Co
495
Transferred to sales A/C 1090
(in General Ledger)

P.45

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D2 Sales Ledger
After recording each transaction in the
Sales Journal, the transaction is posted to
the Debtors A/C in the Sales Ledger.
At the end of month or year, the total of
the Sales Journal is posted to the Sales
A/C in the General Ledger.

P.46

10

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Posting each sales

transactions

Sales Journal
Record each credit sales

Sales Ledger
Debtors: Rabbit Co.
Dr.

Posting the total

to the Sales A/C

General Ledger

Sales A/C
Cr.
$

P.47

11

Purchases Journal and

Purchases Ledger

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E1 Purchases Journal
Record all credit purchases
There is no credit items in Purchases
A/C, so the Purchases A/C
transforms to a statement(), i.e,
Purchases Journal.

P.48

12

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Examples of Purchases Journal

The credit purchases transactions of Cucumber Co. in February
2008 are as follows
Feb 6, bought goods $200 on credit from Celery Co., and
received 1% trade discounts.
Feb 17, bought $100 goods on credit from Carrot Co. If the
debt is repaid within 1 week, 2% cash discounts is offered.
Feb 27, bought $200 goods on credit from Spinach Co, and
received 1% trade discounts. If the debt is repaid within 1
week, 2% cash discounts is offered.

You are required to prepare

The Purchases Journal to record the above transaction.
P.49

13

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2006
Feb 6
17
27
28

Purchases Journal

Particular
Celery Co.
Carrot Co.
Spinach Co.

Inv. No.

Transferred to Purchases A/C

$
198
100
198
496

(in General Ledger)

P.50

14

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E2 Purchases Ledger
After recording each transaction in the
Purchases Journal, the transaction is
posted to the Creditors A/C in the
Purchases Ledger.
At the end of month or year, the total of
the Purchases Journal is posted to the
Purchases A/C in the General Ledger.
P.51

15

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Posting the total to

the Purchases A/C

Purchases Journal

Posting each
purchases transaction

Record the credit purchases

General Ledger
Purchases
Dr.

Purchases Ledger
Creditors: Celery Co
Cr.

P.52

16

Returns Inwards Journal

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()
Customers (Debtors) demand to return goods to
our company. When we accept the goods returned,
we issue a Credit noteto the customers.
Examples
Goods returned to Cucumber Co in March, 2006
are as follows
March 1, Rabbit Co. returned $50 goods to us
(After deducted 1% trade discounts).
March 10, Pepper Co. returned $10.
You are required to prepare
The Returns Inwards Journal to record the above
transaction.
P.53

17

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Returns Inwards Journal

Credit Note No.
2006
Particular
Mar 1
Rabbit Co.
10 Pepper Co.
31 Transferred to returns inwards A/C

$
50
10
60

(in General Ledger)

P.54

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Posting the total

to the returns
inwards A/c

Returns Inwards Journal

(Record each items in Credit Notes)

General Ledger
Returns Inwards A/C
Dr.

Posting each
returns transaction

Sales Ledger
Debtors: Carrot Co.
Cr.

P.55

19

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G Returns Outwards Journal

Our company demands to returns the goods to
suppliers (Creditors). We issue a Debit note
with the goods returns to the suppliers.
Examples
Cucumber Co returned goods in March, 2006
are as follows
March 1, returned $20 goods to Celery Co.
(After deducted 1% trade discounts).
March 5, returned $10 goods to Carrot Co.
You are required to prepare
The Returns Outwards Journal to record the
above transaction.
P.56

20

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Returns Outwards Journal

2006 Particular Debit Note No.

Mar 1 Celery Co.
5 Carrot Co.
31 Transferred to returns Outwards A/C

$
20
10
30

(in General Ledger)

P.57

21

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Posting each
transaction in debit
notes

Returns Outwards Journal

(Recording each items in Debit Notes)

Purchases Ledger
Creditors: Celery Co.
Dr.

Posting the total to

the Returns
Outwards A/C

General Ledger
Returns Inwards A/C
Cr.

P.58

22

H Classification of T Accounts
T
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Accounts

Personal
Accounts

Debtors
(Sales Ledger)

Creditors
(Purchases
Ledger)

Impersonal
Accounts

Real Accounts
Nominal

Accounts

Records
Records
expenses,
assets
incomes,
and
Liabilities and Capital
in General in General
Ledger
Ledger
P.59

23

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Cash Book ()
References
Chapter 15-16(P.152)
P.60

A Type of Bank Accounts

()
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Mainly has two types ()

Current account ()allows holders to
withdraw money and make payments to other
people and firms with cheques.

Deposit account ()Interest is given

on money deposited in deposit account.
Deposit account includes saving accounts and
time deposit account.

P.61

B Two Columns Cash Book

()
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Two columns are the cash and bank

column.
Put the Cash A/C and Bank A/C together
into one A/C. T

All cash transactions record in the cash

column.
All transactions of cheques record in the
bank column.

P.62

Example of Two Column Cash Book

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Melon Companys cash and cheques transactions in January,

2007 were as follows:
20071
Jan 1
Sole trader Mr. Ho invested $1000 cash.
11
$1000
Jan 5
Deposited $900 cash into bank.
15
$900
Jan 10
Paid rent by $100 cheque.
110
$100
Jan 15
Cash purchases $200
115
$200
Jan 25
Cash Sales $300
125
$300
You are required to prepare
Two column Cash Book
P.63
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2007
11
15
125

$
1000
300
1300

2007
21 200

2007
$
15900
900 110
115
200
131200
900
1300

$
100
800

900

800
P.64

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Exercises Ex. 16.8

Homework Ex.16.9X

P.65

C Cash Discounts and Trade Discounts

()
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1 Trade discounts
Offered to attract large quantity purchase.

2 Cash discounts
Offered to encourage early repayment of debts.

Two types of cash discounts

Discounts allowed

Discounts received

P.66

Accounting entries ()
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Debit
Trade Discounts

Discounts
Allowed

Discounts
Received

Credit

No entry is required

Discounts
Allowed

Debtors X Ltd.
X

Creditors Y Ltd.
Y

Discounts
Received

P.67

Example of Discounts Allowed

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On 5 January, 2006, Lemon Ltd. sold goods $10,000

on credit to Mr. Chan and gave him 5% trade
discounts. If Mr. Chan could repay the debt within
1 week, he could enjoy 5% cash discount. Mr. Chan
repaid the debt on 10 January.
200615$10000
5%5%
110
$9500

$9500

$9025

$475

$9500

P.68

Example of Discounts Received

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On 10 January, 2006, Lemon Ltd. purchased $800

goods on credit from Mr. Lam. If Lemon Ltd. could
repay debts within 1 week, he could enjoy 2% cash
discount. Mr. Lam repaid the debt on Jan. 15.
2006110$800
2%115

$800

$800
$800

$784
$16

P.69

10

D Three Columns Cash Book

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Three columns are cash, bank and

discount.

Discount column on the debit is

Discounts Allowed

Discount column on the credit is

Discounts Received

P.70

11

Example of Three Columns

Cash Book
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The transactions in January 2008 of Coconut Ltd. are as follows:

20071

Jan 1
Balances: Cash $100, Bank $2000
11 $ 100$ 2000
Jan 5
Cash purchases $500
15$500
Jan 10 Cash Sales $800
110$800
Jan 15 Deposited $400 cash to bank.
115$400
Jan 20 Received a cheque from Mr. Lam for paying $2000 debt, and enjoyed 2% discount.
120$20002%
Jan 25 Paid Mr. Chan by cheque to settle $1500 debts and enjoyed 2% discount.
125$15002%
You are required to prepare
Three columns cash book.

P.71

12

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2007

2007

$
11
110
115
120 40

** 40
2007
21

$
100
800

900

2000 15
115
400 125 30
1960

131
4360
** 30

500
400
1470

900

2890
4360

2890

**

P.72

13

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Exercises Ex. 16.10, 16.11

Homework Ex.16.12X, 16.13X

P.73

14

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Petty Cash Book and Imprested System

Reference: Chapter18 (p.194)

18 (p. 210)

P.74

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A Petty Cash Book

A petty cash book is a cash book for
recording small cash payment.

P.75

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Imprested System

The imprested system is a system by which the

amount spent in a period would be reimbursed (
) and the petty cash balance in the next period
would be made equal to the original amount (cash
float ) started with.

e.g. The opening balance (cash float) was $100, the

petty cash payment was $80, the reimbursed
amount would be $80
$100$80
P.76
$80
3

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Example of Petty Cash Book

p. 196-197 18.2 (English version)

p. 212-21418.2 ()

P.77

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Class work: Ex.18.6,18.8,

Homework: Ex. 18.7X, 18.9X
Ex. 15.3, 15.4
Ex. 15.5X, 15.6X

P.78

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Journal

Reference: Chapter 19 (p.206)

19 p. 222

1
P.79

A Uses of Journal

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The entries, that are not recorded in

the other six books of original entries,
would be recorded in the Journal.

E.g. purchases or sales of fixed assets

on credit, bad debts written off,
corrections of errors, opening entries,
closing entries.

P.80

Format of the Journal

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2007
Jan 1

Journal
Particular

Dr. Cr.

$
XX

A/C name to be debited

A/C name to be credited
Narration
11
XX

$
XX

XX
3
P.81

Format of the Journal

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Write the debit entry first and then

the credit entry.

The amount of debit entry must equal

to the credit entry.

The number of debit entries may not be

equal to those of credit entries.

4
P.82

Examples of Journal

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Record the following transactions of January 2007

in the Journal:
Jan 1 Mr. Cheung invested $30,000 cash to open
Violet Company.
Jan 10 Purchased $4,800 machinery on credit from
Chans Company.
Jan 20 Mr. Cheung brought $1,000 Furniture and
$2,000 Office Fitting into the company.
20071
11 $30000
110 $4800
5
120 $1000$2000
P.83

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2007
11

$
$
30000
30000

110

4800
4800

120

1000
2000
3000

6
P.84

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Homework:
Use Journal to record the entries:
Ex.
Class work:
Use Journal to record the entries:

:
Ex7.3, 7.4, 7.5 (p.78-79)

:
Ex.7.6X, 7.7X (p.80-81)
7
P.85

7 Accruals and Prepayment

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(Accrued expenses, Prepaid expenses,

Revenues in arrears, Revenues in advance)
()
Reference: Chapter 20 (p.221)
(p.239)

P.86

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Accrued Expenses
Definition: Accrued expense is an expense
which has been incurred, but has not yet
been paid for.

E.g. The rent of Tai Tai Co.is $1,200

for a year, $1,100 rent was paid for the
year ended 31 December 2008.
$1200
8$1100
P.87

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1100

$
1200

100
1200

1200
P.88

Exercise 1

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The rates of Siu Siu Co. for a year

is $240,$220 rates was paid for
the year ended 31 December 2008.
$240
20081231$220

P.89

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220
20
240

240
240
P.90

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Prepaid Expenses
Definition:
Prepaid expense is an expense to be
incurred in the following period, but
which has been paid in advance.

E.g. The annual rent for Tai Tai Co. is

$2,400. $2,600 was paid for the year
ended 31 December 2008.
$2400
8$2600

P.91

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2600 2400
200
2600
2600
P.92

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Exercise 2

The annual rates for Siu Siu Co. was

$360. $390 rates was paid for the year
ended 31 December 2008
$360
20081231$390

P.93

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390

360

30
390

390
P.94

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$5200$330

P.95

10

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5200

4800

5200

400
5200
P.96

11

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330

360

30
360

360
P.97

12

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Revenue in arrears

Definition:
Revenue in arrears / Accrued revenue
means other revenue earned by the
firm which has not been received at the
end of the period.

P.98

13

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Example: Annual rental income for Lee

Wan Co. is $2,400. $2,200 rental income
was received for the year ended 31
December 2008.
$2400
20081231
$2200

P.99

14

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2400

2200

200
2400

2400

P.100

15

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Exercise 4

The rental income of Fa Fa Co. for the year

ended 31 December 2008 was $3,600. Only
$3,300 was received.
20081231
$3600 $3300

P.101

16

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3600

3300

300

3600

3600
P.102

17

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Revenue in advance
Definition:
Revenue in advance / Prepaid revenue is the
other revenue to be earned in the next period
but which has been received in advance

Example: Annual rental income of Woody Co.

was $7,200. $7,800 rental income was received
for the year ended 31 December 2008.
$7200
20081231$7800

P.103

18

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7200

$
7800

600
7800

7800
P.104

19

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Exercise 5

Annual rental income for View Co. was

$4,800. $5,200 rental income was received
for the year ended 31 December 2008.
$4800
20081231$5200

P.105

20

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4800

5200

400
5200

5200

P.106

21

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$6500$1820

$140

P.107

22

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6000

6500

500
6500

6500
P.108

23

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1960

1820

140

1960

1960
P.109

24

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Year-ended adjustment in the final

accounts
Profit and Loss A/C
for the year ended 31 December 2008

Rent

Rental income

Rates

Commission
received
P.110

25

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Year-ended adjustment in the final

accounts

20081231
$

P.111

26

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Amount recorded in the Profit and Loss

This accounting
period

Last accounting
period

Accrued expenses

Add

Less

Prepaid expenses

Less

Add

Accrued revenues

Add

Less

Prepaid revenues

Less

Add

P.112

27

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Balance Sheet(Extracted)
as at 31 December 2008
$

Current Assets
Prepaid expenses
Accrued incomes
Current Liabilities
Accrued expenses
Prepaid incomes
P.113

28

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()
20081231
$

P.114

29

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Capital Expenditure and

Revenue Expenditure

Reference: Chapter 20 (p.221)

21 (p. 258)
P.115

Reasons to distinguish Capital

and Revenue Expenditure

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Capital expenditure
Recording as the

cost of fixed

assets
Revenue expenditure
Recording as

expenses

P.116

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Capital Expenditures

Definition: Capital expenditure is made when a

firm spends money to buy fixed assets, and
add value to an existing fixed asset.

e.g. cost of buying a lorry, the delivery

charge of transporting fixed assets, the legal
fee for purchasing building, other costs needed
to get the fixed assets ready to use.

P.117

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The entry for Revenue

expenditures:
Dr. Motor Vehicles

Cr. Bank / Creditors

P.118

Revenue Expenditures

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Definition: Revenue expenditure

includes expenses needed for the
day-to-day running of the business.

e.g.: rent, electricity, petrol for a

van

P.119

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The entry for capital expenditures:

Dr. Motor expenses

Cr. Bank / Creditors

P.120

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Exercises
Ex. 21.6 (p.242)
Ex. 21.8 (p.243)
Ex. 21.9 (p.243)

Ex. 22.3 (p.238)
Ex. 22.5 (p.239)
Ex. 22.6 (p.239)
P.121

Capital Income

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Definition: Capital income is

receipts from the sale of fixed
assets

E.g. receipts from sales of motor

vehicles (fixed assets)
$1000
P.122

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Revenue Income

Definition: Revenue income is receipts

from the sale of goods and services,
plus other revenues from the
operation of the business.

E.g. Sales, Revenue received,

Commission received, Rental received

9
P.123

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Depreciation and Disposal

of Fixed Assets

References: Chapter 22 (p.244) - 23 (p.255)

22 (p. 265)23 (p. 277)
P.124

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A Definition of Depreciation

Depreciation is
cost allocation of
fixed assets,
consumed during
its useful life.
Depreciation is
the expense of
the company.

P.125

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B Causes of Depreciation

Physical
deterioration, e.g.
wear and tear,
erosion, rusting, rot
and decay.
Economic factors, e.g.
obsolescence,
inadequacy.
Time factor, e.g.
amortization
(patent); depletion
(silver mines)

P.126

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C Methods for Calculating Depreciation

1 Straight-line Method
Calculating the
average depreciation
of the fixed assets.
The depreciation is
the same during the
useful lives.

P.127

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1 Straight-line Method
Depreciation Cost*Residual Value** Estimated Useful life
OR Depreciation Cost*Residual Value** Depreciation rate

*Cost is the acquisition cost of the fixed assets

**Residual value is the estimated value when scraping the assets

1
***

***
*
**

P.128

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Repairs
Depreciation
1st
year

2nd
year

3rd
year

4th
year

5th
year
P.129

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e.g. 1: Apple Co. bought $2,000 furniture by

cheque on 1 January 2006. The useful life
is 5 years and the scrap value after 5
years is $100. Calculate the depreciation
for 5 years.
200611$2000
55
$100
($2000$100)5
$380
P.130

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e.g. 2: Melon Co. bought $5,000 office fittings

by cheque on 1 January 2006. The
depreciation rate is 10% per annum (p.a).
The residual value is $500. Calculate the
depreciation for 5 years.
200611$5000
10%$500

($5000$500)10%
$450

P.131

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2 Reducing balance Method

Calculate the depreciation based on the Net Book Value
of the fixed asset.
Net Book Value = Cost Accumulated depreciation
Depreciation CostAccumulated depreciation) Depreciation rate

2
*

* / /

P.132

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e.g. 3: Lemon Co. bought $2,000 machinery by

cheque on 1 January 2006. The depreciation
rate is 10% p.a. and the scrap value is $200.
Calculation the depreciation from 2006 to
2008.
200611$2000
10%$200

$200010%$200
$2000$20010%$180
$2000$200$18010%

$162

P.133

10

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Repairs

Depreciation
1st

year

2nd
year

3rd
year

4th
year

5th
year
P.134

11

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Ex.: Lime Co. bought $4,000 motor vehicles by

cheque on 1 January 2007. The depreciation
rate is 10% p.a. and the residual value is $400.
Calculate the depreciation from 2007 to 2009.
(Using reducing balance method)
200711$4000
10%$400

$400010%$400
$4000$40010%$360
P.135
$4000$400$36010%$324
12

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3 Revaluation Method
Calculate low valued fixed
assets, e.g. Loose tools,
Stationery.
e.g. The details of the
loose tools of Pepper Co.
are as follows:
Opening balance of loose
tools $500
Bought $1,000 loose tools
during 2005
Closing balance of loose
tools $400
Calculate the depreciation
for loose tools in 2005

$500
2005
$1,000
$400

P.136

13

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2005

2005

$500
$1000
$1500
$400
$1100

P.137

14

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Ex.: Cabbage Co used wooden containers for

packing the products. The followings are the
details:
Opening balance of wooden containers $800
Wooden containers bought during 2008 $2,000
Closing balance of wooden containers $900
Calculate the depreciation for 2008.

$800
2008$2,000
$900

P.138

15

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2005

$800
$2000
$2800

$900
2005 $1900

P.139

16

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4 Depletion Unit Method

Used the raw material
extracted from the
fixed asset as a
percentage to
calculate the
depreciation.
Natural resources,
such as oil well, gold
mines, adopt this
method to calculate
depreciation.

P.140

17

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e.g. Narcissus Co. Bought a stone

quarries by $10,000 cheque. It was
estimated to extracted 1,000 tons stone.
During 2008, the company extracted 50
tons stone. Calculate the depreciation
for 2008.
$10,000
1,000200650
2008
$10,0001,00050
$500

P.141

18

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Ex.: Lily Co. bought a coal mine by $20,000.

It was estimated to extract 2,000 tons
coal. During 2008, the company
extracted 30 tons coal. Calculate the
depreciation for 2008.
$20,000
2,000200830
2008
$20,0002,00030
$300
P.142

19

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Accounting treatment for depreciation

1. Dr. Profit and loss

Cr. Provision for
Depreciation
2. Balancing-off as
other accounts

1.

2.

P.143

20

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Examples for Depreciation

John started business on 1 January 2006. The
motor van were bought in cash as follows:
Motor Van
Date
Cost
1
1 Jan., 2006
$10,000
2
1 July, 2007
$15,000
3
1 Nov., 2007
$18,000
The depreciation is calculated at 20% p.a., using straightline method. The depreciation is charging on a
monthly basis.
You are required to:
Prepare the following accounts for three years starting
from 1 January 2006:
(a) Motor van
(b) Provision for
depreciation
(c) Profit and loss (extracted) (d) Balance sheet
P.144
(extracted)

21

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E Disposal of Fixed Assets

After sales of fixed
assets, it is need to
calculate the profit or
loss on disposal.
Accounting entries:
1.
1. Cancel the accounts of
cost of the fixed asset (e.g.
Motor vehicles)
Dr. Disposal: Motor vehicles
Cr. Motor vehicles

P.145

22

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Cancel the amount of

accumulated depreciation
in the Provision for
Depreciation A/C.
Dr. Provision for depreciation:
Motor vehicles
Cr. Disposal: Motor vehicles

Record the amount

received from the disposal
of fixed assets.
Dr. Cash / Bank
Cr. Disposal: Motor vehicles

P.146

23

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Balancing-off: Calculate
the profit or loss on
disposal.
If Dr. is larger than Cr., there
is loss on disposal
Dr. Profit and loss
Cr. Disposal: Motor vehicles
Or
If Cr. Is larger than Dr., there
is gain on disposal
Dr. Disposal: Motor vehicles
Cr. Profit and loss

P.147

24

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e.g.: Plum Co. bought $500

machinery on 1 January 2006.
The company used straightline method to calculate the
depreciation. The estimated
useful life is 5 years and the
scrap value is 50. On 1
January 2008, the company
sold the machinery for $200.
The end of accounting period
is 31 December.
You are required to prepare the
following accounts from
2006 to 2007:
(a) Machinery
(b) Provision for depreciation
(c) Disposal: Machinery
(d) Profit and loss (extract)
(e) Balance sheet (extract)

200611
$500

$50
52008
11$200
12
31

20062007
2008
(a)
(b)
(c)
(d)
P.148
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(a)

2006
$ 2006
$
11 500 1231 500
2007
2007
11 500 1231 500
2008
2008
11 500 11 500
P.149

26

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(b)

2006
$ 2006
1231 90 1231

$
90

2007
2007
1231 180 11
1231
180

90
90
180

2008
2008
11180 11 180
P.150

27

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(c)
2008
11

$ 2008
$
500 11 180
11 200
1231* 120
500
500
*

P.151

28

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(d)
2006

2007

1231
$
90
90

2008
120
P.152

29

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(d)

1231
$

2006

500
90 410
2007

500
180 320

P.153

30

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Bad Debts and

Provision for Bad Debts
and Discounts Allowed

10

Reference: Chapter 24 (p. 277)

24 (p.301)
P.154

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A Bad Debts
Definition: It is the
amount of debt that the
debtor is unable to
repay.
Accounting records:
Dr. Bad Debts
Cr. Debtors
Dr. Profit and Loss
Cr. Bad Debts

P.155

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Example:

A Co. sold $100

goods to Mr.
$100
Lee. Mr. Lee

was insolvent. A

Co. decided to
write off the

debt.

P.156

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Answer:

Dr. Bad Debts $100

Cr. Debtors-Mr. Lee
$100

Dr. Profit and loss

$100
Cr. Bad debts
$100

$100

$100
$100

$100

P.157

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Exercise
B Co. sold $200
goods to Mr.
Cheung. Mr.
Cheung became
bankrupt. B Co.
decided to write
off the debts.

$200

P.158

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Answer
Dr. Bad Debts $200
Cr. Debtors: Mr.
Cheung
$200

$200

$200
Dr. Profit and loss $200

Cr. Bad debts $200

$200
$200

P.159

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B Provision for Bad Debts

Definition: Provision
for bad debts is an

expense that

estimates the debts

likely to be bad.

Calculation of

Provision for bad
X ?%
debts
(Debtors - Bad debts) X ?%
P.160

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Calculation of Provision for Bad Debts

Year
ended 31
December

20X5
20X6
20X7
20X8

Debtors at the end

of the year (before
bad debts written
off

Bad
debts
written
off

Provision for
bad debts
(1%)

Increase /
Decrease in
Provision for
bad debts

30,400

200

302

+302

Dr. Profit and loss 302

283

-19

Dr. Provision for bad debts

453

+170

Dr. Profit and loss 170

150

-303

28,700
45,900
15,300

400
600
300

Entries to record
the Provision for
bad debts

Cr. Provision for bad debts

Cr. Profit and loss 19

Cr. Provision for bad debts

Dr. Provision for bad debts

Cr. Profit and loss 303

P.161

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Increase in Provision
for bad debts:
Dr. Profit and loss
Cr. Provision for bad
debts

Decrease in Provision
for bad debts:
Dr. Provision for bad
debts
Cr. Profit and loss

P.162

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Example 1
On 31 December 2008,
the balance of debtors
is $1,020. $20 debts is
needed to be written
off. The rate of
provision for bad
debts is 3%.

20081231

$1 020$20

3%

P.163

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$20
$20

Dr. Profit and loss $20

Cr. Bad Debts
$20

$20
$20

Dr. Profit and loss $30

Cr. Provision for bad
debts (Increase) $30

$30
()$30

Answer
Dr. Bad Debts
Cr. Debtors

$20
$20

P.164

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Example 2
On 31 December 2008,
the balance of debtors
is $2,040. $40 debts is
needed to be written
off. The rate of
provision for bad
debts is 3%. The
provision for bad
debts for last year was
$70.

20081231

$2 040$40

$70

3%
P.165

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Answer

$40
$40

Dr. Profit and loss $40

Cr. Bad Debts
$40

$40
$40

Dr. Provision for bad

debts (Decrease) $10
Cr. Profit and loss $10

()$10

$10

Dr. Bad Debts

Cr. Debtors

$40
$40

P.166

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Bad Debts and Provision for Bad

Debts Recording in Final Accounts

()

Profit and loss (extract)

$
Bad Debts
Increase in
Provision
for bad
debts

$
Decrease in
Provision
for bad
debts

()

()
P.167

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()

Balance Sheet (extract)

$
Current asset
Debtors
Less:
Provision for
bad debts

()
:
P.168

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Exercise
The debtors for Chong Ho
Co. on 31 December 2005
was $10,200. $200 debts
would be written off. The
company decided to
provide 5% provision for
bad debts on the debtors
after deducting the bad
debts.
You are required to prepare:
(a) Provision for bad debts
(b) Profit and loss (extract)
(c) Balance sheet (extract)

20051231

$10 200$200

5%

2005

(a)
(b)()
(c)()
P.169

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D Provision for Discount Allowed

Definition:

Provision for

discount allowed
shows the

estimated total

amount which will

be deducted when
debtors pay their

accounts within

the credit period.

P.170

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Increase in Provision
for discounts allowed:

Dr. Profit and loss

Cr. Provision for

discounts allowed
Decrease in Provision

for discounts allowed :

Dr. Provision for

discounts allowed

Cr. Profit and loss

P.171

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Example
The debtors for Ka Ka Co.
was $4,000 on 31
December 2008. $200
provision for bad debts
would be provided for
2008. The company
made a provision for
discounts allowed of 2%
on the remaining debtors.
Required:
Show the Provision for
discount allowed A/C to
record the above
transaction.

20081231

$4000
$200

2%

P.172

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Answer

$76
Dr. Profit and loss $76
()
Cr. Provision for bad
$76
debts (Increase) $76
($4000-$200) X 2%

P.173

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E Bad Debts Recovered

Definition: A debt
written of in
previous year to be
recovered in later
year.

P.174

Accounting records:
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1 Debts written off and

1
recovered in the same year
Dr. Debtors

Cr. Bad debts

/
Dr. Cash / Bank

Cr. Debtors
2 Debts written off and
recovered in different year
Dr. Debtors
Cr. Bad debts recovered
Dr. Cash / Bank
Cr. Debtors
Dr. Bad debts recovered
Cr. Profit and loss

P.175

Example:

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$200 bad debts

written off on 31
December 2006 was
recovered and
received cash on 1
July 2006.

20051231

$2002006
71

P.176

Example:

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Debts written off and

recovered in different
year
Dr. Debtors
$200
Cr. Bad debt
$200
recovered

$200
$200

$200

$200
$200

Dr. Bad debt

$200
recovered

Cr. Profit and loss 200

$200
$200

Dr. Cash / Bank

Cr. Debtors

$200

P.177

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11

Bank Reconciliation Statement

Reference: Chapter 17 (p. 176)

17 (p.191)

P.178

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Reasons for the Preparation of Bank

Reconciliation Statement

Explain the reasons for

the differences between
the balances of Cash
Book and Bank
Statement
The reasons include:
Bookkeepers or
banks mistakes
The time-lag of the
entries recorded

P.179

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B.

Example of Bank Statement

Bank Statement
Dr. Cr.
2005
1/12

$
Bal. b/f

15/12 Cheque
31/12 Bank
charges

Bal.
$

2005

400 Cr

1/12

60 460 Cr
20

440 Cr

400()

15/12
31/12

60 460()
440()

20
P.180

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C Causes for Differences in Balances

between Cash Book and Bank Statement

Recorded in Cash Book,

but not recorded in Bank
Statement
1.

2.

Unpresented Cheques
The drawee ()has
not yet presented ()
the cheque drawn by the
firm into his bank.
(Payment)
Uncredited Items / Bank
lodgement not yet credited
by bank The firm has
not yet presented ()
the cheque in the bank. /
The deposited cheque has
not yet appeared in the
bank statement (Receipt)

1.

()
2.

()
P.181

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Recorded in Bank
Statement, but not
recorded in Cash Book:
1. Credit transfer Direct money transfer
to the firmss bank
account without
using a cheque.
(Receipt)
2. Dishonoured
cheques The drawer
() may not
have enough money
in the current account
causing the bank
cannot pay money to
the drawee, i.e. the
firm. (Payment)
[Dr.Debtors Cr.Bank]

1.

(
)
2.

()

P.182

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Bank charges Service

charges of the banks
have been deducted
directly from the firms
bank account. (Payment)
Standing Order
Instructions given by the
firm to make regular
payments to specified
accounts with fixed
amounts automatically.
(Payment)
Autopay - Instructions
given by the firm to let
specified parties to
collect money with
variable amounts and
from time to time
(Payment)
Errors Cash Book Error
and Bank Statement
(Receipts / Payment)

3 -

()
4

(
)

()

6
(/
)
P.183

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Post-dated cheque the

date written on the
cheque is after the
particular date when it is
drawn. No transaction
needs to be made. If the
firm recorded the entries:
Dr. Bank Cr. Debtors.
The correcting entries is
Dr. Debtors Cr. Bank

Stale Cheques
Cheques have not
presented more than 6
months. If the entries
was recorded, the
correcting entries is Dr.
Bank Cr. Creditors

7 -

P.184

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Methods for the Preparation of Bank

Reconciliation Statement

(1)Updated the Cash Book and

(1)
then prepared the Bank
Reconciliation Statement

Enter the following items

in the Cash Book: Credit

transfer, Dishonoured
cheques, Bank charges,
Standing Order, Autopay,
Post-dated cheque, Stale
Cheques
Prepare the Bank
Reconciliation Statement
with the remaining items:
Unpresented Cheques ,
Uncredited Items / Bank
lodgement not yet credited
by bank

P.185

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Updated Cash Book

Cash Book
$

Balance b/f

Bank charges

Credit
transfer

Dishonoured
cheques

Standing
order
Autopay

Balance c/f

P.186

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Prepare Bank Reconciliation

Statement
Bank Reconciliation Statement
31 December 2006

20061231

Adjusted Cash Book

Balance

()

Add: Unpresented cheques

Less: Uncredited items

Balance as per Bank

Statement

P.187

10

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(2) Prepare the Bank

Reconciliation
Statement only, begin
with the Cash Book
balance
Prepare the Bank
Reconciliation
Statement with all
the items.

(2)

P.188

11

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Bank Reconciliation Statement 31 December 2006

$

Balance as per Cash Book

Add: Unpresented Cheques
Credit transfer
Less: Uncredited items
Standing order
Bank charges
Autopay
Dishonoured cheques
Balance as per Bank Statement
P.189

12

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20061231
$

P.190

13

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(3) Prepare the Bank

Reconciliation
Statement only, begin
with the Bank
Statement balance
Prepare the Bank
Reconciliation
Statement with all
the items.

(3)

P.191

14

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Bank Reconciliation Statement 31 December 2006

$

Balance as per Bank Statement

Add: Uncredited items
Standing order
Bank charges
Autopay
Dishonoured cheques
Less: Unpresented cheques
Credit transfer
Balance as per Cash Book
P.192

15

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20061231
$

P.193

16

Summary:

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(2) Begin with Cash (3) Begin with Bank

Book Balance
Statement Balance

Unpresented Cheque

Credit transfer

Uncredited items

Standing order

Bank charges

Autopay

Dishonoured cheques

+
P.194

17

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13

Corrections of Errors (1):

Errors not affecting the Trial Balance
agreement
(1)

Reference: Chapter 25 (p.295)

25 (p.319)
P.195

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Two Types of Errors:

(1) Errors not affecting the Trial

Balance agreement
The errors result in the same
amounts in debit and credit
sides.
For example, both debit and
credit sides are omitted.
(1) Errors affecting the Trial
Balance agreement
Different amounts are
entered in debit and credit
side.
For example, only debit entry
is recorded and credit entry is
omitted.

(1)
-

(2)
-

P.196

Six Kinds of errors not affecting the

agreement of Trial Balance
()

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(1) Errors of commission

(2) Errors of principles
(3) Errors of original entry
(4) Errors of Omission
(5) Compensating errors
(6) Complete reversal of
entries

(1)
(2)
(3)
(4)
(5)
(6)

P.197

Definitions and Examples of Errors not

affecting the Trial Balance agreement

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(1)Errror of Commission:
entered in a wrong
persons A/C
Sales to Mr Cheung
recorded in Mr. Chens A/C
e.g. 1
On 1 May 2009, credit sales
of $500 to A Co. wrongly
recorded in B Co.

(1)


(1)
200951
$500

P.198

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Correcting Entry:
Journal
Dr.
$

2009
May 1

DebtorsA Co.
DebtorsB Co.

Cr.
$

500

$
$

2009
51

500

500
500

P.199

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(2)Errors of Principle
entered in the wrong type
of A/C
Motor expenses A/C
wrongly entered in the
Motor Car A/C
e.g. 2
On 1 June 2009, purchases
$1,000 machinery wrongly
recorded in the purchases
A/c

(2)


(2)
200961
$1000

P.200

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Correcting Entry:
Journal
Dr.
$

2009
June 1

Machinery
Purchases

Cr.
$

1000

2009
61

1000

Dr.
$

Cr.
$

1000
1000

P.201

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(3)Errors of Original Entry

Incorrect amounts
entered in the debit and
credit of ledger accounts
e.g. 3:
On July 1 2009, credit
sales $500 to C Co., both
debit and credit
recorded as $5000.

(3)

(3)
200971
$500
$5000

P.202

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Correcting Entry:
Journal
Dr.
$

2009
July 1

Sales
Debtors
C Co

Cr.
$

4500

Dr.
$

2009
71

4500

Cr.
$

4500
4500

P.203

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(4) Errors of Omission

Both debit and credit are
not recorded.
e.g. 4:
On 1 August 2008, credit
purchases of $300 from D
Co. are omitted in the
ledger.

(4)

(4)
200881
$300

P.204

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Correcting Entry:
Journal
Dr.
$

2008
Aug. 1

Purchases
CreditorsD Co.

Cr.
$

300

2008
81

300

Dr.
$

Cr.
$

300
300

P.205

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(5) Compensating Errors

An error in debit side are
set off an error in credit
side.
e.g. 5
On 30 September 2008,
the total purchases
overcasted by $100 and
the total sales also
overcasted by $100.

(5)

(5)
2008930
$100
$100

P.206

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Correcting Entry:
Journal
Dr.
$

2008
Sept. 1

Sales
Purchases

Cr.
$

100

2008
930

100

Dr.
$

Cr.
$

100
100

P.207

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(6)Complete Reversal of Entries

The debit entry wrongly
recorded in credit and the
credit entry wrongly recorded
in debit at the same time.
e.g. 6:
On 1 October 2008, received
$500 from C Co., the entry
wrongly debited the C Co. and
credit the cash book.

(6)

(6)
2008101
$500

P.208

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Correcting Entry:
Journal
Dr.
$

2008
Oct. 1

Cash
DebtorsC Co.
($500x2)

Cr.
$

1000

Dr.
$

2008
101

1000

-
($500x2)

Cr.
$

1000
1000

P.209

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14

Corrections of Errors (2):

Errors affecting the Trial
Balance agreement
(2)
Reference: Chapter 26 (p. 312)
26 (p.336)
P.210

Reasons affecting the Trial Balance

agreement

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1. Incorrect addition
in any account
2. Omit one of the
entry (debit /
credit)
3. The amount in
debit is different in
the credit side

1.
2.

3.

P.211

B Suspense Account

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A suspense
account is an
account showing a
balance equal to
the difference in
the trial balance
totals.

P.212

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The Effects of Errors on Profits

If the errors effect

the items (i.e.
Income, Expenses,
Stock) in the
Trading and Profit
and Loss A/C,
these items are
needed to be
adjusted in the
Statement of
Corrected Profit

P.213

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Example:
On 31 December 2008, there is a shortage of $77 on debit
side of Trial Balance. A suspense account was opened for
the difference. In 8 January 2009, the following errors
made in 2008 was found:
(i) Cheque $150 issued to Mr. Kwan only recorded in
Cash Book, but omitted in Mr. Kwans ledger account.
(ii) Purchases undercasted by $20.
(iii) $93 cheque received from Mr. Sun recorded in the
Cash Book, but omtted in Mr. Suns ledger account.
You are required to prepare
(a)
Journal to correct the above errors;
(b)
Suspense account
(c)
Statement correcting the net profit ( Net profit is $2200)
P.214

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:20081231$77
$77

(i)$150

(ii)$20
(iii)$93

(a)
(b)
(c)($2200)
P.215

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(a)

Journal
Dr.
$

2008
Jan. 8
(i)

Creditor Mr. Kwan

Suspense
(ii) Purchases
Suspense
(iii) Suspense
Debtor Mr.
Sun

Cr.
$

150
150
20
20
93
93
P.216

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(a)

2008
18 (i) -

(ii)

(iii)
-

150
150
20
20
93
93
P.217

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(b)

Suspense A/C

2008

Jan.
8

2008

Balance b/f

77 Jan. (i) Creditor - Mr.

8
Kwan

15
0

(iii) Debtor - Mr.

Sun

93

20

(ii) Purchases

170

17
0

P.218

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(b)
2008
18

2008

77 18 -

93
170

150
20
170

P.219 10

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(c)
Statement correcting net
profit
for the year ended 31 December
2008
$
Net profit before corrections
Add : Purchases undercast
Net profit after corrections

2200
20
P.220 11

2180

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(c)

20081231
$

2200
20
2180
P.221 12

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Control Accounts
Reference:
Chapter 27 (p. 338)

P.222

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Functions of Control A/C

Locate errors;
Provide a summary of the total of
debtors and creditors;
Cross-check to avoid fraud.

P.223

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Revision
Books of original entries and Ledgers
7 books: Sales journal, Purchases
journal, Returns inwards journal,
Returns outwards journal, Cash book,
Petty cash book, Journal
3 ledgers: Sales ledger, Purchases
ledger, General ledger

Original
documents

7 books

Posting

3 ledgers
P.224

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Original
documents

Sales /
Purchases
Journals
(7 books)

General ledger
Sales and
Purchases a/c
Sales /
Purchases ledgers
Debtors /
Creditors a/c

Trial
Balance

Double entry system

Sales ledger control account

Purchases ledger control account
For memorandum purposes

posting

extracting

P.225

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Sales Ledger Control a/c

Sales Ledger Control a/c

2008
Dec 1 Balance b/f

2008

(a) Dec 1 Balance b/f

(h)

31 Sales

(b)

31 Returns inwards

(i)

31 Cash / Bank (Refund)

(c)

31 Cash / Bank

(j)

31 Bank(Dishonoured cheques) (d)

31 Set-off

(k)

31 Interest received

(e)

31 Discounts allowed

(l)

31 Bad debts recovered

(f)

31 Bad Debts

(m)

31 Balance c/f

(g)

31 Balance c/f

(n)

X
P.226

Items

(a)

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Total of opening debit balances of debtors

(b) Total credit sales

(c)

Cash refund to a customer

(d) Dishonoured cheques

(e)

Interest charged by us on overdue debts

(f)

Bad debts recovered

(g) Total of closing credit balances of debtors

(h) Total of opening credit balances of debtors
(i)

Returns inwards

(j)

Cash or cheques received from debtors

(k)

Balances in sales ledger set off against credit

balances in purchases ledger

(l)

Discounts allowed

(m) Bad debts written (not provision for bad debts)

(n) Total of closing debt balances of debtors

Sources

Sales ledger
Sales journal
Cash book
Cash book
Journal
Journal
Sales ledger
Sales ledger
Returns inwards journal

Cash book
Journal
Cash book
Journal
P.227
Sales ledger

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D Purchases Ledger Control a/c

Purchases Ledger Control a/c
2008
Dec 1 Balance b/f

2008

(a) Dec 1 Balance b/f

(g)

31 Returns outwards

(b)

31 Purchases

(h)

31 Cash / Bank

(c)

31 Cash / Bank

(i)

31 Set-off

(d)

31 Bank

(j)

31 Discounts received

(e)

31 Interest expenses

(k)

31 Balance c/f

(f)

31 Balance c/f

(l)

P.228

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Items

Sources

(a) Total of opening debit balances of creditors

Purchases ledger

(b) Returns outwards

Returns outwards journal

(c) Cash or cheques paid to creditors

(d) Balances in purchases ledger set off against
debit balances in sales ledger
(e) Discounts received
(f) Total of closing credit balances of creditors
(g) Total of opening credit balances of creditors
(h) Total credit purchases
(i) Cash refund from suppliers who have
overcharged us
(j) Dishonoured cheques returned from creditors
(k) Interest payable on overdue debts
(l) Total of closing debt balances of creditors

Cash book
Journal
Cash book
Purchases ledger
Purchases ledger
Purchases journal
Cash book
Cash book
Journal
PurchasesP.229
ledger

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15

NON-PROFIT MAKING
ORGANIZATION

Reference:
Chapter 28 (p. 359)

28 (p. 385)
P.230

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Non-profit Making Organization

Example, club and

association.
The establishing goal
is not for profit
making.
As there is no gain or
loss, trading and
profit and loss
account is not needed.
A receipts and
payment account and
Income and
expenditure account
are prepared.

2
P.231

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Receipts and Payment Account

A summary of actual
receipts and
payments
Similar to Cash Book

3
P.232

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Format of Receipts and Payment A/C

Oriental Club
Receipts and Payment A/C
for the year ended 31 December 2009
Receipts
$ Payments
$
Opening cash and bank
balance

XXX

Wages of the stadium

XX

Subscriptions received
in 2009

XXX

Stadium repairs

XX

Rental income

XX

Closing cash and bank

balance

XXX

P.233
4

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20091231
$

P.234
5

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Income and Expenditure A/C

An account used to
calculate the
surplus (net profit)
or deficit (net
loss).
Similar to a profit
and loss account.
The income and
expenses recorded
subject to the yearended adjustment,
i.e. accruals and
prepayment.

6
P.235

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Format of Income and Expenditure A/C

Oriental Club
Income and Expenditure A/C
for the year ended 31 December 2009
Income
$
$
Subscriptions
XX
Rental income
XX
XXX
Less: Expenditures
Wages of the stadium
XX
Stadium repairs
XX
XX
Surplus
XX P.2367

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20091231

$
XX
XX
XX
XX

$
XXX

XX
XX

P.237
8

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Bar Trading Account

If a non-profit making
organization involves
activities making
profit, a bar trading
A/C is used to
calculate the profit
or loss.
E.g. a bar operated in
a golf club.
Expenses related to
the bar operation are
recorded in the Bar
Trading A/C (not in
the Receipts and
Payment A/C

P.238

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Format of Bar Trading A/C

Oriental Club
Income and Expenditure A/C
for the year ended 31 December 2009
$

Bar Taking
LessCost of goods sold
Opening bar stock
AddBar purchases
LessClosing bar stock
Gross profit
LessWages of bartender
Profit to Income and Expenditure A/C

1000
100
500
600
150

450
550
150
400
P.239
10

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20061231
$

1000
100
500
600
150

450
550
150
400
P.240
11

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Balance Sheet

The balance sheet is

similar to that of
profit making
organization, except
the capital.
In non-profit making
organization, the
capital is called
the Accumulated
Fund.
Accumulated Fund

+ Liabilities = Assets
12
P.241

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Format of Balance Sheet

Oriental Club
Balance Sheet as at 31 December 2009
$

Fixed Assets
Property
Current Asset
Bar Stock
Cash
Less: Current Liabilities
Bar Creditors

10,000
1,000
1,000
2,000
1,000

Financed by:
Accumulated fund as at 31 December 2008
Add Surplus
400

1,000
11,000
10,600
P.242
13

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20051231

10,000
1,000
1,000
2,000
1,000

1,000
11,000
10,600
400
11,000
P.243
14

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F
If

Subscription
there is no

subscription in arrear or
in advance, the amount
of subscription in the
Receipts and payment A/C
will be recorded in the
Income and Expenditure
A/C
If there are subscription
in arrear and advance
presented, the following
adjustments are to be
made:
Subscription (in I & E)
= Subscription (in R & P)
+ In arrear (this year)
- In advance (this year)
- In arrear (last year)
+ In advance (last year)

15
P.244

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Subscription
in Arrear and in Advance

At the year ended,

the subscriptions in

arrear and

subscriptions in

advance of the year

are to be recorded
in the Balance Sheet.
Subscription in
arrear is Current
Assets
Subscription in
advance is Current
Liabilities

16
P.245

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G
Donations and Entrance Fees

Donations are income

and are recorded in
the Income and
Expenditure A/C
Entrance fees are
income and received
when the member
joined the
organization. Also
recorded in the
Income and
Expenditure A/C

17
P.246

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Life Membership

Member can pay a lump

sum of subscription in
one times and enjoy
the membership in his
lifetime.
Life membership is an
income, it needed to
spread the life
membership into
several years. So it
needed to credit the
Income and Expenditure
A/C for several years

18
P.247

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16

Manufacturing Accounts

Reference
Chapter 29 (p. 385)
35
(p. 424)

P.248 1

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Manufacturing Company ()
and Manufacturing Accounts ()

Trading company purchases

goods for resale;
manufacturing company
manufactures goods for
sales.
The final accounts for
manufacturing company
are almost the same as
trading company. An
additional account,
Manufacturing Account.

P.249 2

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Manufacturing Accounts

Manufacturing accounts is
used to calculate the
Production cost of goods
completed.
Prime cost
Factory overhead
Opening work-in-progress
Closing work-in-progress
Production cost of goods completed

P.250 3

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Prime Cost (Direct Cost)

Direct materials
Direct labour
Direct expenses
Prime cost

P.251 4

C1
C1

Direct Material (Cost of raw material consumed)

()

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Stock of raw materials as at 1 Jan 20X7

AddPurchases of raw material
50000
Less Returns Outwards
2000
Net Purchases
48000
Add Carriage inwards
1000
LessStock of raw materials as at 21 Dec 20X7
Cost of raw materials consumed

5000

49000
54000
3000
51000
5000

50000
1000
51000
2000

49000
54000
3000
51000

P.252 5

C2

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Direct Labour

Wages for workers directly

participate in
manufacturing the products.

C3

Direct Expenses

Cost can be allocated to the

units of good manufactured.
E.g. royalties , and
subcontracting costs

P.253 6

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Factory Overhead (Indirect Cost)

Costs cannot be easily

traced to the

manufactured items;

costs occurred indirectly

during production.

E.g., wages of cleaners,

rent and rates of the

factory, wages of
foremen, depreciation
of the factory plant and
machinery
P.254 7

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Other

Administrative expenses
(e.g. wages of the
management, rent of the
office, depreciation of office
equipment)
Selling and distribution
expenses (e.g. wages and
commission of the
salesmen, carriage
outwards, depreciation of
delivery van, advertising
expenses. )
Administrative expenses
and Selling and distribution
expenses are recorded in
the Profit and Loss
Accounts.

)
(

P.255 8

F Format of Manufacturing Account

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Miu Miu Clock Co.

Manufacturing A/C
for the year ended 31 December 20X7
$
$
Stock of raw materials as at 1 Jan 20X7
AddPurchases of raw materials 50000
AddCarriage inwards
1000
51000
LessReturns Outwards
2000

5000

49000
54000
LessStock of raw materials as at 31 Dec 20X7 3000
Cost of raw material consumed
51000
P.256 9

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Cost of raw materials consumed

Direct expenses
Direct labour
Prime Cost

Factory Overhead
Factory electricity
Indirect wages
Depreciation of machinery
Factory rent

15000
5000
8000
20000

$
51000
10000
20000
81000

48000
129000
P.25710

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129000
AddWork-in-progress as at 1 Jan 20X7

20000
149000
Less Work-in-progress as at 31 Dec 20X7 25000
Production cost of goods completed c/d 124000

P.25811

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20071231
$

50000
1000
51000
2000

$
5000

49000
54000
3000
51000
P.259

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51000
10000
20000
81000
15000
5000
8000
20000

48000
129000
P.260

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129000
20000
149000
25000

124000

P.261

Trading Account in
Manufacturing company

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Miu Miu Clock Co.

Trading A/C
for the year ended 31 December 2007
$

Sales
Less:Cost of goods sold

300000

50000
AddProduction cost of goods completed 124000
174000
Less: Stock of finished goods as at 1 Jan 20X760000 114000
Gross profit
186000
15
Stock of finished goods as at 1 Jan 20X7

P.262

G
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20071231
$

300000

50000
124000
174000
60000 114000

186000
P.263

Balance Sheet (extracted)

in Manufacturing Company

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Miu Miu Clock Co.

Balance Sheet (extracted)

as at 31 December 2007
$

Current assets
StocksRaw material
Finished goods
Work-in-progress
Debtors
Bank
Cash

3000
60000
25000
80000
70000
20000

58000
P.26417

H ()
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()
20071231

3000
60000
25000
80000
70000
20000

258000
P.265