Chapter 1 (Accounting Principle) - Đã G P

Chapter 1
Introduction to
Accounting
and Business
Objectives
• Describe the nature of a business
• Describe the role of accounting in business
• Describe the profession of accounting
• Summarise the development of accounting
principles and relate them to practice
• State the accounting equation and define each
element of the equation.
• Describe the financial statements of a sole
proprietorship and explain how they interrelate.
Content
• Nature of a business
• What is accounting?
• Profession of accounting
• GAAP
• Accounting equation
• Financial statement
Nature of a
business
• In general, a business is an
organisation in which basic resources
(inputs) are assembled and processed
to provide goods or services (outputs)
to customers.
• Each business has its own objective!!!
Nature of a business
• Types of businesses:
Manufacturing
Trading
Service
Manufacturing
Trading
Service
Types of Business Organisation
• Sole proprietorship
• Partnership
• Company
Types of Business Organisation
What is accounting?
• Accounting provides
information for stakeholders.
• Accounting = Gathering,
Processing and Communicating
Providing Information to
Stakeholders Assess
Internal/External their
Identify
stakeholders
1 Stakeholders 2 informatio
n needs
Record
economic data 4 Accounti 3 Design the AIS
about business ng
Informatio
n System
Stakeholder
• Internal:
– Manager
– Employee
• External:
– Bank
– Tax authority
Stakeholders’ information needs
• Managers?
• Investors?
• Creditors (such as Bank)?
• Government?
Profession of accounting
Accountant
Private accountant Public accountant
Accounting Fields
Financial Accounting Managerial Accounting

GAAP
GAAP (Generally Accepted Accounting
Principles) US GAAP
UK GAAP
...
* Accountants follow GAAP in preparing reports. By

this, these reports could be compared from one
business to another.
GAAP
Accounting concepts developed from GAAP.
 Business Entity Concept
 Historical Cost
 Accounting Period
 Going Concern
 Consistency
 Materiality
 Money measurement concept
 …
Accounting equation
Assets = Liabilities + Owner’s Equity
* All business transactions can be stated in terms of changes in the elements

of
the accounting equation
Assets
• Resources controlled by the business
Assets
• Cas
h
• Property, Plant and Equipment
• Stock (Inventory)
• Patent right
• Land usage right
• Money in bank account
Liabilities
• Debts owed to outsiders (creditors)
• Business’s present obligations to pay
cash, transfer assets, or provide
services to other entities in the future.
Liabilities
• Loan
s
• Advance payment from customer
• Bank overdraft
• Payable to supplier
• Tax payable
Owner’s Equity
• Owner’s right to the asset of the business
Owner’s Equity
• Contributed capital investment
• Reserves
• Retained earnings
Business Transactions and the
Accounting
Equation
• Deposit in bank account for initial
capital investment ($1,000)
• Purchase a machine by cash ($300)
• Borrow money from your family ($400)
• Sell goods to customer and receive
cash ($200)
Financial statement
• Profit and loss statement
• Statement of owner’s equity
• Balance sheet
• Statement of cash flows
• Notes of FS
Profit and loss statement
Revenues
Expenses
Statement of owner’s equity
Summary
of the
changes in
the
owner’s
equity
Balance sheet
A list of
assets,
liabilities
and
owner’s
equity
Statement of cash flows
A summary
of the cash
receipts and
cash
payment
Practice !!
Use the financial statement items and amounts listed
below from the records of Keep-Fit Center for the year
ended April 30, 2014, the company’s first year of
operations, and prepare the following:
• Income statement • Statement of owner’s equity • Balance
sheet
Notes of FS
• List of note to accommodate user of FS
with additional information.
 Accounting policies
 Detailed information
 Contingency liabilities
 Events after reporting date
 Transactions with related parties
How are they linked together?
Profit and loss Statement of
Balance sheet
statement owner’s equity
Notes of FS Statement of cash

flows
Analysing
Transactions
 Describe the characteristics of an account
 List the rules of debit and credit and the
normal balances of accounts.
 Prepare a trial balance
🞂 What is an Account and its usefulness?
🞂 Characteristics of an Account
🞂 Debit and credit
🞂 Trial balance
🞂 A record to record the increase and decrease of each item
on the Financial Statement
◦ Cash account: record the increase and decrease of
cash
◦ Fixed Assets account: record the increase and
decrease of fixed assets
◦ Liabilities account: record the increase and
decrease of liabilities
◦ ....
🞂 A company will have separate accounts for such items
as cash, salaries expense, accounts payable, and so on.
🞂 Group of accounts called a ledger
🞂 List of accounts called a chart of accounts
🞂 Assets = Liabilities + Owner’s Equity
🞂 Revenues: a result of providing services

or selling products to customers.
🞂 Expenses: the using up of assets and
the consuming of services in the
process of earning revenues.
T Account Columnar
Account
🞂 There are 4 columns:
◦ Account title
◦ Debit
◦ Credit
◦ Balance
🞂 There are 3 parts:
◦ Title
◦ Debit side (Dr)
◦ Credit side (Cr)
🞂 When an amount entered on the left side of
an account (whatever!!!), is called debit to
the account (or the account is said to be
debited)
🞂 On the other hand, when an amount entered
on the right side of an account (whatever!!!),
is called credit to the account (or the account
is said to be credited)
🞂 The sum of the increases recorded in an
account is usually greater than the sum of the
decreases recorded in the account.
🞂 Increase side is normal balances of

an account
🞂 Remember the phrase:
◦ After Eating Dinner (Debit)
◦ Let’s Read Comics (Credit)
EASY???
* Every transaction affects at least two accounts
🞂 Deposit in bank account for initial capital
investment
🞂 Purchase a machine by cash
🞂 Borrow money from your family
🞂 Sell goods to customer and receive cash
🞂 The sum of debits must always equal the
sum of the credits for each transaction.
1
• Transaction Authorised
2
• Transaction takes place
3
• Business document prepared
4
• Entry recorded in journal
5
• Entry posted to ledger
🞂 Steps:
◦ 1: Determine which account is affected by the
transaction
◦ 2: Increase or Decrease?
◦ 3: Debit or Credit?
🞂 “Trial” is process of proving or testing
🞂 TB is used as a proof that the debit balances

equal credit balances.
 Remember: TB does not ensure that the ledger is

100% correct.
Prepare a TB
🞂 You have a list of transactions (provided
in class).
🞂 You might want to help me to prepare a
TB. Remember to follow steps as stated
below:
◦ 1: Record transactions in journal
◦ 2: Post to accounts
◦ 3: Make a TB
🞂 Column incorrectly added
🞂 Amount incorrectly entered on TB
🞂 Posted a wrong amount
🞂 Debit posted as credit, or vice versa
🞂 Debit or credit omitted
🞂 The following errors still make a TB to be
balanced:
◦ Not journalising a transaction or posting a
transaction
◦ Recording the same wrong amount for both debit
and credit parts of a transaction
◦ Recording the same transaction more than once
◦ Posting a part of a transaction correctly as a debit
or credit but to the wrong account
Chapter 3
The Matching Concept and
The Adjusting Process
Objectives
⚫ Explain how the matching concept
relates to the accrual basis of
accounting
⚫ Explain why adjustments are
necessary and list the
characteristics of adjusting
entries
⚫ Journalise entries for accounts
requiring adjustment
Content
⚫ Time difference!
⚫ Cash Basis and Accrual Basis
⚫ Matching concept
⚫ Adjusting process
Time difference
⚫ Remember “accounting period
concept”?
⚫ Thisis where all the problems in

accounting start!!! Accountants
must determine in which period to
report the
REVENUES and EXPENSES of
the business.
⚫ Sothey use: Cash Basis OR Accrual
Basis
Cash Basis
⚫ Revenues and expenses are
reported in the profit and loss
statement in the period in which
cash is received or paid.
⚫ Example:Your company purchased a

machine in March on credit.The
indebted
amount is paid in May.
Accrual Basis
⚫ Revenues are reported in the profit
and loss statement in the period in
which they are earned.
⚫ Revenue is reported when services

are provided to customers in
March! (Cash
may or may not be received)
Matching Concept
⚫ Accounting concept that supports
reporting revenues and related
expenses in the same period is
called the Matching
Concept, or Matching Principle
Adjusting Process
⚫ At
the end of the month or year, some
accounts require “updating”
⚫ Ex:
Supplies balance,
Depreciation Account, etc
⚫ Journalentries that update accounts

are called Adjusting entries
Nature of Adjusting entries
⚫ Affect at least one profit and loss
account (revenue or expense) and
one balance sheet account (asset or
liability)
⚫ Deferrals (expenses and revenues)

⚫ Accruals (expenses and revenues)
Difference between
Deferrals and
Accruals
⚫ Deferrals
◦Cash received or paid in the current
period,
but revenue and expense relate to future
period.
⚫ Accruals
◦Cash will not be received or paid until a
future period, the revenue and
expense relates to the current period.
Current Accounting Future Accounting
Period Period
Revenu
Cash e
Deferrals Received Earned
or Paid or
Expens
e
Incurre
d
Revenu
e Cash
Accruals Earned Received
or or Paid
Expens
e
Incurre
d
Deferred Expenses
⚫ Initially
recorded as assets
but are expected to become
expenses.
⚫ Supplies and Supplies Expense

⚫ Prepaid Insurance and Insurance
Expense
Supplies and Supplies Expense
Supplies and Supplies
Expense (Cont)
⚫ 1.1 Bought supplies with cost $1,000
⚫ Amount of supplies used during
the month $350
⚫ The supplies account balance at
the end of the month?
Prepaid Insurance and Insurance
Expense
Prepaid Insurance and Insurance
Expense
⚫ The company bought an 12-
months insurance contract (@cost
of $12,000) for their inventory on
1st of December.
⚫ How would they record this at

the beginning and end of
December? Let
prepare your T-account for this
transaction.
What is the effect of omitting
adjusting entries?
Expenses
Assets
Owner’s
Equity
Deferred Revenue
⚫ Initial
recorded as liabilities but
are expected to become
revenues.
⚫ Think of any example?
⚫ Unearned Revenue and Revenue

Unearned Revenue and
Revenue
⚫ Letassume I have a house to rent
out for students @ $100 per
month.
⚫ What if you guys sign a 6-months

rent contract with me at 1st
December? (Paid
in full = paid full in advance)
Accrued Expenses
⚫ These are expenses that have been
incurred but have not been recorded in
the accounts.
⚫ Accrued expenses are services that are

paid for after the services has been
performed.
⚫ Salaries owned to employees
⚫ Salaries Payable and Salaries Expense

Salaries Payable and Salaries
Expense
⚫ Youare hired as sale assistants
in Mr Quan’s food store on 1st
March
⚫ Salaries:
5 mil per month
⚫ How Mr Quan record this at the
beginning and the end of March?
Salaries Payable and Salaries
Expense
⚫ Whatif at the end of March Mr
Quan has paid you guys just 2 mil?
⚫ How to treat this unpaid salaries at

the end of the month?
Accrued Revenue
⚫ Are revenues that have been
earned but have not been recorded
in the accounts.
⚫ Ex: Lawyer has provided services to

a client but has not send an invoice
still the
end of the month
⚫ Account Receivable and Revenue

Account Receivable and
Fees Earned
⚫I signed an agreement with students on
January 15th . Binding by the agreement,
I will
help students to answer their
accounting- related-questions @
$10 per question.
Invoice will be sent to students on the
15th of each month. Given that I had
answered 20 questions at the end of
January.
⚫ How do I record this at the end

of the month?
Fixed Assets and Depreciation
⚫ Fixed Assets:
◦Permane Used to
nt earn
◦Duration Revenue
⚫ Depreciation:
◦Decrease in
usefulness
Recorded
as
expenses
⚫ Company bought a machine on
1/1/20X0 at cost of $10,000.At the
year end, the estimated amount of
depreciation for the
year is assumed to be $1,000.
⚫ How to record this at the year end?

⚫ Accumulated depreciation accounts
are called Contra Accounts, or
Contra Asset Accounts
⚫ Fixedassets are presented on the

BS at their Net Book Value (Cost
of Fixed Assets – Accumulated
Depreciation)
Summary of Adjusting Process
⚫ Deferred Expense Dr
C
r
⚫ Deferred Revenue Dr
C
r
⚫ Accrued Expense Dr
C
r
⚫ Accrued Revenue Dr
C
r
⚫ Depreciation Dr
C
r
Practice !!
A.A Consultant Company’s trial balance on December 31, 20x4 as follows:
A.A Consultant Company
Trial Balance
December 31, 20x4
Cash 12,786
Account Receivable 24,840
Office Supplies 991
Prepaid Rent 1,400
Office Equipment 6,700
Accumulated Depreciation – Equipment 1,600
Account Payable 1,820
Notes Payable 10,000
Unearned Service Revenue 2,860
A.A, Capital 29,387
A.A, Withdrawals 15,000
Service Revenue 58,500
Salaries Expense 33,000
Utilities Expense 1,750
Rent Expense 7,700
104,167 104,167
⚫ The following information:
-Ending inventory of office supplies is $86
-Prepaid rent expired, $700
-Depreciation of office equipment for the period, $600
-Interest accrued on the note payable, $600
-Salaries accrued at the end of the period, $200
-Service Revenue still unearned at the end of the period
$1,410
-Service Revenue earned but not billed, $600
Required:
a) Open T-accounts show all the balance of A.A
company
b)Prepare the adjusting entries and post directly to the
T-
accounts
c)Prepare an adjusted trial balance
Completing the
Accounting Cycle
Chapter 4:
Objectives
🞂 Prepare a work sheet
🞂 Prepare financial statements

from a work sheet
Contents
🞂 Work sheets
🞂 Steps in completing a work sheet
🞂 Financial statements
Work sheets
🞂 Collecting and summarising data (adjusting
entries and account balances)
🞂 Not a formal accounting record
🞂 Prepared by using a spread-sheet program on a

computer
🞂 Helpful tool in preparing financial statements

Work sheets
🞂 6 Columns
🞂 1st : Account title

🞂 2nd :Trial balance
🞂 3rd : Adjustments
🞂 4th : Adjusted Trial balance
🞂 5th :Profit and loss Statement
🞂 6th: Balance sheet
Steps in completing a work sheet
🞂 Step 1: Enter Trial Balance
🞂 Step 2: Enter Adjustments (Accounts are

added – as needed)
🞂 Step 3: Determine Adjusted Trial Balance
🞂 Step 4: Place adjusted amount to PL or BS
🞂 Step 5: Determine profit or loss (The difference

between Dr and Cr of PL)
Work sheets
Work sheets
Financial statements
🞂 Profit and loss statement
🞂 Statement of Owner’s Equity
🞂 Balance Sheet
Profit and loss statement
🞂 Revenues
🞂 Expenses
Statement of Owner’s Equity
🞂 Opening Balance of OE
🞂 Additional Investment (if any)
🞂 Net profit/(loss)
🞂 Withdrawals
🞂 Closing Balance of OE
Balance Sheet
🞂 Assets
🞂 Current Assets
🞂 Fixed Assets
🞂 Liabilities
🞂 Current Liabilities
🞂 Long-term Liabilities
🞂 Owner’s Equity
Closing Entries
🞂 Accounts in PL should have no balances
🞂 Closing these balances by transferring them to

Profit and Loss Summary
🞂 This is called the Closing Process.Transferring

entries are called Closing Entries
Step in accounting cycle
Chapter 5
Accounting for
Trading Business
Objectives
⚫ Distinguish the activities of a service business from those of a
trading business
⚫ Journalise the entries for trading transactions
⚫ Prepare a profit and loss statement for a trading business

Contents
1. Nature of Trading Businesses
2. Transportation Costs
3. Perpetual Inventory System
4. Periodic Inventory System
5. Profit and loss statement for a trading
business
Nature of Trading Businesses
⚫ Would you please tell me three most
common type of businesses?
Manufacturing Trading Services

⚫ Which type of business has the most
complex accounting system?
Manufacturing
Trading Operations
⚫ Why?
Service Business Trading Business

Fees X Sales X
Expenses (X) COGS (X)
Net Profit X Gross Profit X
Operate Expenses (X)
Net Profit X
COGS in a manufacturing business: Material, Labour and Overhead

COGS
Purchase
Goods Re-sale
Goods on hand at the end of the month or the

year (Inventory)
Transportation Costs
⚫ Sale is determined when ownership (title) of
the good passes to the buyer.
⚫ This point determines which party (buyer

or seller) must pay the transportation costs.
Buyer Pays Shipping

Point
FOB (Free On Board)
Destination
Seller Pays
⚫ FOB Shiping point
⚫ Debit Transportation In
Buyer
⚫ Credit Cash/Bank/Payable
⚫ FOB Destination
⚫ Debit Transportation Out Seller
⚫ Credit Cash/Bank/Payable
Perpetual Inventory System
1. Purchase on Credit/Cash/Mixture
2. Purchase Returns and Allowances
3. Purchase Discounts
4. Sale on Credit/Cash/Mixture
5. Sale Returns and Allowances
6. Sale Discounts
Perpetual Inventory System
⚫ Updates inventory and cost of goods sold after
every purchase and sales transaction.
⚫ When merchandise is purchased: cost of each item
is recorded in the Inventory account.
⚫ When merchandise is sold: cost is transferred from
the Inventory account to the Cost of Goods Sold
account.
⚫ The amount of goods available for sale and the
amount sold are continuously (perpetually) shown in
the
inventory records.
Closing Balance = Opening Balance + Purchase - Sale

• Could be made: By Cash/On Credit/By Mixture
(Cash + Credit)
• Transaction: On August 3, A received
merchandise purchased on credit from the
supplier, invoice dated August 1, terms 2/10,
n/20, $4,890
Dr Inventory 4,890
Cr Trade Payable 4,890
(Purchased merchandise on credit)
• Transaction: On August 6, A returned part of
merchandise received on August 3 for credit
to the supplier, $490
Dr Trade Payable 490
Cr Inventory 490
(Returned merchandise from purchase)
• Transaction: On August 10, A paid in full the
amount of merchandise purchased on Aug 3 to
the supplier to enjoy the discount through bank
transfer.
Dr Trade Payable 4,400
Cr Bank 4,312
Cr Inventory 88
(Payment for inventory with 2/10 settlement discount)
⚫ Transaction: On August 14, A sold merchandise on credit for
customer C, terms 4/15, n/30, FOB shipping point,
$1,200.
The cost of the merchandise was $720.
Dr Account Receivable 1,200
Cr Sales 1,200
Dr COGS 720
Cr Inventory 720
⚫ On August 18, A accepted for full credit a return of part of
merchandise sold on August 14 from C, and returned it to
inventory, $300.The cost of the merchandise was $180.
Dr Sale Returns and Allowance 300
Cr Account Receivable 300
Dr Inventory 180
Cr COGS 180
6. Sale Discounts
⚫ On August 29, A received in full the amount of sale
of merchandise on Aug 14 les the return on Aug 18
from
customer C.
Dr Cash/Bank 864
Dr Sale Discount 36
Periodic Inventory System
6. Sale Discounts
Periodic Inventory System
⚫ Delays updating of inventory and cost of
goods sold until end of the period
⚫ Inventory not yet sold is counted
periodically: physical count = physical
inventory
⚫ No detailed records of the inventory are
maintained during the accounting period
COGS = Opening Balance + Purchase – Closing Balance

• Could be made: By Cash/On Credit/By Mixture
(Cash + Credit)
• Transaction: On Sep 3, N received
merchandise purchased on credit from the
supplier, invoice dated Sep 1, terms 2/10,
n/25, $4,890.
Dr Purchases 4,890
Cr Trade Payable 4,890
(Purchased merchandise on credit)
• Transaction: On Sep 6, N returned part of
merchandise received on Sep 3 to the supplier for
credit, $490.
Dr Trade Payable 490
Cr Purchase Returns & Allowances 490
(Returned merchandise from purchase)
• Transaction: On Sep 10, N paid in full the
amount of merchandise purchased on Sep 3 to
the supplier to enjoy the discount.
• When making early payment (enjoy purchases discounts)
Debit Trade Payable 4400
Credit Cash/Bank Account 4312
Credit Purchases Discounts
88
(Payment for inventory with 2/10 settlement discount)
⚫ Transaction: On August 14, N sold merchandise on credit to
customer D, terms 3/10, n/30, $1,200. The cost of the
merchandise was $720.
Dr Account Receivable 1,200
Cr Sales 1,200
⚫ Sales made with the use of credit cards? (Master cards, VISA, etc)
⚫ Will create a receivable with the card companies. These companies
will charge a service fee.
Sales on credit cards:
Debit Account Receivable (Card Company)
Credit Sales
Receive money from card company:
Debit Cash
Debit Credit Card Expenses
Credit Account Receivable (Card Company)
Goods sold be returned to seller (sales return)
The seller may reduce the initial price because of defects (sales
allowance)
This will reduce sales. However, manager may want to know
the amount of returns and allowances for a month or a year 
open contra sales accounts
⚫ Transaction: On August 18, N accepted for full credit a return of

part of merchandise sold on August 14 from D, and returned it to
inventory, $300.The cost of the merchandise was $180.
Dr Sale Returns and Allowance 300
6. Sale Discounts
Seller may offer the buyer credit terms that include
a discount for early payment.
In theory, discount for early payment will reduce
Sales/Sales Revenues (Debit it!!!). However, managers
may want to know the amount of sales discount for the
period  Open Sales Discounts Account (Contra Sales
Account)
⚫ Transaction: On August 24, A received in full the amount of sale
of merchandise on Aug 14 les the return on Aug 18 from
customer C.
Dr Cash/Bank 873
Dr Sale Discount 27
Goods and Services Tax (GST)
In some countries, this type of tax could be also
known under the name Value Added Tax (VAT)
Businesses are authorised to charge and collect GST

(or VAT) on behalf of the Controller of GST (Tax
Authority)
Goods and Services Tax (GST)
In some countries, this type of tax could be also known
under the name Value Added Tax (VAT)
GST Payable (When sale is made)

GST Receivable (When purchase is made)
At the end of each quarter, business pays the net amount of

tax (ie GST Payable – GST Receivable)
Profit and loss statement for a trading
business
Revenue from Sales X
Cost of Goods Sold (X)
Gross Profit X
Other Revenue X
Operating Expenses (X)
Net Profit X
Chapter 6
Objective
 Describe the nature of cash and the importance
of internal control over cash
 Summarise basic procedures for achieving internal
control over cash receipts
 Summarise basic procedures for achieving internal
control over cash payments
 Describe the nature of a bank account and its use
in controlling cash
Contents
⚫ Importance of cash and cash controls
⚫ Internal Control
⚫ Internal Control for Cash
⚫ Bank Account
Importance of cash and cash
controls
⚫ Cash: coins, paper money, cheques, and fixed deposits
with banks
⚫ Cash is needed for everyday operation of any business
⚫ High risk of loss  safeguard needed
Internal Control
⚫ Policies, procedures within organisation (effected by
BOD and BOM) to give reasonable assurance of
achieving objectives:
⚫ Effectiveness of operation (hiệu quȧ trong hoạt động)
⚫ Reliability of reports (Độ tin cậy trong BC (vd: các BCTC
⚫ Compliance with laws and regulations (Tuân thủ các
luật định và quy tắc)
Internal Control
⚫ Control Environment. (Môi trường kiểm soát)
⚫ Risk Assessment (Quy trình Đánh giá rủi ro)
⚫ Information and Communication (TT và TT)
⚫ Control Activities (Các hoạt động kiểm soát)
⚫ Monitoring (Giám sát)
Internal Control
Risk Assessment Monitoring
Control
Environment
Control Activities Information

and
Communication
Internal control
Control activities:
⚫ Segregation of duties
⚫ Authorisation of transactions
⚫ Retention of records
⚫ Supervision or monitoring of operations
⚫ Physical safeguards
Segregation of duties
⚫ Separating authorisation, custody, and record
keeping roles to prevent fraud or error by one
person.
⚫ No one person should (altogether):
⚫ Initiate transaction
⚫ Approve transaction
⚫ Record transaction
⚫ Reconcile balances
⚫ Handle assets
⚫ Review reports
Authorization of
transactions
⚫ Review of particular transactions by an appropriate person.
⚫ Normally by supervisor.
Retention of records
⚫ Maintaining documentation to substantiate transactions.
Supervision or monitoring of
operations
⚫ Observation or review of ongoing operational activity.
Physical safeguards
⚫ Usage of cameras, locks, physical barriers, etc. to protect
property, such as merchandise inventory.
Internal Control for Cash
Purchase
Sale (FG, raw
material)
Cash
Debt
Bank
Collecting
1. Cash Receipts
2. Cash Payments
Receipts
⚫ Received from Cash Sales
Cash
Register
Receipts
⚫ Received in the Mail
Payment
⚫ Payment by cheques, petty cash or electronic funds
transfer
⚫ Supporting documents are needed
Bank Account
⚫ Business may have several bank accounts
Check Check
Payee
Bank
Drawer (Drawee)
Money
Bank Account
⚫ Bank statement
Bank Account
⚫ Bank account could be used as a Control Over Cash as
it provides a second record of cash transactions.
⚫ Payment should not be made out by cash!!!!
Chapter 7
⦿ Summarise and provide
examples of internal control
procedures that apply to
receivables
⦿ Describe the nature of and
the accounting for bad
debts and doubtful debts
⦿ Classification of Receivables
⦿ Internal Control of Receivables
⦿ Uncollectible Receivables
⦿ Allowance Method
⦿ Direct Write-off Method
Receivables = money owing to the business
by other entities
 Account Receivable
 Notes Receivable
 Other Receivable
⦿ Account Receivable
◾ Result from selling goods or providing services on
credit
◾ Normally collected within a short period
such as 30 or 60 days
⦿ Notes Receivable
◾ Amounts that customers owe, for which a formal
written agreement has been issued
◾ Interest is required
⦿ Note Receivable and Accounts

Receivable are sometimes called Trade
Receivables
⦿ Other Receivables
◾ Shown separately on the balance sheet
◾ Include interest receivable and receivables from
employees
Custom
P er Payment
O
Credit
Approval
Goods Collecting
or
Invoic
Service e
s
Sales Receip
t
Notes
Accounting
Information flow in a business for sale

activitie
⦿ Segregation of duties (employee
responsible for sales and employee
doing the accounting for the
receivables)
⦿ Approving credit
⦿ Reconciliation frequently
(Receivables outstanding and
receipt notes)
⦿ Collecting policy
⦿ Common fraudulences:
◾ Lapping
◾ Fake documents
◾ Do not write-off received amounts
⦿ Sometimes, receivables will not be (or
cannot be) collected.
⦿ Indications that an account may be uncollectible
include:
 Receivables is past due.
 Customer does not respond to collection attempts.
 Customer files for bankruptcy, etc…
⦿ These amount can be limited by the credit-
granting function.
⦿ When receivables become uncollectible,
outstanding receivables balances will be
converted into expense.
⦿ Bad debt: confirmed
uncollectible receivables
⦿ Doubtful debt: potential bad debts
⦿ Under prudence principle, expected

losses to be recognised in the
accounting books as soon as possible.
⦿ These losses will be recorded through:

allowance method or direct write-off
method
⦿ Estimates the expense for
uncollectible receivables even
before the account is confirmed to
be worthless
⦿ Example: At the year end, company A’s

receivable balance is $10,000 (made of
from some customers and this amount
is past
due). Company estimates that 5% of this
balance will become worthless. What is
the accounting treatment for this
estimation?
⦿ Company need to open an
Allowance for Doubtful Debt
account because:
◾ This amount is an estimation
◾ This amount cannot be credited
(decrease) to specific customer
⦿ This account is a contra asset account
◾ Dr Doubtful Debts Expense $500

◾ Cr Allowance for Doubtful Debts $500
⦿ Recognises the expense only when
accounts are confirmed to be
worthless
⦿ An allowance account is not

needed. Company will directly
write-off the bad debts to an
expense account
⦿ This method is used when

uncollectible amount is impossible to
estimate and small
⦿Example: On December 1, $5000
account receivable from Joe is
determined to be uncollectible.
Dec 1
◾ Dr Bad Debts Expense $5,000
◾ Cr Account Receivables, Joe $5,000
Inventories
Chapter 8
www.themegallery.com
Objectives
Compute the cost of inventory under the
periodic and perpetual inventory
system, using the FIFO,LIFO and
Weighted average cost methods
Compare and contrast the use of the
three inventory costing methods
Contents
Inventory cost flow assumptions
Periodic and perpetual inventory system
Inventory Costing Methods under
the periodic inventory system
Inventory Costing Methods under
the perpetual inventory system
Effect on PL and BS
Which costing method to choose from?
Inventory cost flow assumptions
Business may buy identical units of
goods at different unit costs  cost flow
must be assumed.
First in, first out (FIFO)

Last in, first out (LIFO)
Weighted Average
First in, first out
Last in, first out
Weighted Average
Periodic and perpetual inventory
system
Remember?
Periodic
COGS = Opening Balance +
inventory
Purchase – Closing Balance
system
Perpetual Closing Balance = Opening

inventory Balance + Purchase - Sale
system
Periodic and perpetual inventory
system
Periodic inventory system: Inventory
is accounted for at the end of the
period
Perpetual inventory system: Each

purchase and sale of goods is recorded
in an Inventory Account.
Inventory Costing Methods under
Using one of the following cost
flow assumptions:
 FIFO;
 LIFO;
 and Weighted Average Cost method
FIFO
Example:
Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 400 $12

5th Jan Purchase 600 $14
31st Jan Closing Bal 400 Unkown
Under FIFO method, the goods
purchased first are sold first. Therefore:
 Ending inventory: 400 units would comprise:
200 units 200 units

purchased on purchased on
20th Jan (@$10 5th Jan (@$14
per unit) per unit)
Inventory Closing
Balance = $4,800
LIFO
Example:

Under LIFO method, the goods
purchased last are sold first. Therefore:
 Ending inventory: 400 units would comprise:
300 units of 100 units

Beginning Bal purchased on
1st Jan (@$10 2nd Jan (@$12
per unit) per unit)
Inventory Closing
Balance = $4,200
Weighted Average cost method
Example:

Weighted Average unit cost =
= (3,000 + 4,800 + 8,400 + 2,000)/

(300 + 400 + 600 +200)
= $12.13
Ending inventory= 400 * 12.13 = $4,852
Using one of the following cost
flow assumptions:
 FIFO;
 LIFO;
 and Weighted Average Cost method
Also, stock card or inventory subsidiary

ledger account are used in determining
the inventory’s ending balance and value.
FIFO
Example
2nd Jan Sale 200

5th Jan Sale 500
8th Jan Sale 300
FIFO
Ending Inventory?
 Quantity = Units
 Value = $
COGS = $
LIFO
Example
2nd Jan Sale 200

5th Jan Sale 500
8th Jan Sale 300
LIFO
 Value = $
COGS = $
Example
2nd Jan Sale 200

5th Jan Sale 500
8th Jan Sale 300
 Value = $
COGS = $
Effect on PL and BS
Whatever the cost method apply, it will
affect both PL and BS results as it
affects:
 COGS
 Inventory ending balance
Which costing method to choose
from?
It depends on company’s policy
LIFO is not permitted in a number
of countries
This is an accounting policy, therefore,
it requires a consistency
Which costing method to choose
from?
During a period of inflation or rising price,
applying FIFO would give a higher gross
profit and higher ending inventory
balance as compared with other two
methods.
FIXED ASSET
Chapter 9
Objectives
▶ Compute depreciation, using the

following methods: straight – line
method, units-of-production method,
and
declining-balance method.
▶ Journalise entries for the disposal of
fixed assets
▶ Describe how depreciation expense is
reported in a profit and loss
statement and prepare a balance
sheet that includes fixed assets.
Contents
▶ Fixed Assets
▶ Purchase of Fixed Assets
▶ Depreciation
▶ Accounting for Depreciation
▶ Disposal of Fixed Assets
▶ Financial Reporting for Fixed Assets
Fixed assets
▶ They could be machines,

plants, properties, etc
Fixed assets
▶ Main characteristics:
▶ Permanent
▶ Duration Used to
earn
Revenue
Purchase of PPE
▶ Fixed assets maybe purchase

with cash, bank or on credit (on
account)
Dr PPE
Cr Cash/Bank/Account payable
Purchase of PPE
▶ Other costs included in the cost

of PPE:
▶ Irrecoverable tax (import duties)
▶ Installing cost
▶ Transportation cost
Depreciation
▶ As time passes, fixed assets (except

land) lose their ability to provide
useful services. In other words, when
they get older, they may spoil, and
do not work as well as before.
▶ Depreciation:
▶ Decrease in usefulness
Recorded
as
expenses
Depreciation
▶ Fixed assets are presented

on the BS at their Net Book
Value (Cost of Fixed Assets –
Accumulated Depreciation)
Accounting for Depreciation
▶ Fixed asset’s cost: all amounts spent to get it

to the business’ premises and ready for use
▶ Expected useful life: how long the fixed

asset can be used by the business
▶ Residual value: what the fixed asset item is

worth at the end of its expected useful life
Fixed
Residu Depreciatio
asset’s
al n Cost
cost
value
▶ Three methods of depreciation:

1. Straight-line
2. Units-of-production
3. Declining-balance
Straight-line Depreciation
▶ This method provides for the same

amount of depreciation expense for
each year of the asset’s useful life.
Depreciation Cost
Annual
Depreciatio
n Expense
Estimated useful Life
▶ Example:
▶ Assume that the cost of an asset is
$40,000, its estimated residual value is
$4,000, and its estimated life is
10 years.
▶ Annual Depreciation Expense = ????????

▶ The amount of depreciation could be

calculated for less than one
accounting period
▶ Example:
▶ An asset is bought at cost of $40,000
on 1st of March 20X0, its estimated
residual value is $4,000, and its
estimated life is 10 years. What is its
depreciation expense for the year
ended on 31st December 20X0?
Units-of-Production
Depreciation
▶ This method is used when the
usage of fixed asset varies from
year to year.
▶ The idea is that the more

depreciation should be recorded
when the machine is used for
more hours (or for more units
produced)
Units-of-Production
Depreciation
▶ The useful life of fixed asset is now
expressed in terms of estimated number of
hours used or estimated number of units
produced
Depreciatio Depreciation Cost

n For a unit-
of-
production Estimated Number of hours
used (or estimated number of
units produced)
Units-of-Production
Depreciation
▶ Example:
▶ A machine with a cost of $100,000
and an estimated residual value of
$5,000 is expected to produce
200,000 units during its useful life
time. What is the depreciation
expense of this machine?
Given that, during the accounting
period, this machine produced
35,000 units.
Declining-Balance Method
▶ This methods provides

for a declining
(reducing) depreciation
expense over the .
useful life of the asset
▶ The highest amount of

depreciation is
recorded on the first
year.
▶ Depreciation amount:
▶ For the first year = cost of
asset X declining-balance rate
▶ After the first year =
the OPENING net book
value X declining-
balance rate
▶ Example: The cost of an asset is

$40,000, its estimated residual
value is $4,000, and its
estimated life is 5 years.
Declining-balance rate is 40%.
Compute the depreciation for
this asset. Assume that the
asset is purchased at the
beginning of the year.
Year Cost Accu Open Rat Depre Close
(A) m Net e for Net Book
Depr Book (D) Year Value
e (B) Value (E=C* (F= C –
(C=A D) E)
- B)
1 $40,000 $40,000 40% $16,000 $24,000
2 $40,000 $16,000 $24,000 40% $9,600 $14,400
3 $40,000 $25,600 $14,400 40% $5,760 $8,640
4 $40,000 $31,360 $8,640 40% $3,456 $5,184

5 $40,000 $34,816 $5,184 $1,184 $4,000
▶ Singapore Airlines (SIA) has
revised its policy of depreciating
aircraft. The carrier says the
depreciation period for its aircraft
will now be 15 years (the industry
norm) to 10% residual value (of
the total cost). Since 1990, its
passenger aircrafts were
depreciated over a 10-year period,
to 20% residual value (of the total
cost). The change should add to
SIA's bottom line this financial
year as the carrier says it will save
S$265 million ($151 million) in
depreciation charges.
Disposal of Fixed Assets
▶ When fixed assets are

no longer used:
▶ Discarded (thrown away)
▶ Sold
▶ Traded in (exchanged)
▶ Accounting treatment
for above situation?
Discarding Fixed Assets
▶ The fixed asset could be fully

depreciated (Net Book Value = 0)
Dr Accumulated
Depreciation Cr Fixed
Asset
▶ If the fixed asset is not
fully depreciated
▶ Remember:
▶ To calculate and include
depreciation for the period Dr Depreciation Expense
prior to removing date. Cr Accumulated
Depreciation
▶ The net book value would
be recorded as Loss on Dr Accumulated
Disposal of Fixed Assets Depreciation Dr Loss on
Disposal of FA
Cr Fixed Asset
▶ Example:
Assume that equipment costing $20,000
is depreciated at a straight-line rate of
10%. In addition, assume that
accumulated depreciated at the
beginning of 20X0 is
$5,000 and the asset is discarded on
30th June 20X0.
How would this transaction be
recorded on 30th June 20X0?
Selling Fixed Assets
▶ If the selling price:

< Net Book Value: Make a loss
= Net Book Value: No gain no loss
> Net Book Value: Make a profit
▶ And as always, take off the

Accumulated Depreciation
▶ Example: Assume that equipment costing

$20,000 is depreciated at a straight-line
rate of 10%. In addition, assume that
accumulated depreciation at the beginning
of 20X0 is $5,000 and the asset is sold on
30th June 20X0.
▶ How would this transaction be recorded if:
▶Selling price is $12,000
Step 1: Determine the depreciation

expense prior selling point
Depreciation = (6/12*$20,000*10%)=
$1,000 Step 2: Find the Net Book Value
of the
equipment:
Net Book Value = $20,000 – ($5,000 + $1,000)
= $14,000
Step 3: Compare NBV with selling price
and record the transaction
1. Selling price is $12,000 < NBV:

make a loss ($14,000 - $12,000 =
$2,000)
Dr Cash $12,000
Dr Accumulated Depreciation
$6,000 Dr Loss on Disposal
$2,000
Cr Equipment $20,000
2. Selling price is $14,000 = NBV: no

gain or loss ($14,000 - $14,000 =
$0)
Dr Cash $14,000
$6,000 Cr Equipment
$20,000
3. Selling price is $16,000 > NBV:

make a profit ($16,000 - $14,000
= $2,000)
Dr Cash $16,000
$6,000 Cr Equipment
$20,000 Cr Profit on Disposal

$2,000
Exchanging Fixed Assets
▶ Old equipment could be traded in for

new equipment. Seller allows the
buyer an amount for the old
equipment traded in.
▶ This amount is called the trade-in

allowance. In addition, trade-in
allowance could be > or < NBV of
the old equipment
▶ Example:
▶ Assume that equipment costing $20,000 is
depreciated at a straight-line rate of 10%.
In addition, assume that accumulated
depreciated at the beginning of 20X0 is
$17,000.
▶ The equipment will be traded in for a
new equipment (cost $15,000, cash pay)
on 1st Jan 20X0 and receive a trade-in
allowance.
▶ How this transaction would be recorded
if the trade-in allowance:
▶ A) $2,000
▶ B) $4,000
▶ A) Trade-in allowance is $2,000
New equipment $15,000
Trade-in allowance $ 2,000
Cash paid $13,000
Old equipment $20,000

Accumulated $17,000
depreciation
NBV $ 3,000
Trade-in allowance $ 2,000
Loss on exchange $ 1,000
▶A) Trade-in allowance is

$2,000
Dr Accumulated Depreciation $17,00

0
Dr New Equipment $15,00
0
Dr Loss on Exchange $
1,000
Cr Old Equipment $20,00
0
Cr Cash $13,00
0
▶ B) Trade-in allowance is $4,000 > NBV of old
equipment: No gain is recognised for the
exchange. However, this unrecognised gain
could be used to reduce the cost of new
equipment.
Old equipment $20,000

Accumulated depreciation $17,000
NBV $ 3,000
New equipment (List price)

$15,000 Unrecognised gain (4,000-
3,000) $ 1,000 Cost of new
equipment
$14,000
▶ B) Trade-in allowance is $4,000
Dr Accumulated $17,000
Depreciation
Dr New Equipment $14,000
Cr Old Equipment $20,000
Cr Cash (15,000 – 4,000) $11,000
Financial Reporting for
Fixed Assets
▶ PL:
▶ Depreciation expense
▶ Profit/Loss on Disposal of Fixed Assets
▶ BS:
▶ Fixed Assets Cost
▶ Accumulated Depreciation

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Chapter 1

Private accountant Public accountant

Financial Accounting Managerial Accounting

* Accountants follow GAAP in preparing reports. By

Assets = Liabilities + Owner’s Equity

* All business transactions can be stated in terms of changes in the elements

Notes of FS Statement of cash

🞂 Revenues: a result of providing services

🞂 Increase side is normal balances of

🞂 TB is used as a proof that the debit balances

 Remember: TB does not ensure that the ledger is

⚫ Thisis where all the problems in

⚫ Example:Your company purchased a

⚫ Revenue is reported when services

⚫ Journalentries that update accounts

⚫ Deferrals (expenses and revenues)

⚫ Supplies and Supplies Expense

⚫ How would they record this at

⚫ Think of any example?

⚫ Unearned Revenue and Revenue

⚫ What if you guys sign a 6-months

⚫ Accrued expenses are services that are

⚫ Salaries owned to employees

⚫ Salaries Payable and Salaries Expense

⚫ How to treat this unpaid salaries at

⚫ Ex: Lawyer has provided services to

⚫ Account Receivable and Revenue

⚫ How do I record this at the end

⚫ How to record this at the year end?

⚫ Fixedassets are presented on the

🞂 Prepare financial statements

🞂 Steps in completing a work sheet

🞂 Not a formal accounting record

🞂 Prepared by using a spread-sheet program on a

🞂 Helpful tool in preparing financial statements

🞂 1st : Account title

🞂 Step 2: Enter Adjustments (Accounts are

🞂 Step 3: Determine Adjusted Trial Balance

🞂 Step 4: Place adjusted amount to PL or BS

🞂 Step 5: Determine profit or loss (The difference

🞂 Closing these balances by transferring them to

🞂 This is called the Closing Process.Transferring

⚫ Journalise the entries for trading transactions

⚫ Prepare a profit and loss statement for a trading business

Manufacturing Trading Services

Service Business Trading Business

Operate Expenses (X)

COGS in a manufacturing business: Material, Labour and Overhead

Goods on hand at the end of the month or the

⚫ This point determines which party (buyer

Buyer Pays Shipping

Closing Balance = Opening Balance + Purchase - Sale

COGS = Opening Balance + Purchase – Closing Balance

⚫ Transaction: On August 18, N accepted for full credit a return of

Businesses are authorised to charge and collect GST

GST Payable (When sale is made)

At the end of each quarter, business pays the net amount of

Control Activities Information

⦿ Note Receivable and Accounts