EFFECTIVE: JUNE 2023

TUNKU ABDUL RAHMAN UNIVERSITY OF

MANAGEMENT AND TECHNOLOGY

CENTRE FOR PRE-UNIVERSITY STUDIES

FOUNDATION IN BUSINESS

FPAC1014 BUSINESS ACCOUNTING

LECTURE NOTES

ACADEMIC SESSION: 202309

PREPARED BY: MS LIM PEI LING

Name:
Class:

*FOR INTERNAL CIRCULATION ONLY

 EFFECTIVE: JUNE 2023

Topic Contents
Introduction to Accounting
• Accounting Equation
1
• Capital and Revenue Expenditure
• Capital and Revenue Income
Books of Prime Entry
• Cash book
2
• Specific Journals
• General journal
Double entry system
• Double entry rules
3 • Ledger accounts
• Trial balance
• Accounting concepts
Year-end adjustment
• Depreciation of non-current assets
• Disposal of asset
4
• Bad debts
• Provision for doubtful debt
• Accruals and Prepayments
Financial statements
5 • Income Statement
• Statement of financial position
Control Accounts
• Purpose of Control Accounts
6
• Trade receivables control account
• Trade payables control account
Bank Reconciliation Statement
• Bank statement
7
• Reasons for differences
• Preparation of bank reconciliation statement
Manufacturing account
• Cost of materials consumed
8 • Labour cost
• Manufacturing overheads
• Manufacturing accounts

Break-even analysis
• Fixed costs and variable costs
9
• Using formulae
• Using graphs

1
 EFFECTIVE: JUNE 2023

TOPIC 1: INTRODUCTION TO ACCOUNTING

1. Type of Business Organization

o Businesses are organisations which provide goods and services in order to make a profit.

o There are a number of ways of classifying businesses. It is possible to think about

businesses by what they do. For example
1) Manufacture goods through mining, farming, fishing, etc.

2) Sell goods to the general public

3) Provide services for business and the general public.

o It is also possible think about businesses in terms of who owns them, for example:

1) Sole trader: where one individual owns the business.

✓ The individual controls the business.

✓ If successful, the profits made by the business belong to this individual; if

unsuccessful, the individual can lose whatever has been invested and private
resources too.

2) Partnerships: where several individuals own the business. (2-20 persons)

✓ Partners jointly control the business sharing profits between them.

✓ They are also jointly responsible for the debts of the business, and can lose their
private resources if the partnership is unsuccessful.

3) Limited liability companies: these are owned by shareholders (owner) who each
contribute to the funds needed to establish and run the company.

✓ Most shareholders do not take part in the day-to-day management and control
of the company, but elect directors to undertake these responsibilities on their
behalf.

✓ Shareholders are rewarded by receiving some of the profits made by the

company if successful.

✓ Shareholders’ responsibility for the debts of the company is limited to the

amount they invest.
2
 EFFECTIVE: JUNE 2023

2. The Accounting Cycle

o The accounting cycle is the name given to the sequence of events and processes that are
used to develop the accounting records of an organization.

Briefly, the cycle is made up of the following stages:

o Stage 1: the collecting of source documents (eg: invoice) that provide details for the
financial records.

o Stage 2: the listing of key details in books of prime entry. There are separate books of
prime entry for different categories of transactions: credit sales, credit purchases,
returns, cash and bank transactions and other miscellaneous transactions.

o Stage 3: posting the information shown in the books of prime entry to ledger accounts.
There are separate ledger accounts for each aspect of a business’s finances.

o Stage 4: checking and control systems to ensure that accounting records are
arithmetically correct. (trial balance)

o Stage 5: summarizing financial information periodically (and at least annually) in the

financial statement (statement of profit or loss, statement of financial position, etc).

3
 EFFECTIVE: JUNE 2023

3. Common Accounting Terminology

• Revenue

• Revenue is income that a company receives for its products or services provided.

• Examples of revenue:

Sales, rent received, interest received

• Expenses

• Business expenses are the costs of carrying on a trade or business to earn revenue.
Expenses are the opposite of revenues.

• Examples of expenses:
Purchases, rent expense, salaries, insurance, utilities (water bill/ electricity /
telephone)

• Assets

• An asset is a resource that a company owns with the expectation that it will provide
future benefits.

• Examples of assets:

Cash, Bank, motor vehicles, furniture and fixtures, Buildings

• Liabilities

• Liabilities are a company’s obligations and are contra to assets. (owed to)

• Examples of liabilities:

Bank loan, Bank overdraft (negative balance)

• Owners' equity

• For sole traders, owner's equity is described by the equation below:

Capital + Profit – Drawings

4
 EFFECTIVE: JUNE 2023
equity=cap-loss-drawings

drawings= withdraws of S or inventory by the owners for PERSONAL USE

4. Financial Statements (topic 5)

4.1 Statement of profit or loss / Income Statement (P&L)

• It also shows the profit or loss incurred over a specific accounting period, typically over
a fiscal year. Profit or loss for the year is determined by matching expenses against revenue.

Profit = Revenue – Expenses

• Accounting year (12 months)

Beginning Ending
1 Jan 2020 31 Dec 2020
1 March 2019 29 Feb 2020
1 May 2020 30 April 2021

• Illustration exercise 1:

Statement of profit or loss for the year ended 31 December 2021

RM RM RM
Sales 36 000

Less: Purchases 5 000

Gross profit 31000

Add: Other income

Commission received 250
31250
Less: Expenses
Salaries and wages 20 000
Insurance 6 000 26000
Profit for the year 5250

5
 EFFECTIVE: JUNE 2023

• Illustration exercise 2:

Statement of profit or loss for the year ended 31 December 2021

RM RM RM
Sales 20 000

Less: Purchases 5 000

Gross profit 15000

Add: Other income

Commission received 250
15250
Less: Expenses
Salaries and wages 20 000
Insurance 6 000 26000
Loss for the year 10750

Conclusion:
Revenue / income > Expenses / cost = Profit

Revenue / income < Expenses / cost = Loss

6
 EFFECTIVE: JUNE 2023

4.2 Statement of financial position (SOFP) / Balance sheet

• Assets, liabilities and owners’ equity of a company at a specific point in time are
shown in a statement of financial position.

• Illustration exercise:

Statement of financial position at 31 December 2016

RM RM RM
Non-current assets
Premises 45 000
Van 16 000
Shop fittings 18 000
79 000
Current assets
Inventory 1 000
Cash in hand 670
1 670
Total assets 80 670

Equity
Capital 27 780

Non-current liabilities
Bank loan 52 000

Current liabilities
Trade payables 890
Total liabilities and equity 80670

What is the missing figure? What does it represent?

Note:
ASSETS = LIABILITIES + EQUITY

RM27,780 is the amount invested by the owners in the business

7
 EFFECTIVE: JUNE 2023

5. Accounting Equation

• Introduction

Every business transaction will have an effect on a company’s financial position as measured
by the company’s assets, liabilities and owner’s equity. The relationship between assets,
liabilities and owner's equity is shown by the Accounting Equation which states that:

ASSETS = LIABILITIES + EQUITY

5.1 Assets (OWNED BY BUSINESS)

• Assets are resource with economic value that an individual, corporation or country
owns or controls with the expectation that it will provide future benefit.

• Assets are classified according to how long the assets are likely to be used in the
company and how liquid the assets are.

✓ Current Assets

• Assets which will be consumed within one year and could easily be converted to
cash without suffering substantial drop in value.

• Examples are:

Cash in hand, cash at bank, inventory, trade receivables /debtors

trade receivable = customer

✓ Non-current Assets trade payable = supplier

• Non-current assets are those assets owned by a company that contributes to the
company's income and are not held for resale purposes.

• Non-current assets are durable in nature and are expected to keep providing
benefit for more than one year.

• Examples are:

Motor vehicles, office equipment, buildings, furniture and fittings

8
 EFFECTIVE: JUNE 2023

5.2 Liabilities (owed to someone)

• A liability is as an obligation of an entity, the settlement of which may result in

the transfer or use of assets such as cash.

• Liabilities are classified according to the time allowed by the creditor to settle the
debt.

✓ Current liabilities

• Current liabilities represent the amount owed to trade payables due for payment
within 12 months.

• Examples are:

Short – term loan, bank overdraft (negative balance), trade payables /creditors

✓ Non-current liabilities

• Non-current liabilities are debt obligations of the company that is not due for
repayment within the next 12 months.

• Examples are:

Long-term bank loan, mortgage loan

5.3 Owner’s equity

• Businesses need to be financed and a portion of the financing fund comes from
those owning the business. This funding that is supplied to the company by the
owners is called "equity".

• Equity is also provided when the company generates profit and retains that profit in
the business. This is reflected on the statement of financial position as the profit for
the year is added to capital.

Capital + Profit - Drawings

9
 EFFECTIVE: JUNE 2023

5.4 Worked example

Example 1: (A = L + E)
Fill in the missing figures in the following table.

Assets Liabilities Equity

$35 000 $12 500 22 500

63 700 $44 400 $19 300

$67 300 12 300 $55 000

Example 2:

Effect
Example of transactions
Assets Liabilities Equity
Owner pays capital into the bank Bank 100 000 - Capital 100
($100,000) 000
Buy inventory (stock) by cheque Inventory 50 000 - -
($50,000) Bank (50 000)
Inventory 50 000 Trade payables -
Buy inventory on credit ($50 000)
50 000
Inventory (50 000) - -
Sale of inventory on credit ($50 000) Trade receivables
50 000
Inventory (50 000) - -
Sale of inventory for cash ($50 000)
Cash 50 000
Pay creditor (trade payables) by Bank (50 000) Trade payables -
cheque ($50 000) (50 000)
Bank 50 000 - -
Debtor (trade receivables) pays
Trade receivables
money owing by cheque ($50 000)
(50 000)
Owner takes money out of the Bank (5000) - Capital
business bank account for own use (5000)
($5 000) - DRAWINGS
Owner pays creditor from private - Trade payables Capital
money outside the firm ($5000) (5000) 5000

10
 EFFECTIVE: JUNE 2023

Example 3:

Jan 1 Celine set up a business to trade under the name of The Garment Shop. She
opened a business bank account and paid in $20 000 as capital.

2 The business purchased premises, $15 000, and paid by cheque.

3 The business purchased goods $3 000, on credit

4 The business sold goods, at the cost price of $1 000, on credit.

Show the accounting equation after each of the above transactions.

Owner’s
Assets Liabilities
equity
Stocks / Debtors
Creditors
Premises Vehicles inventory (TR) Bank Cash Capital
(TP)

Jan 1 20 000 20 000

2 15000 (15000)

3 3000 3000

4 (1000) 1000

23 000 23 000

11
 EFFECTIVE: JUNE 2023

Exercises

David Ham Restaurant has the following items in his statement of financial position as at 30
April 2020:

Capital RM20 900

Trade Payables RM 1 600
Fixtures RM 3 500
Motor Vehicles RM 4 200
Inventory RM 4 950
Trade Receivables RM 3 280
Cash at Bank RM 6 450
Cash in Hand RM 120

During the first week of May 2020, the following transactions took place:

a) He bought extra stock of goods RM770 on credit.

b) One of the trade receivables paid him RM280 in cash.

c) He bought extra fixtures by cheque RM1 000.

d) He brought his own personal van with a value of RM3 000 for office use.

e) He withdraws RM200 cash for personal use.

f) He paid by the firm’s cheque RM500 for his family house rent.

g) Credit sales of goods costing RM800 for the same amount.

h) Paid RM600 by cheque to creditor.

You are required to draw up a statement of financial position as at 7 May 2020 after the above
transactions have been completed.

12
 EFFECTIVE: JUNE 2023

Assets Liabilities

Trade Trade
Fixtures Vehicles Inventory Bank Cash Capital
receivables payables

RM RM RM RM RM RM RM RM

1 May 3500 4200 4950 3280 6450 120 20 900 1600

a) 770 770

b) (280) 280

c) 1000 (1000)

d) 3000 3000

e) (200) (200)

f) (500) (500)

g) (800) 800

h) (600) (600)

4500 7200 4920 3800 4350 200 23200 1770

24970 24970

13
 EFFECTIVE: JUNE 2023

David Ham Restaurant

Statement of financial position as at 7 May 2020
RM RM RM
Non-current assets
Fixtures 4500
Vehicles 7200
11700

Current assets
Inventory 4920
Trade receivables 3800
Cash at bank 4350
Cash in hand 200
13 270
Total assets 24970

Owner’s equity
Capital 23200

Current liabilities
Trade payables 1770
Total liabilities and equity 24970

14
 EFFECTIVE: JUNE 2023

5.5 Capital and Revenue Expenditure (money spent) and Receipts (money received)

Capital Expenditure
• Capital expenditure is money spent that has a long-term benefit to the business (more
than one year). In practice, this usually means money spent on buying or improving
non-current assets.

• Examples are:

Buy a van

Revenue expenditure
• Is money spent that has a short-term benefit to the business (less than one year), for
example the day-to-day running costs of the business.
• Examples are:

Paying for petrol

Capital receipts
• Arise from the sale of non-current assets or capital being invested in the business from
either the owners or outside lenders.
• Examples are:

Sold a company van, capital invested by owner, loan from outsider

Revenue receipts
• Are receipts that arise from normal business activities.
• Examples are:

Sales proceeds of goods, commission received

15
 EFFECTIVE: JUNE 2023

TOPIC 2: BOOKS OF PRIME ENTRY

2.1 Introduction

• All transactions are initially recorded in a book of prime entry before they can be
entered in the ledger (T-account).

• Important transaction details such as date or transaction, relevant customer or

supplier details, types and quantities, terms of transactions and the amount of the
transaction are noted.

•The various types of books of prime entry are the:

• Specialized Journals

-Sales journal (credit sales)

-Purchases journal (credit purchases)

-Sales returns journal / return inwards journal

-Purchases returns journal / return outwards journal

• General Journal (transactions not in cash book & specialized journal)

• Cash Book

-Cash book (cash & bank)

-Petty cash book (small cash items)

16
 EFFECTIVE: JUNE 2023

2.2 Cash Book

• A cash book is a book of prime entry used to record payments and receipts by cash and
cheques

• A cash book consists of the cash account and the bank account put together in one
book.

• There are two types of cash book namely the two-column cash book and the three
column cash book.

Two-column Cash Book

Date Particulars Cash Bank Date Particulars Cash Bank

Three-Column Cash Book

Discount Discount
Date Particulars Cash Bank Date Particulars Cash Bank
allowed received

17
 EFFECTIVE: JUNE 2023

2.2.1 Recording in a two-column cash book

May Transactions RM
1 Owner started business with cash 80 000
2 Paid shop rental by cash 3 000
4 Cash purchase of goods 30 000
5 Cash sales. The cash received was not bank in 35 000
6 Open bank account with cash 50 000
7 Bought office furniture with cheque 8 000
12 Sold some goods and received a cheque 23 000
17 Owner withdrew cash from bank for personal use 6 000
29 Owner withdrew cash from bank for office use-cash on hand 4 000
31 Paid cheque for purchase of tables for office use 3 000

Cash Book

Date Particulars Cash Bank Date Particulars Cash Bank

May May

1 Capital 80 000 2 Rent 3000

5 Sales 35000 4 Purchases 30 000

6 Cash 50 000 6 Bank 50 000

12 Sales 23000 7 Furniture and fittings 8000

29 Bank 4000 17 Drawings 6000

29 Cash 4000

31 Furniture and fittings 3000

____
____ 31 Balance c/d 36 000 52 000

119 000 73 000 119 000 73 000

Jun
Balance b/d 36000 52000
1

18
 EFFECTIVE: JUNE 2023

2.2.2 Recording in a three-column cash book

July Transactions $
1 Owner deposited his savings into the business new bank account 90 000
3 Withdrew cash from bank for office use 3 000
8 Paid office rent with cheque 10 000
15 Purchased goods on credit from Isabella 60 000
16 Sold goods on credit to Wati Limited 50 000
Settled Isabella debt by cheque and received a 10% cash discount
17 (discount = 10% x 60 000 = 6000) (paid = 60 000-6000 = 54000)

19 Purchased a fax machine for office use by cheque 2 000

22 Cash purchases paid by cheque 15 000
26 Cash sales to Hashimo Partners – cheques were received 16 000

Wati paid by cheque in full settlement of its account.

29 Discount allowed 5% (5% x 50000 = 2500 discount)
(50000-2500 = 47500 received)

29 Cash received from cash sales 20 000

30 Purchased goods on credit from Isabella (x) 120 000
30 Cash in the office was banked in 18 000
Paid off the amount owed to Isabella by cheque. Discount allowed 10%
31 (10% x 120 000 = 12000 discount) (paid = 120000-12000 = 108000)

Cash sales. 90% of the cash received was banked in

31 70 000
(70 000 x 90% = 63000 bank ; 10% x 70000 = 7000 cash)

19
 EFFECTIVE: JUNE 2023

Three-Column Cash Book

Dis. Dis.
Date Particulars Allow Cash Bank Date Particulars Receiv Cash Bank
ed ed
July July
Capital 90 000 Cash 3000
1 3

3 Bank 3000 8 Rent 10 000

26 Sales 16 000 17 Isabella 6000 54000

Office
29 Wati Limited 2500 47500 19 2000
equipment

29 Sales 20 000 22 Purchases 15000

30 Cash 18000 30 Bank 18000

31 Sales 7000 63000 31 Isabella 12000 108 000

Balance c/d 12000 42500

___ ___ ___ ____ ____ _____

2500 30 000 234 500 18 000 30 000 234 500

Aug
Balance b/d 12000 42500
1

20
 EFFECTIVE: JUNE 2023

2.3 General Journal

Used to record credit transactions which cannot be recorded in special journals such as:

• Credit purchases of non-current assets (motor vehicles, buildings)

• Non-cash withdrawals (stock withdrawals)

• Opening and closing of accounts

• Adjustment of accounts (Topic 4)

• Correction of errors

• Additional capital of non-cash items

• The account to be debited is always stated first before the one to be credited

• Every entry should have a suitable narrative.

• The layout of the journal can be shown:

The Journal

Date Particulars Debit (RM) Credit (RM)

Account A xx

Account B xx

(short description / narrative)

21
 EFFECTIVE: JUNE 2023

2.3.1 Worked Example

• Credit purchases of non-current asset items

Popular Book Store purchases book shelves for office use on credit from Ba
5 March
Wood

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)
Mar 5 Furniture and fittings XXX

Ba Wood xxx
(Purchases book shelves for office use from Ba
Wood)

• Recording stock withdrawals

Owner of Popular Book Store took magazines homes costing RM300 for his
21 March
children

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)
Mar 21 Drawings 300

Purchases 300

(Withdrawals of magazines for personal use)

• Recording additional capital:

22 March Popular Book Store’s owner brought his home computer for office use

General Journal (Popular Book Store)

Date Particulars Debit (RM) Credit (RM)
Mar 22 Computer / office equipment xxx

Capital xxx
(Owner brought in home computer for office
use)

22
 EFFECTIVE: JUNE 2023

• Recording opening entries of an existing business:

1 April The balance of assets and liabilities are as follows:

Assets : Motor Vehicles - $30 000;
Inventory - $90 000;
Trade receivables - $12 000

Liabilities : Bank overdraft - $5 000;

Trade payables - $24 000

General Journal
Credit
Date Particulars Debit (RM)
(RM)
Motor vehicles 30 000

Inventory 90 000

Trade receivables 12 000

Bank overdraft 5000

Trade payables 24000

Capital ______ 103 000

132000 132000

(to record the opening balances of the business)

• Recording a newly established business

Three Enterprise started business with RM10 000 cash and deposited RM200
1 July
000 into the bank

General Journal
Debit Credit
Date Particulars
(RM) (RM)
Jul 1 Cash 10 000
Bank 200 000
Capital 210 000
(Business started with cash and bank)

23
 EFFECTIVE: JUNE 2023

2.4 Specialized Journals

Specialized journals are used to record all credit transactions of the business goods
including returns. The following are some of the specialized journals:

• Sales Journal

-record credit sales

• Purchases Journal

-Record credit purchases

• Sales returns journal

-Goods returned by credit customer

• Purchases returns journal

-Goods returned to credit supplier

(a) Purchases journal

A purchases journal is a record of all stock acquisitions made on credit during a period.

Purchases journal is laid out in the form of a table having columns for date, order number, supplier
name, invoice reference number and amount on invoice.

Below is an example of a typical purchases journal.

Purchases Journal
Date Particulars Invoice No. Amount ($)

Sept 1 ABC Brothers A2569 11 000

2 Tescco Enterprise 45621BA 19 000

3 Tessco Enterprise 45632BA 10 000

5 ABC Brothers A26013 30 000

8 Kita Jom Berhad 245AB123 20 000

30 Purchases account 90 000

24
 EFFECTIVE: JUNE 2023

Notes:
Document issued by the supplier of goods on credit term; showing details,
Invoice
quantities and price of goods supplied.

Sept 1 Purchase / bought goods $11000 on credit from ABC Brothers

2 Purchased goods $19000 on credit from Tessco Enterprise

3 Purchased goods $10000 on credit from Tessco Enterprise

5 Purchased goods $30000 on credit from ABC Brothers

8 Purchased goods $20000 on credit from Kita Jom Berhad

30 Total credit purchases $90 000 for the month of September

(b) Sales journal

The sales journal records all credit sales showing a summary of all invoices issued to customers.

Sales Journal
Date Particulars Invoice No. Amount ($)

July 2 Ontard Berhad SS23452 90 000

3 QQ Company SS23453 30 000
3 Burrburr Links SS23454 40 000

5 Ontard Berhad SS23455 60 000

8 QQ Company SS23456 70 000

31 Sales account 290 000

Notes:
July 2 Sold goods $90 000 on credit to Ontard Berhad

3 Sold good $30000 on credit to QQ Company

3 Sold good $40000 on credit to Burrburr Links

5 Sold good $60000 on credit to Ontard Berhad

8 Sold good $70000 on credit to QQ Company

31 Total credit sales $290 000 for the month of July

25
 EFFECTIVE: JUNE 2023

(c) Purchases returns journal

This journal is used to record purchases returns when goods are returned to the suppliers.

Purchases Returns Journal

Date Particulars Debit Note No. Amount ($)
Sept 5 ABC Brothers 0036 1 000

11 Kita Jom Berhad 0037 2 000

30 Purchases returns account 3 000

Notes:
A debit note is a document issued by a purchaser of goods on credit to request for
Debit note
a deduction in the invoice received.
Sept 5 Goods $1000 were returned to ABC Brothers

11 Goods $2000 were returned to Kita Jom Berhad

30 Total purchases returns $3000 for the month of September

(d) Sales returns journal

A seller records all the sales that have been returned to him by his customers. Sales returns journal is
also known as returns inwards book and sales returns day book.

Sales Returns Journal

Date Particulars Credit Note No. Amount ($)

July 19 Ontard Berhad AB21 200

27 QQ Company AB22 300

31 Sales returns account 500

Notes:
A credit note is a document issued by a seller of goods on credit to notify of a
Credit note
reduction in an invoice previously issued
July 19 Goods $200 were returned by Ontard Berhad

27 Goods $300 were returned by QQ Company

31 Total sales returns $500 for the month of July

26
 EFFECTIVE: JUNE 2023

2.4.1 Purchases Journals

• A purchases journal is a record of all credit purchases.

• The source documents are the purchases invoices received.

• A typical purchases journal is as below:

Purchases Journal
Feb Particulars Invoice No. RM
6 Celery Company AA2 198
17 Carrot & Company 213 D 100
27 Carrot & Company 219 D 298
29 Transferred to Purchases Account 596

• The list of purchases is totaled at the end of a certain period (daily, weekly or monthly)
and the total is posted to the debit side of the purchases account in the general ledger.
Double entry
Dr purchases account – GL (total)
Cr Supplier account (individual) – Purchases ledger

GENERAL LEDGER
Purchases Account
Feb Particulars RM Feb Particulars RM
Various trade
29 596 29 Balance c/d 596
payables

March 1 Balance b/d 596

PURCHASES LEDGER
Celery Company
Feb Particulars RM Feb Particulars RM
29 Balance c/d 198 6 Purchases 198

March 1 Balance b/d 198

Carrot & Company

Feb Particulars RM Feb Particulars RM
29 Balance c/d 398 17 Purchases 100

27 Purchases 298

398 398
March 1 Balance b/d 398

27
 EFFECTIVE: JUNE 2023

2.4.2 Sales Journal

• When goods are sold, the seller sends a sales invoice to the customer. A copy of this
invoice is retained by the seller as source documents to record in a sales journal

• A sales journal is a record of all credit sales.

• The list of credit sales is totaled at the end of a certain period and the total is posted to
the credit side of the sales account in the general journal.

• Each individual customer’s ledger account in the sales ledger is debited with the value
of goods sold to them.

2.4.3 Sales Returns Journal

• Sales not accepted are returned by customers.

• Credit notes will be sent to the customers and the copies of credit notes retained by the
seller which will be the source document when the sales returns journal is written up.

• The total of the sales returns is posted to the debit of the sales returns account and not
debited to the sales account.

• Each individual entry in the sales returns journal is posted to the credit of the customers
who returned the goods.

Worked Example:
Sales Journal
July Particulars Invoice No. RM
5 Compact Berhad ZZ112 40 000
12 Compact Berhad ZZ113 50 000
23 ABC Traders ZZ114 60 000
31 Transferred to sales account 150 000
Dr Trade receivables (individual)
Cr Sales (total)

Sales Returns Journal

July Particulars Credit Note No. RM
9 Compact Berhad CN60 7 000
26 ABC Traders CN61 3 000
31 Transferred to sales return account 10 000
Dr Sales returns (total)
28
 EFFECTIVE: JUNE 2023

Cr Trade receivables (individual)

GENERAL LEDGER
Sales Account
July Particulars RM July Particulars RM
Various trade
31 150 000
receivables

Sales Returns Account

July Particulars RM July Particulars RM
Various trade
31 10 000
receivables

SALES LEDGER
Compact Berhad
July Particulars RM July Particulars RM
Sales returns/
5 sales 40 000 9 7 000
returns inwards
12 sales 50 000 31 Balance c/d 83 000
90 000 90 000

Aug 1 Balance b/d 83 000

ABC
July Particulars RM July Particulars RM
Sales returns/returns
23 sales 60 000 26 3 000
inwards
31 Balance c/d 57 000
60 000 60 000

Aug 1 Balance b/d 57 000

29
 EFFECTIVE: JUNE 2023

TOPIC 3: DOUBLE ENTRY SYSTEM

3.1 Introduction

o The system is a set of rules for recording financial information and is based on
the fact that every financial transaction has equal and opposite effects in at least two
different accounts.

o The two effects of an accounting entry are known as Debit and Credit.

o The double entry system is based on the principal that:

▪ for every debit entry, there will always be an equal credit entry.
▪ the sum of debits and the sum of the credits must be equal in value.
(debit = credit)

3.2 The Double Entry Rules

• In deciding which account has to be debited and which account has to be credited, the
following rules of accounting are applied:

Debit (Dr) Credit (Cr)

Assets To record an increase + To record a decrease (-)
Liabilities
To record a decrease (-) To record an increase +
Owner’s Equity

Expenses √

Revenue (income) √

Notes:
Apply to Bank & Cash

Received Cash (Dr Cash), Paid Cash (Cr Cash)

Received cheque (Dr Bank), Paid cheque (Cr Bank)

No INVENTORY A/C

Buy inventory - Purchases (Dr)

30
 EFFECTIVE: JUNE 2023

Sold inventory – Sales (Cr)

Complete the following table and indicate with a tick (✓) whether each account would have a
debit or credit balance.
ASSET & EXPENSES – DEBIT BALANCE
LIABILITIES & EQUITY & INCOME – CREDIT BALANCE

Debit balance Credit balance

Capital ✓
Cash ✓
Drawings (reduce equity /capital) ✓
Bank overdraft (-ve balance) (liability) ✓
Machinery ✓
Trade receivables ✓
Trade payables ✓
Inventory ✓
Furniture & fittings ✓
Bank loan ✓
Salaries (expenses) ✓
Rent expense ✓
Rent received (income) ✓
Sales (income) (sold goods to customers) ✓
Sales returns (return inwards) (customers
✓
return goods to us)
Purchases (expenses) ✓
Return outwards (purchases returns) (returns
✓
goods to supplier)

31
 EFFECTIVE: JUNE 2023

3.3 Worked Example

Steps to record:
1. Identify double entry
2. Record in ledger (T) account
3. Balance the ledger account
4. Record in Trial Balance

2020 Transactions Dr. Cr.

Cash Capital
Aug 1 Suzana starts her firm with RM50 000 in cash
50 000 50 000
Purchase of machinery on credit from Nippon Machinery Nippon
Aug 8
(payables) for RM30 000 30 000 30 000
Nippon Cash
Aug 20 Suzana paid Nippon RM6 000 by cash
6000 6000
Suzana bought another machine costing RM11 000 Machinery Nippon
Aug 25
from Nippon 11000 11000
Suzana introduces RM15 000 cash into her business Cash Capital
Aug 29
for additional capital 15000 15000

Cash Account
2020 $ 2020 $

Aug 1 Capital 50 000 Aug 20 Nippon 6000

29 Capital 15 000 31 Balance c/d 59 000

65000 65 000

Sept 1 Balance b/d 59000

Capital Account
2020 $ 2020 $

Aug 31 Balance c/d 65000 Aug 1 Cash 50 000

_____ 29 Cash 15 000

65000 65000

Sept 1 Balance b/d 65000

32
 EFFECTIVE: JUNE 2023

Machinery Account
2020 $ 2020 $

Aug 8 Nippon 30 000 Aug 31 Balance c/d 41000

25 Nippon 11000 ___

41000 41000

Sept 1 Balance b/d 41000

Nippon Account
2020 $ 2020 $

Aug 20 Cash 6000 Aug 8 Machinery 30 000

Aug 31 Balance c/d 35000 25 Machinery 11000

41000 41000

Sept 1 Balance b/d 35000

3.4 Trial Balance

• A trial balance is used to verify that the total of all accounts with debit balances
equals the total of all accounts with credit balances.

• The trial balance lists every open general ledger account by account number and
provides separate debit and credit columns for entering account balances.

• Suzana's trial balance at 8 August 2020 appears below.

Debit Credit
RM RM
Cash 59 000
Capital 65 000
Machinery 41000
Nippon _____ 35000
100 000 100 000

33
 EFFECTIVE: JUNE 2023

3.5 Exercises

Exercise 1
Complete the following table. The first item has been completed as an example.

No. Transactions Debit (RM) Credit (RM)

Owner deposited RM21 500 into the firm’s bank Bank Capital
(i)
account as capital 21 500 21 500

Rent expense Bank

(ii) Paid rent of RM500 with cheque
500 500

Office equipment Bank

(iii) Bought office phone for RM75 with cheque
75 75

Office supplies Bank

(iv) Bought RM75 of office supplies with cheque
75 75
Computer / office
Bought RM500 in parts for computer with Bank
(v) equipment
cheque 500
500
Bank charges (expenses) of RM10 deducted from Bank charges Bank
(vi)
bank account 10 10

Owner invested another RM11 000 into firm’s Bank Capital

(vii)
bank account 11 000 11000

Purchased car costing RM8 000 with cheque. Motor vehicles Bank
(viii)
The car is for business use 8000 8000
Furniture and
Bank
(ix) Bought RM700 office chair with cheque fittings
700
700
Utilities /
Received RM100 electric bill (expenses). Paid Bank
(x) Electricity
bill with cheque 100
100
Purchase goods (Purchases - DR) RM20 000 for Purchases Ali Bakar
(xi)
resale from Ali Bakar (Trade payables). 20 000 20 000

Purchases Cash
(xii) Cash purchases RM3 000
3000 3000

34
 EFFECTIVE: JUNE 2023

Ali Bakar Bank

(xiii) Paid Ali Bakar RM12 000 with cheque
12000 12000

Sold goods (SALES - cr) RM30 000 on credit to Mani more Sales
(xiv)
Mani More (trade receivables) 30 000 30 000

Sold goods RM13 000 for cash. Cash received Bank Sales
(xv)
was deposited into bank account 13000 13000

Bank Mani more

(xvi) Received a cheque RM22 000 from Mani More
22000 22000

Owner withdraws goods costing RM4 000 for Drawings Purchases

(xvii)
personal use (DRAWINGS - dr) 4000 4000
Marketing
Owner withdraws goods costing RM1 000 for expenses Purchases
(xviii)
customer samples / Advertising 1000
1000
Owner used company cheque RM800 to pay his Drawings Bank
(xix)
house rent 800 800
Purchases
Some goods costing RM3 500 was returned to Ali Bakar
(xx) returns
Ali Bakar 3500
3500
Mani More returned some goods which was sold Sales returns Mani more
(xxi)
to him for RM2 500 2500 2500

The company received RM50 000 from a 8% Bank Bank loan

(xxii)
bank loan 50 000 50 000

Six months interest of 8% on the bank loan was Loan interest Bank
(xxiii)
paid (8% x 50 000 x 6/12 = 2000) 2000 2000

The company repaid part of the bank loan RM5 Bank loan Bank
(xxiv)
000 5000 5000
Furniture &
Sold the office chair costing RM700 at cost. A Bank
(xxv) fittings
cheque was received 700
700

35
 EFFECTIVE: JUNE 2023

Exercise 2
Write up the various accounts needed in the books of Henry Books Distributors to record the
following transactions. Prepare a trial balance as at 30 April 2020.

April Transactions Dr. Cr.

Bank Capital
1 Started business with RM600 000 in the bank
600 000 600 000
Motor
Bought motor van paying by cheque RM40 Bank
3 vehicles
000 40 000
40 000
Office Sam
Bought office fixtures of RM2 000 on credit
6 fixtures Suppliers
from Sam Suppliers
2000 2000
Big Book
Bought goods costing RM160 000 for resale Purchases
7 Store
on credit from Big Book Store 160 000
160 000
Withdrew RM300 from business bank account Cash Bank
9
for office use 300 300
Sam
Bank
11 Paid Sam Suppliers a cheque RM400 Suppliers
400
400
Cash sales RM35 000. A cheque was received Bank Sales
15
and banked on the same day 35000 35000
Big Book
Credit purchases costing RM80 000 from Big Purchases
19 Store
Book Store 80000
80000
Big Book
Bank
23 Paid Big Book Store by cheque RM100 000 Store
100000
100 000
Cash Sales
28 Cash RM2 800 was received from sales
2800 2800

Bank Account
2020 RM 2020 RM

Apr 1 Capital 600 000 Apr 3 Motor vehicles 40 000

15 Sales 35000 9 Cash 300

11 Sam Suppliers 400

23 Big book stores 100 000

______ 30 Balance c/d 494 300

635 000 635 000

May 1 Balance b/d 494300

36
 EFFECTIVE: JUNE 2023

Capital Account
2020 RM 2020 RM

Apr 30 Balance c/d 600 000 Apr 1 Bank 600 000

May 1 Balance b/d 600 000

Motor Vehicles Account

2020

Apr 3 Bank 40 000 Apr 30 Balance c/d 40 000

May 1 Balance b/d 40 000

Office Fixtures Account

2020 RM

Apr 6 Sam suppliers 2000 Apr 30 Balance c/d 2000

May 1 Balance b/d 2000

Sam Suppliers
2020 RM 2020 RM

Apr 11 Bank 400 Apr 6 Office fixtures 2000

30 Balance c/d 1600 ____

2000 2000

May 1 Balance b/d 1600

Purchases Account
2020 RM

Apr 7 Big book stores 160 000 Apr 30 Balance c/d 240 000

19 Big book stores 80 000 ______

240 000 240 000

May 1 Balance b/d 240 000

37
 EFFECTIVE: JUNE 2023

Big Book Stores

2020 RM 2020 RM

Apr 23 Bank 100 000 Apr 7 Purchases 160 000

30 Balance c/d 140 000 19 Purchases 80 000

240 000 240 000

May 1 Balance b/d 140 000

Cash Account
2020 RM 2020

Apr 9 Bank 300 Apr 30 Balance c/d 3100

28 Sales 2800 ____

3100 3100

May 1 Balance b/d 3100

Sales Account
2020 2020 RM

Apr 30 Balance c/d 37 800 Apr 15 Bank 35000

______ 28 Cash 2800

37800 37800
May 1 Balance b/d 37 800

38
 EFFECTIVE: JUNE 2023

Henry Books Distributors

Trial Balance as at 30 April 2020
Dr. Cr.

Bank 494 300

Capital 600 000

Motor vehicles 40 000

Office fixtures 2 000

Sam Suppliers 1600

Purchases 240 000

Big Book Stores 140 000

Cash 3100

Sales _______ 37 800

779 400 779 400

3.6 Accounting Concepts

• Introduction

• Basic assumptions and rules and principles which form the basis of recording business
transactions and preparing accounts.

• To maintain uniformity and consistency in preparing and maintaining accounting

records to provide reliable information.

• The concepts were developed over the years and are generally accepted by members
of the accounting profession.

A list of the major accounting concepts and principles is as below:

(a) Business Entity

• The business enterprise and its owners are assumed to be two separate distinct
independent entities for the purpose of accounting.

Eg: The personal spending of the owner do not appear in the accounting records of
the business.

39
 EFFECTIVE: JUNE 2023

(b) Principle of duality (DEBIT & CREDIT)

• Every transaction is assumed to has a dual effect where every transaction would be
recorded in two different accounts in their respective opposite sides.

• The term double entry is used to describe how these two aspects of a transaction are
recorded in the accounting records.

(c) Money Measurement

• Only transactions that are capable of being measured in monetary terms are
recognized in financial statements.

• Transactions which could not be expressed in terms of money would not be recorded.

Eg: Staff intelligence, manager’s experience/ skills will not be recorded

(d) Going Concern

• The business enterprise is assumed to continue operate in the foreseeable future and is
not expected to be liquidated or curtail its operational activities significantly in the
near future.

• Eg: The concept provides a basis for reporting the value of assets in the statement of
financial position at net book value and not at closing-down value.

(e) Accounting Period Concept (12 months)

• Profits of are ascertained for a specified period of time called the accounting period.

• The usual accounting period is one calendar year or one financial year.

Eg: Financial year ended 31 Dec 2023 (1 Jan 2023 to 31 Dec 2023)

FYE 31 May 2023 (1 Jun 2022 to 31 May 2023)

40
 EFFECTIVE: JUNE 2023

(f) Historical Cost

• All assets are to be recorded at their original acquisition costs and not at current
market prices.

Eg: Bought premises at RM100 000 – record in a/c at RM100,000

(g) Prudence

• The preparation of financial statements requires professional judgment where caution is

exercised in the adoption of policies and estimates of the values.

• Prudence requires that assets and income are not overstated whereas liabilities and
expenses are not understated

Eg: Provision for doubtful debts (Topic 4) (estimate of debts that cannot be
collected in the future) - included in expenses

(h) Matching Concept

• Expenses are charged against revenue to ascertain profits of an accounting period.

Revenue 2022 – Expenses 2022 = Profit 2022

• The expenses and revenue must belong to the same accounting period

(i) Accrual Basis (Topic 4)

• Expense and revenue must be recognised in the accounting periods to which they
relate rather than on cash basis.

• Revenue must be recorded in the accounting period in which it is earned rather than
in the accounting period in which the revenue was or will be received.

• Expenses must be recorded in the accounting period in which they incurred rather than
in the accounting period in which the expenses are paid.

Eg: In July 2023, paid Jan 2024 rental payment [record in 2024 expenses, even
though paid in 2023]

41
 EFFECTIVE: JUNE 2023

In July 2023, received Feb 2024 rental income [record in 2024 income, even
though received in 2023]

(j) Consistency
• Accounting methods once adopted must be applied consistently in future. The same
methods and techniques should be used for similar items or situations.

• The consistency concept is important as it allows comparability of the financial

statements of a company.

(k) Materiality [only record significant / important transactions]

• Financial statements are prepared to provide useful information for the users in decision
making. Information which could affect or influence the decisions of the users of
financial statements is considered as material.

• Information which is considered as material is reported as line items in the financial

statements while those which are not material could be aggregated with other similar
items.
Eg: Loan (RM100 000) must record in a/c – if not it will affect user’s decision

A pen (RM1) if not recorded will not affect decision of users

42
 EFFECTIVE: JUNE 2023

TOPIC 4: YEAR-END ADJUSTMENT

4.1 DEPRECIATION & DISPOSAL OF FIXED ASSETS (NON-CURRENT ASSET)

1 Introduction

• Depreciation is an estimate of the loss in value of a non-current asset over its expected
working life.

• Method of distributing costs of fixed assets over the life of the assets to the appropriate period.

2 Causes of depreciation

Physical deterioration
- This is the result of ‘wear and tear’ due to the normal usage of the non-current asset. It can
also be because the asset falls into a poor physical state due to rust, rot, decay and so on.

Economic reasons
- The non-current asset may become inadequate as it can no longer meet the needs of the
business. It can also be because the non-current asset has become obsolete as newer and
more efficient assets are now available.

Passage of time
- This arises where a non-current asset, for example a lease, has a fixed life of a set number
of years.

43
 EFFECTIVE: JUNE 2023

3 Two common methods to calculate depreciation:

i) Straight-Line Method

• A constant amount of depreciation is allocated throughout the useful life of a fixed asset
(EVERY YEAR DEPRECIATION SAME)

• This method spreads the cost of the fixed asset evenly over its useful life

Formula 1:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑢𝑠𝑒
Note: Scrap value / Residual value
- The remaining value of an asset after it had been fully depreciated

OR

Formula 2:

Depreciation = % x cost of assets

Example:

On 1 July 2021, Karina purchased fixtures costing $25 000 and paid by cheque. She estimated
that she would be able to use the fixtures for four years and then be able to sell them for $3
000.

Calculate the annual depreciation charge:

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
Annual Depreciation = 𝑦𝑒𝑎𝑟𝑠

25000−3000
Annual Depreciation =
4

Annual depreciation = $5500

If Karina thought that after four years the fixtures would have no disposal value, the charge for
depreciation would be:

25000
Annual Depreciation = 4

Annual Depreciation = $6250

44
 EFFECTIVE: JUNE 2023

ii) Reducing Balance Method

• Depreciation is calculated as a constant proportion of the balance of the asset after deducting
the amount previously provided.

• An accelerated method of depreciation where it results in higher depreciation expense in the

earlier years of ownership.

• The amount of depreciation reduces as the life of the asset progresses.

• Formula:

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = % 𝑥 𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒

Note:
Net book value is the asset’s net value at the start of an accounting period.

𝑁𝑒𝑡 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 – 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

Accumulated Depreciation
Accumulated Depreciation Y1 = Depreciation Y1
Accumulated Depreciation Y2 = Depreciation of Y1+Y2
Accumulated Depreciation Y3 = Depreciation of Y1+Y2+Y3
Accumulated Depreciation Y4 = Depreciation of Y1+Y2+Y3+Y4

45
 EFFECTIVE: JUNE 2023

Example:

Karina’s financial year ends on 30 June (financial year 1 Jul to 30 Jun).

On 1 July 2021, she purchased fixtures costing $25 000 and paid by cheque. She estimated that
she would be able to use the fixtures for four years and then be able to sell them for $3 000.

Calculate the depreciation for each of the four years of the fixtures’ working life using the
reducing balance method at the rate of 40% per annum.
$
30 June 2022
Cost 25 000
Depreciation (40% x 25000) *1st yr times with cost of asset 10 000
Net book value (25000 – 10000) 15 000

30 June 2023
Depreciation (40% x 15000) 6000
Net book value (25000 – 10000 - 6000) 9000

30 June 2024
Depreciation (40% x 9000) 3600
Net book value (25000 – 10 000-6000-3600) 5400

30 June 2025
Depreciation (40% x 5400) 2160
Net Book value (25000 – 10000-6000-3600-2160) 3240

46
 EFFECTIVE: JUNE 2023

Exercise:

On 1 January Year 1, Company Ah Fatt purchased an equipment at the cost of $130 000. The
equipment is estimated to have 5 years useful life and residual value of $5,000 at the end of the
5th year.

i) Straight-Line Method

End of year Annual depreciation Accumulated depreciation

130 000−5000
Y1 = $25000 $25000
5

Y2 $25000 25000+25000 = $50000

Y3 $25000 $75000

Y4 $25000 $100 000

Y5 $25000 $125 000

ii) Reducing Balance Method (Rate 10% per annum)

Annual depreciation Accumulated Net book value

End of year
[% x NBV] depreciation [cost – acc depr]
10% x 130 000 130 000 – 13000
Y1 =13000 13000 = 117 000

10% x 117000 13000+11700 130 000 – 24700

Y2 = 105 300
=11 700 = 24 700
10% x 105300 24700+10530 130000-35230
Y3 =94770
= 10530 =35230
10% x 94770 35230+9477 130000 – 44707
Y4 = 85293
=9477 =44707
10% x 85293 44707+8529.30 130000 – 53236.30
Y5 =76763.70
= 8529.30 =53236.30

47
 EFFECTIVE: JUNE 2023

4 Accounting Entries for recording depreciation (expenses)

• At the end of every accounting period, depreciation of assets is charged for the year until the
asset is disposed (sold) or until the asset is fully depreciated.

Double Entry:
Debit: Statement of profit or loss / Income statement (Expenses)

Credit: Accumulated depreciation account

Example 1:
A company bought machinery for $100 000 on 1 January 2021 by cheque. The depreciation
rate is 10% per annum using the straight-line method. Prepare relevant ledgers and financial
statement extracts for year 2021,2022,2023. The financial year end is 31 December.

Workings:

Straight-line method (Depreciation = % x cost)

2021: 10% x 100 000 = $10 000

2022: $10 000

2023: $10 000

Bought machinery –
Dr Machinery Cr Bank

Machinery Account
2021 2021
Bank 100 000 Balance c/d 100 000
1 Jan 31 Dec

2022 2022
Balance b/d 100 000 Balance c/d 100 000
1 Jan 31 Dec

2023 2023
Balance b/d 100 000 Balance c/d 100 000
1 Jan 31 Dec

48
 EFFECTIVE: JUNE 2023

Accumulated Depreciation Account

2021 2021 Statement of
Balance c/d 10 000 10 000
31 Dec 31 Dec profit or loss

2022 2022
Balance c/d 20000 Balance b/d 10 000
31 Dec 1 Jan
Statement of
____ 31 Dec 10 000
profit or loss
20000 20000

2023 2023
Balance c/d 30000 Balance b/d 20 000
31 Dec 1 Jan
Statement of
31 Dec 10 000
profit or loss
30000 30000

Statement of profit or loss (extract) for the year ended 31 December

$
2021
Less: Expenses
Depreciation 10 000

2022
Less: Expenses
Depreciation 10 000

2023
Less: Expenses
Depreciation 10 000

49
 EFFECTIVE: JUNE 2023

Statement of financial position (extract) as at 31 December

$ $

2021

Non-current assets

Machinery (cost) 100 000

Less: accumulated depreciation (Y1) 10 000 90 000

2022

Non-current assets

Machinery 100 000

Less: accumulated depreciation (Y1+Y2) 20000 80000

2023

Non-current assets

Machinery 100 000

Less: accumulated depreciation (Y1+Y2+Y3) 30000 70000

Example 2:

A company bought motor vehicles for $200 000 on 1 January 2021 by cheque. The depreciation
rate is 20% per annum using the reducing balance method. Prepare relevant ledgers and
financial statement extracts for year 2021,2022,2023. The financial year end is 31 December.

% x NBV
NBV = COST – ACC DEPR
Workings:

2021: 20% x 200 000 = 40 000 (1st yr times with cost)

2022: 20% x (200 000 – 40 000) = 32000

2023: 20% x (200 000 – 40000 – 32000) = 25600

50
 EFFECTIVE: JUNE 2023

Dr MV Cr Bank

Motor Vehicles Account

2021 2021
Bank 200 000 Balance c/d 200 000
1 Jan 31 Dec

2022 2022
Balance b/d 200 000 Balance c/d 200 000
1 Jan 31 Dec

2023 2023
Balance b/d 200 000 Balance c/d 200 000
1 Jan 31 Dec

Accumulated Depreciation Account

2021 2021 Statement of
Balance c/d 40 000 40 000
31 Dec 31 Dec profit or loss

2022 2022
Balance c/d 72000 Balance b/d 40 000
31 Dec 1 Jan
Statement of
______ 31 Dec 32 000
profit or loss
72000 72000

2023 2023
Balance c/d 97 600 Balance b/d 72 000
31 Dec 1 Jan
Statement of
______ 31 Dec 25 600
profit or loss
97 600 97 600

51
 EFFECTIVE: JUNE 2023

Statement of profit or loss (extract) for the year ended 31 December

$
2021
Less: Expenses
Depreciation 40000

2022
Less: Expenses
Depreciation 32000

2023
Less: Expenses
Depreciation 25600

Statement of financial position (extract) as at 31 December

$ $
2021
Non-current assets
Motor vehicles 200 000
Less: accumulated depreciation (Y1) 40000 160 000

2022
Non-current assets
Motor vehicles 200 000
Less: accumulated depreciation (Y1+Y2) 72000 128000

2022
Non-current assets
Motor vehicles 200000
Less: accumulated depreciation (Y1+Y2 +Y3) 97600 102400

52
 EFFECTIVE: JUNE 2023

Exercise

A company starts in business on 1 January 2021, the financial year end being 31 December.
You are to show:

(a) The machinery account.

(b) The accumulated depreciation account.
(c) Statement of profit or loss extracts for each of the years 2021, 2022, 2023
(d) The statement of financial position extracts for each of the years 2021, 2022, 2023

The equipment bought was:

2021 1 January 1 machine costing $800 (Machine A)

2022 1 July 2 machines costing $1,200 each (Machine B&C)
1 October 1 machine costing $600 (Machine D)

Depreciation is 10 per cent per annum using the straight line method, machines being
depreciated for the proportion of the year that they are owned.

Workings:
2021 Machine A = 10% x 800 = 80

2022
Machine A = 80
Machine B & C = 10% x (1200+1200) x 6/12 = 120
Machine D = 10% x 600 x 3/12 = 15
Total: 80+120+15 = 215

2023
Machine A = 80
Machine B&C = 10% x (1200+1200) = 240
Machine D = 10% x 600 = 60
Total: 80+240+60 = 380

53
 EFFECTIVE: JUNE 2023

Machinery Account
2021 2021
Bank 800 Balance c/d 800
1 Jan 31 Dec

2022 2022
Balance b/d 800 Balance c/d 3800
1 Jan 31 Dec
1 Jul Bank 2400
1 Oct Bank 600 ____
3800 3800

2023 2023
Balance b/d 3800 Balance c/d 3800
1 Jan 31 Dec

Accumulated Depreciation Account

2021 2021 Statement of
Balance c/d 80 80
31 Dec 31 Dec profit or loss

2022 2022
Balance c/d 295 Balance b/d 80
31 Dec 1 Jan
Statement of
___ 31 Dec 215
profit or loss
295 295

2023 2023
Balance c/d 675 Balance b/d 295
31 Dec 1 Jan
Statement of
31 Dec 380
profit or loss
675 675

54
 EFFECTIVE: JUNE 2023

Statement of profit or loss (extract) for the year ended 31 December

$
2021
Less: Expenses
Depreciation 80

2022
Less: Expenses
Depreciation 215

2023
Less: Expenses 380
Depreciation

Statement of financial position (extract) as at 31 December

$ $
2021
Non-current assets
Machinery 800
Less: accumulated depreciation (y1) 80 720

2022
Non-current assets
Machinery 3800
Less: accumulated depreciation (y1+y2) 295 3505

2023
Non-current assets
Machinery 3800
Less: accumulated depreciation (y1+y2+y3) 675 3125

55
 EFFECTIVE: JUNE 2023

5 Accounting for Disposal of Fixed (non-current) Assets

Fixed assets could be disposed in the following ways:

• A fixed asset is being scrapped or given away because it is obsolete or no longer in use, and
the asset has no resale value;
• A fixed asset is sold for cash or part-exchanged with another asset.

Formula:

𝐺𝑎𝑖𝑛/𝐿𝑜𝑠𝑠 𝑜𝑛 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑙 = 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 – 𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒

Note 1: positive amount (Gain on disposal); negative amount (Loss on disposal)

Note 2: Sales Proceeds (selling price)
Note 3: Net Book Value = cost – accumulated depreciation

Take note:
(Income) Gain on disposal: sales proceeds > net book value (remaining value of assets)
(Expense) Loss on disposal: sales proceeds < net book value

Worked Examples:
Example 1:

A machinery which was bought on 1 January 2019 at a cost of $15 000 and was depreciated at
the rate of 10% p.a under straight line method (% x cost). The machinery was sold for $6 500
cash on 31 December 2021.

The accounting year of the business ends on 31st December each year.
Calculate the gain or loss on disposal of the machinery.

Depreciation
2019: 10% x 15000 = 1500
2020: 1500
2021: 1500
2021 NBV = 15000 – 4500 = 10500

6500 – 10500 = (4000)

- Loss on disposal 4000 (expenses)

56
 EFFECTIVE: JUNE 2023

Example 2:
Universal Industries provided the following information:

i. Purchased a machine for $8 000 on 1 October 2019.

ii. Sold the machine for cash, $7000, on 31 March 2021.
iii. The policy of Universal Industries is to charge depreciation at the rate of 10% per
annum on cost using the straight line method. Depreciation on machinery is charged
from the date of purchase and up to the date of sale.
iv. All sales of fixed assets are recorded in a disposal account.
v. Universal Industries prepares final accounts on 31 March each year.

Calculate the gain or loss on disposal of the machine.

Depreciation
Year 2020 (1/4/2019 to 31/3/2020)
10% x 8000 x 6/12 = 400
Year 2021 (1/4/2020 to 31/3/2021)
10% x 8000 = 800
NBV = cost – acc depr
= 8000 – 1200 = 6800

Sales proceeds – NBV = 7000 – 6800 = 200 (Gain on disposal) (other income)

57
 EFFECTIVE: JUNE 2023

4.2 BAD DEBTS & ALLOWANCE / PROVISION FOR DOUBTFUL DEBTS

1 Bad Debts
• Accounts receivables (trade receivables) are not always collected in full. A debt which is
uncollectible is a bad debt.
• When a debt is unlikely to be recover from a receivable, it must be written off (remove) from
the books so that the business’s assets (receivables) are not overstated which is in line with the
prudence concept. (not overstate assets & income ; not understate liabilities & expenses)

Accounting entries

Dr. Cr.
Bad debts (expenses) x
Trade Receivables (remove/minus) x

At the end of financial year:

Dr Statement of profit or loss (expenses)
Cr Bad debts

Example:
Amelia sold goods, $400, on credit to Bloom on 8 January 2021. After many attempts to
recover the amount due, Amelia wrote off Bloom accounts as bad debts on 31 December 2021.
Dr Bloom Cr Sales
Dr Bad debts Cr Bloom
Bloom
2021 2021
Sales 400 Bad debts 400
8 Jan 31 Dec

Bad Debts
2021 2021 Statement of
Bloom 400 400
31 Dec 31 Dec profit or loss

58
 EFFECTIVE: JUNE 2023

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Less: Expenses

Bad debts 400

2 Allowance / Provision for Doubtful Debts

• The provision for doubtful debts might refer to the balance sheet account also known as the
Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible
Accounts. In this case, the account Provision for Bad Debts is a contra asset account (an asset
account with a credit balance).
• Accounts receivable which are likely to be potential bad debts
• Provision for doubtful debts is an estimate of debts that are deemed not collectible in the
future accounting periods.
• The provision for doubtful debts is determined after the trial balance is prepared.

Adjustments for provision for doubtful debts are needed for:

(i) Creating provision for doubtful debts for the first time; or
(ii) Increased provision for doubtful debts brought forward from previous period; or
(iii) Decreased provision for doubtful debts brought forward from previous period.

(i) Creating Provision for Doubtful Debts (1st time)

• When a business determines its doubtful debts and want to make adjustments for the provision
of doubtful debts for the first time, the provision for doubtful debts is created for recording the
adjustments for its doubtful debts.
Accounting entries

Dr. Cr.
Statement of profit or loss 500
Provision for doubtful debts 500

• The whole amount of the doubtful debts is entered in both the statement of profit or loss
and provision for doubtful debts account.

59
 EFFECTIVE: JUNE 2023

• The statement of financial position deducts the balance on the provision of doubtful
debt account from the trade receivables.
IS – full amount
SOFP – current year balance
Example:
Sachin’s financial year ends on 31 December.
During the year ended 31 December 2021 he wrote off bad debts totalling $950.
On 31 December his trade receivables amounted to $25 000. He decided to create a provision
for doubtful debts of 4% of the trade receivables. (4% x 25000 = 1000)
a) Write up the bad debts account and the provision for doubtful debts account in Sachin’s
nominal ledger for the year ended 31 December 2021.
b) Prepare an extract from Sachin’s statement of profit or loss for the year ended 31 December
2021.
c) Prepare an extract from statement of financial position as at 31 December 2021.
Dr Bad debts Cr Trade receivables
Bad Debts
2021 2021 Statement of
Trade receivables 950 950
31 Dec 31 Dec profit or loss

Allowance for doubtful debts

2021 2021 Statement of
Balance c/d 1000 1000
31 Dec 31 Dec profit or loss

2022
Balance b/d 1000
1 Jan

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Less: Expenses

Bad debts 950

Allowance for doubtful debts 1000

60
 EFFECTIVE: JUNE 2023

Statement of financial position (extract) as at 31 December 2021

$
$

Current assets

Trade receivables 25000

Less: Allowance for doubtful debts (1000) 24000

(ii) Increased Provision for Doubtful Debts

• The provision for doubtful debts will be increased when the doubtful debts determined for
the current period is more than the provision for doubtful debts of the previous period.

Last year 2017 1000 (trial balance)

This year 2018 1500 (additional information)
(increased 500)

Accounting entries

Dr Cr
Statement of profit or loss 500
Provision for doubtful debts 500

• Only the increased amount of the doubtful debts is entered in both the statement of profit or
loss and provision for doubtful debts account.

Example:
John’s financial year ends on 31 December.

During the year ended 31 December 2021, John wrote off debts totalling $990 (bad debts).

On 31 December 2020, John created a provision for doubtful debts of $1 000. On 31 December
2021 his trade receivables amounted to $28 000. He decided to maintain the provision for
doubtful debts at the rate of 4% of the trade receivables.
Year 2020: $1000
Year 2021: 28000 x 4% = 1120 (SOFP)
(increased by 120) - IS

61
 EFFECTIVE: JUNE 2023

a) Write up the bad debts account and the provision for doubtful debts account in John’s
nominal ledger for the year ended 31 December 2021.
b) Prepare a relevant extract from John’s statement of profit or loss for the year ended 31
December 2021.
c) Prepare a relevant extract from John’s statement of financial position at 31 December
2021.
Bad Debts
2021 2021 Statement of
Trade receivables 990 990
31 Dec 31 Dec profit or loss

Allowance for doubtful debts

2021 2021
Balance c/d 1120 Balance b/d 1000
31 Dec 1 Jan
Statement of
____ 31 Dec 120
profit or loss
1120 1120

2022
Balance b/d 1120
1 Jan

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Less: Expenses

Bad debts 990

Increase in allowance for doubtful debts 120

Statement of financial position (extract) as at 31 December 2021

$
$

Current assets

Trade receivables 28000

Less: Allowance for doubtful debts 1120 26 880

62
 EFFECTIVE: JUNE 2023

(iii) Decreased Provision for Doubtful Debts

• The provision for doubtful debts will be decreased when the doubtful debts determined for
the current period is less than the provision for doubtful debts of the previous period.
Last year 2017 1000 (as per trial balance)
This year 2018 600 (SOFP) (additional information)
(decreased by 400) - IS

Accounting entries
Dr. Cr.
Provision for doubtful debts 400
Statement of profit or loss 400

• Only the decreased amount of the doubtful debts is entered in both the statement of profit or
loss and provision for doubtful debts account.

Example:
Darren’s financial year ends on 31 December.
On 31 December 2020, Darren’s provision for doubtful debts amounted to $1120.
On 31 December 2021, his trade receivables amounted to $24 000. He decided to maintain the
provision for doubtful debts at the rate of 4% of the trade receivables.

Year 2020: $1120

Year 2021: $24000 x 4% = 960 (SOFP)
(decreased by 160) - statement of profit or loss

a) Write up the provision for doubtful debts account in Darren’s nominal ledger for the
year ended 31 December 2021.

b) Prepare an extract from Darren’s income statement for the year ended 31 December
2021.

c) Prepare an extract from Darren’s statement of financial position at 31 December 2021.

63
 EFFECTIVE: JUNE 2023

Allowance for doubtful debts

2021 Statement of 2021
160 Balance b/d 1120
31 Dec profit or loss 1 Jan
Balance c/d 960 ___

1120 1120
2022
Balance b/d 960
1 Jan

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Add: Other income

Decrease in allowance for doubtful debts 160

Statement of financial position (extract) as at 31 December 2021

$
$

Current assets

Trade receivables 24000

Less: Allowance for doubtful debts 960 23040

64
 EFFECTIVE: JUNE 2023

Exercise 1:
The following information was extracted from the books of Sabah Winds Limited on 31
December:
Year Trade Receivables ($)
2015 100 000
2016 120 000
2017 200 000
2018 150 000
2019 180 000

Additional information:
The company decided to create and maintain a provision for doubtful debts account of 10% of
trade receivables for the year 2015.
(a) Complete the table below
31 Creation,
December Allowance for Increase or Account to be
Doubtful (Decrease)
Debts in allowance Debited Credited
($) ($) ($) ($)
2015 100 000 x 10% Creation Statement of profit Allowance for
= 10 000 10 000 or loss 10 000 doubtful debts
account
10 000
2016 120 000 x 10% Increased Statement of profit Allowance for
= 12 000 2000 or loss 2000 doubtful debts
account
2000
2017 200 000 x 10% Increased Statement of profit Allowance for
= 20 000 8000 or loss 8000 doubtful debts
account
8000
2018 150 000 x 10% Decreased Allowance for Statement of profit
= 15 000 5000 doubtful debts or loss 5000
account
5000
2019 180 000 x 10% Increased Statement of profit Allowance for
=18 000 3000 or loss 3000 doubtful debts
account
3000

(b) Prepare the provision for doubtful debts account, statement of profit or loss (extract)
for year 2015 to 2019 and statement of financial position (extract) at the end of each
financial year

65
 EFFECTIVE: JUNE 2023

Allowance for Doubtful Debts

2015 2015 Statement of

Balance c/d 10000 10000
31 Dec 31 Dec profit or loss

2016 2016
Balance c/d 12000 Balance b/d 10000
31 Dec 1 Jan
Statement of
_____ 31 Dec 2000
profit or loss
12000 12000

2017 2017
Balance c/d 20000 Balance b/d 12000
31 Dec 1 Jan
Statement of
_____ 31 Dec 8000
profit or loss
20000 20000

2018 Statement of 2018

5000 Balance b/d 20000
31 Dec profit or loss 1 Jan
Balance c/d 15000 _____
20000 20000

2019 2019
Balance c/d 18000 Balance b/d 15000
31 Dec 1 Jan
Statement of
_____ 31 Dec 3000
profit or loss
18000 18000

2020
Balance b/d 18000
1 Jan

66
 EFFECTIVE: JUNE 2023

Statement of profit or loss (extract) for the year ended 31 December

$
2015
Less: Expenses
Increase in allowance for doubtful debts 10000

2016
Less: Expenses
Increase in allowance for doubtful debts 2000

2017
Less: Expenses
Increase in allowance for doubtful debts 8000

2018
Add: Other Income
Decrease in allowance for doubtful debts 5000

2019
Less: Expenses
Increase in allowance for doubtful debts 3000

67
 EFFECTIVE: JUNE 2023

Statement of financial position (extract) as at 31 December

$ $
2015
Current Assets
Trade receivables 100 000
Less: Allowance for doubtful debts 10 000 90 000

2016
Current Assets
Trade receivables 120 000
Less: Allowance for doubtful debts 12 000 108 000

2017
Current Assets
Trade receivables 200 000
Less: Allowance for doubtful debts 20 000 180 000

2018
Current Assets
Trade receivables 150 000
Less: Allowance for doubtful debts 15 000 135 000

2019
Current Assets
Trade receivables 180 000
Less: Allowance for doubtful debts 18 000 162 000

68
 EFFECTIVE: JUNE 2023

Exercise 2:
• A trader decided to open a Provision for Doubtful Debts account in 2016. The provision was
to be 5% of outstanding debtors at each year end.
You are required to complete the table below and prepare the Provision for Doubtful Debts
account for the years 2016 to 2019 from the following information.

Allowance / Provision
31 Trade receivables / Create / Increase /
for Doubtful Debts
December Debtors (Decrease)
(5%)
2016 170,000 5% x 170 000 Create 8500
= 8500
2017 130,000 5% x 130 000 Decrease by 2000
= 6500
2018 160,000 5% x 160 000 Increase by 1500
= 8000
2019 180,000 5% x 180 000 Increase by 1000
= 9000

Allowance for Doubtful Debts

2016 2016 Statement of

Balance c/d 8500 8500
31 Dec 31 Dec profit or loss

2017 Statement of 2017

2000 Balance b/d 8500
31 Dec profit or loss 1 Jan
Balance c/d 6500 ____
8500 8500

2018 2018
Balance c/d 8000 Balance b/d 6500
31 Dec 1 Jan
Statement of
____ 31 Dec 1500
profit or loss
8000 8000

2019 2019
Balance c/d 9000 Balance b/d 8000
31 Dec 1 Jan
Statement of
____ 31 Dec 1000
profit or loss
9000 9000

69
 EFFECTIVE: JUNE 2023

Statement of profit or loss (extract) for the year ended 31 December

$
2016
Less: Expenses
Allowance for doubtful debts 8500

2017
Add: Other Income
Decrease in allowance for doubtful debts 2000

2018
Less: Expenses
Increase in allowance for doubtful debts 1500

2019
Less: Expenses
Increase in allowance for doubtful debts 1000

70
 EFFECTIVE: JUNE 2023

Statement of financial position (extract) as at 31 December

$ $
2016
Current Assets
Trade receivables 170 000
Less: Allowance for doubtful debts 8500 161 500

2017
Current Assets
Trade receivables 130 000
Less: Allowance for doubtful debts 6500 123 500

2018
Current Assets
Trade receivables 160 000
Less: Allowance for doubtful debts 8000 152 000

2019
Current Assets
Trade receivables 180 000
Less: Allowance for doubtful debts 9000 171 000

4.3 ACCRUALS AND PREPAYMENTS

1 Accruals (not yet paid) and Prepayments (paid in advance)

Examples of accruals are:

• Interest incurred but not yet paid on borrowings (accrued interest)
• Rent owed, but not yet paid (accrued rent)
• Commission and royalties incurred but not yet paid (accrued commission)

Examples of prepayments are:

• Payment for insurance coverage that extends over two accounting periods. (prepaid
insurance)
• Payment of rent of property, plant and equipment in advance. (prepaid rent)

71
 EFFECTIVE: JUNE 2023

• Payment of conference fees, software licences in advance. (prepaid conference fee)

2 Accrual basis of accounting

• When calculating profits for a financial year, all expenses and all revenue of the same
financial year must be taken into consideration when calculating profits of the year.

Profit for the year 2022 = Total revenue earned in 2022 – Total expenses incurred in 2022

The figures in the trial balance showed all the expenses paid and revenue received during
the year. The expenses paid might include prepaid expenses and the revenue received might
include revenue received in advance.

ADJUSTMENT ENTRIES
• To record expenses incurred and revenue earned during the year.

3 Recording accruals and prepayments

Eg: 2022 water bill Eg: Rent income Eg: Paid 2024 PREPAID INCOME
still not yet paid 2022 still not yet telephone bill
received Eg: Received 2024
rental income

72
 EFFECTIVE: JUNE 2023

TWO FINANCIAL STATEMENTS

1. Statement of profit or loss / Income statement (Expenses or Revenue)

• At year end, the expenses and revenue ledger accounts are balanced. The expenses
incurred and the revenue earned during the year will be posted to the income statement.

2. Statement of Financial Position (Assets or Liabilities)

• During the current year, some of the expenses incurred may not have been paid or some
expenses may have been paid in advance. Similarly, some income may still be outstanding
or may have been received in advance.

• These balances will be carried forward (balance c/d) to the following year.

Record in SOFP

Accrued expenses Expenses incurred but not yet paid Current Liabilities

Services delivered but not yet

Accrued revenue received income (WILL RECEIVE Current Assets
IN FUTURE)
Paid in advance for some future
Prepaid expenses Current Assets
services
Revenue received in Income received which relates to
Current Liabilities
advance / Prepaid revenue future services

73
 EFFECTIVE: JUNE 2023

Example 1:
Trial balance as at 31 December 2021
Dr Cr
Salaries 260 000
Rent income 7 000

Additional information:
• Monthly salaries are $20 000
• The company has rented out a section of its premises for a monthly rent income of $1000.
Note:

Salaries paid = 260 000

Salaries incurred = 20 000 x 12 = 240 000 (Statement of profit or loss)

Prepaid expenses = 260000-240000 = 20 000 (SOFP – CA)

Rent received = 7000

Rent income earned = 1000 x 12 = 12 000 (Statement of profit or loss)

Accrued rent income = 12000-7000 = 5000 (SOFP – CA)

74
 EFFECTIVE: JUNE 2023

Example 2:

Trial balance as at 31 December 2021

Dr Cr
Insurance 11 000
Sales commission 17 000
Rent income 4 000

Additional information
(a) The annual insurance premium is $12 000.
(b) Sales commission is paid at 10% of total sales. The total sales for the year was $200 000.
(c) The company rented out a section of its premises for a monthly rent of $800 beginning 1
July 2021.
(d) The company has a 5% fixed deposit of $100 000. No interest for the year has been received
yet.

Workings:
Insurance paid = 11000

Insurance incurred = 12000 (Statement of profit or loss)

Accrued expenses = 12000-11000 = 1000 (SOFP – CL)

Sales comm paid = 17000

Sales comm incurred = 10% x 200 000 = 20 000 (Statement of profit or loss)

Accrued expenses = 20000-17000 = 3000 (SOFP – CL)

Rent received = 4000

Rent income earned = 800 x 6months = 4800 (Statement of profit or loss)

Accrued income = 4800-4000 = 800 (SOFP – CA)

Interest received = 0

Interest income earned = 5% x 100 000 = 5000 (Statement of profit or loss)

Accrued income = 5000 (SOFP – CA)

75
 EFFECTIVE: JUNE 2023

Worked examples:

(a) Accrued expenses

During the year 2021, Harith Supplier's annual rent was $24 000. Harith Suppliers has paid
rent of $20 000 in 2021.
Rent paid = 20 000
Rent incurred = 24000 (Statement of profit or loss)
Accrued expenses = 4000 (SOFP – CL)

Dr Rent Cr Bank
Rent Expense Account
2021 2021 Statement of profit
Bank 20 000 24 000
31 Dec 31 Dec or loss
Balance c/d
4000 _____
(accrued expenses)
24 000 24000
2022 Balance b/d
4000
1 Jan (accrued expenses)

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Less: Expenses

Rent expense 24 000

Statement of financial position (extract) as at 31 December 2021

$

Current liabilities

Accrued expenses / accrued rent / other payables 4 000

76
 EFFECTIVE: JUNE 2023

(b) Prepaid expenses

Jose Brothers has paid $30 000 for insurance during 2021 of which $2000 was paid in advance
for insurance in 2022.
Insurance paid = 30 000
Insurance incurred = 30 000-2000 = 28000 (Statement of profit or loss)
Prepaid expenses = 2000 (SOFP – CA)

Dr Insurance Cr Bank
Insurance Account
2021 2021 Statement of profit
Bank 30 000 28000
31 Dec 31 Dec or loss
Balance c/d
____ 2000
(prepaid expenses)
30 000 30 000
2022 Balance b/d
2000
1 Jan (prepaid expenses)

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Less: Expenses

Insurance 28 000

Statement of financial position (extract) as at 31 December 2021

$

Current assets

Prepaid expenses / prepaid insurance / other receivables 2000

77
 EFFECTIVE: JUNE 2023

(c) Unearned revenue / Accrued revenue

Lorrin sublets a section of her shop to Dani for a rental of $1000 per month. At 31 December
2021 Dani owes one month's rent.

Rent received = 1000 x 11months = 11000

Rent revenue earned = 1000 x 12 = 12000 (Statement of profit or loss)
Accrued income = 1000 (SOFP – CA)

Dr Bank Cr Rent revenue

Rent Revenue account
2021 Statement of 2021
12000 Bank 11 000
31 Dec profit or loss 31 Dec
Balance c/d
____ (accrued revenue / 1000
income)
12000 12000
2022 Balance b/d
1000
1 Jan (accrued revenue)

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Add: Other income

Rent revenue 12 000

Statement of financial position (extract) as at 31 December 2021

$

Current assets

Accrued income / accrued rent revenue / other receivables 1000

78
 EFFECTIVE: JUNE 2023

(d) Revenue received in advance / Prepaid income

Total interest income received by ABC Limited in 2020 was $20 000. If $3 000 of interest
income received was for the year 2021.

Interest received = 20 000

Interest income earned = 20000-3000 = 17000 (Statement of profit or loss)
Prepaid income = 3000 (SOFP – CL)

Dr Bank Cr interest income

Interest Income account
2020 Statement of 2020
17 000 Bank 20 000
31 Dec profit or loss 31 Dec
Balance c/d
3000 ____
(prepaid income)
20 000 20000

2021
Balance b/d 3000
1 Jan

Statement of profit or loss (extract) for the year ended 31 December 2021
$

Add: Other income

Interest income 17 000

Statement of financial position (extract) as at 31 December 2021

$

Current liabilities

Other payables / prepaid income / prepaid interest income 3000

79
 EFFECTIVE: JUNE 2023

5 FINANCIAL STATEMENT

5.1 Introduction
• The financial statements prepared for a sole proprietorship are the income statement
(statement of profit or loss) (trading account, profit and loss account) and the statement
of financial position (balance sheet).

• The financial statements are prepared at the end of an accounting period.

5.2 Statement of profit or loss / Income Statement

o The income statement reports the net profit or net loss for a specific period of time.

o The income statement contains two sections:

• Trading account
• Profit and loss account

(i) Trading Account

• The purpose of preparing the trading account is to determine the gross profit or
gross loss of the business during an accounting period.

• The trading account shows the income from sales and the direct costs of making
those sales.

Gross Profit = Sales – Cost of sales

(ii) Profit & Loss Account

• The profit and loss account shows the calculation of profit for the year or loss (net
profit) of the business for an accounting period.

• The profit for the year is the profit after all operating expenses and any other items of
income.

Profit for the year = Gross profit + other income - expenses

80
 EFFECTIVE: JUNE 2023

Specimen of income statement

Statement of profit or loss for the year ended .........................

RM RM RM
Sales 1000
Less: Sales returns 500
500
Less: Cost of sales
Opening inventory 10
Purchases 200
Less: Purchases returns 20
180
Add: Carriage inwards 10
Add: Direct wages 20
210
220
Less: Closing inventory 20
200
Gross profit 300

Add: Other income

Rent received 10
Interest received 10
Discounts received 10 30
330
Less: Expenses
Rent expense 20
Salaries 20
Insurance 20 60
Profit for the year 270

81
 EFFECTIVE: JUNE 2023

5.3 Statement of financial position

o A statement of financial position is a statement of the financial position of the business on

a certain date. It shows the business assets, and amounts owing to the business and the
capital.

o In a statement of financial position assets and liabilities are properly grouped and
classified under appropriate headings such as:

(i) Non-current assets

Motor vehicles, machinery, furniture and fittings

(ii) Current assets

Inventory, cash, bank, trade receivables

(iii) Equity

Capital + profit for the year – drawings

(iv) Non-current liabilities (>1 year)

Long term loan

(v) Current liabilities (< 1 year)

Trade payables, bank overdraft

82
 EFFECTIVE: JUNE 2023

Specimen of a statement of financial position

Statement of financial position as at xxxxxxx

$ $ $
Accumulated Net Book
Cost
depreciation Value
Non-current Assets
Motor vehicles 50 000 20 000 30 000
Fixtures & fittings 60 000 30 000 30 000
110 000 50 000 60 000
Current Assets
Inventory 2 000
Trade receivables 5 000
Less: provision for doubtful debts 1 000 4 000
Cash at bank 6 000
Other receivables (prepaid expenses/accrued revenue) 1 000 13 000
Total assets 73 000

Financed by:
Capital 50 000
Add: Profit for the year 10 000
60 000
Less: Drawings 2 000
58 000
Non-current liabilities
10-year bank loan 5 000

Current liabilities
Trade payables 8 000
Bank Overdrafts 1 000
Other payables (accrued expenses/ prepaid revenue) 1 000 10 000
Total equity and liabilities 73 000

83
 EFFECTIVE: JUNE 2023

Exercise 1
The following trial balance was extracted from the books of a business, Eastern Winds for the year
ended 31st December 2020.

ASSET, EXPENSES (DR)

LIABILITY, EQ, INCOME (CR)
Debit Credit

$ $

Capital 50 000

Plants & machinery 18 000

Direct wages 10 000

Repairs 1 600

Salaries 28 000

Cash in hand 2 500

Land & buildings 74 500

Purchases 123 500

Sales 249 000

Bank overdraft 4 000

Discounts received 8 500

Commissions received 1 500

Trade receivables 45 000

Trade payables 26 300

Bad debts 1 000

Stock on 1st January 2020 => Opening inventory 37 000

Advertising 600
Office expenses 2 700

Fixtures & fittings 4 000

Office stationery 400

Interest 2 000

Bank loan (repayable 2029) ______ 11 500

Total 350 800 350 800

The closing inventory on 31st December 2020 was valued at $28 000. (IS – COS, SOFP – CA)

(a) Prepare a statement of profit or loss for the year ended 31st December 2020.
84
 EFFECTIVE: JUNE 2023

Statement of profit or loss for the year ended 31 December 2020

$ $ $

Sales 249 000

Less: Cost of sales

Opening inventory 37 000

Purchases 123 500

Add: Direct wages 10 000

133 500

Cost of goods for sale 170 500

Less: Closing inventory 28 000

Cost of sales 142 500

Gross profit 106 500

Add: Other income

Discounts received 8 500

Commissions received 1 500 10 000

116 500

Less: Expenses

Repairs 1 600

Salaries 28 000

Bad debts 1 000

Advertising 600

Office expenses 2 700

Stationery 400

Interest 2 000 36 300

Profit for the year 80 200

(b) Prepare a statement of financial position as at 31st December 2020.

85
 EFFECTIVE: JUNE 2023

Statement of financial position as at 31 December 2020

$ $ $

Non-current assets

Plant and machinery 18 000

Land & Buildings 74 500

Furniture and fittings 4 000 96 500

Current assets

Inventory 28 000

Trade receivables 45 000

Cash in hand 2 500 75 500

Total assets 172 000

Equity

Capital 50 000

Add: profit for the year 80 200

130 200

Non-current liabilities

Bank loan 11 500

Current liabilities

Bank overdraft 4 000

Trade payables 26 300 30 300

Total equity and liabilities 172 000

86
 EFFECTIVE: JUNE 2023

Exercise 2
The following trial balance has been extracted from the books of Takewah Brothers for the year ended
31st December 2020:

Debit Credit
$ $
Sales 198 000
Discount received 700
Bank interest received 200
Purchases 53 000
Carriage outwards 4 900
Carriage inwards 2 000
Bad debts 300
Rent 14 100
Office salaries 26 200
Sales commission 37 600
Discount allowed 100
Stationery 2 400
Advertising 8 700
Utilities 7 200
Cash at bank 34 700
Inventory on 1st January 2020 39 000
Trade receivables & Trade payables 10 000 11 300
Office furniture 8 000
Delivery van 37 300
Premises – cost 29 000
Bank loan (repayable in 2021) Current liab 22 000
Capital 98 300
Drawings 14 000
Interest on loan 2 000 ______
Total 330 500 330 500

The closing inventory on 31st December 2020 was valued at $ 41 000 (IS – COS, SOFP –
CA)

(a) Prepare the statement of profit or loss for the year ended 31st December 2020; and
(b) Prepare the statement of financial position as at 31st December 2020

Takewah Brothers
87
 EFFECTIVE: JUNE 2023

Statement of profit or loss for the year ended 31 December 2020

$ $ $

Sales 198 000

Less: Cost of sales

Opening inventory 39 000

Purchases 53 000

Add: Carriage inwards 2 000

55 000

Cost of goods for sale 94 000

Less: Closing inventory (41 000)

Cost of sales (53 000)

Gross profit 145 000

Add: Other income

Discount received 700

Bank interest 200 900

145 900

Less: Expenses

Carriage outwards 4 900

Bad debt 300

Sales commission 37 600

Rent 14 100

Office salaries 26 200

Discount allowed 100

Stationery 2 400

Advertising 8 700

Utilities 7 200

Interest on loan 2 000 (103 500)

Profit for the year 42 400

88
 EFFECTIVE: JUNE 2023

Takewah Brothers
Statement of financial position as at 31 December 2020

$ $ $

Non-current assets

Delivery van 37 300

Office furniture 8 000

Premise 29 000

74 300

Current assets

Cash at bank 34 700

Inventory 41 000

Trade receivables 10 000

85 700

Total assets 160 000

Equity

Capital 98 300

Add: Profit for the year 42 400

140 700

Less: Drawings (14 000)

126 700

Current liabilities

Trade payables 11 300

Bank loan 22 000

33 300

Total equity and liabilities 160 000

89
 EFFECTIVE: JUNE 2023

Exercise 3
Trial Balance at 31 August 2021
Dr Cr
Inventory 1 September 2020 8 200
Purchases and sales 26 000 40 900
Rent 4 400
Business rates 1 600
Sundry expenses 340
Motor vehicle at cost 9 000
Trade receivables and trade payables 1 160 2 100
Bank 1 500
Accumulated depreciation of motor vehicle 1 200
Capital 19 700
Drawings 11 700
63 900 63 900

At 31 August 2021, there was

a) Inventory valued at $9100

b) Accrued rent $400
c) Prepaid business rates of $300
d) The motor vehicle is to be depreciated at 20% of cost

Required:

Draw up the statement of profit or loss for the year ending 31 August 2021 together with a
statement of financial position as at 31 August 2021.

Rates = tax on offices, shops and factories

90
 EFFECTIVE: JUNE 2023

Statement of profit or loss for the year ended 31 August 2021

$ $ $
Sales 40 900

Less: Cost of sales

Opening inventory 8 200
Add: Purchases 26 000
Cost of goods for resale 34 200
Less: Closing inventory 9 100
Cost of sales 25 100
Gross profit 15 800

Less: Expenses
Rent (4400+400) 4 800
Business rates (1600-300) 1 300
Sundry expenses 340
Depreciation of motor vehicle (20% x 9000) 1 800 8 240
Profit for the year 7 560

91
 EFFECTIVE: JUNE 2023

Statement of financial position as at 31 August 2021

$ $ $
Accumulated Net book
Cost
depreciation value
Cost – Acc
Non-current assets TB TB + SPL
dep
Motor vehicle (1200 + 1800) 9 000 3 000 6 000

Current assets
Inventory 9 100
Trade receivables 1 160
Bank 1 500
Other receivables / prepaid expenses 300 12 060
Total assets 18 060
Financed by:
Equity
Capital 19 700
Add: Profit for the year 7 560
27 260
Less: Drawings 11 700
15 560
Current liabilities
Trade payables 2 100
Other payables / accrued expenses 400 2 500
Total equity and liabilities 18 060

92
 EFFECTIVE: JUNE 2023

Exercise 4

The following trial balance was extracted from the books of R. Giggs at the close of business
on 28 February 2021.
Dr Cr
Purchases and sales 92,800 157,165
Cash at bank 4,100
Cash in hand 324
Capital account 1 March 2013 11,400
Drawings 17,100
Office furniture 2,900
Rent 3,400
Wages and salaries 31,400
Discounts 820 160
Accounts receivable and accounts payable 12,316 5,245
Inventory 1 March 2013 4,120
Allowance for doubtful debts 1 March 2013 405
Delivery van 3,750
Van running costs 615
Bad debts written off 730
174,375 174,375

Notes:

a) Inventory 28 February 2021 $2,400.

b) Wages and salaries accrued at 28 February 2021 $340.
c) Rent prepaid at 28 February 2021 $230.
d) Van running costs owing at 28 February 2021 $72.
e) Increase the allowance for doubtful debts by $91.
f) Provide for depreciation as follows: Office furniture $380; Delivery van $1,250.

Required:

Draw up the statement of profit or loss for the year ending 28 February 2021 together with a
statement of financial position as at 28 February 2021.

93
 EFFECTIVE: JUNE 2023

Statement of profit or loss for the year ended 28 February 2021

$ $ $
Sales 157 165

Less: Cost of sales

Opening inventory 4 120
Purchases 92 800
Cost of goods for resale 96 920
Less: Closing inventory 2 400
Cost of sales 94 520
Gross profit 62 645

Add: Other income

Discount received 160
62 805
Less: Expenses
Wages and salaries (31400+340) 31 740
Rent (3400-230) 3 170
Discount allowed 820
Van running cost (615+72) 687
Bad debts 730
Increase in allowance for doubtful debts 91
Depreciation of office furniture 380
Depreciation of delivery van 1250 38 868
Profit for the year 23 937

94
 EFFECTIVE: JUNE 2023

Statement of financial position as at 28 February 2021

$ $ $
Accumulated Net book
Cost
depreciation value
Non-current assets
Office furniture 2 900 380 2 520
Delivery Van 3 750 1 250 2 500
5 020
Current assets
Cash at bank 4 100
Cash in hand 324
Inventory 2 400
Trade receivables 12 316
Less: Allowance for doubtful debts
496 11 820
(405+91)
Other receivables (prepaid expenses) 230 18 874
Total assets 23 894

Financed by:
Equity
Capital 11 400
Add: Profit for the year 23 937
35 337
Less: Drawings 17 100
18 237
Current liabilities
Trade payables 5 245
Other payables (340+72) 412 5657
Total equity and liabilities 23 894

95
 EFFECTIVE: JUNE 2023

2. From the following trial balance of John Brown, prepare a statement of profit or loss for the
year ending 31 December 2021, and a statement of financial position as at that date, taking into
consideration the adjustments shown below:

Trial Balance as at 31 December 2021

$ $
Sales 400,000
Purchases 350,000
Sales returns 5,000
Purchases returns 6,200
Opening inventory at 1 January 2021 100,000
Allowance for doubtful debts 800
Wages and salaries 30,000
Rates 6,000
Telephone 1,000
Shop fittings at cost 40,000
Van at cost 30,000
Accounts receivable and accounts payable 9,800 7,000
Bad debts 200
Capital 179,000
Bank balance 3,000
Drawings 18,000
593,000 593,000

i) Closing inventory at 31 December 2021 $120,000.

ii) Accrued wages $5,000.
iii) Rates prepaid $500.
iv) The allowance for doubtful debts to be increased to 10 per cent of accounts receivable.
v) Telephone account outstanding $220.
vi) Depreciate shop fittings at 10 per cent per annum, and van at 20 per cent per annum, on
cost.

96
 EFFECTIVE: JUNE 2023

Statement of profit or loss for the year ended 31 December 2021

$ $ $
Sales 400 000
Less: Sales returns 5 000
395 000
Less: Cost of sales
Opening inventory 100 000
Purchases 350 000
Less: Purchase returns 6200
343 800
443 800
Less: Closing inventory 120 000
Cost of sales 323 800
Gross profit 71 200

Less: Expenses
Wages and salaries (30000+5000) 35000
Rates (6000-500) 5500
Telephone (1000+220) 1220
Bad debts 200
Increase in allowance for doubtful debts 180
Depreciation of shop fittings 4000
Depreciation of van 6000 52 100
Profit for the year 19 100

97
 EFFECTIVE: JUNE 2023

Statement of financial position as at 31 December 2021

$ $ $
Accumulated Net book
Cost
depreciation value
Non-current assets
Shop fittings 40 000 4 000 36 000
Van 30 000 6 000 24 000
70 000 10 000 60 000

Current assets
Bank 3 000
Trade receivables 9 800
Less: Allowance for doubtful debts 980 8 820
Inventory 120 000
Other receivables (Prepaid expenses) 500 132 320
Total assets 192 320

Equity
Capital 179 000
Add: Profit for the year 19 100
198 100
Less: Drawings 18 000
180 100
Current liabilities
Trade payables 7 000
Other payables (5000 + 220) 5 220 12 220
Total equity and liabilities 192 320

98
 EFFECTIVE: JUNE 2023

TOPIC 6: CONTROL ACCOUNTS

6.1 Division of Ledgers

Ledger Notes
Contains individual trade receivables (credit customers)
(a) Sales ledger
accounts
Contains individual trade payables (credit suppliers)
(b) Purchases ledger
accounts

6.2 Control Accounts

↑↓
(a) Contains the totals of all postings made to accounts in either sales ledger or purchases
ledger

(b) Duplicate the information contained in the sales ledger and purchases ledger

(c) Trade receivables control account represent or summarize all trade receivables’
accounts in the sales ledger

(d) Trade payables control account represent or summarize all trade payables’ account in
the purchases ledger

6.3 Reasons for having Control Accounts

(a) to act as a check on the accuracy of the totals of the balances in the sales and purchases

ledgers to determine the reliability of ledger accounts.

(b) To provide totals of debtors (TR) and creditors (TP) quickly when preparing the trial

balance.

6.4 Limitations

(a) Control accounts may themselves contain errors

(b) Control accounts could not detect some types of errors such as compensating errors

6.5 Other important points:

99
 EFFECTIVE: JUNE 2023

(a) Trade receivables control account is also known as sales ledger control account

(b) Trade payables control account is also known as purchases ledger control account

(c) Cash sales and cash purchases are not recorded in the control accounts.

6.6 Worked Example:

The following information has been extracted from the books of Able.

SALES LEDGER
Indra White
Mar 1 Balance b/d 700 Mar 6 Sales returns 100
5 Sales 3 000 8 Bank 2 700
16 Sales 8 000 8 Discount allowed 200
_____ Balance c/d 8 700
11 700 11 700

Jenny Sorene
Mar 1 Balance b/d 1 000 Mar 13 Sales returns 200
11 Sales 5 000 19 Bank 3 500
_____ 31 Balance c/d 2 300
6 000 6 000

Bitter Bird
Mar 1 Balance b/d 200 Mar 21 Bank 10 000
18 Sales 25 000 Balance c/d 15 200
25 200 25 200

GENERAL LEDGER
Trade Receivables Control Account
Mar 1 Balance b/d 1 900 Mar 31 Sales returns 300
31 Sales 41 000 Bank 16 200
Discount allowed 200
____ Balance c/d 26200
42900 42900

Apr 1 Balance b/d 26200

100
 EFFECTIVE: JUNE 2023

6.7 Trade receivables (Sales ledger) control account – Details & Notes

Particulars Notes

(a) Debit balance Trade receivables are assets (normal balance)

(b) Credit balance Some trade receivables may have over-paid

Debit trade receivables control Trade receivables increase

(c)
account

Credit trade receivables Trade receivables decrease

(d)
control account

Receipts from trade

(e) Dr. Bank; Cr. Trade receivables
receivables
Contra / Set-off
(f) (both sides purchase from each Reduce trade receivables (credit side)
other)

Trade Receivables Control Account

August $ August $
1 Balance b/d x 1 Balance b/d x
31 Sales (credit sales) x 31 Bank x
Interest income x Cash x
Bank – dishonoured
x Sales returns x
cheque
Balance c/d x Discount allowed x
Bad debts x
Purchases ledger
x
contra
_ Balance c/d x
x x
Sept. Sept.
1 Balance b/d x 1 Balance b/d x

101
 EFFECTIVE: JUNE 2023

6.8 Trade payables (purchases ledger) control account – details & notes

Particulars Notes

(a) Debit balance Overpayment to trade payables

(b) Credit balance Trade payables is liabilities (normal balance)

Debit trade payables control TP decrease

(c)
account

Credit trade payables control TP increase

(d)
account

(e) Payment to trade payables Dr Trade payable Cr Bank

Trade Payables Control Account

August $ August $
1 Balance b/d x 1 Balance b/d x
31 Bank x 31 Purchases x
Cash x Interest charged x
Purchases returns x Balance c/d x
Discounts received x
Sales ledger contra x
Balance c/d x _
x x

Sept. Sept.
1 Balance b/d x 1 Balance b/d x

102
 EFFECTIVE: JUNE 2023

Exercise 1
Fatima Ayub is a trader. She maintains a full set of accounting records and prepares control
accounts for her sales ledger and purchases ledger at the end of every month. Fatima Ayub
provided the following information.
$
April 1 2021 Debit balances in purchases ledger 3 800
Credit balances in purchases ledger 426 000

April 30 Totals for the month

Cheques received from credit customers 534 000
Cheques paid to credit suppliers 370 500
Credit purchases 668 000
Cash purchases 35 500
Returns by credit customers 23 500
Returns to credit suppliers 24 300
Discount allowed 12 700
Discount received 9 500
Interest charged by supplier on overdue account 1 100
Contra entry 32 000

May 1 2021 Debit balances in purchases ledger 2 200

Select the relevant figures and prepare Fatima Ayub’s purchases ledger control account for
the month ended 30 April 2021.

Purchases Ledger Control Account

Date Details / Particulars $ Date Details / Particulars $
2021 2021
Balance b/d 3 800 Balance b/d 426 000
Apr 1 Apr 1
30 Bank 370 500 30 Purchases 668 000
Purchases returns 24 300 Interest charged 1 100
Discount received 9 500 Balance c/d 2 200
Sales ledger contra 32 000
Balance c/d 657 200 ________
1 097 300 1 097 300

May 1 Balance b/d 2 200 May 1 Balance b/d 657 200

103
 EFFECTIVE: JUNE 2023

Exercise 2
Prepare a sales ledger control account from the following information:

2021 $
Mar 1 Debit balances 12 000

Totals for March

Sales journal 9 000
Cash and cheques received from debtors 11 000
Discount allowed (customer) 1 000
Debit balances in the sales ledger set off against credit 100
balances in purchases ledger

Apr 1 Debit balances ?

Credit balances 50

Sales Ledger Control Account / Trade receivables control account

Date Details $ Date Details $
2021 2021
Balance b/d 12000 Cash / Bank 11000
Mar 1 Mar 31
31 Sales 9000 Discount allowed 1000
Purchases ledger
Balance c/d 50 100
contra
_____ Balance c/d 8950

21050 21050

Apr 1 Balance b/d 8950 Apr 1 Balance b/d 50

104
 EFFECTIVE: JUNE 2023

Exercise 3
Shweta provided the following information for the month of May 2021.

$
May 1 => Balance b/d
Sales ledger control account debit balance 1850
Sales ledger control account credit balance 115
Purchases ledger control account credit balance 2118

May 31 Totals for the month:

Sales journal => credit sales 5360
Purchases journal => credit purchases 5110
Sales returns journal => sales returns 134
Purchases returns journal - purchases returns 216
Cheques and bank transfers received from credit customers 4965
Cheques and bank transfers paid to credit suppliers 4508
Discount received from credit suppliers 92
Irrecoverable debt / bad debt written off 35
Interest charged by credit supplier on overdue account 14
Contra entry 190

June 1
Sales ledger control account debit balance ?
Purchases ledger control account credit balance ?
Purchases ledger control account debit balance 135

Prepare Shweta’s sales ledger control account and purchases ledger control account for the
month of May 2021. Balance the accounts and bring down the balances on 1 June 2021.

105
 EFFECTIVE: JUNE 2023

Sales Ledger Control Account

2021 2021
Balance b/d 1850 Balance b/d 115
May 1 May 1
31 Sales 5360 31 Sales returns 134

Bank 4965

Bad debts 35
Purchases ledger
190
contra
Balance c/d 1771
______
7210 7210

Jun 1 Balance b/d 1771

Purchases Ledger Control Account

2021
2021
May Purchases returns 216 Balance b/d 22118
May 1
31
Bank 4508 31 Purchases 5110

Discount received 92 Interest charged 14

Sales ledger contra 190 Balance c/d 135

Balance c/d 2371

____
7377 7377

Jun 1 Balance b/d 135 Jun 1 Balance b/d 2371

106
 EFFECTIVE: JUNE 2023

TOPIC 7: BANK RECONCILIATION STATEMENT

7.1 Introduction
• Bank reconciliation statement is a report which compares the bank balance (cash book) as
per company’s accounting records with the balance stated in the bank statement.

• It is normal for a as per accounting records to differ from the balance as per bank statement
due to company’s bank balance timing differences.

7.2 Reasons why the cash book (bank balance) and the bank statement may differ

Items in cash book not in bank statement

Unpresented cheques
- Cheques issued for payments but have not presented to the bank

Amounts not yet credited

- Deposits by the company to the bank but not yet credited (+) into bank account
Errors in cash book
- Mistakes in cash book

Items in bank statement not in cash book

Bank charges
- Service charges deducted from bank account

Dishonoured cheques
- Cheques deposited but the bank is unable to receive payment on those cheques due to
insufficient funds
Direct Debits
- Transfer of funds for payments instead of issuing cheques (direct payment – internet
banking)
Direct Credits
- Deposits or payments by customers directly into bank account (receipts)

Standing Order
- Instruction to bank to make regular payments of specific amount on a recurring basis

Interest on Deposits
- Interest earned from bank deposits credited directly by the bank

Errors on bank statement

- Mistakes in bank statement

107
 EFFECTIVE: JUNE 2023

7.3 Importance of Bank Reconciliation

• Preparation of bank reconciliation helps in the identification of errors in the accounting

records of the company or the bank.

• Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary
control mechanism to help protect the valuable resource through uncovering irregularities such
as unauthorized bank withdrawals

• Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of
a business.

7.4 Preparing a bank reconciliation statement

1. Check the opening balance of both the cash book and bank statement to ascertain the
two balances are the same.

2. Compare the cash book debit column (receipt) with the credit column of bank
statement to tick (✓) all common items.

3. Compare the cash book credit column (payment) with the debit column of bank
statement to tick (✓) all common items.

4. Update the cash book - All items not ticked in the bank statement will be adjusted in
the cash book.

5. Correct errors in the cash book (if any)

6. Prepare bank reconciliation statement - All items not ticked in the cash book will be
recorded in the bank reconciliation statement.

Bank reconciliation statement format:

(i) Start with updated cash book balance
(ii) Start with bank statement balance

108
 EFFECTIVE: JUNE 2023

Example:
On 2 March 2021, Mella received the following bank statement while her cash book was as
below:√

Bank statement
Feb Dr ($) Cr ($) Balance ($)
(-) (+)
1 Balance b/d 650 Cr√
4 Monki People Limited 1500√ 2150 Cr
9 Sweetie 730√ 1420 Cr
14 Interest payable 12 1408 Cr
25 Credit transfer (dividends) 130 1538 Cr

Cash Book (Bank Column Only)

$ $
Feb 1 Balance b/d 650√ Feb 7 Sweetie 730√
3 Monki People Limited 1 500 √ 14 Iron Rod Holdings 400
28 Ronaldo 200 Balance c/d 1220
2350 2350

March Balance b/d 1220

1

(i) Update the cash book (item in BS not in CB) for Mella on 28 February 2021. Balance the
cash book on that date and then prepare the bank reconciliation statement.

Cash Book (Bank Column Only)

$ $
Feb Balance b/d 1220 Feb 28 Interest payable 12
28
Credit transfer 130 Balance c/d 1338
(dividend)
1350 1350

Mar 1 Balance b/d 1338

109
 EFFECTIVE: JUNE 2023

(ii) Prepare the bank reconciliation (item in CB not in BS)

Format 1: Start with cash book balance

Bank Reconciliation Statement at 28 February 2021

$ $ $
Balance as per updated cash book 1338

Add: Unpresented cheque

Iron rod holdings 400
1738
Less: Amount not yet credited
Ronaldo 200
Balance as per bank statement 1538

Format 2: Start with bank statement

Bank Reconciliation Statement at 28 February 2021

$ $ $
Balance as per bank statement 1538

Add: Amounted not yet credited

Ronaldo 200
1738
Less: Unpresented cheque
Iron rod holdings 400
Balance as per updated cash book 1338

110
 EFFECTIVE: JUNE 2023

Exercise 1:

Bank Statement

Date Cheque Dr Cr Balance

no. (-) (+)
June $ $ $
1 Balance b/d 2000 √ Cr
2 Cash 300√ 2300 Cr
5 Cheque 3211 700√ 1600 Cr
7 Cheque 3212 200√ 1400 Cr
11 Standing Orders – Star World 100 1300 Cr
15 Cheque 3215 600√ 700 Cr
19 Dividends (GH Ltd) 4000 4700 Cr
21 Cheque 3214 5000√ 300 Dr
27 Bank Charges 10 310 Dr
30 Deposit 1000√ 690 Cr

Cash Book (Bank Column Only)

(+) (-)
Cheque
June $ June $
no.
1 Balance b/d 2 000√ 5 3211 Honey Wind 700√

2 Deposit 300 √ 6 3212 William Big 200√

22 Ali Bakar 1 000√ 7 3213 Swatika Boy 500

29 Chaze Bea 600 10 3214 Yama Car 5 000√

30 Balance c/d 3 100 14 3215 TNB 600√

7000 7000

July

1 Balance b/d 3100

Required:
a) Update the cash book and balance the cash book on that date.
b) Prepare the bank reconciliation statement.
(highlighted in BS)
111
 EFFECTIVE: JUNE 2023

Cash Book (Bank Column Only)

Jun
Dividends (GH Ltd) 4000 Jun 30 Balance b/d 3100
30
Standing order – 100
Star world
Bank charges 10

___ Balance c/d 790

4000 4000

Jul 1 Balance b/d 790

Format 1: Bank Reconciliation Statement at 30 June 2021

$ $ $
Balance as per updated cash book 790

Add: Unpresented cheque

Swatika Boy 500
1290
Less: Amount not yet credited
Chaze bea 600
Balance as per bank statement 690

Format 2: Bank Reconciliation Statement at 30 June 2021

$ $ $
Balance as per bank statement 690

Add: Amounted not yet credited

Chaze Bea 600
1290
Less: Unpresented cheque
Swatika Boy 500
Balance as per updated cash book 790

112
 EFFECTIVE: JUNE 2023

Exercise 2:

The bank statement for R. Hood for the month of March 2021 is:

Dr (-) Cr (+) Balance

(payment) (receipt)
1 Balance 4,200 O/D √
8 T.MacLeod 184 √ 4,384 O/D
16 Cheque 292√ 4,092 O/D
20 W.Milne 160√ 4,252 O/D
21 Cheque 369√ 3,883 O/D
31 G. Frank: trader's credit 88 3,795 O/D
31 TYF: standing order 32 3,827 O/D
31 Bank charges 19 3,846 O/D

The cash book for March 2021 is:

Cash book
Dr $ Cr $
16 G.Philip 292√ 1 Balance b/d 4,200√
21 J. Forker 369√ 6 T. Macleod 184√
31 S. O'Hare 192 30 W.Milne 160√
31 Balance c/d 4,195 30 S. Porter 504
5,048 5,048

Apr 1 Balance b/d 4195

You are required to:

(a) Write the cash book up to date, and
(b) Draw up a bank reconciliation statement as on 31 March 2021.

113
 EFFECTIVE: JUNE 2023

Cash book
Mar G:Frank: trader’s
88 Mar 31 Balance b/d 4195
31 credit
Balance c/d 4158 TYF: standing 32
order
Bank charges 19

4246 4246

Apr 1 Balance b/d 4158

Bank reconciliation statement at 31 March 2021

$ $ $
Balance as per updated cash book (4158)

Add: Unpresented cheque

S.Porter 504
(3654)
Less: Amount not yet credited
S O’Hare 192
Balance as per bank statement (3846)

114
 EFFECTIVE: JUNE 2023

TOPIC 8: MANUFACTURING ACCOUNTS

8.1 Introduction
• There are companies which manufacture products to be sold from raw materials.
• Such companies will prepare:
(i) manufacturing accounts to determine the total cost of manufacture of its products;
(ii) Statement of profit or loss / Income statement to determine the trading profits
(iii) Statement of financial position to determine the financial position

8.2 Elements of Costs

o Costs which are incurred to make a product are named as manufacturing costs.

o Such costs are usually grouped into various categories or divided into elements. There are
three elements of cost:

• Material Cost:
This is the cost of material used for production purpose. Material is the substance
required from which a product is made.

• Labour Cost:
This is the cost, incurred to pay to the workforce for their services. The workforce
required to convert material into finished product is called labour.

• Overheads / Expenses:
Costs of services required for production purpose.
115
 EFFECTIVE: JUNE 2023

o The three elements of costs can be further divided into direct (can be traced to the
product) and indirect (cannot be traced to one specific product) costs:

(a) Material Cost

(i) Direct Material

• An integral part of the finished product and is easily identified with that
finished product.

• Example:
Computer Plastic, Glass, Metal

Furniture Wood, Metal, Plastic, Leather

(ii) Indirect Material

Minor materials used for ancillary(support) purposes and cannot be conveniently

identified with the finished product.
• Example:
Computer Screws, wires
Furniture Nails, Paint

(b) Labour Cost

(i) Direct Labour

The wages paid to employees who directly work on the producing the product.
• Example:

Machine operators, Carpenters, cutters

(ii) Indirect Labour

The wages paid to other employees who do not work directly on a product.

• Example:

Factory manager, Factory supervisor, Factory cleaner

116
 EFFECTIVE: JUNE 2023

(c) Overheads / Expenses:

(i) Direct Expenses

Expenses which can be directly identified with the individual products.

• Example:

Royalty (patent, copyright)

(ii) Indirect Expenses

Expenses which cannot be directly identified with the individual products.

• Example:

Factory rent, Factory utilities

8.3 Manufacturing Overheads (Total Indirect costs) (FACTORY OVERHEADS)

• All manufacturing costs other than direct materials, direct labour and direct
manufacturing expenses.

• Manufacturing overheads are also named as indirect costs.

• Examples include:
(i) Factory rent
(ii) Factory manager’s salary
(iii) Factory maintenance cost

• Non-manufacturing costs for selling and administrative purposes are not part of
manufacturing overheads

8.4 Manufacturing Account

• A manufacturing account is an account in which the costs of producing finished goods
are accumulated.

• Eventually the factory cost of finished goods produced in the period is transferred to
the trading account as part of the cost of finished goods sold.

• Manufacturing accounts are prepared for internal management use only to distinguish
between the costs and profitability associated with manufacturing operations and those
associated with trading activities.

117
 EFFECTIVE: JUNE 2023

o The Manufacturing Account has two main sections:

(i) Prime Cost (Total direct costs)

Prime costs contain the direct costs which are costs that are directly linked to
manufacturing products.

Prime cost = direct material + direct labour + direct expenses

(ii) Factory Overheads (Total indirect costs)

Factory overhead contains all the other expenses associated with production. Such costs
are those costs which are not directly linked to the production process.

Factory overhead = indirect material + indirect labour + indirect expenses

o Inventory of work-in-progress (WIP) (not yet completed)

• Inventory of WIP are inventory that have not been completely manufactured at the
end of the financial year.

• Such inventory need to be accounted for in determining total production cost where
the beginning WIP is added to production costs and ending WIP is subtracted from
production costs.

o Cost of production
• Cost of production is prime cost plus factory overheads, adjusted for any work in
progress at the start and at the end of the year. It is the total cost of manufacturing the
goods completed.

Prime cost + Factory overhead + opening WIP - closing WIP

118
 EFFECTIVE: JUNE 2023

Format of a manufacturing account

ABC Industries Limited

Manufacturing Account for the year ended ...............................
RM RM RM
Direct Materials
Opening stock of raw materials x
Add: Purchases of raw materials x
(-) Purchases returns of raw materials x
x
(+) Carriage inwards of raw materials x
(+) Import duties of raw materials x
x
x
x
Less: Closing stock of raw materials x
Costs of raw materials used / consumed x

Direct Labour
Factory wages x

Direct Expenses
Royalties x
Prime Cost (Total direct costs) x

Add: Factory Overheads

Factory salaries x
Factory rent & rates x
Factory indirect wages x
Factory building depreciation x
Machinery depreciation x
x
xxx
Add: Opening work in progress x
x
Less: Closing work in progress x
Cost of production xxx

119
 EFFECTIVE: JUNE 2023

ABC Industries Limited

Statement of profit or loss for the year ended ...............................
RM RM RM

Sales of finished goods x

Less: Cost of goods sold

Opening stock of finished goods x

Cost of production (from manufacturing acc) xxx

Purchases of finished goods x

Less: Closing stock of finished goods x

Gross profit x

Add: Other Income

Commission received x

Discount received x

Less: Operating Expenses

Office salaries x

Advertising expenses x

Administration & distribution expenses x

Office utilities x

Profit for the year x

120
 EFFECTIVE: JUNE 2023

8.5 Worked Example:

Exercise 1

The following information was provided by the Kapoor Manufacturing Company on 30 April
2021:
$
Raw materials – Inventory 1 May 2020 14 900
Inventory 30 April 2021 15 300
Purchases 181 200
Carriage on purchases 3 300
Factory wages – Direct 166 100
Indirect 93 800
Royalties 10 000
Factory insurance 2 070
Factory rent and rates 2 930
Factory general expenses 6 350
Depreciation of factory machinery 9 500
Work in progress – Inventory 1 May 2020 8 790
Inventory 30 April 2021 8 640

Prepare the manufacturing account of the Kapoor Manufacturing Company for the year
ended 30 April 2021.

121
 EFFECTIVE: JUNE 2023

Manufacturing account for the year ended 30 April 2021

$ $
Direct materials
Opening inventory of raw materials 14 900
Purchases of raw materials 181 200
Add: Carriage inwards of raw materials 3 300
184 500
199 400
Less: Closing inventory of raw materials 15 300
184 100

Direct labour
Factory wages 166100

Direct Expenses
Royalties 10 000
Prime cost (DM+DL+DE) 360 200

Add: Factory overheads

Indirect factory wages 93800
Factory insurance 2070
Factory rent and rates 2 930
Factory general expenses 6 350
Depreciation of factory machinery 9 500 114 650
474850
Add: Opening work-in-progress 8790
483 640
Less: Closing work-in-progress 8640
Cost of production 475 000

122
 EFFECTIVE: JUNE 2023

Exercise 2
Sandar Manufacturing makes a single product. The following balances were extracted from
the books at the end of the financial year on 30 September 2020:
RM
Inventory at 1 October 2019:
Raw materials 17 500
Work in progress 24 000
Finished goods 50 000

Purchases of raw materials 82 600

Sales Revenue 500 000
Carriage 12 000
Production wages 75 000
Office wages 35 000
Sundry office expenses 14 500
Production manager’s salary 20 500
Factory rent, rates and power 18 400
Royalties 9 000
General factory expenses 15 200
Premises maintenance 40 000
Factory machinery (at cost) 120 000
Factory machinery – accumulated depreciation 70 000

Inventory at 30 September 2020:

Raw materials 16 300
Work in progress 29 000
Finished goods 46 000

Additional information at 30 September 2020:

• 60% of the carriage relates to raw materials and 40% to goods sold.
• General factory expenses owing RM400.
• 70% of the maintenance relates to the factory premises and 30% to the office premises.
• Factory machinery is depreciated at the rate of 15% per annum using the reducing balance
method.

Prepare the manufacturing account and the statement of profit or loss for the year ended 30
September 2020. Clearly label the prime cost and cost of production.

123
 EFFECTIVE: JUNE 2023

Sandar Manufacturing
Manufacturing account for the year ended ended 30 September 2020
RM RM
Direct materials
Opening inventory of raw materials 17 500
Purchases of raw materials 82 600
(+) Carriage inwards of raw materials 7200 89800
107 300
(-) Closing inventory of raw materials 16 300
91 000
Direct labour
Production wages 75000

Direct expenses
Royalties 9000
Prime cost (DM+DL+DE) 175 000

Add: Factory overheads

Production manager’s salary 20 500
Factory rent, rates and power 18 400
General factory expenses (15 200 + 400) 15 600
Factory premises maintenance (70% x 40 000) 28 000
Factory machinery depreciation (15% x [120 000 – 70 000]) 7 500
90 000
265 000
(+) Opening work in progress 24 000
289 000
(-) Closing work in progress 29 000
Cost of production 260 000

124
 EFFECTIVE: JUNE 2023

Sandar Manufacturing
Statement of profit or loss for the year ended 30 September 2020
RM RM
Sales 500 000

Less: Cost of sales

Opening inventory (finished goods) 50 000

Cost of production 260 000

310 000

Less: Closing inventory (finished goods) 46 000 264 000

Gross Profit 236 000

Less: Expenses
Carriage outwards (40% x 12 000) 4 800

Office wages 35 000

Sundry office expenses 14 500

Office premises maintenance (30% x 40 000) 12 000

66 300

Profit for the year 169 700

125
 EFFECTIVE: JUNE 2023

TOPIC 9: BREAK-EVEN ANALYSIS

9.1 COST BEHAVIOUR

1 Introduction
The description of cost behaviors to changes in activity levels is grouped as:
(i) variable,
(ii) fixed, and
(iii) semi-variable costs.

2 Fixed costs
• Costs which do not vary with changes in output level.

• Examples:
Factory rent , Factory manager’s salary

Illustration 1 : ABC company rent its factory premises for RM8 000 per month
Production volume 10 000 units 20 000 units 30 000 units 50 000 units
Total fixed cost (RM) 8000 8000 8000 8000
Unit cost (RM) 0.80 0.40 0.27 0.16

Note:
1. When activity level increases, total fixed cost remains the same

2. When activity level increases, fixed cost per unit decreases but not proportionately

Total cost (RM)

8 000

0 50 000 Activity level (units)

126
 EFFECTIVE: JUNE 2023

2 Variable costs
• Cost which vary in direct proportion to changes in output level.
• Variable costs will increase with each additional unit of output.
• Examples:

Direct materials, direct labour

Illustration 1:
ABC Company produces calculators. Each unit produced requires a chip that costs RM2
Production volume 0 unit 1 000 units 2 000 units 8 000 units
Total variable cost (RM) 0 2000 4000 16 000
Unit cost (RM) 2 2 2 2

Illustration 2:
DEF company requires a casing costing RM5 for each of the product.
Production volume 300 units 600 units 1 200 units
Total variable cost (RM) 1500 3000 6000
Unit cost (RM) 5 5 5

Notes:
1. When activity level increases, total variable cost increases proportionately

2. When activity level increases, variable cost per unit remains the same

Total cost (RM)

16 000

0 8 000 Activity level (units)

127
 EFFECTIVE: JUNE 2023

9.2 BREAK-EVEN ANALYSIS

1 Break-even

• Break-even occurs when there is no profit or loss.

• Break-even point results where sales and total costs are equal.

2 Uses of Break-Even Analysis

• To measure profits and losses at different levels of production and sales

• To predict the effect of changes in sales prices
• To forecast the effect on profitability when there are changes in costs

4 Break-even Formula

There are two formulas to determine the break-even point where either way, the result
would be the same.

a) Break-even point (units)

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
Break even units = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑢𝑛𝑖𝑡

where Contribution per unit = selling price – variable cost per unit

b) Break-even point (value)

Break even value = Break even units x selling price

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

Break even value = 𝑐
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡𝑖𝑜 ( 𝑟𝑎𝑡𝑖𝑜)
𝑠

where
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
C/S ratio = or
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑆𝑎𝑙𝑒𝑠

Worked example

ABC Company expects to sell 20 000 toys at RM5 each (selling price). The variable cost per
unit is RM3 and total fixed costs is RM10 000 per annum.

a) Contribution per unit

RM5 – RM3 = RM2
128
 EFFECTIVE: JUNE 2023

b) Break even point (units)

𝐹𝐶
BE units = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
10000
BE units = 2

BE units = 5000 units

c) Break even point (value)

BE value = BE units x selling price

= 5000 x RM5

= RM25000

OR
𝐹𝐶
BE value = 𝑐
𝑠
10000
BE value = 2
5

= RM25000

4 Target Profits or Target Sales Volume

To determine the sales level to earn a required amount of profit

a) Sales units
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑜𝑓𝑖𝑡
Sales units = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑢𝑛𝑖𝑡

where Contribution per unit = selling price – variable cost per unit

b) Sales value

Sales value = Sales units x selling price

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑜𝑓𝑖𝑡

Sales value = 𝑐
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑅𝑎𝑡𝑖𝑜 ( 𝑟𝑎𝑡𝑖𝑜)
𝑠

where
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
C/S ratio = or
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑆𝑎𝑙𝑒𝑠

129
 EFFECTIVE: JUNE 2023

Worked example:

DEF Company expects to sell 30 000 toys at RM8 each (selling price). The variable cost per
unit is RM6 and total fixed costs is RM20 000 per annum.

(a) Calculate the sales units needed to earn a profit of RM300 000
𝐹𝐶+𝑃𝑅𝑂𝐹𝐼𝑇
Sales units = (𝑆𝑃−𝑉𝐶)
20000+300 000
= (8−6)

= 160 000 units

(b) Calculate the sales value needed to earn a profit of RM300 000
Sales value = sales units x selling price

= 160 000 x RM8

= RM1 280 000

OR
𝐹𝐶+𝑃𝑅𝑂𝐹𝐼𝑇
Sales value = 𝑐/𝑠
20000+300000
= 2 = RM1 280 000
( )
8

(c) Calculate the profit if the business decides to manufacture and sell 50 000 units.

𝐹𝐶+𝑷𝑹𝑶𝑭𝑰𝑻
Sales units = (𝑆𝑃−𝑉𝐶)
20000+𝑷𝑹𝑶𝑭𝑰𝑻
50000 =
(8−6)
Profit = RM80000

130
 EFFECTIVE: JUNE 2023

5 Break-even charts

• The break-even chart is a graphical representation of costs at various levels of

activity.

• The chart illustrates three possible situations of loss making, break-even and profit-
making.

• The point at which neither profit or loss is made is known as the “break-even” point
which is the point of intersection between the revenue and total costs lines.

• The break-even point is the point at which total revenues (sales) equal total costs.

TR = Total revenue
TC = Total cost (starting at fixed cost)
TVC = Total variable cost
FC = Fixed cost

• Above the break-even point is when a business begins to make a profit.

• A business will make a loss if it produces and sells output below the break-even
point.

131
 EFFECTIVE: JUNE 2023

6 Limitations of break-even analysis

• It does not allow product mix and is usually calculated for a single product.

• Not all costs can be easily separated into variable or fixed costs.

• The selling price is assumed to remain fixed throughout the year, so seasonal sales or
discounts are not considered.

• A breakeven chart may be time-consuming to prepare.

• It assumes fixed cost are constant at all levels of output.

• It assumes that variable cost per unit are the same at all level of output.

• It ignores the uncertainty in the estimates of fixed cost and variable cost per unit.

7 Exercise
1. Coco Water Limited expects to sell 100 000 bottles at RM10 each (SP). The variable cost
per unit is RM6 and total fixed costs is RM150 000 per annum.
(a) Calculate the break-even point in units and in sales value; and
(b) Calculate the sales (units and value) required to achieve a target profit of RM30 000.

𝐹𝐶 𝐹𝐶+𝑝𝑟𝑜𝑓𝑖𝑡
a) BE units = b) Sales units =
(𝑆𝑃−𝑉𝐶) (𝑆𝑃−𝑉𝐶)
150 000 150000+30000
= =
(10−6) (10−6)
= 37500 units = 45000 units

BE value = BE units x selling price Sales value = sales units x selling price

= 37500 x RM10 = 45000 x 10

= RM375000 = RM450000

OR OR
𝐹𝐶 𝐹𝐶+𝑝𝑟𝑜𝑓𝑖𝑡
BE value = Sales value =
𝑐/𝑠 𝑐/𝑠
150000 150000+30000
= =
4/10 4/10
= RM375000 = RM450000

132
 EFFECTIVE: JUNE 2023

2. Kingkoton manufactures a single product, the Kingko. The following information

(based on budgeted output of 800 units) relates to one unit of Kingko:
Per unit RM
Selling price 35.00
Variable production costs 13.50
Fixed production costs 3.50
Variable selling costs 1.50
Fixed selling costs 1.00

Kingkoton produces and sells 800 Kingko a week. Calculate the weekly breakeven point in
units and in revenue.

Fixed cost = (3.5 +1.00) x 800units = RM3600

VC per unit = 13.5+1.5 = 15

𝐹𝐶 3600
BE units = = = 180 units
(𝑆𝑃−𝑉𝐶) (35−15)
BE value = BE units x selling price = 180 x 35 = RM6300
𝐹𝐶 3600
BE value = = = RM6300
(𝑐/𝑠) (20/35)

133