DỮ LIỆU TỪ SÁCH: Accounting - Workbook - 2025.pdf ================================================== --- Trang 1 --- ACCOUNTING WORKBOOK 2 0 2 5 CERTIFICATE LEVEL i c a e w . c o m ICAEW --- Trang 2 --- ICAEW The Institute of Chartered Accountants in England and Wales Accounting WORKBOOK For exams in 2025 icaew.com --- Trang 3 --- Accounting The Institute of Chartered Accountants in England and Wales ISBN: 978-1-0355-1930-9 Previous ISBN: 978-1-0355-1000-9 e-ISBN: 978-1-0355-1952-1 First edition 2007 Eighteenth edition 2024 All rights reserved. N o part of this publication may b e reproduced, stored in a retrieval system o r transmitted in any form or by any means, graphic, electronic o r mechanical including photocopying, recording, scanning or otherwise, without the prior written permission of the publisher. The content of this publication is intended to prepare students for the ICAEW examinations, and should not be used as professional advice. 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IFRS ICAEW 2024 --- Trang 4 --- C o n t e n t s Welcome to ICAEW Accounting Key resources Professional skills required by the ACA Qualification Sustainability in the ACA Qualification ACA and Technology 1 Introduction to accounting 2 The accounting equation 3 Recording financial transactions 4 Ledger accounting and double entry 5 Preparing basic financial statements 6 Errors and corrections to accounting records and financial statements 7 Cost of sales and inventories 8 Irrecoverable debts and the allowance for receivables 9 Accruals and prepayments 1 0 Non-current assets, depreciation and impairment 11 Company financial statements 1 2 Company financial statements under IFRS Accounting Standards 13 Statement of cash flows 1 4 Company financial statements under UK GAAP 1 5 Sole trader financial statements under UK GAAP Appendix: Notes Glossary of terms Index Questions within the Workbook should be treated as preparation questions, providing you with a firm foundation before you attempt the exam-standard questions. The exam-standard questions are found in the Question Bank. --- Trang 5 --- Welcome t o ICAEW I d like to personally welcome you to ICAEW. As we transition to a sustainable economy and continue to navigate geopolitical crises, the role of the accountancy profession has never been more important. As an ICAEW Chartered Accountant, you will make decisions that will define the future of global business in a fast-changing and volatile world. Whether studying for our internationally recognised Certificate in Finance, Accounting and Business (ICAEW CFAB) or our world-leading chartered accountancy qualification, the ACA, you will acquire exceptional knowledge and skills - with technology, sustainability and ethics at the heart of your learning. A focus on capabilities such as judgement and scepticism will enable you to make the right decisions in diverse and often complex environments. You will be equipped to flourish and to lead in areas that are transforming the business landscape. This includes embracing technological change and harnessing digital disruption, to help our profession deliver greater value. It also includes putting climate change and sustainability at the heart of business strategy. We will equip you to be adaptable and agile in your work and all within a set of values fundamental to trust and transparency, which will set you apart from others. Joining over 203,000 ICAEW Chartered Accountants and students worldwide, you are now part of a global community. This unique network of talented and diverse professionals work in the public interest to build economies that are sustainable, accountable and fair. You are also joining a community of 1 .8 million chartered accountants and students as part of Chartered Accountants Worldwide - a family of leading institutes, of which we are a founding member. We will support you through your studies and throughout your career: this is the start of a lifetime relationship, and we will be with you every step of the way to ensure you are ready to face the challenges of the global economy. Visit the Key resources section to review the resources available as you study. With our training, guidance and support, you will join our members in realising your career ambitions, developing world-leading insights and maintaining a competitive edge. We will enable a world of sustainable economies, together. I wish you the best of luck with your studies. Alan Vallance Chief Executive ICAEW Accounting You can access this guide and more exam resources on our website. If you are studying this exam as part of the ACA qualification go to icaew.com/exam-resources or if you are studying the ICAEW CFAB qualification go to icaew.com/cfab-students. Module aim To ensure that you have a sound understanding of the techniques of double entry accounting and can apply its principles in recording transactions, adjusting financial records and preparing non-complex financial statements. On completion of this module, you will be: (cid:127) proficient in the use of double entry accounting techniques and the maintenance of accounting records and able to specify the regulation governing the publication of financial statements; (cid:127) able to identify and correct omissions and errors in accounting records and financial statements; and (cid:127) able to specify the components of financial statements and prepare and present non-complex financial statements for sole traders and limited companies. --- Trang 6 --- Method of assessment The Accounting exam is 1 .5 hours long. 40% of the marks are allocated from the preparation of single company financial statements; either a statement of profit or loss and statement of financial position or a statement of cash flows, using a pro forma template. The remaining 60% of the marks are from 24 multiple- choice, multi-part multiple choice or multiple-response questions. These questions will cover the areas of the syllabus in accordance with the weightings set out in the specification grid. Ethics Ethics is an overarching requirement for the professional accountant and students will be expected to recognise that the exercise of judgement is required in applying fundamental accounting concepts. Students will learn about the ICAEW Code of Ethics fundamental principles, which are based on the IESBA Code of Ethics for Professional Accountants principles and consider the merits of a principles-based code. Specific questions on this area are included within the Maintaining financial records weighting in the specification grid. Sustainability Knowledge of core sustainability concepts is a requirement for the professional accountant. Students will be expected to understand the overarching concept of sustainability and why people and planet are strategically important to business. Understanding how the ICAEW chartered accountant can contribute to and help manage sustainability risks, opportunities and regulations (particularly in terms of information flows) is fundamental to understanding the context of the ACA sustainability content. Whilst climate is the predominant issue of our time, students will be introduced to sustainability topics beyond climate and the emerging regulation that affects financial accounting and reporting. Specific questions on this area are included within the Maintaining financial records weighting in the specification grid. Specification grid This grid shows the relative weightings of subjects within this module and should guide the relative study time spent on each. Overtime, the marks available in the assessment will equate to the weightings below while slight variations may occur in individual assessments to enable suitably rigorous questions to be set. Key resources Whether you re studying the ICAEW CFAB or ACA qualification with an employer, at university, independently, or as part of an apprenticeship, we provide a wide range of resources and services to help you in your studies. ACA students, you can access dedicated exam resources, guidance and information for the ACA qualification via your dashboard at icaew.com/Dashboard. ICAEW CFAB students, you can also access dedicated exam resources, guidance and information at icaew.com/cfab-students. Syllabus and technical knowledge grids The syllabus presents the learning outcomes for each exam and should be read in conjunction with the relevant technical knowledge grids. --- Trang 7 --- Exam support A variety of exam resources and support have been developed to help you through your studies and each exam. This includes expert guides, sample exams, hints and tips, marks plans, and more. Tuition The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core principles of quality course delivery. If you are not receiving structured tuition and are interested in doing so, take a look at ICAEW recognised Partner in Learning tuition providers in your area at icaew.com/tuitionproviders. Errata sheets These documents will correct any omissions within the learning materials once they have been published. You should refer to them when studying. Student support team Our student support team is here to help and advise you, so do not hesitate to get in touch via webchat, student support. You will be able to speak directly to an adviser. Mia, our ChatBot, is also on hand to answer your queries on selected pages of our website. Student Insights Access our practical and topical student content on our dedicated online student hub, Student Insights at icaew.com/student-insights. You ll find interviews, guides and features giving you fresh insights, innovative ideas and an inside look at the lives and careers of our ICAEW students and members. No matter what stage you re at in your journey with us, you ll find content to suit you. ICAEW Business and Finance Professional (BFP) ICAEW Business and Finance Professional (BFP) is an internationally recognised designation and professional status. It demonstrates your business knowledge, your commitment to professionalism and that you meet the standards of a membership organisation. Once you have completed the ICAEW CFAB qualification or the ACA Certificate Level, you are eligible to apply towards gaining BFP status. Start your application at icaew.com/become-a-bfp. Professional skills required by the ACA Qualification The following professional skills areas are present throughout the ACA qualification. Skill area Overall objective Assimilating and using Understand a business or accounting situation, prioritise by determining information key drivers, issues and requirements and identify any relevant information. Structuring problems and Structure information from various sources into suitable formats for analysis solutions and provide creative and pragmatic solutions in a business environment. Applying judgement Apply professional scepticism and critical thinking to identify faults, gaps, inconsistencies and interactions from a range of relevant information sources and relate issues to a business environment. Concluding, recommending Apply technical knowledge, skills and experience to support reasoning and and communicating conclusion and formulate opinions, advice, plans, solutions, options and reservations based on valid evidence and communicate clearly in a manner suitable for the recipient. The level of skill required to pass each exam increases as ACA trainees progress upwards through each Level of the ACA qualification. The skills progression embedded throughout the ACA qualification ensures ACA trainees develop the knowledge and professional skills necessary to successfully operate in the modern workplace which are expected by today s forward-thinking employers. --- Trang 8 --- At Certificate Level, the ACA professional skills which you are expected to demonstrate in the exam are summarised as follows: Assimilating and using information (cid:127) Understanding the situation and the requirements. (cid:127) Identifying and using relevant information. (cid:127) Identifying and prioritising key issues. Structuring problems and solutions (cid:127) Structuring data. (cid:127) Developing solutions. Applying judgement (cid:127) Applying professional scepticism and critical thinking. (cid:127) Relating issues to the broader business environment, including ethical issues. To help you develop your ability to demonstrate competency in each professional skills area, each chapter of this Workbook includes relevant Professional Skills Guidance points. Each Professional Skills Guidance point focuses on one of the four ACA Professional Skills areas and explains how to demonstrate a particular aspect of that professional skill relevant to the topic being studied. It is advised you refer back to the Professional Skills Guidance points while revisiting specific topics and during question practice. Concluding, recommending and communicating (cid:127) Concluding and recommending. (cid:127) Communicating. To help you develop your ability to demonstrate competency in each professional skills area, each chapter of this Workbook includes up to four professional skills guidance points. Each professional skills guidance point focuses on one of the four ACA professional skills areas and explains how to demonstrate a particular aspect of that professional skill relevant to the topic being studied. It is advised you refer back to the professional skills guidance points while revisiting specific topics and during question practice. Sustainability in the ACA Qualification The sustainability landscape has developed at a rapid pace in recent years, with a marked shift from voluntary frameworks and guidance to more mandatory reporting and risk management requirements. The relevance of sustainability to the role of accountants is growing, with the skillset provided by the CA becoming increasingly valuable to respond to the tide of incoming regulations and increasing investor and broader stakeholder requirements. The taxonomy and language around sustainability and its related areas is varied and may as yet be unfamiliar and so there is a need for consistency of sustainability language and underlying concepts. ICAEW has created this glossary to provide support for greater consistency and concepts across the ACA exams. Term Definition or description Climate Environmental issues such as climate change are giving rise to significant risks for businesses. These scenario may arise from physical climate events or the transition to a net-zero carbon economy. Scenario a analysis nalysis is key to better understanding and managing future risks today, as well as supporting the transition to a net-zero carbon economy. Forward-looking assessments using scenario analysis is recommended by the TCFD to test strategic resilience to future climate shocks. It is not about providing profit forecasts or predicting the future but assures investors that the organisation is prepared for plausible future outcomes. Companies In the UK, the Companies Act 2006 (Strategic Report and Directors 7 Report) requires quoted Act 2006 companies to report on environmental matters within the Strategic Report section of their Annual Report, to the extent that this environmental information is necessary for an understanding of the development, performance or position of the company s business. --- Trang 9 --- This requirement comes under one of the seven general duties directors have to the company, commonly referred to as the s1 72 duty to promote the success of the company . Part 1 of that duty notes that: ... A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have (amongst other matters) regard to ... the impact of the company s operations on the community and the environment. (Source: https://www.icaew.com/technical/financial-reporting/section-1 72-1- statement) Corporate Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social Social and environmental concerns in their business operations and interactions with their stakeholders. Responsibility CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives ( Triple-Bottom-Line-Approach ), while at the same time addressing the expectations of shareholders and stakeholders. (UN Industrial Development Organisation: https://www.unido.org/our-focus/advancing-economic- competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social- resp o n si b i I ity- m a r ket- i nte g rati o n/wh at-cs r) This term is used less often in recent times, following a swathe of articles exposing greenwashing practices associated with the movement. Sustainability and ESG tend to be more favoured. Corporate In tandem with the development of standards by the ISSB, the EU has adopted the Corporate Sustainability Sustainability Reporting Directive (CSRD). The CSRD introduces detailed sustainability reporting Reporting requirements for large and listed companies and paves the way for mandatory sustainability Directive assurance. (CSRD) The CSRD incorporates the concept of double materiality . This means that companies have to report not only on how sustainability issues might create financial risks for the company (financial materiality), but also on the company s own impacts on people and the environment (impact materiality). This diverges from the ISSB concept of materiality, which remains aligned with financial materiality. Double Double materiality means considering not only the sustainability issues that might create financial materiality risks for the company (financial materiality), but also those sustainability issues where a company s activities materially impact on people and the environment (impact materiality). This concept is fundamental to the CSRD. ESG Environmental, social and governance (ESG) approaches sustainability-related issues through a corporate lens and considers the impact of these risks on business and enterprise values (ratherthan on society more broadly). It is a frequently used terminology in corporate and investment communities. At a high level, it is another characterisation of sustainability, providing the 3 lenses of environment, social and corporate governance to use when exploring relevant sustainability factors: --- Trang 10 --- Board accountability Governance Shareholder Compensation engagement Resource Labour Anti-bribery use standards corruption Biodiversity and Product land use I responsibility Environmental Social Climate change Human Diversity Waste rights inclusion Air quality Health safety When looked at in more detail, however, ESG is distinct from sustainability. It does not include consideration of planetary limits and a social foundation, together considered the safe operating space within which companies, governments and individuals can sustainably operate. According to the Principles for Responsible Investment (PRI) (a United Nations-supported international network of investors) ESG issues faced by organisations can be defined as follows: (cid:127) Environmental: Issues relating to the quality and functioning of the natural environment and natural systems. These include: biodiversity loss; greenhouse gas (GHG) emissions; climate change; renewable energy; energy efficiency; air, water or resource depletion or pollution; waste management; stratospheric ozone depletion; changes in land use; ocean acidification; and changes to the nitrogen and phosphorus cycles. (cid:127) Social: Issues relating to the rights, well-being and interests of people and communities. These include: human rights; labour standards in the supply chain; child, slave and bonded labour; workplace health and safety; freedom of association and freedom of expression; human capital management and employee relations; diversity; relations with local communities; activities in conflict zones; health and access to medicine; HIV/AIDS; consumer protection; and controversial weapons. (cid:127) Governance: Issues relating to the governance of companies and other investee entities. In the listed equity context these include: board structure, size, diversity, skills and independence, executive pay, shareholder rights, stakeholder interaction, disclosure of information, business ethics, bribery and corruption, internal controls and risk management, and, in general, issues dealing with the relationship between a company s management, its board, its shareholders and its other stakeholders. This category may also include matters of business strategy, encompassing both the implications of business strategy for environmental and social issues, and how the strategy is to be implemented. (Source: https://www.unpri.Org/Uploads/i/m/n/maindefinitionstoprireportingframework_12 7272_949397.pdf) ESG vs Sustainability describes a world of thriving economies and just societies based on what nature can Sustainability afford. It incorporates consideration of both the impacts and dependencies of an organisation and so includes those factors that are material both to the organisation but also to society. Environmental, social and governance (ESG) approaches this issue through a corporate lens and considers only how these risks and opportunities affect a business and its enterprise value. --- Trang 11 --- Whilst sustainability includes the concept of environmental and social limits (planetary limits and a social foundation) within which there is a safe operating space, ESG focusses on enterprise value and so does not incorporate considerations of a safe operating space. GHG Scope 1 , 2 and 3 is a way of categorising different kinds of Greenhouse Gas (GHG) emissions. emissions - (cid:127) Scope 1 : The GHG emissions that an entity makes directly by eg, running boilers and vehicles. scope 1 , 2 3 (cid:127) Scope 2: The GHG emissions it makes indirectly by eg, purchasing electricity or energy that is produced on its behalf. (cid:127) Scope 3: All the GHG emissions the entity is indirectly responsible for, up and down its value chain eg, by buying products from its suppliers, and from its products when customers use them. INDIRECT (Source: GHG Protocol Corporate Standard) Impacts and There are two fundamental aspects to sustainability: dependencies (cid:127) one is organisations considering how their business positively or negatively affects environmental, societal and governance issues ( impacts ); Impact Business/ Government (Source: ifac.org) (cid:127) the other is considering how environmental, social and governance issues can affect the organisation s ability to create and maintain value ( dependencies ). --- Trang 12 --- ninii: a a a a a a a aaaaaaa ilium Dependencies (Source: ifac.org) Information on dependencies is generally more useful for investors, who want to assess how well a company is managing its exposure to long-term ESG risks, and hence assess the value of the company to inform investment decisions. This relates to financial materiality. In this context, investor- useful information comprises financially material disclosure topics performance metrics addressing sustainability dependencies (and impacts) relevant to enterprise value. Impact information is generally useful for broader stakeholders, including consumers, civil society and employees. The decisions they make are more attuned to information on how an organisation is impacting, for example, livelihoods; deforestation; equality and health. In this context information useful for broader stakeholders includes disclosures, indicators and contextual information addressing sustainable development, impacts, or public policy objectives. Reporting impact information alongside dependencies is aligned with the concept of double materiality. However, a company s impacts can also be financially material due to reputational impacts affecting consumer demand, license to operate etc. These concepts are usefully visualised by the International Federation of Accountants here: https://www.ifac.org/system/files/publications/files/IFAC-enhancing-corporate-reporting- sustainability-building-blocks.pdf ENHANCING CORPORATE REPORTING SUSTAINABILITY BUILDING BLOCKS: ENCOURAGING CONSISTENT, COMPARABLE AND ASSURABLE SUSTAINABILITY INFORMATION BUILDING BLOCK APPROACH BLOCK BLOCK MULTbSTAKEHOLDER FOCUSED NTlROPtR ABI LIT (Source: ifac.org) --- Trang 13 --- Mitigation In the face of increasing climate-related risks, organisations need to focus on both mitigation and and adaptation activities. adaptation Climate change mitigation means avoiding and reducing emissions of greenhouse gases into the atmosphere to prevent the planet from warming to more extreme temperatures. This involves a transition away from fossil fuels to clean, renewable energy; halting deforestation; and restoring natural habitats to reach net zero emissions. Climate change adaptation refers to adjustments of strategies and actions in response to the effects and future risks of climate change. These risks may be linked to the physical impacts of climate change; but also, the economic impact of a transition towards net zero. Identifying, managing and adapting to these risks is key for the development of a resilient business that can survive, and even thrive in the unprecedented physical and transitional changes ahead. Paris The Paris Agreement is an international treaty on climate change that was signed by nearly 200 Agreement countries in 2015 at the United Nations Framework Convention on Climate Change s 21s t and Net Zero Conference of Parties, known as COP21. This agreement is generally regarded as the framework for international action towards mitigating climate change and its impacts. The Paris Agreement set the ambition to a maximum of 2 C global temperature change, with the preferred goal of 1 .5 C above pre-industrial levels. The term net zero refers to the global reduction of greenhouse gas emissions to net zero by 2050 and is the action required to limit temperature rise to 1 .5 degrees Celsius. Physical and The risks business and the public sector will face due to climate change can be categorised into two Transition areas: Risks (a) Physical risks, which arise from the physical effects of climate change such as storms, extreme temperatures, wildfires, flooding. (b) Transition risks, which relate to social and economic shifts to a low-carbon economy such as changes to policy, regulation, technology and market. Stranded Stranded assets are assets that are economically stranded, having suffered from unanticipated or assets premature write-downs, devaluations or conversion to liabilities (Smith School of Enterprise and the Environment, 2014). Stranded assets can be caused by a range of environmental-related risks including: (cid:127) climate change (cid:127) new regulations (cid:127) evolving social norms (cid:127) litigation Sustainability Sustainability is a broad term that encompasses an environmental and social focus to improve people s lives and improve the planet for the long-term. The technical definition of sustainability comes from the 1 987 Brundtland report, and is defined as development that: meets the needs of the present without compromising the ability of future generations to meet their own needs . Frameworks, goals or categories for sustainability can help to break it down for practical application. This is where characterisations such as environmental, social and governance (ESG) or environmental, social and economic factors can be useful. Sustainability is not limited to the environment. Interpretations of the scope of sustainable development have developed from a narrow interpretation which focused on green issues to broader interpretations which include concerns such as: (cid:127) Increasing extremes of poverty and wealth (cid:127) Population growth (cid:127) Biodiversity loss (cid:127) Deteriorating air and water quality (cid:127) Climate change (cid:127) Human rights (cid:127) Bribery and corruption --- Trang 14 --- Sustainable The United Nation s Sustainable Development Goals are a set of 1 7 goals based on the key Development environmental, social and economic factors required for peace and prosperity for people and planet. Goals (SDGs) They frame sustainability through the lens of environmental, social and economic characterisations, with a healthy environment underpinning a healthy society, which underpins a healthy economy. The Taskforce The G20 is an intergovernmental forum comprising 1 9 countries and the European Union. It works to on Climate- address major issues related to the global economy, such as international financial stability, climate related change mitigation, and sustainable development. Financial The UK Government is the first in the G20 to mandate that the largest UK-registered companies Disclosures provide disclosures, on a comply or explain basis, in line with the recommendations of the Task (TCFD) Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations are structured around four core elements - Governance, Strategy, Risk Management, and Metrics and Targets. Each of these core elements include reporting requirements and additional guidance for disclosing organisations. In particular, the TCFD recommendations focus on forward-looking financial disclosure. They ask organisations to identify climate-related risks and opportunities, to consider the financial implications, and to assess the resilience of the business strategy to future climate outcomes. TCFD recommends organisations use scenarios to explore future business risks arising from climate change and present the findings in the narrative report. WEF Global The World Economic Forum s annual Global Risks Report explores some of the most severe risks the Risks Report world may face over the next decade. It is underpinned by their annual Global Risks Perception Survey, bringing together leading insights from over 1 ,200 experts across the World Economic Forum s diverse network. In 2024, perceptions of the most severe risks on a global scale over the next 2 and 1 0 years were as follows: --- Trang 15 --- 1 0 years : 1 Misinformation and disinformation Extreme weather events Extreme weather events 2 Critical change to Earth systems 3 Biodiversity loss and ecosystem Societal polarization collapse Cyber insecurity : 4 Natural resource shortages Interstate armed conflict ; 5 Misinformation and disinformation I Adverse outcomes of Al Lack of economic opportunity 6 technologies Inflation : 7 Involuntary migration 8 I 8 Involuntary migration Cyber insecurity 9 Economic downturn i Societal polarization 1 0 Pollution 10 Pollution Risk categories: : Economic Environmental Geopolitical Societal Technological (Source: https://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2024.pdf) WEF IBC The World Economic Forum (WEF) International Business Council (IBC) metrics provide a useful metrics starting point when considering what sustainability metrics may be relevant for an organisation. The WEF paper Measuring Stakeholder Capitalism was written with the aim of developing a core set of common metrics and disclosures o n non-financial factors, for sustainable value creation. It highlights the key themes significant to the planet, society and business and was produced in collaboration with Deloitte, EY, KPMG and PwC in 2020. The metrics are categorised into four pillars: Principles of Governance, Planet, People and Prosperity and aligned with their relevant SDGs. Sustainability and the role of ACA Professionals ICAEW Chartered Accountants (ACA Professionals ) recognise that sustainability is at the core of what they d o and are capable of actively using their business skills to analyse how to make the new sustainable economy work for their business. The relevance of sustainability to the role of accountants is growing, with the skillset provided by the ACA becoming increasingly valuable to respond to incoming regulations and increasing investor and broader stakeholder requirements. --- Trang 16 --- Finance and accounting professionals need to move beyond simply measuring and reporting the impact of climate change, environmental regulation, supply chain pressure and rising energy costs. ACA Professionals need to focus on understanding those implications and integrating them into financial management and business planning by integrating knowledge and understanding the broader implications of environmental, social and governance issues. Sustainability and decision making Integrating sustainability to strategic decision making and operational processes is closely related to the skills and experience of ACA Professionals. Examples include: (cid:127) Identification and management of risks. (cid:127) Compliance with laws, regulations and code of corporate governance. (cid:127) Design and operation of management control systems. (cid:127) Measurement of environmental, social and governance (ESG) related liabilities and impaired assets, financial instruments and new forms of taxation, such as renewable energy reliefs or carbon emission tariffs and any assurance required thereon. Where the technical issues extend beyond the accountant s reach then the accountant will work with sustainability experts and other relevant experts when required, which is good practice. Reporting The role of ACA Professionals includes the preparation and issuance of reported sustainability information with related activities which include: (cid:127) Identifying and evaluating sustainability-related risks and opportunities and advising on solutions to mitigate impacts and risks. (cid:127) Considering how current and future sustainability-related risks and opportunities affect an organisation s strategy, operations, financial reporting, regulatory and legal compliance and sustainability reporting requirements. (cid:127) Advising on an organisation s specific sustainability metrics to monitor and report. (cid:127) Developing methods and solutions to measure sustainability metrics. (cid:127) Developing processes and controls to produce and verify the information. (cid:127) Preparing sustainability reports and advising on the sufficiency of current sustainability reporting disclosures. (cid:127) Providing assurance over mandatory and voluntary sustainability reported information. (cid:127) Providing sustainability information that is relevant to strategic and operational decision making. (cid:127) Influencing others in positions of power to take appropriate action to safeguard or improve an organisation s sustainability performance. Applying sustainability related learning in ACA ACA students can develop these skills by applying a common set of sustainability principles across every ACA module in this complex and fast changing area. These core principles include, but are not limited to: (cid:127) Consider an organisation s sustainability-related dependencies alongside its sustainability-related impacts. (cid:127) Clarify that climate change is only one aspect of environmental concerns. (cid:127) Consider sustainability-related opportunities alongside risk. (cid:127) Consider physical risks as well as transition risks and opportunities. (cid:127) Confirm that climate and other environmental issues are considered against the broader context of sustainability. (cid:127) Apply a principles-based approach of identifying, evaluating and mitigating sustainability-related risks and opportunities where the sustainability landscape is complex and lacks a global/mandatory standard. This can be aided by the application of the following ACA Professional Skills to specific sustainability-related situations: (cid:127) Assimilating and using information (cid:127) Structuring problems and solutions (cid:127) Applying judgement (cid:127) Concluding, recommending and communicating --- Trang 17 --- ACA and Technology Changes in technology have automated many routine aspects of accountancy. However, with these changes in technology also come complexity and risk. Accountants need to adapt and develop new skills to manage the change resulting from the emergence of new technologies. These and other innovations in technology are likely to have a significant impact o n the way that accountants access information, transact and manage business finances. Technology tools can provide information more quickly and often more accurately than humans, but they cannot replicate human intelligence and quality decision-making, or effectively communicate the output of analysis. Therefore, ACA professionals hold key roles such as validating the source of the data, interpreting, and analysing the outputs, and ensuring the tools support effective management of the organisation. Additionally, as routine and compliance work reduces, the ACA provides a focus o n the development of skills that equip ACA professionals to work with the outputs of automated processes, with other specialists, and in a changing world. While there are many new technology capabilities that have broad application across the business and consumer environment, ICAEW has identified seven trends that have the greatest potential to transform the accountancy profession: Artificial Intelligence, Automation, Blockchain, Cybersecurity, Cloud computing, Data and Digital Transformation. These technologies are explored across relevant ACA modules and are supported by the following definitions. Term Definition Artificial Artificial Intelligence involves the creation and use of advanced computer systems to Intelligence (Al) perform tasks that traditionally require human intelligence. This includes learning from data, reasoning and problem-solving, sensory understanding, language processing, and recognising patterns. Al systems are characterised by their ability to adapt to new information or environments, operate with a degree of autonomy, and make informed decisions. Al often, but not always, involves the use of Machine Learning. Augmented Augmented Reality is a technology that overlays digital information - such as images, Reality (AR) text o r effects - onto the real world as seen through a device, such as a smartphone or AR glasses. Automation Automation is the creation and application of technology to monitor and control the production and delivery of products and services. (Source: The International Society of Automation, 2018) (current BST definition) Big Data Big Data is the term that describes those datasets whose size is beyond the ability of typical database software to capture, store, manage and analyse. (Source: McKinsey Global Institute, Big data: The next frontier for innovation, competition and productivity) Blockchain Blockchain is a specific form of distributed ledger technology that records data in a decentralised and immutable manner across multiple nodes. This structure makes records tamper-proof and enhances security by removing single points of failure. Blockchains are often public, allowing anyone to verify the data, though private configurations exist for tailored organisational needs. This technology supports cryptocurrencies and has many other applications, including supply chain oversight, digital identity and secure voting. Chatbot A chatbot is a software application designed to simulate conversation with human users. It uses natural language processing to understand and respond to user queries. Cloud Cloud accounting refers to performing accounting tasks using cloud computing accounting software, often delivered in a software-as-a-service (SaaS) model. --- Trang 18 --- Cloud Cloud computing is on-demand access, via the internet, to computing resources - computing applications, servers (physical servers and virtual servers), data storage, development tools, networking capabilities and more - hosted at a remote data centre managed by a cloud services provider (or CSP). (Source: https://www.ibm.com/topics/cloud- computing : :text Cloud%20computing%20is%20on,or%20CSP) Cryptocurrency Crypto currency is a digital asset that is designed to function as a medium of exchange and store of value. It operates through a decentralised computer network independent of any central authority, such as a central bank, which does not issue or regulate it. Cryptocurrencies use blockchain technology to achieve decentralisation, transparency and immutability, distinguishing them from traditional monetary systems and financial assets. While they perform roles similar to currency, under IFRS Accounting Standards they are not recognised as cash or financial instruments but may be accounted for as intangible assets or inventory depending on the circumstances. Cyber-attack A cyber-attack is an attempt by individuals or groups to breach the cybersecurity of a specific organisation or individual. This includes any unauthorised access, manipulation or damage to computers, networks, digital systems or data. Cyber-attacks are carried out to steal, alter or destroy information, or to disrupt the operation of systems and services. Common forms of cyber-attacks include phishing, malware, ransomware, denial of service (DoS) and advanced persistent threats (APTs). Cybersecurity guidelines, risk management approaches, actions, training, best practices, assurance and technologies that can be used to protect an organisation s and user s assets against cyber-a ttack. Data analytics Data analytics is the process of collecting, organising and analysing large sets of data to discover patterns and other information which an organisation can use for its future business decisions. Data bias Data is biased when it is not representative of the population that is being analysed. Bias can be inherent in the data collected or it can be introduced by those analysing the data. Data mining Data mining is the process of analysing large datasets to discover patterns, relationships and insights. It employs Al and statistical algorithms to identify correlations and trends that transform raw data into actionable information. Distributed Distributed ledger technology (DLT) encompasses a range of decentralised database ledger systems where transactions are recorded and validated across multiple sites. Unlike technology traditional ledgers, DLT does not rely on a central authority, enhancing transparency (DLT) and reducing the need for audits. While blockchain is a well-known type of DLT noted for its chained data structure, other forms of DLT may organize data differently and offer varying levels of access and privacy. Generative Al Generative Al refers to a type of artificial intelligence that is designed to generate new content, such as images, text, audio or video, based on patterns learned from a training dataset. Unlike predictive models that focus on making predictions or classifications based on existing data, generative Al models create entirely new data instances that mimic the characteristics of the training data. Infrastructure- Infrastructure-as-a-service, or laaS, provides virtual computing resources overthe as-a-service internet. It allows businesses to rent servers, storage space and networking capabilities (laaS) without needing to own physical infrastructure. Users can manage operating systems, storage and deployed applications while the service provider handles the physical hardware. --- Trang 19 --- Machine Machine Learning is the capability of computer systems to learn from and make Learning predictions or decisions based on large volumes of training data, without being explicitly programmed to do so. It involves two primary methods: supervised and unsupervised learning. In supervised learning, the model is trained on labelled data, meaning it learns to predict outcomes from input data that has an associated correct answer. Unsupervised learning involvestraining on data without labelled responses, allowing the model to identify patterns and relationships in the data independently. Natural Natural Language Processing is a branch of artificial intelligence that enables Language computers to understand, interpret, and generate human language in a way that is both Processing meaningful and useful. By employing techniques from linguistics and computer (NLP) science, NLP helps machines process and analyse large amounts of natural language data, facilitating tasks such as translation, sentiment analysis, voice-activated services and chatbot responses. Platform-as-a- Platform-as-a-service, or PaaS, offers a development and deployment environment service (PaaS) delivered over the internet, allowing users to build, test and deploy applications without the complexity of managing the underlying infrastructure. Providers supply a framework that developers can build upon, including support for software development kits, databases and development tools. PaaS is designed for developers who want to create applications without worrying about hardware, software updates or storage. Robot A robot is a programmable machine capable of carrying out complex actions autonomously or semi-autonomously. Typically equipped with sensors and actuators, robots are used in various industries for tasks that require precision and endurance or involve hazardous conditions. Robotic Process Robotic Process Automation is a software solution that replicates a business process, Automation designed to do a task that would otherwise be performed manually. It is pprrooggrraammmmeedd to follow if this, then that instructions. It runs with other applications rather than replacing them. Software-as-a- Software-as-a-service, or SaaS, is a delivery model that allows users to access software service (SaaS) applications over the internet. These applications are hosted and maintained by external providers, offering convenience and reduced IT overhead for users. SaaS solutions are typically subscription-based, with common applications including email, customer relationship management (CRM) and collaboration tools. Virtual Reality Virtual Reality (VR) is a digital technology that creates a simulated environment, (VR) immersing users in a three-dimensional space. Users can interact with virtual objects and experience scenarios that mimic real life or imaginative worlds. --- Trang 20 --- C h a p t e r 1 I n t r o d u c t i o n t o a c c o u n t i n g Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 The purpose of accounting information 2 The regulation of accounting 3 Sustainability and sustainability standards 4 The main financial statements 5 Capital and revenue items f I f 66 QQuuaalliittaattiivvee cchhaarraacctteerriissttiiccss ooff uusseeffuull aaccccoouunting information II..WM. Jo l-l 7 Accounting concepts and conventions Mflg I NM f 8 Ethical considerations SSuummmmaarryy h r v i Further question practice k iH J : hm Technical references Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 21 --- I n t r o d u c t i o n Learning outcomes (cid:127) Specify why an entity maintains financial records and prepares financial statements (cid:127) Specify the ethical and sustainability considerations for preparers of financial statements (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Specify the key aspects of the accrual basis of accounting and the cash basis of accounting Specific syllabus learning outcomes are: 1a, b, d; 3b Syllabus links The material in this chapter will be developed as you progress through the Accounting modules, and later in Professional Level Financial Accounting and Reporting. Examination context Questions on topics in this chapter will be knowledge-type multiple choice, multi-part multiple choice or multiple-response questions. In the exam you may be required to: (cid:127) identify capital as opposed to revenue expenditure (cid:127) specify the distinctions between the different qualitative characteristics (cid:127) identify the principles that relate to each qualitative characteristic (cid:127) identify the different interests of stakeholders (cid:127) identify the differences between IFRS Accounting Standards and UK GAAP Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Topic Practical significance Study approach Exam approach Interactive questions 1 The purpose of Approach In the exam you might IQ1 Accounting accounting be asked to identify information Read through the information the different interests information carefully, This question asks you of stakeholders. You It is important that you attempting the to consider how could be presented understand what is Interactive question as businesses with a single meant by accounting you do so. Give communicate stakeholder, for information, wwhhoo tthhee careful consideration information to example a bank, and primary userss ooff to the information external stakeholders. asked to select the financial statements needs of stakeholders main (most likely) are, and the and ensure you can reason they would be information needs of differentiate internal interested in financial the different from external information. stakeholders who are stakeholders. interested in Stop and think accounting What do you think of information. This will the Conceptual help you to Framework view that understand how the the financial information produced statements are bbyy aacccountants is primarily focused on uusseedd. existing and potential investors, lenders and other creditors Does --- Trang 22 --- this mean that the financial statements are not useful for other stakeholders 2 The regulation of You can read through In the exam you might accounting this information fairly be required to identify quickly. It is important the differences Understanding how to understand IFRS between IFRS accounting regulation Accounting Standards Accounting Standards has been developed, vs UK GAAP as we will and UK GAAP. IFRS including an highlight the key Accounting Standards understanding of the differences in are the examinable IFRS Foundation s accounting treatment standards in Conceptual as we go through this Accounting, but you Framework for Workbook. Pay are expected to be Financial Reporting particular attention to aware of terminology (Conceptual the true and fair view, and format differences Framework) will give which is an important as well as some key you the context for the concept in technical differences accounting standards accounting. between specific that UK companies are aspects of UK GAAP expected to follow. Stop and think and IFRS Accounting Consider the term Standards. 1 faithfully represent in the context of accounting. What do you think it means and why is it important 3 Sustainability and Approach An exam question sustainability may ask you about the Read through the standards aims of the ISSB or information to ensure how the Standards will The accounting you understand why help to meet standard-setters have the ISSB has been information needs. recently formed the formed and how it will International satisfy the information Sustainability needs of users. Standards Board Stop and think (ISSB) which has Is there overlap issued sustainability- between related disclosure sustainability-related standards. information and more It is important that you traditional information understand why the sought by primary standard-setters have users of financial taken this crucial step. statements 4 The main financial Approach You will need to know statements what is included in the It is essential that you primary financial As we work through understand what statements in order to the Accounting information is attempt the long form workbook, we will contained in the questions. This topic develop an approach statement of financial provides a starting to preparing the position (SFP) and point to meeting that financial statements of what is contained in requirement. a business, which is a the statement of profit basic expectation for or loss (SPL). Cover most accountants. This these sections topic gives your first carefully. It might be look at those financial useful to create a statements. separate note with the --- Trang 23 --- key SFP headings (assets, liabilities, equity) and key SPL sections (income, expenses) which you can build on later. Stop and think Can you think of some of the assets, liabilities, income and expenses of a business Note them down under the relevant headings. 5 Capital and revenue Approach In the exam you will IQ2 Capital or items need to consider the Revenue Read through the type of expenditure or Businesses incur definitions of capital This question is a income described in a different types of and revenue useful check that you scenario and correctly expendi ture/income expenditure then can differentiate determine whether it which an accountant carefully cover the capital from revenue is capital or revenue. must be able to worked examples for items. distinguish as capital each. expendi ture/income Once you are happy rather than revenue you have understood expendi ture/income those, cover capital in order to classify and revenue income. items correctly in the Attempt the financial statements. Interactive question as you work through the topic. Stop and think Why would the purchase of inventory for resale be revenue expenditure, but the purchase of machinery used to produce inventory be capital expenditure 6 Qualitative Approach It is quite common to characteristics of see an exam question Read through the financial reporting which contains a definitions carefully. description and you Topic 2 introduced Some of the are asked to identify the Conceptual definitions are the correct Framework which sets common sense and characteristic being out the fundamental you may have come described. You may and enhancing across them in other also be asked to qualitative areas, but others are identify which characteristics of unique to accounting. characteristic is NOT, useful financial Stop and think for example, an information. It is enhancing Why do you think important that you characteristic. relevance is a understand these fundamental characteristics as they qualitative underpin some of the characteristic accounting principles and standards that we will meet as we progress through Accounting. --- Trang 24 --- Accounting concepts Approach You might be required IQ4 Accounting and conventions to identify the correct Concepts There is quite a bit of definition of an Similar to Topic 6, the detail in this topic and This is a short accounting concept or accounting concepts some terms you may scenario-based convention, or identify and conventions are never have heard question which checks which concept or driven by the before. Read through that you understand convention is being Conceptual the material and write the underlying applied in a given Framework and they yourself a short note concepts. situation. underpin some of the explaining what each accounting principles concept/convention and standards that we means. Attempt the will meet as we work worked examples as through Accounting. you progress through These concepts are the material. important notions that Stop and think you will come back to Consider why a as your studies company might progress. choose to revalue its head office property. Ethical considerations Approach An exam question IQ6 Ethics may explicitly deal All ICAEW members Read through the This tests that you with ethics, or ethics and students must act topic, ensuring you understand what could be more implicit in accordance with the understand that ethical decision and underpin the ICAEW Code of accountants should betaken and information in a Ethics. It is essential frequently apply the reason forthat question. that you understand judgement and must decision based on the what is expected of be seen to behave in Ethics is always in the fundamental you, even at this early accordance with the mind of the examiner principles. stage of your studies. five fundamental so you will see it ethical principles. appearing frequently Ensure you can define in questions. these principles accurately. Stop and think Why is it important for accountants to be ethical but also be seen to be ethical Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 The p u r p o s e o f a c c o u n t i n g i n f o r m a t i o n Section overview (cid:127) Accounting is a way of recording, analysing and summarising the transactions of an entity. (cid:127) The three main types of business entity are sole traders, partnerships and companies. (cid:127) Stakeholders who need financial information include: managers, owners, customers, suppliers, lenders, employees, trade unions, HM Revenue and Customs (HMRC), financial analysts and advisers, government agencies and the public. (cid:127) Existing and potential investors, lenders and other creditors are the primary users of general purpose financial statements. --- Trang 25 --- (cid:127) The primary users of financial statements use the financial information of a company to make decisions 1 about providing resources to the entity and to assess managers stewardship of the company s economic resources. 1 .1 What is accounting Accounting is a way of recording, analysing and summarising the transactions of an entity (a term we shall use to describe any business organisation). We will assume that entities use computerised accounting systems to record, process and summarise their transactions. (cid:127) Computerised accounting systems and the recording of transactions are covered in Chapter 3. (cid:127) The aggregation and analysis of transactions in the accounting system is covered in Chapter 4. (cid:127) Finally, the summary of the transactions in the financial statements is covered in Chapter 5. One of the roles of an accountant is to measure the revenue and expenditure of an entity and, if it is a business, its profit. This is not as straightforward as it may seem and in later chapters, we will look at some theoretical and practical difficulties. 1 .2 Types of business entity There are three main types of profit-focused business entity: (cid:127) Sole traders (cid:127) Partnerships (cid:127) Limited liability companies Sole traders are people who work for themselves. Examples include a local shopkeeper, plumber or hairdresser. The term sole trader refers to the ownership of the business; sole traders can have employees. Partnerships occur when two or more people decide to share the risks and rewards of a business together. Examples include an accountancy, medical or legal practice. A partnership can take one of two forms: a general partnership (like two or more sole traders) or a Limited Liability Partnership LLP (more like a company). Partnerships are not considered further in Accounting. Limited liability companies are incorporated to take advantage of limited liability for their owners (shareholders). This means that, while sole traders (always) and partners (usually) are personally responsible for the amounts owed by their businesses, the owners (shareholders) of a limited liability company are only responsible for the amount to be paid for their shares. 1 .3 Types of financial information Entities produce a wide range of financial information for use both internally, and reports that are produced for external users. Reports produced for internal use include, for example, management accounts, budgets and forecasts. These are not considered further on this course. The annual report and financial statements are produced for external users and include not only a statement or profit or loss and statement of financial position, but also break-downs and explanations of figures, disclosures of sustainability and other business issues all of which have an impact on the financial data and which users require information about. The detail of the disclosures is not going to be considered in the Accounting syllabus, but examples of the type of information in disclosures, why they re important, what regulation applies to them, which is required, which voluntary or best practice is examinable. 1 .4 The objective of financial statements Why do businesses need to produce accounting information in the form of financial statements If a business is being run efficiently, why should it have to go through all the bother of accounting procedures in order to produce financial information According to the IFRS Foundation s Conceptual Framework for Financial Reporting (which we will cover in more detail later in the chapter), the objective of financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity . (Conceptual Framework: para. 1 .2) Existing and potential investors, lenders and other creditors are known as the primary users of the financial statements. When making decisions, the primary users need to assess: --- Trang 26 --- (cid:127) The economic resources of an entity (eg, its cash and other assets), claims against the entity (eg, its liabilities) and changes in those resources and claims. (cid:127) How efficiently and effectively the entity s management have discharged their responsibilities relating to the management of the entity s resources. (Conceptual Framework: para. 1 .4) Cash is important to businesses. An entity needs to be able to use its resources to generate cash and use that cash to settle its claims. The timing and certainty of cash flows determines whether the business can: (cid:127) pay its employees and suppliers (cid:127) meet interest payments (cid:127) repay loans (cid:127) pay something to its owners Large businesses are of interest to a wider range of stakeholders and so we will consider the case of a large public company, whose shares can be purchased and sold on a stock exchange. 1 .5 Users of financial information and their information needs The following stakeholders are likely to be interested in financial information about a large company with listed shares. (cid:127) Man agers/dir ectors appointed by the company s owners to supervise the day-to-day activities of the company. They need information about the company s present and future financial situation. This enables them to manage the business efficiently (exercising the stewardship function) and to make effective decisions about matters such as pricing, output, employment and financing. (cid:127) Managers may also be responsible for meeting environmental, social and governance (ESG) targets. They will need information on these measures and how they are performing against them. (cid:127) Owners of the company (shareholders) want to assess management performance. They are the providers of capital for the company, so they are interested in the risk to their capital, and the return they will get for taking that risk. They need information to help them determine whether they should buy, hold or sell shares. They want to know how profitable and sustainable the company s operations are and how much profit is available for distribution to the shareholders through a dividend. In addition, the value of their investment in the company is affected by the company s profitability. (cid:127) The owners will also be interested in how the entity s dependencies on environmental, social and governance (ESG) issues can affect its ability to create and maintain value. Dependencies could include, for example, climate risks, resource availability, worker health, diversity, regulatory risks and consumer expectations. (cid:127) Owners will want to know whether the entity s policies and practices in relation to its impact on the environment and on society, are in keeping with the investors expectations. This could include, for example, policies on worker rights, human rights issues within its supply chains, greenhouse gas (GHG) emissions and water usage. (cid:127) Lenders include banks which allow the company to operate an overdraft or, provide longer term loan finance secured on the company s assets. A bank wants to ensure that the company is able to keep up loan payments. (cid:127) Lenders often include financial and non-financial conditions the business must meet each year, otherwise the loan may be withdrawn or the terms changed. Increasingly lenders are including ESG related conditions, for example emission levels, which directly link to the interest rate on the loan. The higher the emissions, the higher the interest rate. (cid:127) Other creditors such as suppliers who provide goods and services on credit and customers who purchase goods or services. Suppliers want to know about the company s ability to pay its debts. Trade creditors are likely to be interested in an entity over a shorter period than lenders, unless they are dependent upon the continuation of the entity as a major customer. Suppliers are also interested in the company s corporate values such as its fair trade policies, how it treats its employees and its environmental practices. (cid:127) Trade contacts, which includes suppliers as above, and customers need to know that the company is a secure source of supply, so that repeat purchases and after-sales care will be available. (cid:127) H M Revenue and Customs (HMRC) want to know about business profits in order to assess the company s tax liabilities. (cid:127) Employees and their representative groups need information about the stability and profitability of their employers, so they can assess the entity s ability to provide remuneration, retirement benefits and employment opportunities. Employees are also interested in how the company does business so that they can assess whether they want to be a part of the organisation. Issues such as the ethical stance of the company and pay equality between genders. --- Trang 27 --- (cid:127) Financial analysts and advisers need information for their clients or audience. For example, stockbrokers need information to advise investors; credit agencies want information to advise potential suppliers of goods to the company; and journalists need information for their reading public. (cid:127) Government agencies are interested in the efficient allocation of resources and therefore in the activities of enterprises. They also require information in order to provide a basis for national statistics. (cid:127) They may want to assess how entities are implementing mandatory reporting requirements to disclose information, for example the disclosure requirements of the Task Force on Climate-related Financial Disclosures (TCFD). (cid:127) The public are affected by business entities in a variety of ways. For example, they may make a substantial contribution to a local economy by providing employment and using local suppliers. Another important factor is the effect of an entity on the natural environment, for example as regards the levels of pollution generated by the entity. (cid:127) Regulatory bodies such as the Financial Conduct Authority (FCA) which regulates the financial services industry, require information to ensure compliance with regulations and the law. The financial statements are intended to provide useful information to the primary users, however that information is also likely to be useful to the other stakeholders. Some of the stakeholders may have conflicting needs or information needs that are not satisfied by the financial statements. This information 1 gap is likely to be greater in large companies. Managers of a business need financial information to help them make planning and control decisions. They do not, however, rely on the financial statements as they have access to internal business information. Managers can obtain extra information through the cost and management accounting system. Therefore, instead of being thought of as users of the financial statements, management are primarily responsible for the preparation and presentation of the financial statements. Interactive question 1 : Accounting information It is easy to see how internal stakeholders access accounting information. A manager, for example, can just go along to the accounts department and ask the staff there to prepare whatever accounting statements she needs, but external users of accounts cannot do this. Requirement How, in practice, can a business contact or a financial analyst access accounting information about a company In addition to the financial statements, additional accounting information is often prepared for the benefit of other stakeholders to satisfy their specific information needs: (cid:127) HMRCwill receive information to make tax assessments. (cid:127) A bank might demand a cash flow forecast as a pre-condition of granting an overdraft. 1 .5.1 Not-for-profit entities It is not only businesses that need to prepare financial statements. Charities and clubs, for example, prepare financial statements every year. Financial statements also need to be prepared for government (public sector) organisations. 1 .5.2 Ethical considerations Ethical considerations should underpin the work of all professional accountants, including those in business who prepare financial statements and those who set the rules and regulations of financial reporting. In order for the work of accountants to continue to be valuable, the financial information that they provide must be perceived as being trustworthy. If this reliability becomes compromised, then users will no longer depend on the information and the value of the profession will be damaged. By adhering to a code of conduct and ethical behaviour, accountants can maintain public confidence in the profession and thus maintain the value of accounting. Ethical considerations are discussed further in Topic 7 of this chapter. --- Trang 28 --- Professional skills focus: Applying judgement As we will discuss throughout Accounting, professional accountants often apply judgement in determining how to account for certain transactions, in estimating the correct value to report in the financial statements and in deciding what information should be disclosed. From this early stage in your studies, it is important that you understand that such judgements should always be made in a manner that is consistent with professional ethics. 2 The r e g u l a t i o n of a c c o u n t i n g KB Section overview (cid:127) In the UK, all companies must comply with the provisions of the Companies Act. (cid:127) In the UK, financial statements must be prepared in accordance with either the UK GAAP or IFRS Accounting Standards. They must also give a true and fair view of the performance and position of the company. A number of factors have shaped the development of accounting. The regulatory framework of accounting, and the technical aspects of the changes made, will be covered later in this Workbook and in your professional studies. The purpose of this section is to give a general picture of some of the factors which have shaped accounting. We will concentrate on the financial statements of limited liability companies, as these are the ones most closely regulated by statute or otherwise. The following factors can be identified: (cid:127) Generally Accepted Accounting Practice (GAAP) (cid:127) legislation (cid:127) accounting standards (cid:127) true and fair view/fair presentation (cid:127) accounting concepts and individual judgement (cid:127) sustainability disclosure standards Note: In the UK, GAAP refers to generally accepted accounting practice. Internationally, the term GAAP refers to generally accepted accounting principles. In Accounting, we will adopt the UK terminology and use the term practice. 2.1 Generally Accepted Accounting Practice (GAAP) GAAP is a term used to cover all the rules, from whatever source, which govern accounting in various jurisdictions. The requirement that financial information is relevant, reliable, comparable and understandable is common to both IFRS Accounting Standards and GAAP. 2.2 Legislation A listed company is one whose shares can be traded on a stock exchange, for example the London Stock exchange. Unlisted companies tend to be smaller than listed companies and their shares cannot be traded on a stock exchange. Limited liability companies are required by the Companies Act 2006 to prepare and publish financial statements annually. Their form and content are regulated by legislation but must comply with accepted accounting and financial reporting standards. For listed groups this means compliance with IFRS Accounting Standards. Non-listed companies generally follow UK accounting standards which are substantially converged with international ones. Certain entities are exempt from preparing financial statements under s394 of the Companies Act. The nature of a limited company and the issue of shares are dealt with in more detail in Chapter 1 1 . --- Trang 29 --- 2.3 Accounting standards While ethical principles underpin financial accounting, different people could still interpret situations differently. Professional judgement is applied by accountants based on their interpretation of a scenario, which can lead to subjectivity in accounting. In order to deal with some of this subjectivity, and to achieve comparability between different organisations, accounting standards were developed. These were developed at an international level by the International Accounting Standards Board (IASB) and at a UK level by the Financial Reporting Council (FRC). The FRC sets UK and Ireland accounting standards via its Codes and Standards Committee. The Corporate Reporting Council supports and advises the Codes and Standards Committee in accounting and reporting. It is responsible for the development of UK standards and for considering and commenting on international proposals. In 2021, the IFRS Foundation announced the formation of the International Sustainability Standards Board (the ISSB), which formally recognised the need for companies to disclose sustainability-related non-financial information alongside their financial statements. The ISSB is covered in more detail in Topic 3 below. 2.4 International Financial Reporting Standards (IFRS Accounting Standards) The IASB is responsible for setting international financial reporting standards (IFRS Accounting Standards). The standards that are issued by the IASB comprise: (cid:127) International Financial Reporting Standards (IFRS Accounting Standards) (cid:127) International Accounting Standards (IAS) The interpretations that are issued by the IFRS Interpretations Committee are: (cid:127) IFRIC Interpretations (cid:127) SIC Interpretations IAS and IFRS Accounting Standards have the same status, IASs are simply older standards; those published since 2001 are called IFRS Accounting Standards. IFRS Accounting Standards is the collective term used throughout this Workbook to refer to all IFRS Accounting Standards and IASs. The Conceptual Fra me work seis out the concepts that underlie the preparation and presentation of financial statements. IFRS Accounting Standards stem from the concepts set out in the Conceptual Framework (although some Standards were developed prior to the Conceptual Framework and there are some inconsistencies as a result). 2.5 UK position Non-listed companies in the UK can choose to report under IFRS Accounting Standards or UKfinancial reporting standards (FRS). References to UK GAAP in this Workbook refer to the use of the UK Companies Act 2006 and UK FRS. Whilst IFRS Accounting Standards have different standards for different issues, there is one main accounting standard in the UK - FRS 1 02, The Financial Reporting Standard applicable in the UK and Republic of Ireland - covering all issues. FRS 1 02 also contains the underpinning concepts and principles, which are similar to those which guide IFRS Accounting Standards. 2.5.1 UK GAAP UK GAAP encompasses: (cid:127) the Companies Act 2006 (cid:127) UK accounting standards (which are derived from IFRS Accounting Standards with limited exceptions) UK GAAP uses different terminology in many important respects regarding financial statements. FRS 1 02 uses international terminology, while the Companies Act 2006 uses terminology that is UK specific. In their published financial statements, UK non-listed companies tend to follow the Companies Act 2006 format for financial statements and UK specific terminology. This is considered in more detail in Chapter 1 4 Company financial statements under UK GAAP. 2.6 True and fair view/faithful representation Financial statements are required to give a true and fair view or present fairly in all material respects the financial results of the entity. These terms are not defined and tend to be decided in courts of law on the facts. --- Trang 30 --- (cid:127) The Conceptual Framework: Conceptual Framework states that if financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (Conceptual Framework: para. 2.5). (cid:127) The Companies Act: Companies Act 2006 requires that the financial statements should give a true and fair view of the financial position of the entity at a particular point in time. (cid:127) In terms of IAS 1 , Presentation of Financial Statements, financial statements should present fairly the financial position and performance, and the cash flows, of the entity. This requires faithful representation of the effects of transactions. Professional skills focus: Applying judgement When an accountant is preparing the financial statements of an entity, they should always do so with the 1 true and fair view in mind. The accounting treatment selected and applied should always be the one that most faithfully represents the effect of the underlying transaction. 3 Sustainability and sustainability standards Section overview (cid:127) What is sustainability (cid:127) Why reporting of sustainability is important for companies users of the accounts (cid:127) ICAEW Chartered Accountants need to understand the importance of sustainability issues and their impact on organisations, professions and other stakeholders (cid:127) The ISSB was formed in 2021 with responsibility for developing sustainability disclosure standards (cid:127) The aim is to provide the users with the information they require to understand the entity s sustainability- related risks and opportunities and its responses to them (cid:127) IFRS Sustainability Disclosure Standards were issued in June 2023 effective for accounting periods beginning on or after 1 January 2024 Before we look at sustainability in more detail, it is important to note that near the start of this Workbook before this chapter there is an ICAEW ACA sustainability glossary. Definition Sustainability: Meeting the needs of the present without compromising the ability of future generations to meet their own needs. While environmental and climate change considerations are the current predominant issue, it is vital to remember when looking at sustainability that it also encompasses important social and governance issues. 3.1 What is sustainability Sustainability refers to the practice of meeting the needs of the present generation without compromising the ability of future generations to meet their own needs. Individuals and companies need to make choices and take actions that balance environmental, social, and governance issues to ensure long-term well-being for people and the planet. 3.2 Why reporting on sustainability is important Sustainability reporting is important to users of financial statements who, are increasingly interested in information relating to the sustainability of an entity s operations when informing their decisions. The users are interested in both the social aspects of sustainability such as the impact an entity has on its local environment, and how sustainability impacts company value. --- Trang 31 --- Accountants play a key role in measuring, analysing and reporting on entities impact on the environment and society, and analysing how these issues impact the entity. 3.3 Laws, regulation and guidance Some organisations have developed guidance around the disclosure of sustainability information; however, a lack of mandatory standards and the range of guidance has led to inconsistency in what type of information is disclosed, how it is disclosed and how it links to traditional accounting and measures of corporate value. Governments are employing a wide range of laws and regulations to internalise external environmental costs and incentivise organisations and individuals to act in a more sustainable way. Effective operation of laws and regulations requires reliable information regarding the subject material and the current regulations. There are a number of bodies, for example the Taskforce on Climate-related Financial Disclosures (TCFD), the ISSB and the Global Reporting Initiative (GRI) who have issued guidance and reports on sustainability disclosures. Some are best practice, some will become mandatory. 3.3.1 Taskforce on Climate-related Financial Disclosures Listed companies in the UK are required to apply the disclosure recommendations of the TCFD. These disclosures include information on the climate-related risks and opportunities that the company faces. You are not required to understand the detailed requirements of the TCFD in Accounting. 3.4 The ISSB and Sustainability Disclosure Standards The ISSB was formed by the IFRS Foundation in 2021 with responsibility for developing a set of sustainability disclosure standards (IFRS Sustainability Disclosure Standards) which will complement the existing IFRS Accounting Standards. The ISSB comprises members from a range of professional backgrounds and geographical areas who have experience and expertise relevant to sustainability. The aim of the IFRS Sustainability Disclosure Standards is to provide high-quality, transparent and comparable information relating to sustainability in their annual report and sustainability disclosures which are focused on the needs of investors and the financial markets. The intention is for the ISSB to cover a range of sustainability topics on which investors want information. It has begun with the climate-related disclosures due to the urgency regarding climate-related matters. However, a general requirements standard has also been drafted to enable companies to disclose a complete set of sustainability-related financial disclosures for all significant sustainability-related risks and opportunities. The ISSB initially built on the work of existing organisations which have issued guidance on voluntary disclosures relating to sustainability and value creation. Building on the work of others, including the TCFD, 1 gave the ISSB a running start when it came to developing and issuing IFRS Sustainability Disclosure Standards. Draft IFRS Sustainability Disclosure Standards were issued for public consultation in 2022, with the first two standards issued in 2023. There are two fundamental aspects to sustainability reporting: (cid:127) one is companies reporting how their business positively or negatively affects environmental, societal, and governance issues - impacts (cid:127) the other is considering how these factors affect a company s financial statements and their ability to maintain value - dependencies Examples of impacts include worker rights, human rights, health and safety policy, waste, greenhouse gas emissions, water usage, land usage and biodiversity. The ISSB has no authority to mandate the application of IFRS Sustainability Disclosure Standards, it is up to national governments to require their application in annual reports. Note: An organisation s impacts can also be financially material due to reputational impacts such as reduced consumer demand or removal of license to operate. Examples of dependencies which may affect an organisation are worker health, workplace diversity, climatic conditions, resource availability, regulation, consumer expectations, other stakeholder expectations and risks to organisational reputation. --- Trang 32 --- Disclosure of information on dependencies is generally more useful for investors, who want to assess how well a company is managing its exposure to long-term sustainability-related risks, and hence assess the value of the company to inform investment decisions. This directly relates to financial materiality. Professional skills focus: Structuring problems and solutions The formation of the ISSB is an example of how the accounting profession has to adapt to societal changes and demands for non-financial information. As an ICAEW student accountant, it is important that you take an interest in this area as it is a significant development in the profession. You should understand that the lack of reliable and comparable sustainability-related information was a problem that impacted the usefulness of company accounts, and that the IFRS Sustainability Disclosure Standards are intended to be a solution to that problem. Governments are employing a wide range of laws and regulations to internalise external environmental costs and incentivise organisations and individuals to act in a more sustainable way. Effective operation of laws and regulations requires reliable information regarding the subject material and the current regulations. 4 The m a i n financial statements Section overview (cid:127) Financial statements prepared under IFRS Accounting Standards collectively comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, notes and in certain circumstances, a revised statement of financial position from an earlier period. (cid:127) IAS 1 , Presentation of Financial Statements sets out the form and content of the financial statements. IAS 1 identifies a complete set of financial statements for a reporting period (typically a year) as comprising: (cid:127) a statement of financial position as at the end of the reporting period; (cid:127) a statement of profit or loss and other comprehensive income for the reporting period, which can be in a two-part format including a separate statement of profit or loss (as we shall see in Chapter 1 4, under UK GAAP this is called a profit and loss account); (cid:127) a statement of changes in equity for the reporting period; (cid:127) a statement of cash flows for the reporting period; (cid:127) notes comprising a summary of significant accounting policies and other explanatory information; and (cid:127) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively, makes a restatement of items in its financial statements, or reclassifies items. In this Workbook we are concerned with the statement of financial position, the statement of profit or loss, the statement of changes of equity, and the statement of cash flows. IAS 1 makes it clear that an entity may use titles for the statements other than those used in the Standard. 1 Many entities continue to use the term balance sheet instead of statement of financial position and cash flow statement instead of statement of cash flows . However, in this Workbook we shall use the IAS 1 terminology until Chapter 1 4, when we shall use the terminology of financial statements prepared under UK GAAP ( balance sheet and profit and loss account ). M Professional skills focus: Assimilating and using information A key skill you will develop as you work through Accounting is how to use the information provided about a transaction to determine where transactions and balances should be presented in the primary financial statements, as required by IAS 1. --- Trang 33 --- 4.1 Statement of financial position Definitions Statement of financial position: A list of all the assets controlled and all the liabilities owed by a business as at a particular date: it is a snapshot of the financial position of the business at a particular moment. Monetary amounts are attributed to assets and liabilities. It also quantifies the amount of the owners interest in the company, which is known as equity. Equity: The amount invested in a business by the owners (IAS 1 refers to owners rather than equity holders or shareholders ). The Conceptual Framework defines equity as the residual interest in the assets of the entity after deducting all its liabilities (Conceptual Framework: para. 4.63). Assets and liabilities are explained in more detail in Chapter 2. However, the sum of the assets will always be equal to the sum of the liabilities plus equity. There are a number of factors affecting a company s financial position at any one time which include: (a) the economic resources it controls (cash, labour, materials, machinery, skills) (b) its financial structure (whether it is funded by owners, lenders, suppliers, or by all three) (c) its liquidity (short-term availability of cash) and solvency (long-term access to funds) (d) its adaptability to changes in its operating environment The Conceptual Framework focuses on how information about the nature and amounts of an entity s economic resources and claims (liabilities) can help users to identify the reporting entity s financial strengths and weaknesses. In particular it points out that information about the nature and amounts of an entity s economic resources and claims can help users to assess: (cid:127) the entity s liquidity and solvency (cid:127) the entity s need for additional financing (cid:127) how successful the entity is likely to be in obtaining that financing (Conceptual Framework: para. 1 .1 3) Additionally, by gaining knowledge of the economic resources a business controls, users will be in a better position to predict the entity s ability to generate cash in the future. Information about an entity s financial structure and liquidity/solvency can also help financial statement users. Factor Information on this helps users: Financial structure (cid:127) to predict future borrowing needs (cid:127) to predict how future profits and cash flows will be distributed among owners and lenders (cid:127) to predict how successfully it will be able to raise future finance Liquidity/solvency (cid:127) to predict its ability to meet financial commitments as they fall due 4.2 Statement of profit or loss Definition Statement of profit or loss: A statement displaying items of income and expense in a reporting period as components of profit or loss for the period. The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period). The reporting period chosen will depend on the purpose for which the statement is produced. The statement of profit or loss which forms part of the published annual financial statements of a limited liability company will usually be for the period of a year, commencing from the date of the previous year s financial statements. On the other hand, management might want to keep a closer eye on a company s profitability by making up quarterly, monthly, weekly or even daily statements. The Conceptual Framework sets out how information about the business s financial performance, ie, its profits or losses, is needed by users: --- Trang 34 --- (cid:127) to understand the return that the entity has produced on its economic resources (cid:127) to assess management s stewardship of the entity s economic resources (cid:127) to help predict the business s future returns on its economic resources (Conceptual Framework: para. 1.16) The link between the statement of financial position and the statement of profit or loss and other comprehensive income is provided by the statement of cash flows and the statement of changes in equity. You will find an introduction to the statement of cash flows in Chapter 1 3. The statement of cash flows shows the actual cash flowing into and paid out of the business. The statement of changes in equity reconciles the opening and closing equity of the company. The statement of changes in equity is covered in Chapter 1 2. U K GAAP alert Companies reporting under UK GAAP will present their financial statements in accordance with: (cid:127) Companies Act 2006 (cid:127) FRS102 Details of the different terminology used is outlined in Chapter 14. Generally the profit and loss account formats require less detail than IAS 1 . The Companies Act balance sheet formats are less flexible than the IAS 1 formats. The Companies Act formats are enshrined in law. 4.3 Presentation of financial statements Both the statement of financial position and the statement of profit or loss are summaries of accumulated information. For example, the statement of profit or loss shows a figure for revenue earned from selling goods and services to customers. This is the total revenue earned from all sales made during the period. Ensuring all transactions are captured and that accurate accounting records are maintained to allow true and fair financial statements to be prepared is the responsibility of the directors of a company. The majority of companies will use an accounting software package to capture and record transactions. Accounting software packages will be covered in Chapter 3. 5 Capital and revenue items O Section overview (cid:127) Capital income and expenditure must be distinguished from revenue income and expenditure. 5.1 Capital and revenue expenditure Definition Capital expenditure: Expenditure which results in the acquisition of non-current assets or an improvement or enhancement of their earning capacity. Non-current assets are those which will be kept in the entity for more than one year. (cid:127) Capital expenditure is not charged as an expense in the statement of profit or loss (although a depreciation charge will usually be made to match the capital expenditure against the income that it generates over the useful life of the asset; depreciation expense is shown in the statement of profit or loss). (cid:127) Capital expenditure on non-current assets is presented in the statement of financial position. ft Definition Revenue expenditure: Expenditure which is incurred either: (cid:127) for trade purposes. This includes purchases of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs; or --- Trang 35 --- to maintain the existing earning capacity of non-current assets. Revenue expenditure is charged to the statement of profit or loss of a period, provided that it relates to the trading activity and sales of that particular period. Context example: Revenue expenditure If a business buys 1 0 steel bars for 200 ( 20 each) and sells eight of them during a reporting period, it will have two steel bars left at the end of the period. The full 200 is revenue expenditure but only 160 is the cost of the goods sold during the period. The remaining 40 (cost of two units) will be included in the 1 statement of financial position as inventory valued at 40. Context example: Capital expenditure A business purchases a building for 300,000. It then adds an extension to the building at a cost of 1 00,000. After a few months the building needs to have a few broken windows mended, its floors polished and some missing rooftiles replaced. These cleaning and maintenance jobs cost 900. In this example, the original purchase ( 300,000) and the cost of the extension ( 10 0,000) are capital expenditure, because they are incurred to acquire and then improve a non-current asset. The other costs of 900 are revenue expenditure, because these merely maintain the building and thus do not increase its 1 earning capacity . Capital expenditure can include costs incurred in bringing a non-current asset to its final condition and location, such as legal fees, duties and carriage costs borne by the asset s purchaser, plus installation costs. Repair, maintenance and staff costs in relation to non-current assets are revenue expenditure. 5.2 Capital income and revenue income ft Definition Capital income: Proceeds from the sale of non-current assets. The profits (or losses) from the sale of non-current assets are included in the statement of profit or loss for the reporting period in which the sale takes place. For instance, the business may sell machinery or property which it no longer needs. ft Definition Revenue income: Income derived from: (cid:127) the sale of trading assets, such as goods held in inventory (cid:127) the provision of services (cid:127) interest and dividends received from business investments 5.3 Capital transactions The categorisation of capital and revenue items given above does not mention raising additional funds from the owner(s) of the business or raising and repaying loans. (cid:127) These transactions add to the cash assets of the business and create corresponding capital or liabilities (loans). (cid:127) When a loan is repaid, it reduces the liabilities (loan) and the assets (cash). None of these transactions would be reported through the statement of profit or loss. 5.4 Why is the distinction between capital and revenue items important Calculating profit for any reporting period depends on the correct and consistent classification of revenue or capital items. You must get used to the terminology here as these words appear in the accounting and financial reporting standards themselves. --- Trang 36 --- Interactive question 2: Capital or revenue State whether each of the following items should be classified as capital or revenue expenditure or income. (1) The purchase of a property (eg, an office building) (2) Property depreciation (3) Solicitors fees in connection with the purchase of property (4) The costs of adding extra memory to a computer (5) Computer repairs and maintenance costs (6) Profit on the sale of an office building (7) Revenue from sales paid for by credit card (8) The cost of new machinery (9) Customs duty charged on machinery when imported into the country (10 ) The delivery costs of transporting the new machinery from the supplier s factory to the premises of the business purchasing it (11 ) The cost of installing the new machinery in the premises of the business (12) The wages of the machine operators 6 Q u a l i t a t i v e characteristics o f useful a c c o u n t i n g i n f o r m a t i o n Q Section overview (cid:127) Financial information should be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. The Conceptual Framework states that information must have certain fundamental and enhancing qualitative characteristics if it is to be useful to the primary users. 6.1 The fundamental qualitative characteristics The Conceptual Framework identifies the fundamental qualitative characteristics to be relevance and faithful representation. Information must be both relevant and faithfully represented to be useful. (cid:127) Relevance. Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. (Conceptual Framework: para. 2.6) Financial information can make a difference to decisions if it has one or both of: - predictive value. It can be used to predict future outcomes. - confirmatory value. It provides feedback about previous evaluations (it confirms whether past predictions were reasonable). (Conceptual Framework: paras. 2.7 -2.8 ) Information s relevance is affected by its nature and materiality. (We shall come back to materiality; for now you can think of it as important ). You should note that information may become less relevant if there is undue delay in its reporting. (cid:127) Faithful representation. If information is to be useful, it must represent faithfully the transactions and other events it purports to represent. (Conceptual Framework: para. 2.12) A faithful representation will be: --- Trang 37 --- - Complete. All information necessary for a user to understand the transactions or events being depicted is included. (Conceptual Framework: para. 2.14) - Neutral (unbiased). Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements. It means that assets and income are not overstated and that liabilities and expenses are not understated (although it does not encourage the understatement of assets and income or overstatement of liabilities and expenses either as those can lead to misstatements in future periods). (Conceptual Framework: para. 2.1 6) - Free from error. Free from error in the context of faithful representation does not mean the information is perfectly accurate in all respects. Instead it means there are no material errors or omissions in the description of it and the process used to produce the reported information has been selected and applied with no errors in the process. (Conceptual Framework: para. 2.18) Conceptual Framework: fundamental qualitative characteristics Materiality Relevance Faithful Complete representation Free from error Neutral (prudence) Enhancing qualitative characteristics I I Comparability Timeliness Understandability Figure 1 .1 : The Conceptual Framework U K GAAP alert FRS 1 02 includes qualitative characteristics for companies using UK GAAP which are similar to the characteristics included in the Conceptual Framework. 6.2 Enhancing qualitative characteristics According to the Conceptual Framework information that is relevant and faithfully represented can be 1 enhanced by the following enhancing qualitative characteristics: (cid:127) comparability. Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information should be produced so that valid comparisons can be made with information from previous periods and with information produced by other entities (for example, the financial statements of similar companies operating in the same line of business). Comparability should not be confused with consistency. Applying consistency (using the same methods for the same items) is a means of achieving comparability (comparability is the goal). (Conceptual Framework: paras. 2.24-2.26) (cid:127) verifiability. Verifiability helps to assure users that information is a faithful representation of the transactions or events it purports to represent. If information is verifiable it essentially means that it can be proven, for example you may be able to check it is true by examination, inspection or comparison. The Conceptual Framework states that verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation . (Conceptual Framework: para. 2.30) (cid:127) timeliness. Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. As a general rule, older information is less useful than recent information. However, you should note that some information may still be timely for a long time after the end of a reporting period. This is true of information for users of financial information who need to identify and assess trends. (Conceptual Framework: para. 2.33) --- Trang 38 --- (cid:127) understandability. Information is understandable if it is classified, characterised and presented clearly and concisely. When considering whether information is understandable you should bear in mind that financial reports are prepared for users who have a reasonable knowledge of business and economic activities. (Conceptual Framework: paras. 2.34-2.35) 7 Accounting concepts and conventions B Section overview (cid:127) The fundamental assumptions behind ledger accounting and the preparation of financial statements are contained in IAS 1 and the Conceptual Framework. (cid:127) IAS 1 is concerned with the presentation of financial statements so that they are comparable across time and with other companies. (cid:127) The objective of financial statements is to provide useful information to users making economic decisions. To achieve this information must be presented fairly or faithfully, which generally means it should be presented in accordance with IFRS Accounting Standards. (cid:127) Each entity needs to select and apply accounting policies in order to present its financial statements. The result will be information that is relevant and faithfully represents what it purports to represent. We must consider some of the important concepts which are used in preparing financial statements. We begin by considering the fundamental assumptions which are the subject of IAS 1 (and which are also covered in the Conceptual Framework). 7.1 Fair presentation In this section we look at the general requirements of IAS 1 s assumptions. The rest of IAS 1 , on the format and content of financial statements will be covered in Chapters 1 1 and 1 2 when we look in detail at the preparation of company financial statements. 7.1. 1 Objectives and scope of IAS 1 The main objective of IAS 1 is: to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity s financial statements of previous periods and with the financial statements of other entities. (IAS 1 : para. 1 ) IAS 1 applies to all general purpose financial statements prepared and presented in accordance with IFRS Accounting Standards. General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their particular information needs. 7.1. 2 Purpose of financial statements The objectives of financial statements are: (cid:127) to provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making economic decisions; (cid:127) to show the result of management s stewardship of the resources entrusted to it; and (cid:127) to assist users in predicting the entity s future cash flows and, in particular, their timing and certainty. To fulfil these objectives, financial statements must provide information about the entity s: (cid:127) assets (cid:127) liabilities (cid:127) equity (cid:127) income and expenses (including gains and losses) (cid:127) other changes in equity (cid:127) cash flows --- Trang 39 --- Note: As defined in Chapter 2, assets, liabilities and equity are called the elements of financial statements. A complete set of financial statements includes: (cid:127) statement of financial position (cid:127) statement of profit or loss and other comprehensive income (which may be a single statement or a separate statement of profit or loss and statement of other comprehensive income) (cid:127) accounting policies note (cid:127) statement of cash flows (cid:127) statement of changes in equity (cid:127) explanatory notes (cid:127) a further statement of financial position from an earlier period where there has been retrospective application of an accounting policy, a reclassification or a retrospective restatement - issues that we shall come back to in Chapter 1 1 . Note: Statement of financial position, statement of profit or loss, statement of cash flows and statement of changes in equity are covered in the Accounting syllabus. Explanatory notes and other comprehensive are covered in the Financial Accounting and Reporting syllabus. Preparation of the financial statements is the responsibility of the board of directors. IAS 1 also recognises the value of a financial review by management and the production of any other reports and statements which may aid users, but these fall outside the Accounting syllabus scope. 7.1. 3 Fair presentation and compliance with IFRS Accounting Standards Most importantly, financial statements should present fairly the financial position, financial performance and cash flows of an entity. Applying IFRS Accounting Standards is presumed to result in fair presentation. (IAS 1 : para. 1 5) Definition Fair presentation: The faithful representation of the effects of transactions, other events and conditions in accordance with the Conceptual Framework. The following points made by IAS 1 expand on this principle. (cid:127) Compliance with IFRS Accounting Standards should be explicitly stated in a note to the financial statements. (cid:127) All relevant IFRS Accounting Standards must be followed if compliance with IFRS Accounting Standards is disclosed. (cid:127) Use of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting policies or notes/explanatory material. IAS 1 states what is required for a fair presentation, including the: (cid:127) selection and application of accounting policies (cid:127) presentation of information in a manner which provides relevant, reliable, comparable and understandable information (cid:127) additional disclosures where required to enable users to understand the impact of particular transactions, events and conditions on the entity s financial position and performance (IAS 1 : para. 1 7) 7.1. 4 Departures from IFRS Accounting Standards There may be (very rare) circumstances when management decides that compliance with a requirement of an IFRS Accounting Standard would be so misleading that financial statements would not meet their objectives. Departure from the IFRS Accounting Standards may therefore be required to achieve a fair presentation. The following should be disclosed in such an event: (cid:127) management confirmation that the financial statements fairly present the entity s financial position, performance and cash flows; (cid:127) statement that all IFRS Accounting Standards have been complied with except in respect of departure from individual IFRS Accounting Standards, required to achieve a fair presentation; (cid:127) details of the nature of the departure, why the IFRS Accounting Standards treatment would be misleading, and the treatment adopted; and (cid:127) financial effect of the departure. --- Trang 40 --- 7.2 Going concern (IAS 1 ) Definition Going concern: The entity is viewed as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or ceasing to trade. This concept assumes that, when preparing a regular set of financial statements, the business will continue to operate in approximately the same manner for the foreseeable future (at least, but not limited to, the next 1 2 months). In particular the entity will not go into liquidation or cease trading, or have no realistic alternative but to liquidate or cease trading. When an entity is not a going concern, the financial statements must state that they are prepared on a basis other than going concern, and clarify what this basis entails. An example of a different basis would be the 1 break up basis of accounting. When presenting financial statements using a break up basis of accounting, 1 an entity s assets are valued at their break up value: the amount they would sell for (their net realisable value) if they were sold off individually in a forced sale and the business were broken up. Since this forced sale is necessary because the business has foreseen problems in the next 1 2 months, financial statements prepared on a break-up basis will contain neither non-current assets nor non-current liabilities. All assets will be deemed to be for sale and all liabilities will be treated as becoming due within 1 2 months of the date of the statement of financial position. Interactive question 3 : Going concern A retailer commences business on 1 January and buys 20 washing machines, each costing 100. During the year, the retailer sells 1 7 machines at 1 50 each. Requirements What would the carrying amount (value) of the washing machines be if: 3.1 The retailer is forced to close down the business at the end of the year and the remaining washing machines will realise only 60 each in a forced sale. 3.2 The retailer intends to continue his business into the next year. If the going concern assumption is not followed, that fact must be disclosed, together with: (cid:127) the basis on which the financial statements have been prepared (cid:127) the reasons why the entity is not considered to be a going concern When there is uncertainty as to whetherthe entity is a going concern, this should be disclosed along with the nature of the uncertainty. 7.3 Accrual accounting (IAS 1 and the Conceptual Framework) An entity should prepare its financial statements, except for cash flow information, using accrual accounting (also known as the accrual basis of accounting or the matching concept). Definition Accrual accounting: Accrual accounting requires that transactions are recorded in the period in which they occur even if the resulting cash receipts and payments occur in a different period. (Conceptual Framework, para.1. 1 7) Entities should prepare their financial statements on the basis that transactions are recorded in them, not as the cash is paid or received (cash accounting), but as the income or expenses are earned or incurred in the reporting period to which they relate. According to the accrual basis, when calculating profit, income earned must be matched against the expenses incurred in earning it. --- Trang 41 --- Context example: Accrual basis A sole trader purchases 20 T-shirts in their first month of trading (May) at a cost of 5 each on credit. They sell all of them on credit for 1 0 each. The sole trader has therefore made a profit of 10 0, by matching the income ( 200) earned against the cost ( 100) of acquiring them. If, however, the sole trader only sells 1 8 T-shirts, it is incorrect to charge their statement of profit or loss with the cost of 20 T-shirts, as they still have two T-shirts in hand. If they sell them in June, they are likely to make a profit on the sale. Therefore, only the purchase cost of 1 8 T-shirts ( 90) should be matched with the sales income ( 18 0), leaving a profit of 90. The sole trader s statement of financial position will look like this at the end of May: Assets Inventory (two T-shirts at cost, ie, 2 x 5) 1 0 Receivables (1 8 x 1 0) 1 80 190 Capital and liabilities Proprietor s capital (profit for the period) 90 Payables (20 x 5) 100 190 However, if the sole trader had decided to give up selling T-shirts at the end of May, then the going concern assumption would no longer apply and the two T-shirts in the statement of financial position should be at their break up valuation, not cost. Similarly, if the two unsold T-shirts are unlikely to be sold at more than their cost of 5 each (say, because of damage or a fall in demand) then they should be recorded on the statement of financial position at their net realisable value (ie, the likely eventual sales price less any expenses incurred to make them saleable) rather than cost. In this example, the concepts of going concern and accrual are linked. Since the business is assumed to be a going concern, it is possible to carry forward the cost of the unsold T-shirts as a charge against profits of the next period. Definition Cash accounting basis: Under this method, a company records customer receipts in the period that they are received, and expenses in the period in which they are paid. It is easier to use and can be useful for a smaller company, especially for tax purposes where cash flow may be an issue. Under the accruals basis, a company may have to pay tax on profits before the cash is actually received by the business. Applying the cash accounting basis to the above example, no profit or expenses would be recorded until cash changed hands. Therefore, if the sole trader had bought 20 T-shirts on credit for 5 each and sold them on credit for 10 each in May, no profit or loss would be recorded in May. If, in June, they received payment for the T-shirts that had been sold on credit, and in July they paid for the T-shirts that had been purchased on credit, a profit of 200 would be recorded in June, and a loss of 100 would be recorded in July. 7.4 Consistency of presentation (IAS 1 ) To maintain consistency, the presentation and classification of items in the financial statements should stay the same from one period to the next, unless: (cid:127) there is a significant change in the nature of the operations, or a review of the financial statements indicates a more appropriate presentation; or (cid:127) a change in presentation is required by an IFRS Accounting Standard. By having consistent presentation the comparability of financial statements is enhanced, both over a period of time, and also between different companies. --- Trang 42 --- 7.5 Materiality and aggregation (IAS 1 and the Conceptual Framework) Definition Material: Information is material if omitting, misstating or obscuring it could, individually or collectively, reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or the nature of an item, or a combination of both, could be the determining factor. (IAS 1 : para. 7) Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial. A specific disclosure requirement in an IFRS Accounting Standard need not be satisfied if the information is immaterial. The Conceptual Framework links materiality particularly to the qualitative characteristic of relevance. Financial statements result from processing large numbers of transactions or other events that are then 1 aggregated into classes according to their nature or function, such as revenue , purchases , trade receivables and trade payables . The final stage in the process of aggregation and classification is the presentation of condensed and classified items on the face of the statement of financial position or statement of profit or loss. If an item is not individually material it is aggregated with other items on the face of financial statements, though it may be separately classified in the notes. There is no absolute measure of materiality. In relation to materiality by size it is common to apply a convenient rule of thumb (for example material items are those with a value greater than 5% of net profits). However, some items are regarded as particularly sensitive and therefore as being material by nature. Even a very small misstatement of such an item is taken as a material error; an example is the amount of remuneration paid to directors of a company. 7.6 Offsetting (IAS 1 ) Assets and liabilities, and income and expenditure must be presented separately in the financial statements. IAS 1 does not allow these items to be offset against each other unless such a treatment is required or permitted by another IFRS Accounting Standard. Income and expenses can be offset only when: (cid:127) an IFRS Accounting Standard requires or permits it; or (cid:127) gains, losses and related expenses arising from the same/similar transactions are not material (in aggregate). 7.7 The business entity concept This concept has already been discussed in the context of the separate entity principle: that accountants regard a business as a separate entity, distinct from its owners or managers. The concept applies whether the business is a limited liability company (and so recognised in law as a separate entity), or a sole trader (in which case the business is not legally recognised as separate from its owners). 7.8 The historical cost convention A basic principle of accounting is that the monetary amount at which items are often measured in financial statements is at historical cost, ie, at the amount which the business paid to acquire them. An important advantage of this concept is that the objectivity of financial statements is maximised: there is usually a source document to prove the amount paid to purchase an asset or pay an expense. ft Definition Historical cost: Transactions are recorded at their cost when they were incurred. It is easier to deal with costs when measuring items, rather than with values , as valuations tend to be subjective and to vary according to what the valuation is for. --- Trang 43 --- Context example: Cost or valuation A company acquires a machine to manufacture its products. The company expects to use the machine for four years, which is the useful life of the machine. At the end of two years the company is preparing a statement of financial position and has to decide what monetary amount to give the machine (the 1 Conceptual Framework refers to this process as measurement and provides several measurement bases that might be applied). Numerous possibilities can be considered, including: (cid:127) the original cost (historical cost) of the machine (cid:127) half of the historical cost, on the basis that half of its useful life has expired (cid:127) the amount that would be received if the asset was sold on the open market (fair value) (cid:127) the present value of the cash flows the asset is expected to generate across its life (value in use) (cid:127) the cost of an equivalent machine (current cost) All of these valuations have something to commend them, but the great advantage of the first two is that they are based on a figure (the machine s historical cost) which is objectively verifiable. There are many problems associated with the use of historical cost valuation but these are outside the scope of the Accounting syllabus. Interactive question 4: Accounting concepts 4.1 Your office equipment will be used, on average, for five years, so you charge 20% of its cost as depreciation each year in your statement of profit or loss. This year your business profitability is down and you would prefer not to charge depreciation. Is it acceptable not to make any charge this year 4.2 You have recently paid 4.95 for a wastepaper bin which should be used for about five years. Should you treat it as a non-current asset 8 Ethical considerations Section overview (cid:127) Application of judgement is required in applying fundamental accounting concepts. (cid:127) The ICAEW Code of Ethics describes five fundamental principles of professional ethics that accountants must adhere to: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. (cid:127) ICAEW Code of Ethics is a principles-based system. 8.1 Accounting concepts and individual judgement Many figures in financial statements are derived from the application of judgement in applying fundamental accounting concepts. Different people exercising their judgement on the same facts could arrive at very different conclusions. Interactive question 5 : Value of reputation A firm of ICAEW Chartered Accountants has an excellent reputation amongst students and employers. Requirement How would you value this and include this asset in the financial statements --- Trang 44 --- Other examples of areas where the judgement of different people may vary are as follows: (cid:127) Valuation of buildings in times of changing property prices. (cid:127) Research and development (R D): is it right to treat this only as an expense In a sense it is an investment to generate future revenue. 1 1 (cid:127) Brands such as Nike or Apple . Are they assets in the same way that a forklift truck is an asset Working from the same data, different groups of people may produce very different financial statements, but if judgement is completely unregulated, there will be no comparability between the financial statements of different organisations. This will be all the more significant in cases where deliberate manipulation occurs, in order to present financial statements in the most favourable light. The exercise of judgement in accounting matters should always be underpinned by ethical principles. To this end both the International Ethics Standards Board for Accountants (IESBA) and the ICAEW have produced codes of ethics that state the fundamental ethical principles that all professional accountants should adhere to. 8.1 .1 ICAEW Code of Ethics - fundamental principles The ICAEW Code of Ethics is based on the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants. The IESBA develops ethical standards and guidance for use by professional accountants. The IESBA code applies to all professional accountants, whether in public practice, in business, education and the public sector. It serves as the foundation for codes of ethics developed and enforced by member bodies. The IESBA Code of Ethics for Professional Accountants and the ICAEW Code of Ethics describe five fundamental principles of professional ethics that accountants must adhere to. These are: (cid:127) integrity. A professional accountant should be straightforward and honest in all professional and business relationships. (cid:127) objectivity. A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements. (cid:127) professional competence and d u e care. A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services. (cid:127) confidentiality. A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties. (cid:127) professional behaviour. A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. The structures and processes that support the operations of the IESBA are facilitated by the International Federation of Accountants (IFAC). IFAC is the global organisation for the accounting profession. It aims to ensure that the global accountancy profession is valued in the development of strong and sustainable organisations. Interactive question 6 : Ethics Harley works as an auditor for a client called Screens Ltd. During the audit, the CEO Screens Ltd offers Harley their newest model of OLED television, which is about to be released on the market for free, as a thank you for carrying out the audit. Requirement If Harley accepts the television, which of ICAEW s fundamental principles of professional ethics may be t hreatened --- Trang 45 --- 8.1. 2 ICAEW Code of Ethics The ICAEW Code of Ethics states that Chartered Accountants are expected to demonstrate the highest standards of professional conduct and to take into consideration the public interest and to maintain the 1 reputation of the accounting profession . It should be noted that the guidance applies to ICAEW members, students, affiliates, employees of member firms and member firms themselves. All of these are expected to follow the guidance contained in the fundamental principles in all of their professional and business activities whether carried out with or without reward and in other circumstances where to fail to do so would bring discredit to the profession . Therefore, the Code may apply not only to the paid activities of the professional accountant but also to the life of the professional accountant, particularly if he is involved in matters relevant to his profession, such as being a Trustee of a charity or club. The Code also states that professional accountants are required to follow the spirit as well as the letter of the guidance. In other words, a specific matter being excluded from the guidance does not mean that the accountant does not have to think about it; rather he must determine if the spirit of the guidance would also apply to that situation. Professional competence and due care The principle of professional competence and due care is of particular relevance to preparers of financial statements. Professional accountants have a duty to achieve a level of professional knowledge and skill and must ensure that they do not operate beyond their current level of competence. In order to continue offering services in a particular field the professional accountant must maintain their competence. This can be achieved through a continued awareness of the relevant technical, professional and business developments. As part of the requirement for diligence the professional accountant should do what is required to deliver the agreed service, should ensure that any staff working under their authority are competent and adequately trained and supervised and where appropriate should ensure that the client or employer understands the limitations of the services that are being provided. Professional skills focus: Structuring problems and solutions You may be faced with an ethical issue in the exam which will expect you to identify which fundamental principle of ethics has been breached. It is important that you can identify ethical issues and the relevant ethical principle. Ethical issues that are relevant in accounting will be highlighted throughout this Workbook. It is important that you are aware of the various ethical issues faced by professional accountants in order that you can respond correctly to any such issues you may be faced with during your career. 8.2 Principles-based system Rather than containing a set of rules, the ethics codes discussed above are principles based. There are a number of advantages to a principles-based framework over a system of ethical rules. These are outlined in the table below. Advantages of a principles-based over a rules-based system of ethics A principles-based system places the onus on the individual to actively consider independence for every given situation, rather than just agreeing a checklist of forbidden items. Even if something is not expressly stated in the guidance, professional accountants are required to follow the spirit as well as the letter of the guidance. A principles-based system prevents individuals interpreting legalistic requirements narrowly to get around the ethical requirements. There is an extent to which rules engender deception, whereas principles encourage compliance. A principles-based system allows for the variations that are found in every individual situation. Each situation is likely to be different. A principles-based system can accommodate a rapidly changing environment, such as the one that professional accountants regularly face. A principles-based system can contain prohibitions where these are necessary as safeguards are not feasible. --- Trang 46 --- Interactive question 7: ICAEW Code of Ethics Discuss the merits and drawbacks of the ICAEW Code of Ethics being a principles-based system. S u m m a r y Accounting Business entity Sole trader Partnership Company Transactions Revenue Record (Chapter 3) Analyse (Chapter 4) Summarise (Chapter 5) Accounting information financial statements Regulation Content Objective Statement of Statement of Statement of Use Stakeholders profit or loss changes in equity financial position Managers Accounting Make Owners Accounting Assess standards economic stewardship Customers concepts (Chapter 1 1 ) decisions Suppliers Lenders Conceptual Framework: UK GAAP Estimate Employees Legislation fundamental qualitative (Chapters 14 15) cash Government characteristics flows Analysts Public Faithful Relevance representation (cid:127) Complete Materiality (cid:127) Free from error Enhancing qualitative (cid:127) Neutral (prudence) characteristics Comparability Verifiability Timeliness Understandability --- Trang 47 --- Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning 1 Which parties does the Conceptual Framework identify as the primary users of financial statements (Topic 1 ) 2 Can you explain what is meant by the true and fair view (Topic 2) 3 Do you understand the difference between capital expenditure and revenue expenditure (Topic 4) 4 When is financial information deemed to be material (Topic 6) 5 What are the five fundamental ethical principles (Topic 7) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Introduction to accounting chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. Technical references 1 The purpose of accounting information (cid:127) When making decisions about providing economic resources to an entity, users need to assess: - the economic resources of an entity (eg, its cash and other assets), claims against the entity (eg its liabilities) and changes in those resources and claims. - how efficiently and effectively the entity s management have discharged their responsibilities relating to the management of the entity s resources. - Conceptual Framework, para. 1 .4 (cid:127) The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions involve decisions about: (a) buying, selling or holding equity and debt instruments; (b) providing or settling loans and other forms of credit; or (c) exercising rights to vote on, or otherwise influence, managements actions that affect the use of the entity s economic resources. - Conceptual Framework, para. 1.2 (cid:127) Assists users of the financial statements in predicting the entity s future cash flows and, in particular, their timing and certainty. - IAS 1 , para. 9 --- Trang 48 --- 2 The regulation of accounting (cid:127) A statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, notes and (in certain circumstances) a revised statement of financial position from an earlier period. - IAS 1 , para. 1 0 (cid:127) Fair presentation/faithful representation. - IAS 1, para. 15; Conceptual Framework, paras. 6.58-6.62 3 The main financial statements (cid:127) Information about the nature and amounts of an entity s economic resources and claims can help users to assess the entity s liquidity and solvency, its need for additional financing and how successful the entity is likely to be in obtaining that financing. - Conceptual Framework, para. 1.13 (cid:127) Information about a reporting entity s financial performance is needed by users to understand the return that the entity has produced on its economic resources. Information about the return the entity has produced provides an indication of management s stewardship of the entity s economic resources. Information about the variability and components of that return is also important, especially in assessing the uncertainty of future cash flows. - Conceptual Framework, para. 1.16 4 The qualitative characteristics of useful financial information (cid:127) Fundamental qualitative characteristics: relevance and faithful representation. (cid:127) Enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability. - Conceptual Framework, paras. 2.5-2.38 5 Objectives and scope of IAS 1 (cid:127) To prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity s financial statements of previous periods and with the financial statements of other entities. - IAS 1, para. 1 (cid:127) To be applied to all general purpose financial statements prepared and presented in accordance with International Financial Reporting Standards (IFRS Accounting Standards). - IAS 1, para. 2 (cid:127) General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their particular information needs. - IAS 1, para. 7 6 The purpose of financial statements (cid:127) To provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making economic decisions: - To show the results of management s stewardship of the resources entrusted to it. - To assist users in predicting the entity s future cash flows and, in particular, their timing and certainty. - To provide information about the entity s assets, liabilities, equity, income and expenses (including gains and losses), other changes in equity and cash flows - IAS 1, para. 9 7 Components of financial statements (cid:127) A statement of financial position at the end of the reporting period, a statement of profit or loss, an accounting policies note, a statement of changes in equity, a statement of cash flows, explanatory notes and a statement of financial position at an earlier date where there has been retrospective application, retrospective restatement or reclassification. - IAS 1, para. 1 0 8 Fair presentation (IAS 1 ) (cid:127) The faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria in the Conceptual Framework. The application of IFRS Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. - IAS 1, para. 15 (cid:127) Compliance with IFRS Accounting Standards must be explicit and complete. - IAS 1, para. 1 6 (cid:127) For there to be fair presentation: - accounting policies must be selected and applied. - information must be presented in a manner which provides relevant, reliable, comparable and understandable information. - to enable users to understand the impact of particular transactions, events and conditions on the entity s financial position and performance additional disclosures may be required. - IAS 1, para. 1 7 --- Trang 49 --- (cid:127) Use of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting policies or notes/explanatory material. - IAS 1 , para. 1 8 (cid:127) In some circumstances, departure from the IFRS Accounting Standards may be required to achieve a fair presentation. - IAS 1, para. 23 9 Underlying assumptions (cid:127) Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Assessment of whether the going concern assumption is appropriate must take into account all available information for at least 1 2 months from the end of the reporting period. Any uncertainty must be disclosed. - IAS 1 , paras. 25 a n d 2 6 (cid:127) An entity should prepare its financial statements using the accrual basis of accounting, recognising the elements of financial statements in line with the Conceptual Framework. - IAS 1, paras. 27 and 2 8 (cid:127) To maintain consistency, the presentation and classification of items in the financial statements should stay the same from one period to the next, unless there is significant change in the nature of the operations, or a review of the financial statements indicates a more appropriate presentation, or a change in presentation is required by an IAS. - IAS 1, para. 45 (cid:127) Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or the nature of an item, or a combination of both, could be the determining factor. - IAS 1, para. 7 (cid:127) Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial, but a specific disclosure requirement in an IAS need not be satisfied if the information is immaterial. - IAS 1, paras. 29 a n d 3 1 Self-test questions Answer the following questions. 1 Which of the following is classified as revenue expenditure A Purchase of inventories for resale B Purchase of a motor vehicle to deliver goods to customers C Purchase of machinery for use in production D Purchase of a warehouse to store inventory 2 Liability for the debts of the business does not fall on: A A sole trader B Partners in a general partnership C A limited liability company D Owners of a limited liability company --- Trang 50 --- 3 According to IAS 1 , which of the following is not an objective of financial statements A To provide information to investors in making economic decisions B To provide information to managers in making business decisions C To show the results of management s stewardship of the resources entrusted to it D To provide information about the cash flows of the entity 4 Which one of the following issues in an entity s financial statements is likely to be of most interest to an entity s lender A Whetherthe entity has paid a dividend B Whetherthe entity will repay a loan when it falls due C Whetherthe entity will continue to be able to employ people D Whetherthe entity patronises local suppliers 5 The IFRS Foundation formed the ISSB in 2021. Requirement What does the acronym ISSB stand for A International Social Standards Board B International Sustainability Standards Board C International Standards on Sustainability Benefits D International Society on Sustainability Benefits 6 A statement of financial position is best described as: A A snapshot of the entity s financial position at a particular point in time B A record of an entity s financial performance over a period of time C A list of all the income and expenses of the entity at a particular point in time D A list of all the assets and liabilities of the entity over a period of time 7 In applying fundamental accounting concepts, the preparers of financial information are also using: A Legislation B Accounting standards C Judgement D Financial reporting standards --- Trang 51 --- 8 Match the fundamental ethical principle to the characteristic. (1) Integrity (2) Objectivity A Members should be straightforward and honest in all professional and business relationships. B Members should not allow bias, conflict or interest or undue influence of others to override professional or business judgements. 9 Which of the following would not be a suitable question to ask yourself when resolving an ethical dilemma A Would my colleagues think m y solution is reasonable B Have I thought about all the possible consequences of my solution C Could I defend my solution under public scrutiny D Does my solution benefit my career 1 0 The ICAEW Code of Ethics only applies to the paid activities of the professional accountant. A True B False 1 1 Which of the following is not a source of the accounting rules embodied in UK GAAP A The Companies Act 2006 B UK accounting standards C Listing requirements of the London Stock Exchange D Accounting requirements of an entity s US parent company 1 2 Materiality is an entity-specific aspect of which qualitative characteristic A Relevance B Understandability C Faithful representation D Comparability 1 3 Which of the following is an item of capital expenditure A Cost of goods sold B Purchase of a machine C Repairs to a machine D Wages cost --- Trang 52 --- Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 Limited liability companies (though not otherforms of business such as sole traders or general partnerships) are required to make the financial statements, which include related disclosures, public. This is done by filing information centrally, which is a Companies Act 2006 requirement. Answer to Interactive question 2 Classifications: (1) capital expenditure (2) depreciation is revenue expenditure (3) legal fees associated with purchasing a property may be added to the purchase price and classified as capital expenditure (4) capital expenditure (enhancing an existing non-current asset) (5) revenue expenditure (restoring an existing non-current asset) (6) capital income (net of the costs of sale) (7) revenue income (8) capital expenditure (9) if customs duties are borne by the purchaser of the non-current asset, they should be added to the purchase cost of the machinery and classified as capital expenditure (10) if delivery costs are paid for by the purchaser of the non-current asset, they should be included in the cost of the non-current asset and classified as capital expenditure (11 ) installation fees of a non-current asset are also added to cost and classified as capital expenditure (12) revenue expenditure Answer to Interactive question 3 3.1 If the business is to be closed down, the remaining three washing machines must be valued at the amount they will realise in a forced sale, ie, 3 x 60 180. 3.2 If the business is regarded as a going concern, the washing machines unsold at 31 December will be valued as an asset at cost, 3 x 1 00 300. Answer to Interactive question 4 4.1 No, because of the need for accrual accounting (matching the income generated from the office equipment with the cost of the asset) and comparability. Once the depreciation policy has been established, it should not be changed without good cause. 4.2 No, because of the materiality concept. The cost of the bin is very small. Rather than cluttering up the statement of financial position for five years, treat the 4.95 as an expense in this year s statement of profit or loss. --- Trang 53 --- Answer to Interactive question 5 The firm may have relatively little in the form of things you can touch, perhaps a building, desks and chairs. If you simply drew u p a statement of financial position showing the cost of the things owned, then the business would not seem to be worth much, yet its income earning potential might be high. This is true of many service organisations where the people are among the most valuable assets, but justifying their exact value is extremely problematic. Answer to Interactive question 6 Objectivity. Unless the value of the g ift/hospitaI ity is clearly insignificant, a firm or a member of an assurance team should not accept it. It clearly threatens objectivity. In addition, there may also be an intimidation threat if there is a suggestion that the receipt of the gift will be made public. Answer to Interactive question 7 Advantages The key merit of the Code being principles based is that it is flexible. Professional accountants must consider the spirit of the guidance, even where there is n o explicit guidance for a given scenario. This is necessary in the rapidly changing environment in which ICAEW members operate. Rules-based systems tend to give rise to checklists, which are often unsuitable when considering the ethical implications of decisions. Under the principles-based system, members cannot simply engage in a box- ticking exercise, and the risk of loopholes arising in ethical guidance is reduced. Disadvantages Critics would argue that the principles-based system may allow individuals to get away with non-compliance unchallenged, as they apply their own individual interpretation to the guidance. Answers t o Self-test questions 1 A Purchase of inventories for resale The purchase of inventories for resale is revenue expenditure, as the inventories have been purchased for trade purposes. 2 D Owners of a limited liability company Sole traders and partners bear full liability for the debts of the business entity, as does a limited liability company itself. The liability of the shareholders or owners for the debts of a company is, however, limited. 3 B To provide information to managers in making business decisions IAS 1 identifies A, C and D as objectives of financial statements. The use of accounting information by managers in making business decisions is not identified as an objective. --- Trang 54 --- 4 B Whether the entity will repay a loan when it falls due A is of interest to investors; C is of interest to employees; D is of interest to suppliers. 5 B International Sustainability Standards Board The ISSB is the International Sustainability Standards Board. It will sit alongside the IASB and will issue IFRS Sustainability Disclosure Standards. 6 A A snapshot of the entity s financial position at a particular point in time A statement of financial position is a list of assets and liabilities which represent the entity s financial position at a particular point in time. D is wrong because it refers to a period of time ; C refers to income and expenses, not assets and liabilities; B defines the statement of profit or loss. 7 C Judgement Many figures in financial statements are derived from the application of judgement in putting fundamental accounting concepts into practice. A(1) B (2) 9 D Does my solution benefit my career The best solution to an ethical dilemma should be taken whether or not it improves your career. 10 B False The Code of Ethics applies not only to the paid activities of the professional accountant but also to the life of the professional accountant, particularly if he is involved in matters relevant to his profession, such as being a Trustee of a charity or club. 11 D Accounting requirements of an entity s US parent company UK GAAP refers to Generally Accepted Accounting Practice; the rules applied as a result of internal requirements can therefore not be part of GAAP. --- Trang 55 --- 12 A Relevance Information is material if omitting, misstating or obscuring it could influence the decisions of the users. If information is deemed material then it is relevant to the users. The Conceptual Framework states that materiality is an entity-specific aspect of relevance. 13 B Purchase of a machine This results in the acquisition of a non-current asset. All the others are revenue expenditure. --- Trang 56 --- Chapter 2 T h e a c c o u n t i n g e q u a t i o n Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 Assets, liabilities and the business entity concept 2 The accounting equation 3 Credit transactions 4 The statement of financial position 5 Preparing the statement of financial position 6 The statement of profit or loss SSuummmmaarryy mt r Further question practice Technical references Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 57 --- I n t r o d u c t i o n Learning outcomes (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and capital in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Identify the main components of a set of financial statements and specify their purpose and interrelationship Specific syllabus learning outcomes are: 1d; 3a Syllabus links The material in this chapter will be developed further in this exam, and then in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple- response questions, some of which may involve calculations so that the correct answer can be selected. In the exam you may be required to: (cid:127) identify and manipulate the accounting equation (cid:127) specify transactions affecting the elements of financial statements: assets, liabilities, capital, income and expenditure Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Practical significance Study approach Exam approach Interactive questions Assets, liabilities and Approach Topic 1 is a building the business entity block to This first topic is concept understanding the largely to provide accounting equation You met assets, some context so you (Topic 2), which is liabilities and the can cover it frequently examined. business entity reasonably quickly. concept in Chapter You could add the 1 . Here you will take a different types of asset deeper look at the and liability types of asset and mentioned to your list liability commonly of Statement of held by a business Financial Position and be introduced to (SFP) items that you the notion of capital. started in Chapter 1. Stop and think The business entity concept is important. Why is it important to keep the affairs of a business separate from its owners --- Trang 58 --- The accounting Approach In the exam, you may IQ1 Capital equation be required to identify There are several This is a quick and manipulate the This is the most worked examples as question to confirm accounting equation. important topic you we introduce the you can state the have covered so far. It accounting equation. The accounting equation. is essential that you Make sure you follow equation also understand the them carefully. Writing underpins double accounting equation out the accounting entry , which we will before you continue equation will help. use frequently in with the rest of Attempt the Accounting and which Accounting. Interactive question as it is essential you you complete the understand in order to topic. attempt the long-form question in the exam. Stop and think Why are retained profits added to owner s capital Credit transactions Approach This is an extension of IQ2 The accounting the accounting equation When businesses Start by ensuring that equation, which is transact with each you understand the This is a good test of frequently examined. other, they often offer terms trade your understanding of and take advantage of receivables and We will see examples the accounting credit facilities, which trade payables and involving credit equation so far. mean that the goods that you can transactions Remember to write or services provided differentiate between frequently as we out Assets Capital or received are not the two. progress through Liability then decide paid for until a point Accounting. how the transaction Work carefully in the future. You impacts on each. through the worked need to learn what is examples and meant by the terms Interactive question trade receivable and making sure you trade payable and understand the how the accrual impact on the accounting concept is accounting equation. applied. Stop and think Think for a moment about what the following terms mean: capital, asset, liability, trade receivable (debtor) and trade payable (creditor). The statement of Approach In the exam you may IQ4 Asset financial position be required to specify classification There is quite a bit of transactions affecting You met the detail in this topic that This question tests the elements of Statement of Financial you will need to work your understanding of financial statements: Position (SFP) briefly through methodically. current and non- assets, liabilities, in Chapter 1 . We will It is essential that you current assets. capital, income and now look in more can classify assets and expenditure. detail at its format and liabilities as current the notion of current and non-current so Understanding where vs non-current assets spend time ensuring balances are and liabilities. you understand this. presented in the financial statements is Stop and think also essential for the Why would a user of long-form question. financial statements consider it important --- Trang 59 --- if a loan was a current liability rather than a non-current liability Preparing the Approach You will be required to IQ5 Preparing a statement of financial prepare primary statement of financial Preparing the SFP is position financial statements in position I best learned by the long-form exam Now we have practise. Complete This is a good test of question. This is a considered the the worked example what we have covered starting point to content of the followed by the so far. preparing the statement of financial Interactive question statement of financial position, it is time to carefully. position. try preparing it. The statement of Approach You will be required to profit or loss prepare primary There is some theory financial statements in We will now turn our to cover as we discuss the long-form exam attention to the the different types of question. This is a statement of profit or expense. Cover these starting point to loss (SPL) to consider reasonably quickly preparing the its content and format and focus on the statement of profit or in more detail. worked examples. loss. Ensure you Stop and think understand the terms Why do you think the gross profit and net users of financial profit. statements might be interested in the gross profit sub-heading Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 Assets, liabilities and t h e business entity concept B Section overview (cid:127) An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. (Conceptual Framework: paras. 4.3 and 4.4) (cid:127) Assets may be held for use in the long-term (non-current assets) or for the short term as trading assets (current assets). (cid:127) A liability is a present obligation of the entity to transfer an economic resource as a result of past events. (Conceptual Framework: para. 4.26) (cid:127) Liabilities may also be current (economic resources expected to be transferred in the next 1 2 months) or non-current (economic resources expected to be transferred in more than 1 2 months). (cid:127) A business entity is a separate entity from its owners from an accounting point of view, whatever the legal position may be. 1 .1 Assets and liabilities Definition Asset: The Conceptual Framework states that an asset is a present economic resource controlled by the entity as a result of past event. An economic resource is a right that has the potential to produce economic benefits. (Conceptual Framework: paras. 4.3 and 4.4) --- Trang 60 --- Assets are a key element of financial statements. Examples of assets: (cid:127) land and buildings: factories, office buildings, storage and distribution centres (warehouses) (cid:127) motor vehicles (cid:127) plant and machinery (cid:127) fixtures and fittings: computer equipment, office furniture and shelving (cid:127) software, capitalised development costs, licences quotas (known as intangible assets which are covered in more detail in Chapter 10) (cid:127) cash: in a bank account or held as notes and coins (cid:127) inventory: goods held in store awaiting sale to customers, and raw materials and components held in store by a manufacturing business for use in production (cid:127) receivables: amounts owed by customers and others to the entity Some assets are expected to generate economic benefits over a number of years. An office building is occupied by administrative staff for years; similarly, a machine has a useful life of many years before it wears out. Licences are normally granted for a certain period of time for example, a bus operating licence might give the right to operate buses in an area for a period of ten years. These are non-current assets. Other assets are expected to generate economic benefits in the short term. A newsagent, for example, has to sell his newspapers on the same day that he gets them. The quicker a business sells goods, the more profit it is likely to make, provided, of course, that the goods are sold at a higher price than what it cost the business to acquire them. Short-term assets are called current assets. A company may choose to lease an asset, for example a property or a machine, rather than purchase it outright. They will have the right to use that asset for the lease term and will recognise that right on the statement of financial position. Definition Liability: The Conceptual Framework states that a liability is a present obligation of the entity to transfer an 1 economic resource as a result of past events. Conceptual Framework , para. 4.26) Liabilities are a key element of financial statements. Examples of liabilities: (cid:127) a bank loan or overdraft: the liability is the amount eventually repaid to the bank. 1 (cid:127) payables: amounts owed to suppliers for goods purchased but not yet paid for (purchases on credit ). For example, a boatbuilder buys some timber on credit from a timber merchant, so that the boatbuilder does not pay for the timber until some time after it has been delivered. Until the boatbuilder pays what he owes, the timber merchant is a creditor for the amount owed. (cid:127) taxation owed to the government. A business pays tax on its profits but there is a gap in time between when a business declares its profits (and becomes liable to pay tax) and the payment date. Liabilities for which economic resources are expected to be transferred in the next 1 2 months are current. Liabilities for which economic resources are expected to be transferred in more than 1 2 months are non- current. If an asset is leased and recognised on the statement on financial position a corresponding lease liability is also recognised. The amount repayable in the next 1 2 months will be shown as a current liability with the remainder as a non-current liability. Note: In Accounting, you should assume that cash is the economic resource transferred to settle a liability unless you are told otherwise. 1 .2 The business as a separate entity You may have wondered whether an entity, such as a business, can own assets or have liabilities in its own name. There are two aspects to this question: the strict legal position and the convention adopted by accountants. Many businesses are carried on in the form of limited liability companies. The owners of a limited company are its shareholders, who may be few in number (as with a small, family-owned company) or very numerous (as with a large public company whose shares are listed on a stock exchange). --- Trang 61 --- The law recognises a company as a legal entity, quite separate from its owners. A company may, in its own name, acquire assets, incur debts, and enter into contracts. If a company s assets became insufficient to meet its liabilities, the company as a separate entity becomes insolvent . However, the owners of the company are not usually required to pay the debts from their own private resources: the debts are not debts of the owners, but of the company. The case is different when a business is carried on by an individual (a sole trader). There is no legal separation between a sole trader and the business he/she runs. In most partnerships there is also no legal distinction. A limited liability partnership (LLP) is a hybrid form of business entity in that it is a separate legal entity, like a company, and therefore each partner (member) of the LLP has limited liability, however it does not have shareholders and has other characteristics of a partnership. Context example: Sole trader A sole trader starts business as a hairdresser, trading under the business name Quiff s Hair Salon . The law recognises no distinction between the sole trader, the individual, and the business known as Quiff s Hair Salon . Any debts of the business which cannot be met from business assets must be met from the sole trader s personal resources. However, in accounting any business is treated as a separate entity from its owner(s). This applies whether or not the business is recognised in law as a separate entity, ie, it applies whether the business is carried on by a company or by a sole trader. This is known as the business entity concept (or separate entity concept, or just entity concept). Definition Business entity concept: A business is a separate entity from its owner. Although this may seem illogical and unrealistic you must try to appreciate it, as it is the basis of a fundamental rule of accounting, which is that the liabilities plus the equity of the business must always equal its assets. We will look at this rule in more detail later in this chapter, but a simple example now will clarify the idea of a business as a separate entity from its owners. Context example: The business as a separate entity On 1 July 20X6, Charlie opened a flower stall. They had saved up 2,500 and opened a business bank account with this amount. When the business commences, an accountant s picture can be drawn of what it owns and what it owes. The business begins by owning the cash that Charlie has put into it, 2,500. The business is a separate entity in accounting terms. It has obtained assets, in this example cash, from Charlie. It therefore owes this amount of money to Charlie. If Charlie changed their mind and decided not to go into business, the business would be dissolved by the repayment of cash to Charlie. Definition Capital: The Conceptual Framework states that capital (which it calls equity in the context of a company, as we shall see in Chapter 1 1 ) is the residual interest in the assets of the entity after deducting all its liabilities. (Conceptual Framework: para. 4.63) Equity is a key element of financial statements. In simple terms, capital can be viewed as a measure of the owner s investment in the business. 2 The a c c o u n t i n g e q u a t i o n B Section overview The basic accounting equation states that assets capital liabilities. Capital is the amount that the entity owes to its owners. --- Trang 62 --- 2.1 What is the accounting equation Definition Accounting equation: assets capital liabilities We will use an example to illustrate the accounting equation, ie, the rule that the assets of a business will at all times equal its liabilities plus capital. This is also known as the balance sheet equation. 2.2 Assets capital liabilities Context example: Assets capital Continuing from The business as a separate entity example above, the business began by owning the cash that Charlie has put into it, 2,500. The business is a separate entity in accounting terms and so it owes the money to Charlie as capital. In accounting, capital is an investment of money (funds) with the intention of earning a return. A business owner invests capital with the intention of earning profit. As long as that money is invested, accountants will treat the capital as money owed to the owner by the business. When Charlie sets up the business: Cash at bank 2,500 Capital invested 2,500 We can express Charlie s initial accounting equation as follows: For Charlie, as on 1 July 20X6: Assets Capital Liabilities 2,500 (cash at bank) 2,500 0 Context example: Different types of assets capital Charlie purchases a market stall for 1, 800. They also purchase some flowers from a trader in the wholesale market, at a cost of 650. This leaves 50 in cash, after paying for the stall and goods for resale, out of the original 2,500. Charlie keeps 30 in the bank and holds 20 in small change for trading. They are now ready for their first day of market trading on 3 July 20X6. The assets and liabilities of the business have now altered, and on 3 July, before trading begins, the state of their business is as follows: Assets Capital Liabilities Stall 1,800 2,500 0 Flowers 650 Cash at bank 30 Cash in hand 20 2,500 The stall and the flowers are physical items, but they must be given a money value. This money value is usually what they cost the business (called historical cost in accounting terms). --- Trang 63 --- Professional skills focus: Structuring problems and solutions Understanding the accounting equation now will help you when we meet more complicated transactions later in Accounting. Writing a transaction out in terms of the accounting equation will help to ensure that the transaction is in balance when we record it in the financial statements, which increases the chance that it is accurately reflected. 2.3 Where do profits/losses fit into the accounting equation Context example: Assets capital profit On 3 July Charlie sells all the flowers for 900 cash. Since Charlie has sold goods costing 650 to earn income of 900, we can say that they have earned a profit of 250 on the day s trading. Profits are added to the owner s capital. In this case, the 250 belongs to Charlie. However, so long as the business retains the profits and does not pay anything out to its owner, the retained profits are accounted for as an addition to the owner s (Charlie) capital. Assets Capital Liabilities Stall 1,800 Original investment 2,500 Flowers 0 Cash in hand and at bank (30 20 900) 950 Retained profit (900 - 650) 250 2,750 2,750 We can re-arrange the accounting equation to help us to calculate the capital balance. Assets - liabilities (net assets) Capital At the beginning and end of 3 July 20X6, Charlie s financial position was as follows: Net assets Capital (a) At the beginning of the day: (2,500-0) 2,500 2,500 (b) At the end of the day: (2,750-0) 2,750 2,750 There has been an increase of 250 in net assets, which is the amount of profit earned during the day. Definitions Profit: The excess of income over expenses. Loss: The excess of expenses over income. Income: Income is increases in assets or decreases in liabilities that result in increases in equity (capital), other than those relating to contributions from holders of equity claims. (Conceptual Framework , para. 4.68) It can include both revenue and gains. Expenses: Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims. (Conceptual Framework: para. 4.69) Thus: (cid:127) profits are added to owner s capital (cid:127) losses are deducted from owner s capital Note: The Conceptual Frame work identifies income and expenses, and assets, liabilities and equity, as the elements of financial statements. Each element represents a class of transactions or other events that are grouped together according to their economic characteristics. --- Trang 64 --- 2.4 Appropriation of profits: sole trader drawings The owner of a sole tradership does not get paid a wage; they draw out or appropriate some of their capital as drawings. Definition Drawings: Money and goods taken out of a business by its owner. Professional skills focus: Assimilating and using information It is important for you to remember that any assets taken from a business by its owner are classified as drawings. The information in a question may not always refer to the term drawings, but you are expected to read the information carefully to determine that the owner has extracted assets and therefore such a transaction should be recorded as drawings. fit Context example: Appropriations of profit Business owners, like everyone else, need income for living expenses. Charlie therefore decides to take 1 80 from the business in wages . The payment of 1 80 is regarded by Charlie as a fair reward fortheir day s work and they might think of the sum as wages . However, the 180 Charlie draws is not an expense to be deducted in arriving at the figure of net profit because any amounts paid by a business to its owner are treated by accountants as withdrawals or appropriations of profit and not as expenses incurred by the business. In the case of Charlie s business, the true position is: Net profit earned by the business 250 Less profit withdrawn by Charlie (180) Net profit retained in the business Profits are capital as long as they are retained in the business. Once they are appropriated, the business suffers a reduction in capital. The withdrawals of profit are taken in cash, and so the business loses 1 80 of its cash assets. After the withdrawal has been made, the accounting equation would be restated. Assets Capital Liabilities Stall 1,800 Flowers 2,570 2,570 (b) Alternatively Net assets Capital (2,570-0) 2,570 The increase in net assets since trading operations began is now only (2,570 - 2,500) 70, which is the amount of the retained profits. --- Trang 65 --- Context example: Assets capital On 1 0 July Charlie purchases flowers for cash, at a cost of 740. Charlie decides to employ their cousin for a wage of 40 for the day. After the purchase of the goods for 740 the accounting equation is: Assets Capital Liabilities Stall 1,800 Flowers 740 Cash (770 -740) 30 2,570 2,570 0 On 1 0 July, all the flowers were sold for 1, 1 00 cash, and Charlie s cousin is paid 40. The profit for the day is calculated as follows: Sales 1,100 Less cost of sales 740 Wages 40 (780) Profit 320 Assets Capital Liabilities Stall 1,800 At beginning of 1 0 July 2,570 Flowers 0 Profits earned on 1 0 July 320 Cash (30 1,100-40) 1,090 2,890 2,890 0 Charlie has also decided to withdraw 200 in cash, therefore retained profits will be only (320 - 200) 120. Assets Capital Liabilities Stall 1,800 At beginning of 1 0 July 2,570 Flowers 0 Retained profits for 1 0 July 1 20 Cash (1,090 -200) 890 2,690 2,690 Interactive question 1 : Capital Fill in the missing words. Capital less --- Trang 66 --- 3 Credit transactions B Section overview (cid:127) A creditor is any party to whom the entity owes money. (cid:127) A trade payable is a creditor which has arisen following a purchase on credit by the entity. (cid:127) A trade payable is a liability of the entity. (cid:127) A debtor is any party who owes money to the entity. (cid:127) A trade receivable is a debtor which has arisen following a sale on credit by the entity. (cid:127) A trade receivable is an asset of the entity. (cid:127) The matching or accruals concept requires that income is matched with the expenses incurred in earning it. This concept is the reason why we account for credit transactions before they are realised in the form of cash. 3.1 Trade payables Definition Creditor: A party (normally an individual, another business or a financial institution) to whom a business owes money. A trade creditor is a party to whom a business owes money for trading debts. In the accounts of a business, debts still outstanding which arise from the purchase from suppliers of materials, components or goods for resale are called trade payables. A business does not always pay immediately for goods or services it buys. It is common business practice to make credit purchases, with a promise to pay within 30/60/90 days, of the date of the bill or invoice for the goods. For example, Acorn buys goods costing 2,000 on credit from Branch, Branch sends Acorn an invoice for 2,000, dated 1 March, with credit terms that payment must be made within 30 days. If Acorn then delays payment until 31 March, Branch will be a creditor of Acorn between 1 and 31 March for 2,000. From Acorn s point of view, the amount owed to Branch is a trade payable. A trade payable is a liability of a business. When the debt is finally paid, the trade payable disappears as a liability and the balance of cash at bank and in-hand decreases. Definition Trade payables: The amounts due to credit suppliers. 3.2 Trade receivables Definition Debtor: A party who owes money to the business. A trade debtor is a party from whom a business is owed money for trading debts. Suppose that Cedar sells goods on credit to Diggy for 6,000 on terms that the debt must be settled within two months of the invoice date, 1 October. Diggy will be a debtor of Cedar for 6,000 from 1 October until the date payment is made. In the accounts of the business, amounts owed by debtors are called trade receivables. A trade receivable is an asset of a business. When the debt is finally paid, the receivable disappears as an 1 asset, to be replaced by cash at bank and in hand . Definition Trade receivables: The amounts owed by credit customers. --- Trang 67 --- Worked example: Assets capital liabilities Look at the consequences of the following transactions in the week to 1 7 July 20X6. (See Worked example: Assets capital for the situation as at the end of 1 0 July.) (1) Charlie realises more money is needed for the business and so makes the following arrangements. (a) Invests a further 250 of their own capital. (b) Persuades her uncle to lend the business 500. Charlie s uncle agrees that the loan can be repaid at a later date but, in the meantime, an interest of 5 per week should be paid on the loan. They both agree that it will probably be quite a long time before the loan is eventually repaid in full. (2) Charlie decides to buy a van to pick up flowers from the supplier and bring them to the market stall. A car dealer agrees to sell a van on credit for 700. Charlie agrees to pay for the van after 30 days trial use. (3) During the week, Charlie pays 300 in cash to purchase garden furniture for sale to a customer. The furniture is delivered straight to the customer which will pay 350 at the end of the month. (4) Charlie buys flowers costing 800. Of these purchases 750 are paid in cash, with the remaining 50 on seven days credit. Charlie decides to use their cousin s services again, at an agreed wage of 40 for the day. (5) On 1 7 July, Charlie sells all the goods, for 1, 250 (cash). Charlie decides to withdraw 240 fortheir week s work. Charlie also pays their cousin 40 in cash and decides to make the interest payment to their uncle soon. (6) There are no van expenses for the week. Solution Deal with transactions one at a time in chronological order. (In practice, it is possible to do one set of calculations which combines all transactions.) (1) The addition of Charlie s extra capital and the loan received An investment analyst might call the loan a capital investment, on the grounds that it will probably be for the long term. However, Charlie s uncle is not the owner of the business simply as a result of providing the loan. To the business, Charlie s uncle is a long-term creditor, and it is appropriate to define the loan provided as a liability and not business capital. The accounting equation after (250 500) 750 cash is put into the business will be: Assets Capital Liabilities As at end of Stall 1,800 1 0 July 2,690 Loan 500 Additional Goods 0 capital 250 Cash (890 750) 1,640 3,440 2,940 500 (2) The purchase of the van (cost 700) on credit Assets Capital Liabilities Stall 1,800 As at end of 1 0 July 2,690 Loan 500 Van 700 Additional capital 250 Payables 700 Cash 1,640 4,140 2,940 1,200 (3) The sale of goods to Uncle on credit ( 350) which cost the business 300 (cash paid) --- Trang 68 --- Assets Capital Liabilities Stall 1,800 As at end of 1 0 July 2,690 Loan 500 Van 700 Additional capital 250 Payables 700 Receivable 350 Profit on sale (350 - 300) 50 Cash (1,640 -300) 1,340 4,190 2,990 1,200 (4) After the purchase of goods for the weekly market ( 750 paid in cash and 50 of purchases on credit) Assets Capital - Liabilities Stall 1,800 As at end of 1 0 July 2,690 Loan 500 Van 700 Additional capital 250 Payables (van) 700 Payables Goods (750 50) 800 Profit on sale 50 (goods) 50 Receivable 350 Cash (1,340-750) 590 4,240 2,990 h 1,250 (5) After market trading on 1 7 July Goods costing 800 earned income of 1 ,250 in cash. Charlie s cousin s wages were 40 (paid), the loan interest charge is 5 (not paid yet) and drawings were 240 (paid). The profit for 1 7 July may be calculated as follows, taking the full 5 of interest as a cost on that day. Sales 1,250 Cost of sales 800 Wages Interest (845) Profit earned on market trading on 1 7 July 405 Profit on sale of goods to Uncle 50 Profit for the week 455 Drawings (240) Retained profit 215 Assets Capital Liabilities As at end of 1 0 Stall 1,800 July 2,690 Loan 500 Additional Van 700 capital 250 Payables (van) 700 Goods (800 - 8 0 0 ) Profits retained 215 Payables (goods) 50 Receivable 350 Payables (interest) 5 --- Trang 69 --- Cash (590 1,250 -40-240) 1,560 4,410 1,255 3.3 Accruals concept The accruals (or matching) concept requires that income earned is matched with the expenses incurred in earning it. 1 In Charlie s case, we have matched the income earned with the expenses incurred in earning it. So, in part (e), we included all the costs of the goods sold of 800, even though 50 had not yet been paid in cash. Also, the interest of 5 was deducted from income even though it had not yet been paid. Interactive question 2: The accounting equation How would each of these transactions affect the accounting equation in terms of increase or decrease in asset, capital or liability (1) Purchasing 800 worth of goods on credit (2) Paying the telephone bill 25 (3) Selling 450 worth of goods for 650 (4) Paying 800 to a supplier We shall look now at how the business entity concept and accruals concept together result in the statement of financial position. 4 The s t a t e m e n t of financial p o s i t i o n Section overview (cid:127) The statement of financial position shows the entity s financial position at a particular moment in time. (cid:127) The statement of financial position represents the accounting equation: assets are in one half and capital and liabilities in the other. (cid:127) The more detailed accounting equation, represented in the IAS 1 format for the statement of financial position, states that non-current assets current assets capital profit - losses - drawings non- current liabilities current liabilities. (cid:127) Net assets assets - liabilities, therefore net assets capital. (cid:127) A non-current asset is acquired for long term use in the business, with a view to earning profits from its use, either directly or indirectly. (cid:127) Non-current assets may be tangible (with a physical reality) or intangible. (cid:127) Current assets are either cash or items which are held by the entity to be turned into cash shortly. (cid:127) Capital comprises opening capital capital introduced profits - losses - drawings of capital/profits taken by the owners. (cid:127) Non-current liabilities are payable after one year, such as secured loans. (cid:127) Current liabilities are payable within one year, such as trade payables and bank overdrafts. 4.1 What is a statement of financial position The business s statement of financial position shows its liabilities, capital and assets at a point in time. It is a financial snapshot of the position of the business at the end of the reporting period to which the financial statements relate. --- Trang 70 --- A statement of financial position is very similar to the accounting equation. In fact, the only differences between a statement of financial position and an accounting equation are: (cid:127) the manner or format in which the liabilities and assets are presented (cid:127) the extra detail which is usually contained in a statement of financial position The details shown in a statement of financial position will not be described in full in this chapter. Instead we will make a start in this chapter and add more detail in later chapters as we go on to look at other ideas and methods in accounting. A statement of financial position is divided into two halves, and is presented in either of the following ways: (cid:127) capital and liabilities in one half and assets in the other (the IAS 1 format that we adopt in this Workbook) (cid:127) capital in one half and net assets in the other (the UK GAAP format for the balance sheet that is looked at in Chapters 1 4 and 1 5) Professional skills focus: Assimilating and using information The statement of financial position is the first primary financial statement we have met in Accounting. Over the course of the Accounting module, you will develop your skills in using the information provided in a question to prepare the primary financial statements, including the statement of financial position. Definition Net assets: Assets less liabilities In this Workbook we will follow the assets capital liabilities format given by IAS 1 , Presentation of Financial Statements. Name of business Statement of financial position as at (date) Assets (item by item) Capital Liabilities X X The total amount in one half of the statement of financial position equals the total amount in the other half. Since each half of the statement of financial position has an equal amount, one side balances the other. Assets, capital and liabilities are usually shown in some detail in a statement of financial position. The following paragraphs describe the sort of detail we might expect to find. 4.2 Assets The statement of financial position distinguishes between non-current assets and current assets (again as required by IAS 1 ). (cid:127) Non-current assets are acquired for long-term use within the business. They are normally carried at cost less accumulated depreciation. (cid:127) Current assets are expected to be converted into cash within one year. 4.2.1 Non-current assets Definition Non-current assets: Assets acquired for continuing use within the business, with a view to earning income or making profits from their use, either directly or indirectly, over more than one reporting period. Non-current assets in the statement of financial position usually comprise: --- Trang 71 --- 1 (cid:127) property, plant and equipment (ie, tangible assets) (cid:127) right of use assets (cid:127) intangible assets such as patents and licences (cid:127) long-term investments A non-current asset is not acquired for sale to a customer. (cid:127) Ina manufacturing industry, a production machine is a non-current asset, because it makes goods which are then sold. (cid:127) Ina service industry, equipment used by employees giving service to customers is a non-current asset (eg, the equipment used in a garage, or furniture in a hotel). (cid:127) Less obviously, factory premises, office furniture, computer equipment, company cars, delivery vans or pallets in a warehouse are all non-current assets. To be classed as a non-current asset in the business s statement of financial position, an item must satisfy two further conditions. (cid:127) It must be used by the business. For example, the owner s own house would not normally appear on the business statement of financial position. (cid:127) The asset must have a life in use of more than one reporting period or year. A tangible non-current asset is a physical asset that can be touched. All of the examples of non-current assets mentioned above are tangible assets. They are often referred to as property, plant and equipment. 1 Intangible non-current assets do not have a physical existence; they cannot be touched . Examples are, a patent, which protects an idea and, a licence, which permits the holder to operate in a certain area or use an asset in a particular way. An investment can also be a non-current asset. Company A might invest in another company, B, by purchasing some of B s shares. These investments will earn income for A in the form of dividends paid out by B. If the investments are purchased by A with a view to holding on to them for more than one year, they would be classified as non-current assets of A. In this chapter, we shall restrict our attention to tangible non-current assets. 4.2.2 Non-current assets and depreciation Non-current assets are held and used by a business for a number of years, but they wear out or lose their usefulness in the course of time. Every tangible non-current asset has a limited life, known as the useful life to the business. This is not necessarily the same as the total life of the asset. For example, a well-maintained car might expect to have a total life of ten years but, if a business plans to replace the car after five years, its useful life to the business is only five years. The exception to having a useful life is freehold land, although this too can be exhausted if it is used by extractive industries (eg, mining). The financial statements of a business reflect that the cost of a non-current asset is gradually consumed as the asset is used over its useful life. This is done by gradually writing off the asset s cost in the statement of profit or loss over several reporting periods. For example, in the case of a machine costing 1, 000 and expected to wear out after 1 0 years, it is appropriate to reduce the value in the statement of financial position by 100 each year. This process is known as depreciation. If a statement of financial position were drawn up four years after the asset was purchased, the amount of depreciation accumulated over four years would be 4 x 1 00 400. The machine would then appear in the statement of financial position as follows: Machine at original cost 1 ,000 Less accumulated depreciation (400) Carrying amount 600 ie, the value of the asset in the financial accounts, net of accumulated depreciation. After 1 0 years the asset would be fully depreciated and would appear in the statement of financial position with a carrying amount of zero. The amount that is written off over time does not have to be the full cost of the asset if it is expected to have a resale - or residual - value at the end of its useful life. --- Trang 72 --- Professional skills focus: Applying judgement Determining the useful life and residual value of non-current assets is a matter of judgement for 1 accountants. It is important to note that a longer useful life and higher residual value will increase a business profits and net assets, which will make the performance and position of the business appear favourable. However, recall what we said about true and fair view . The accountant must select the useful life and residual value that most accurately reflects how the asset will be used and what it will be worth at the end of its life. Interactive question 3 : Residual value Suppose a business buys a car for 10,000. It expects to keep the car for three years and then to sell it for 3,400. Requirement What amount of depreciation should be accounted for in each year of the car s useful life We shall study non-current assets in detail in Chapter 10. 4.2.3 Current assets Current assets take one of the following forms. (cid:127) Items owned by the business with the intention of turning them into cash in a short time, usually within one year (see the worked example below). (cid:127) Cash, including money in the bank, owned by the business. These assets are current in the sense that they are continually flowing through the business; they are always realisable in the near future. Definition Current asset: An asset is current when it is expected to be realised in, or intended for sale or consumption in, the entity s normal operating cycle, or it is held for being traded, or it is expected to be realised within 1 2 months of the date of the statement of financial position, or it is cash or a cash equivalent. Context example: Current assets A sole trader runs a business selling cars. They purchase a showroom, which is stocked with cars for sale. The cars are purchased from a manufacturer and paid for in cash on delivery. (cid:127) If the sole trader sells a car in a cash sale, the goods are immediately converted into cash. The cash can then be used to buy more cars for resale. (cid:127) If the sole trader sells a car in a credit sale, the car will be given to the customer, who then becomes a trade receivable. Eventually, the customer will pay what they owe and the sole trader will receive cash. Once again, the cash can then be used to buy more cars for resale. Current assets are as follows: (cid:127) The cars (goods) held in inventory for resale are current assets, because the sole trader intends to sell them within one year in the normal course of trade. (cid:127) Any trade and other receivables are current assets, if they will be paid within the usual cash operating cycle of less than one year. (cid:127) Cash is a current asset. Interactive question 4: Asset classification Identify which of the following assets falls into the non-current category and which should be treated as current. Could any be treated as either --- Trang 73 --- Asset Business Current or non-current Van Delivery firm Machine Manufacturing company Car Car trader Investment Any Cars are current assets for the sole trader because they are in the business of buying and selling them, ie, the sole trader is a car trader. If the sole trader decides to keep one of the cars and use it for business purposes, this car would be a non-current asset. The distinction between a non-current asset and a current asset is not what the asset is physically, but for what purpose it is obtained and used by the business. There are some other categories of current asset. (cid:127) Short-term investments. These are stocks and shares of other businesses, owned with the intention of selling them in the near future. For example, if a business has a lot of spare cash for a short time, its managers might decide to invest short term in the stock exchange. The shares will later be sold when the business needs the cash. If share prices rise in the meantime, the business will make a profit from its short-term investment. Such shares must be readily realisable (ie, easy to sell) to be short term. (cid:127) Prepayments. These are amounts of money paid by the business in one reporting period for benefits which have not yet been enjoyed, but which will be enjoyed within the next reporting period. For example, a business pays an annual insurance premium of 240, and the premium is payable annually in advance at 1 December. If the business has an accounting year end of 31 December, it will pay 240 at 1 December but only enjoy one month s insurance cover by the year end. The remaining 1 1 months cover ( 220 cost, at 20 per month) will be enjoyed in the next year. The prepayment of 220 is shown in the statement of financial position, at 31 December, as a current asset. Prepayments will be described more fully in Chapter 9. 4.2.4 Trade and other receivables A receivable can be due from any entity that owes the business money. For example, if a business makes an insurance claim, the insurance company is a receivable for the money payable on the claim. If the business makes loans to staff to buy rail season tickets, staff are receivables for the amount outstanding. A distinction can be made between two types of receivables. (cid:127) Trade receivables represent customers who owe money for goods or services bought on credit in the course of the trading activities of the business. (cid:127) Other receivables are due from anyone else owing money to the business, such as an insurance company, HMRC for VAT, or employees for season ticket loans. 4.3 Capital (sole trader) The sole trader s capital is usually analysed into its component parts. Capital at the beginning of the reporting period (ie, capital brought forward) X Add additional capital introduced during the period X X Add profit earned during the period (or less losses incurred in the period) X Less drawings (X) Retained profit for the period X Capital as at the end of the reporting period (ie, capital carried forward) X --- Trang 74 --- 1 Brought forward means that the amount is brought forward from the previous period. Similarly, carried forward means carried forward to the next period. The carried forward amount at the end of one period is therefore the brought forward amount of the next period. 4.3.1 Equity (company) The capital or equity side of a company s statement of financial position is more complicated than a sole trader s. We shall look at it in detail in Chapter 1 1 . 4.4 Liabilities A distinction is required by IAS 1 in the statement of financial position between non-current liabilities and current liabilities. (cid:127) Current liabilities are debts which are payable within one year. (cid:127) Non-current liabilities are debts which are payable after one year. 4.4.1 Non-current liabilities Definition Non-current liability: A debt which is not payable within one year. Any liability which is not current must be non-current. Examples of non-current liabilities are below: (cid:127) Loans which are not repayable for more than one year, such as a bank loan or a loan from an individual to a business. (cid:127) Loan stock or debentures. These are common with limited companies. Loan stocks or debentures are securities issued by a company at a fixed rate of interest. They are repayable on agreed terms by a specified date in the future. Holders of loan stocks are therefore lenders of money to a company. Their interests, including security for the loan, are protected by the terms of a trust deed. If the loan is repayable over several years, then the portion repayable within one year is shown as a current liability (see below). 4.4.2 Current liabilities Definition Current liabilities: Debts of the business that must be paid within one year, or within the entity s normal operating cycle, or that are held to be traded. Examples of current liabilities include: (cid:127) loans repayable within one year, including the element of a long-term loan that is repayable within one year. (cid:127) a bank overdraft, which is usually repayable on demand. (cid:127) trade payables represent suppliers to which the business owes money for goods or services bought on credit as part of the business s trading activities. (cid:127) other payables due to anyone else to whom the business owes money, such as HM Revenue and Customs (HMRC) in respect of VAT, pension trustees in respect of pension contributions, and employees in respect of unpaid remuneration, for example sales commissions. (cid:127) taxation payable to HMRC with respect to corporation tax on the company s profits. (cid:127) accruals. These are expenses already incurred by the business, for which no invoice has yet been received, or for which the date of payment has not yet arrived. An example of accrued charges is the cost of gas or electricity used. If a business ends its accounting year at 31 December but does not expect its next quarterly gas bill until the end of January, there will be two months of accrued gas charges to record in the statement of financial position as a liability. Accruals will be described more fully in Chapter 9. --- Trang 75 --- 5 Preparing t h e s t a t e m e n t of financial p o s i t i o n B Section overview (cid:127) The statement of financial position lists out and totals non-current plus current assets, then it lists out and totals capital plus non-current liabilities plus current liabilities. 5.1 How is a basic statement of financial position prepared We shall now look at how the various types of assets and liabilities are shown in a business s statement of financial position (IAS 1 format). You might like to attempt to prepare it yourself from the information provided before reading the solution which follows. k Worked example: Statement of financial position Prepare a statement of financial position for Sunken Arches as at 31 December 20X6, given the information below. Capital as at 1 January 20X6 51,100 Profit for the year to 31 December 20X6 8,000 Premises, carrying amount at 31 December 20X6 50,000 Motor vehicles, carrying amount at 31 December 20X6 9,000 Fixtures and fittings, carrying amount at 31 December 20X6 8,000 Non-current loan 25,000 Bank overdraft 2,000 Inventories 16,000 Trade receivables 500 Cash in hand 1 00 Trade payables 1,200 Drawings 4,000 Accrued costs of rent 600 Prepayment of insurance premium 300 A shop might have cash in its cash registers, but an overdraft at the bank. Solution Sunken Arches Statement of financial position as at 31 December 20X6 ASSETS Non-current assets Property, plant and equipment Premises 50,000 Fixtures and fittings 8,000 Motor vehicles 9,000 67,000 --- Trang 76 --- Current assets Inventories 16,000 Trade and other receivables 500 Prepayments 300 Cash and cash equivalents 100 16,900 Total assets 83,900 CAPITAL A N D LIABILITIES Capital As at 1 January 20X6 51,100 Profit for the year 8,000 Less drawings (4,000) O n 31 December 20X6 55,100 Non-current liabilities Long-term borrowings 25,000 Current liabilities Short-term borrowings (bank overdraft) 2,000 Trade and other payables 1,200 Accrued costs 600 3,800 Total capital and liabilities 83,900 The layout is in the preferred format from IAS 1 , adapted for a sole trader, and we will use it throughout this Workbook, for sole traders as well as companies, until we look at UK GAAP in Chapters 1 4 and 1 5. Interactive question 5 : Preparing a statement of financial position I You are given the following information for Charlie at the end of their first full month of trading, 31 July 20X6: Capital as at 1 July 20X6 2,500 Additional capital introduced 250 Profit for the month 3,620 Stall at cost 1,800 Van at cost 700 Drawings in month 960 Loan 50 Inventories 1,250 Cash in hand 2 0 Trade payables 675 Cash at bank 1,475 Trade receivables 890 --- Trang 77 --- Requirement Prepare a statement of financial position for Charlie as at 31 July 20X6. 6 The statement of p r o f i t or loss Ml Section overview (cid:127) The statement of profit or loss sets out the entity s financial performance over a period of time. (cid:127) It matches income and expenses to arrive at a figure for profit or loss. (cid:127) Trading income less the costs of trading represents gross profit. (cid:127) Gross profit less expenses represents net profit. (cid:127) Profit for the period per the statement of profit or loss is added to the capital section in the statement of financial position; drawings are deducted as appropriations of profit in order to arrive at the owner s total capital. 6.1 What is the statement of profit or loss The statement of profit or loss is a statement in which two key elements of financial statements - income and expenses - are matched to arrive at profit or loss. Many businesses distinguish between: (cid:127) gross profit earned on trading (revenue less cost of sales) (cid:127) profit for the period (sometimes referred to as net profit) after other income and expenses In the first part of the statement of profit or loss revenue from selling goods is compared with direct costs of acquiring or producing the goods sold to arrive at a gross profit figure. From this, deductions are made in the second half of the statement (which we will call the expenses section) in respect of indirect costs (overheads). Additions may also be made to gross profit in respect of non-trading income. Gross profit revenue from sales, less cost of sales Profit for the period gross profit less expenses plus non-trading income Business owners want to know how much profit or loss has been made, but there is only limited information value in the profit figure. In order to exercise financial control effectively, managers must know how much revenue and other income has been earned, what costs have been, and whether the performance of sales or the control of costs appears to be satisfactory. The statement of profit or loss matches income earned to the expenses of earning that income. This is why prepayments and accrued expenses appear in the financial statements. Prepayments are excluded from expenses in the statement of profit or loss and are included in receivables in the statement of financial position, because they relate to future periods. Accrued expenses are added to expenses in the statement of profit or loss and shown as payables in the statement of financial position, because they relate to the current period but have not been paid as cash in the period. 6.1.1 Gross profit Gross profit is the difference between: (cid:127) the value of sales revenue; and (cid:127) the purchase or production cost of the goods sold: cost of sales. In a retail business, the cost of the goods sold is their purchase cost from suppliers. In a manufacturing business, the production cost of goods sold is the cost of raw materials in the finished goods, plus labour costs required to make the goods, plus an amount of production overhead costs. In many types of business, the cost of sales also includes: --- Trang 78 --- (cid:127) the cost of employing those people directly involved in making or providing a service (cid:127) maintenance and depreciation on non-current assets used directly in making sales, plus losses on their disposal Gross profit represents the profit made directly from the sale of goods or services. It can be represented as a percentage of revenue, called the gross profit margin. Gross profit ___ Gross profit margin - ------------ x 100% Revenue The gross profit margin can be used to compare the results of different periods to see how well the costs of sales are being controlled as revenue changes. It can also be used to compare the results of different businesses in the same industry. We shall see more about margins in Chapter 7. 6.1 .2 Profit for the period The second part of the statement of profit or loss shows the net profit for the reporting period. The net profit is: Gross profit X Plus any other income from sources otherthan the sale of goods X Minus other business expenses, not included in the cost of goods sold QQ X Income from other sources will include: (cid:127) profit on disposals of non-current assets (cid:127) dividends or interest received from investments (cid:127) rental income from property owned but not otherwise used by the business (cid:127) amounts due in respect of insurance claims Business expenses not directly related to cost of sales appear in the statement of profit or loss under one of three headings: Distribution costs Administrative costs Finance costs Expenses associated with selling Expenses of providing Expenses associated with funding and delivering goods to management and administration such as bank loans. customers. for the business. For example: For example: For example: (cid:127) salaries, wages and sales (cid:127) management and office staff (cid:127) interest on loans commission of marketing and salaries (cid:127) bank overdraft interest distribution staff (cid:127) rent and local business or (cid:127) marketing costs (eg, property taxes advertising and sales (cid:127) insurance promotion expenses) (cid:127) cloud-accounting software (cid:127) the costs of running and fees maintaining delivery vans, (cid:127) printing and stationery including depreciation on these and any losses on their (cid:127) heating and lighting disposal (cid:127) irrecoverable debts written off or increases in allowance for receivables. Sometimes customers fail to pay what they owe and a business has to decide to write the debt off create an allowance in respect --- Trang 79 --- of the amounts that are unlikely to be collected. Bad debts and allowances for receivables are described more fully in Chapter 8. (cid:127) the cost of running and maintaining other non-current assets such as office buildings, plus depreciation and losses on disposal of these. At this stage of your studies, you should list out all expenses when calculating profit or loss for the year. In Chapter 12 we will consider the presentation requirements under IAS 1, Preparation of Financial Statements. Context example: Preparing a statement of profit or loss At 1 June 20X5, Jasprit commenced trading as an ice cream trader, using a van. (cid:127) Jasprit borrowed 2,000 from the bank, and the interest cost of the loan was 25 per month. (cid:127) Jasprit rented the van for 1, 000 for three months. Running expenses for the van averaged 300 per month. (cid:127) Jasprit hired an assistant for 100 per month. (cid:127) Jasprit s main business was to sell ice cream to customers in the street, but Jasprit also did special catering for business customers, supplying ice creams for office parties. Sales to these customers were usually on credit. (cid:127) For the three months to 31 August 20X5, Jasprit s total sales were as follows: - Cash sales 8,900 - Credit sales 1, 1 00 (cid:127) Jasprit purchased the ice cream from a local manufacturer, Floors Co. The purchase cost in the three months to 31 August 20X5 was 6,200, and at 31 August Jasprit had sold every item. Jasprit still owed 700 to Floors Co for unpaid purchases on credit. (cid:127) One of Jasprit s credit sale customers has gone bankrupt (insolvent), owing Jasprit 250. Jasprit has decided to write off the debt in full, with no prospect of getting any of the money owed. (cid:127) Jasprit used their own home to complete office work. Telephone and postage expenses for the three months to 31 August were 150, which he paid in cash. (cid:127) During this period Jasprit paid themself 300 per month. A statement of profit or loss can be presented in various formats, but here we will use a vertical format similar to the one used in IAS 1 . (It is not exactly the same.) --- Trang 80 --- Jasprit Statement of profit or loss for the three months ended 3 1 August 20X5 Revenue (8,900 1,100) 10,000 Cost of sales (6,200) Gross profit 3,800 Expenses Wages (3 x 100) 300 Van rental 1,000 Van expenses (3 x 300) 900 Irrecoverable debt written off 250 Telephone and postage 150 Interest charges (3 x 25) 75 (2,675) Profit for the period 1,125 6.2 Relationship between the statement of profit or loss and the statement of financial position The profit for the period is the amount by which income exceeds expenses during the reporting period. For a sole trader it is transferred to the statement of financial position as an addition to the owner s capital. A loss for the period, whereby expenses exceed revenue, would be transferred as a deduction from capital in the statement of financial position. Drawings are appropriations of profit and not expenses. They must not be included in the statement of profit or loss. The payments that Jasprit makes to himself ( 900) are shown as deductions from capital in the statement of financial position. The cost of sales is 6,200, even though 700 of the costs have not yet been paid for. The 700 owed to Floors Co will be shown in the balance sheet as a trade payable. This is an example of the accruals concept. Interactive question 6: Preparing a statement of financial position II Prepare a statement of financial position as at 31 August 20X5 for Jasprit, using the information from the Worked example above. --- Trang 81 --- Summary Current liabilities (cid:127) Overdraft (cid:127) Payables Liabilities (cid:127) Tax Non-current liabilities (cid:127) Loans Current assets (cid:127) Cash Assets (cid:127) Inventory Non-current assets (cid:127) Receivables (cid:127) Land and building (cid:127) Vehicle (cid:127) Plant and machinery Capital introduced (cid:127) Fixtures and fittings Profits - Losses - Drawings Business entity concept Accounting equation Assets Liabilities Accruals concept Credit transactions Sales Purchases Payables Receivables Statement of financial Statement of profit or loss position Revenue Non-current assets Cost of sales (X) Current assets X Gross profit X Total assets X Expenses (X) Opening capital X Other income _X Capital introduced X Profit for the period X X Drawings (X) Closing capital X Non-current liabilities X Current liabilities X Total capital and liabilities X Further question practice Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 82 --- Confirm your learning Can you write out the accounting equation (Topic 2) 2 Do you know what the terms receivable and payable mean (Topic 3) Can you name each of the sections in the Statement of Financial Position (Topic 4) How do you calculate gross profit (Topic 6) What is the relationship between the Statement of Profit or Loss and the Statement of Financial Position (Topic 6) 2 Chapter Self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the 1 questions in The accounting equation chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. Technical references (cid:127) Basic format of the statement of financial position and statement of profit or loss - IAS 1, Illustrative Guidance (cid:127) Elements of financial statements - Conceptual Framework, paras. 4.1 to 4.2 (cid:127) Definition of asset - Conceptual Framework, paras. 4.3 to 4.4 (cid:127) Definition of liability - Conceptual Framework, paras. 4.26 to 4.27 (cid:127) Definition of equity - Conceptual Framework, para. 4.63 (cid:127) Definition of income, expense - Conceptual Framework, paras. 4.68 to 4.69 (cid:127) Current/non-current distinction in the statement of financial position - IAS 1 , paras. 60 to 61 (cid:127) Definition of current asset - IAS 1 , para. 66 (cid:127) Definition of current liability - IAS 1 , para. 69 Self-test questions Answer the following questions. 1 Which of the following is an asset A Atrade payable B A loan C Drawings D A prepayment --- Trang 83 --- 2 Which of the following is a liability A Depreciation B An accrual C Cash at bank D Plant and machinery 3 Capital is the amount: A The entity s owners owe to the entity B The entity s customers owe to the entity C The entity owes to its creditors D The entity owes to its owners 4 Which two of the following are assets of an entity A Trade payables B Trade receivables C Bank overdraft D Cash in hand E Funds introduced by the owner 5 Which of the following best describes the application of the accruals concept A Assets are matched with liabilities B Income is matched with expenses C Expenses are matched with assets D Income is matched with liabilities 6 Which of the following is a non-current liability A A bank overdraft B A bank loan repayable within a year C A mortgage repayable in five years time D A trade payable 7 The statement of financial position sets out the entity s: A Financial position over a period of time B Financial performance over a period of time C Financial position at one point in time D Financial performance at one point in time --- Trang 84 --- 8 Which of the following expenses is included in cost of sales A Salaries of sales staff B Management salaries C Overdraft interest D Cost of raw materials 9 A business has sales of 1 00,000, cost of sales of 60,000 and expenses of 20,000. The gross profit margin is: A 60% B 40% 20% D 80% 1 0 Which figure from a sole trader s statement of profit or loss would also appear in its statement of financial position A Gross profit B Drawings C Revenue D Net profit Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 Capital Assets less liabilities Assets capital liabilities. Therefore, capital assets - liabilities Answer to Interactive question 2 Affects: ( D Increase in liabilities (payables): 800 Increase in assets (inventory): 800 --- Trang 85 --- (2) Decrease in assets (cash): 25 Decrease in capital (an expense reduces profit): 25 (3) Decrease in assets (inventory): 450 Increase in assets (cash): 650 Increase in capital (profit): 200 (4) Decrease in liabilities (payables): 800 Decrease in assets (cash): 800 Answer to Interactive question 3 It would be inappropriate to account for depreciation in such a way as to write off the cost of the asset completely over three years as the business expects the car to have a residual value of 3,400. The aim should be to match the cost of the asset, after allowing for the residual value ( 10 ,000 - 3,400 6,600) to the benefits it is expected to generate. This suggests depreciation of 2,200 per year. Answer to Interactive question 4 Asset Business Current or non-current Van Delivery firm Non-current Machine Manufacturing company Non-current Car Car trader Current Investment Any Either The classification of the investment will depend on the purpose for which it is held. If the intention is to make a non-current investment it will be a non-current asset, but if it is a short-term way of investing spare cash it will be a current asset. Answer to Interactive question 5 Statement of financial position as at 31 July 20X6 ASSETS Non-current assets Stall 1,800 Van 700 2,500 --- Trang 86 --- Current assets Inventories 1,250 Trade and other receivables 890 Cash in hand 20 Cash at bank 1,475 3,635 Total assets 6,135 CAPITAL AND LIABILITIES Capital Opening capital 2,500 Additional capital introduced 250 2,750 Profit for month 3,620 Less drawings (960) 2,660 5,410 Non-current liabilities Loan 50 Current liabilities Trade payables 675 Total capital and liabilities 6,135 Answer to Interactive question 6 Jasprit Statement of financial position as at 3 1 August 20X5 ASSETS Current assets Trade receivables (1,1 00 - 250) 850 Cash at bank and in hand (2,000 8,900 - (6,200 - 700) - - 1, 000 - 900 - 1 50 - 75 - 900) 2,075 Total assets 2,925 CAPITAL AND LIABILITIES Capital Opening capital 0 Profit for the period 1,125 Less drawings (900) Closing capital 225 --- Trang 87 --- Non-current liabilities Loan 2,000 Current liabilities Trade payables 700 Total capital and liabilities 2,925 Answers t o Self-test questions 1 D A prepayment A and B are liabilities; C is an appropriation of profit. 2 B An accrual C and D are assets, depreciation is an expense. 3 D The entity owes to its owners B is an asset while C is a liability; A is the wrong way round. A better way of thinking of capital is that it is the owners residual interest in the entity s net assets. 4 B Trade receivables D Cash in hand A and C are current liabilities; E is capital. 5 B Income is matched with expenses Application of the accruals concept is best described as the matching of income with expenses. 6 C A mortgage repayable in five years time The mortgage is repayable in more than one year s time and, therefore, is a non-current liability. The bank overdraft is repayable o n demand, a trade payable is usually paid within a year and the bank loan is repayable within one year, so these are all current liabilities. --- Trang 88 --- 7 Financial position at one point in time B describes the statement of profit or loss accurately. 8 D Cost of raw materials The others are examples of selling expenses (A), administration expenses (B) and finance cost (C). 9 B 40% Gross profit (100,000-60,000) Gross profit margin x 100% 40% X 00/ - Sales 100,000 10 D Net profit Gross profit (A) and revenue (C) are included in the calculation of net profit; drawings are appropriations of net profit that appear in the statement of financial position only. --- Trang 89 --- Chapter 3 R e c o r d i n g f i n a n c i a l t r a n s a c t i o n s Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 Computerised accounting systems 2 Source documents for recording financial transactions 3 Recording bank transactions 4 The payroll SSuummmmaarryy Further question practice Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 90 --- I n t r o d u c t i o n Learning outcomes (cid:127) Identify the sources of information for the preparation of accounting records and financial statements (cid:127) Record transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements Specific syllabus learning outcomes are: 1c, d Syllabus links The material in this chapter will be developed further throughout the Accounting module, and then in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple- response questions, some of which may involve calculations so that the correct answer can be selected. In the exam you may be required to: (cid:127) specify source documents for the accounting system (cid:127) specify how bank transactions are recorded (cid:127) calculate net or gross pay, or the amounts owed to HMRC (cid:127) calculate VAT and discounts Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Topic Practical significance Study approach Exam approach Interactive questions Computerised Approach You may get direct accounting systems questions relating to This is topic is computerised Almost all businesses theoretical so read accounting systems use computerised through the relevant or cloud accounting, accounting systems to sections, focusing on but more generally it record their financial definitions. will be assumed in transactions and prepare Stop and think other questions. their financial Can you think of any statements. Ensure you providers of cloud are comfortable with accounting what a computerised services A few are accounting package is now commonly and what is meant by advertised in the UK. cloud accounting. Source documents for Approach In the exam you may IQ2 Source recording financial be asked to specify documents Read through the transactions the source material carefully to This is a short documents used in Source documents such ensure you question that tests an accounting as invoices and credit understand the your understanding system. Questions notes have huge source documents of the source will often be worded practical significance; used in the sales documents in a credit in such a way that you failure to correctly system and sale and associated select which one record information from purchases system return of goods. from a list is NOT a source documents and what information source document. means that the contained in the --- Trang 91 --- computerised source documents accounting system needs to be outputs, including the recorded. Attempt financial statements, may the Interactive be inaccurate or question to test your incomplete. understanding. Stop and think What information is commonly included in an invoice What parts of that information are relevant for accounting purposes Recording bank Approach The exam may ask transactions you to specify how Read through the bank transactions are Business banking has information, focusing recorded. You should changed a lot in recent on the matching expect to see years. Businesses have process that is questions which state had to transition away automatically that the from the use of cash undertaken. computerised and, to a lesser extent, Stop and think accounting system card payments towards Consider what types has not been able to digital wallet payments, match certain bank of transaction the such as Apple Pay. computerised transactions so it is Businesses also now important to accounting system have the advantage of might not be able to understand which having instant and transactions will automatically match. constant access to up-to- commonly be date banking automatically information. It is matched and which important to recognise may require manual that many computerised adjustment. accounting systems will now automatically match bank transactions to other known transactions such as the settlement of trade payables. The payroll Approach In the exam you may IQ4 Payroll be required to The payroll is the source Read the material This question tests calculate net or gross document for recording and work through the your understanding pay, or the amounts the wages and salaries worked example, of which deductions owed to HMRC. You expense. You should be paying attention to are paid to HMRC. need to be familiar with some of the how the deductions comfortable with common deductions affect net pay. what comprises the taken from an Stop and think employer s payroll employee s salary (the expense and what is What gets deducted gross amount) before from your salary deducted to calculate they are paid (the net employee s net pay. before it is paid to amount). you Who are these deductions paid to Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. --- Trang 92 --- 1 Computerised accounting systems Section overview (cid:127) The majority of businesses record their financial transactions using a computerised accounting system. (cid:127) Computerised accounting systems range from simple, off-the-shelf accounting software packages used by small businesses for recording day-to-day transactions, to bespoke systems that fully integrate with other business systems in place in large and complex businesses. (cid:127) The development of cloud accounting software in recent years has changed how computerised accounting systems are used and accessed. 1 .1 Accounting system An accounting system is the system in place within a business to allow it to record, process and store financial information. An accounting system enables a business to satisfy the requirement for businesses to maintain records of their financial transactions and allows it to produce relevant and reliable information for stakeholders. Historically, accounting systems consisted of several large books in which the bookkeeper would enter each transaction by hand. A lot of the language still used in accounting, such as bookkeeper, or referring to the books of a company, stem from this way of maintaining accounting records. In Accounting, we refer to this traditional way of recording transactions, using books and pencils, as a manual accounting system. The vast majority of accounting systems are now computerised. However, accountants still need to understand the accounting principles and processes that lie within a computerised system. As such, although we will assume the use of computerised accounting systems throughout this Workbook, we will use some aspects of a manual accounting system to illustrate the accounting requirements relating to the recording, processing, summarising and reporting of financial information. At a basic level, computerised accounting systems, like all systems, have inputs, processes and outputs: Inputs J------------------ Processes -------- Outputs T t I t (cid:127) Source documents (cid:127) Ledgers (cid:127) Reports (cid:127) Standing data (cid:127) Journals (cid:127) Trial balance (cid:127) Calculations (cid:127) Financial statements (cid:127) Record keeping Figure 3.1 : Accounting System These terms will be explained in detail as we progress through the Workbook. 1 .2 Accounting software packages Accounting software packages are commonly used computerised accounting systems. Accounting software packages range from simple off-the-shelf programmes that meet the requirements of a small business, to systems that are fully integrated with businesses other systems such as inventory management and human resource management systems that are used in large and complex organisations. The largest organisations are likely to use bespoke accounting software that has been developed specifically for them. In this Workbook, we will assume that the computerised accounting system is a software package which contains several different modules such as for payroll, for managing balances owed by credit customers or for maintaining a record of non-current assets. One of the modules will be the main accounting record of the business. The modules interact with each other in such a way that information entered into one module will automatically update other relevant modules, for example, recording a credit sale will update both the sales module and the module that manages the balances owed by credit customers. --- Trang 93 --- 1.3 General points It is important that you understand the following points regarding computerised accounting systems that will be assumed throughout the Accounting course: Standing data - standing data is reference data that does not regularly change, such as the name and registered address of the business, payment terms for goods sold on credit, the VAT registration number and relevant VAT rates, wage rates for payroll purposes etc. It is important that access to, and maintenance of, standing data is tightly controlled as many different transactions rely on the accuracy of this underlying data. We will assume throughout this Workbook that relevant standing data has already been entered into the computerised accounting system. Account codes - Each of the modules in the software package is sub-divided into accounts and each account will have a unique code which makes it easier to input and process accounting information. We will discuss account codes within the main accounting record in more detail in Chapter 4. Processing - transactions that are undertaken by the business need to be entered into the system. The recording may be real-time or batch processing: (cid:127) Real-time processing - real-time processing means that transactions are entered into the system and relevant modules and accounts are updated at the point at which the transaction takes place. We will assume that real-time processing is used throughout this Workbook. (cid:127) Batch processing - batch processing involves processing a number of transactions together in a group, or batch, usually at the end of each day or each week. Controls - we will assume throughout this Workbook that there are adequate controls in place in the system to ensure the continued reliability of the systems. Such controls include that the system is operated by trained and qualified staff, that access to the system is restricted to authorised users and that there are adequate levels of approval and review of transactions that are input into the system. 1 .4 Cloud accounting Definitions Cloud computing: Cloud computing is on-demand access, via the internet, to computing resources - applications, servers (physical servers and virtual servers), data storage, development tools, networking capabilities, and more - hosted at a remote data centre managed by a cloud services provider (or CSP). Cloud accounting: Cloud accounting refers to performing accounting tasks using cloud computing software, often delivered in a software-as-a-service (SaaS) model. Cloud computing is a service that provides a business with access to software and data storage via the internet. Instead of being held locally on the user s computer, the software and data are held in the cloud , which means they are held remotely on the computer servers of the software service provider. Examples of cloud computing include Amazon Web Services (AWS) which offers storage, computer power and networking services or Microsoft OneDrive, which offers storage services. Cloud computing technologies have changed the ways in which organisations store and manage their data. An increasing amount of organisational data is now held in servers operated by cloud-based service providers. In effect, cloud computing is the access to business services through the internet. There could take the form of: (cid:127) Software as a service - eg, anti-virus software. The software is hosted in the cloud, but appears on users devices with full functionality. This type of cloud service is the most common, and is often aimed directly at the end user (eg, Hotmail; Gmail). (cid:127) Platform as a service - eg, Windows Azure. For a fee, the cloud provider offers virtual space in which customers can host and develop their own applications. (cid:127) Infrastructure as a service - eg, data storage and back-up. Cloud storage can handle all kinds of structured and unstructured data. Cloud accounting is an application of cloud computing. Accounting software is provided in the cloud by a service provider. The user accesses this software to process their accounting transactions and run reports as they would if the software was installed on their own computer. The use of cloud accounting does not change the requirement for source documents to be input into the system, which, depending on the type of accounting software package used, may be done by a bookkeeper or may be automated. The processing of transactions takes place in the software within the cloud and outputs in the form of reports, or financial statements, which are extracted from the cloud. --- Trang 94 --- A benefit of cloud accounting is that a business can access its accounting records from any computer (or tablet or phone) that has an internet connection. Additionally, because most of the processing and data storage is done on the service provider s servers, and not the business s computers, the business does not need to purchase expensive, sophisticated IT equipment in order to run specialised software or store large amounts of data. As the software is maintained by the service provider, the business may also be able to reduce IT support costs within its own business. Another benefit of cloud accounting is the ability to collaborate with advisors and other professionals. For example, the accounting team could work remotely with their auditors or tax advisors and all parties have access to the live data at the same time. Whilst it has many advantages, cloud accounting does have its drawbacks. Cloud accounting requires access to the internet. If a business s internet connection is unreliable, accessing its accounting records held in the cloud will be difficult. There may be server outages on the cloud that would mean that there were temporary restrictions on the ability to access data. There are also potential data security issues, such as an increased risk of data being hacked and loss or damage to data. The business does not retain back-up copies of its data on its local computer, and therefore is reliant on the service provider to provide adequate security. 1 .5 Artificial intelligence Definition Artificial intelligence: Artificial Intelligence involves the creation and use of advanced computer systems to perform tasks that traditionally require human intelligence. This includes: learning from data; reasoning and problem-solving; sensory understanding; language processing; and recognising patterns. Al systems are characterised by their ability to adapt to new information or environments, operate with a degree of autonomy, and make informed decisions. Al often, but not always, involves using Machine Learning. Al is used in many aspects of life now, streaming platforms such as Netflix analyse users watch history to suggest films or shows tailored to that individual s preferences, enhancing user engagement and, hopefully, satisfaction. Al is also increasingly used by accountants as it is a powerful tool which can save time and increase accuracy of postings. Al can assist bookkeepers with the recording of transactions by: (cid:127) Automating data entry: A significant amount of time is spent entering data from receipts, invoices and bank statements. If these documents are digital, Al can automate this process by extracting relevant information and recording it in the accounting software. This will significantly reduce manual work and help reduce errors. (cid:127) Categorisation of expenses: Transactions need to be classified, for example an invoice might need to be recorded as a payment of insurance, stationery, or goods for resale (purchases). This can be time consuming. Often the same suppliers are used regularly for the same types of expenses, for example a business might use EE for its mobile phone and every month an invoice from EE will need to be coded to Phone expenses . Al can learn that invoices from EE should always be coded in this way and automatically categorise the expense. Al can also categorise new transactions by learning from past data entry. This will save bookkeepers time and reduce the chance of errors. (cid:127) Reconciliations: All the transactions which are recorded in the bank statement will also be recorded in the accounting software. To ensure that all transactions have been recorded correctly, and the bank balance in the accounting records is reconciled to the balance on the bank statement provided by the bank. This can be a lengthy process. Al can streamline this task by automatically matching transactions between bank statements and the bank balance in the accounting records, highlighting discrepancies for review. More information on bank reconciliations is in Chapter 6. (cid:127) Fraud and errors: Al can analyse transactions for unusual patterns or unusual amounts, which may indicate fraud or error. For example, Al might alert users if a sale is recorded for over 1 00,000 when the average sale is only 50,000. This can help identify and therefore correct issues early. (cid:127) Generating reports: Al can assist in generating routine financial reports freeing up bookkeepers time for more complex analysis. (cid:127) Customer service chatbots: Al-powered chatbots can answer basic client questions about their accounts, reducing the administrative burden on bookkeepers. There are, however, some disadvantages of using Al to assist with bookkeeping: (cid:127) High initial cost: Setting up and implementing Al technology requires a significant initial investment in software and training. This may be cost-prohibitive for some businesses. --- Trang 95 --- (cid:127) Non-standard transactions: While Al excels at dealing with routine transactions, it may misinterpret more complex items, including items where judgement is needed, and record them incorrectly. These errors may not be identified and corrected. (cid:127) Data dependence: Al is reliant on the data it is trained on. Inaccurate or incomplete data can lead to errors. Bookkeepers must verify Al-generated results and correct any errors. (cid:127) Security risks: Al systems will have access to confidential financial data. Robust security measures are therefore vital to protect this data from breaches or unauthorised access. Al can empower bookkeepers to become more efficient and focus on higher-value tasks, instead of being bogged down by repetitive data entry. However, manual checks will still need to be performed to ensure the accuracy of any tasks carried out by Al, in the same way checks are done of work performed by humans. Which of the following statements regarding the use of Al to assist with processing transactions is TRUE A Al can completely replace human bookkeepers in transaction processing B Al cannot be used to process bank transactions due to data security risk C Al needs to be trained on every different transaction type to be useful D Al can identify unusual patterns in transactions, which might indicate fraud or error 2 Source documents for recording financial transactions M Section overview (cid:127) Credit sales make use of sales orders, delivery notes to the customer and sales invoices (which is the source document that is then recorded). (cid:127) Credit purchases make use of purchase orders, goods received notes and purchase invoices (which is the source document recorded). The purchase invoice is received from the credit supplier. (cid:127) Invoices show, among other things, what has been sold or purchased and at what price. Trade discounts, VAT and any early-settlement (cash) discounts are also shown, so that the total reflects the full amount that remains to be paid. (cid:127) Credit notes are negative invoices. 2.1 Source documents Whenever a business transaction takes place involving sales or purchases, receiving or paying money, or owing or being owed money, it is necessary for the transaction to be evidenced by a source document. The documents may be hard copy or electronic and these documents are often passed between organisations entirely electronically for example via email. Source documents are the documents which are produced by, or input into, a business s accounting system as the starting point to recording the transactions of a business for accounting purposes. 2.2 Recording information from source documents Financial information contained in the source documents is recorded in the computerised accounting system. In respect of a credit sale made, the business needs to record: (cid:127) the amount of the sale itself (cid:127) the amount owed by the customer (receivable) (cid:127) any VAT/discounts (cid:127) payments subsequently received --- Trang 96 --- In some sophisticated accounting software packages the system will use Artificial Intelligence (Al) to correctly raise invoices to customers, and input and process invoices received. The use of Al in accounting is increasing with advances in technology. Recent developments in Al have focused o n machine learning techniques which use algorithms to identify patterns in large data sets in order to learn to classify, cluster o r predict things. Whilst the use of Al has reduced the need for intervention from bookkeepers, as discussed above, it is important for professional accountants to understand what information the system is recording and be able to confirm the accuracy of that information. The following sections include more detailed information o n the source documents used by businesses and the type of information those documents contain. Chapter 4 will provide further explanation as to how the relevant information is recorded. Professional skills focus: Assimilating and using information You should understand what information is provided in the source documents and what information is relevant for the computerised accounting system to record. Remember that the accounting system is interested in the financial effect of transactions. Other systems, such as inventory management, will be interested in, for example, the quantity of goods purchased o r sold. 2.3 Sales system Consider the following stages that arise when a business sells goods o n credit to its customers. When a customer places an order, a sales order is created detailing the Customer goods or services required and the agreed price. While sales orders are very order important from a practical point of view, they are not treated as source documents for recording financial transactions in the business accounts. WWhheenn tthhee ggooooddss oor services are delivered to the customer, they are usually aaccccoommppaanniieedd bbyy aa delivery note prepared by the seller. This sets out the goods/services delivered, the quantities delivered, the date of delivery and Dispatch the delivery address. A delivery note is not a source ddooccuummeenntt.. goods The delivery note is most often prepared with reference to the sales order. Once the delivery is complete the delivery note is used to provide information for creating the sales invoice. The delivery note is not a source document for credit transactions. The seller will then prepare and send an invoice to the customer to request Raise payment for the goods or services delivered. Invoices are source documents invoice and need to be recorded in the accounting system. More detail is given in section 2.5 below. Receive The customer will then settle the invoice either by bank transfer or by cheque payment or cash. More detail is given in section 3 below. Figure 3.2: Sales system 2.4 Purchases system Consider the following stages that arise when a business purchases goods o n credit from its suppliers. --- Trang 97 --- A business will identify the goods it requires from its supplier and raise an Purchase purchase order which is sent to the supplier. The supplier will generate a order sales order (see sales system at 2.3 above) based on the purchase order received. A purchase order is not a source document. Once the goods are received, a goods received note (GRN) is raised by the Receive business to record the receipt of goods. The accounts department will often goods ask to see the GRN to confirm the goods were delivered before paying a purchase invoice. A GRN is not a source document. Sometime later, the business will receive an invoice from the supplier to Receive request payment for the goods delivered. Invoices are source documents and invoice need to be recorded in the accounting system. More detail is given in section 2.5 below. Make The business will then settle the invoice by transfer to the supplier s bank payment account or by cheque or cash. More detail is included in section 3 below. Figure 3.3: Purchase System 2.5 Invoices Invoices are source documents for credit transactions. 1 Invoices are used to record transactions which have been made on credit. On credit means goods or services are supplied but payment is not made straight away as there is a period of credit before payment is due. (cid:127) When a business sells goods or services on credit to a customer, it sends out a sales invoice. The invoice details should match the details on the delivery note. The invoice is a request for the customer to pay what is owed. Sales invoices can be manually prepared and entered into the accounting system by the bookkeeper or automatically generated by the accounting system. Invoices raised are sequentially numbered, so that the business can keep track of all the sales invoices it sends out. (cid:127) When a business buys goods or services on credit it receives a purchase invoice from the supplier. The details on the invoice should match the details on the purchase order (to confirm goods were actually ordered and at what price) and the goods received note (to confirm the quantity of goods received). A purchase invoice received by the customer is the same document as the sales invoice raised by the supplier. Information usually shown on an invoice includes the following: (cid:127) invoice number (cid:127) name and address of seller and purchaser (cid:127) sale date (cid:127) product/service description (cid:127) quantity and unit price of what has been sold (eg, 20 pairs of shoes at 25 a pair) (cid:127) details of trade or bulk discount, if any (eg, 1 0% reduction in cost if buying over 1 00 pairs of shoes) and any early settlement (cash) discount offered for payment by an agreed date (cid:127) total invoice amount including VAT details, if appropriate (cid:127) the date by which payment is due, account details for the transfer of funds and other terms of sale (cid:127) a remittance advice slip may also be included if settlement by cheque is permitted. The customer will include the remittance advice slip with their payment so that the seller can identify what outstanding amounts are being settled by the payment. 2.6 Credit notes Suppose Creative Supplies sent out a sales invoice to a customer for 20 dinner plates, but the bookkeeper responsible for creating the invoice accidentally input in a total of 1 62.1 0, instead of 62.1 0. The customer has been overcharged by 100. What are Creative Supplies to do --- Trang 98 --- Another customer received 1 5 plates from Creative Supplies but found that they had all been broken in the post. Although the customer has received an invoice for, say, 45.60, it has no intention of paying it because the plates were substandard. Again, what is Creative Supplies to do The answer is that Creative Supplies sends out credit notes to its customers. It will be made out in the same 1 1 way as an invoice, but with a credit note number instead of a sales invoice number . Definition Credit note: A document issued to a customer relating to returned goods, or refunds when a customer has been overcharged for whatever reason. It can be regarded as a negative invoice. It is a source document for credit transactions. 2.6.1 Debit notes A debit note might be issued to a supplier as a means of formally requesting a credit note from that supplier. A debit note is not a source document. Interactive question 2: Credit note Fill in the blanks. Creative Supplies sends out a to a credit customer in order to correct an error where a customer has been overcharged on a 2.7 VAT Value added tax (VAT) is a sales tax added to most sales invoices in the UK. Details for calculating and recording VAT are discussed in Chapter 4. As well as the sale or purchase amount, the business also normally needs to record VAT on each invoice or credit note. This amount will ultimately be paid to or received from HMRC. 2.8 Other source documents So far, we have only considered source documents for sales and purchases on credit, ie, sales and purchase invoices and credit notes. Other source documents are also used for transactions involving settlement of credit transactions (by digital wallet, card payment or bank transfer), cash, wages and other matters, as we shall see. Interactive question 3 : Source documents Elephant sold goods on credit to Jackal for 860. Jackal returned 20 of these goods as they were of substandard quality. Requirement What are the source documents that provide the information to be recorded in Elephants accounting sys te m --- Trang 99 --- 3 R e c o r d i n g b a n k transactions gM Section overview (cid:127) Businesses have constant and instant access to their bank accounts via electronic banking. Electronic banking allows a business to create a transaction report at any point in time. Transaction reports are source documents for transactions through the cash at bank account. (cid:127) Some businesses have accounting software packages which are integrated with electronic banking systems, allowing banking transactions to be recorded directly in the business s accounting system. (cid:127) Many accounting software packages use Al to automatically match receipts and payments on the transaction report to information within the system regarding purchases, sales and other transactions, and account for the receipt or payment accordingly. (cid:127) Less sophisticated software packages will require a transaction report to be downloaded from the electronic banking system which can then be used by a bookkeeper to enter transactions into the business s accounting system. 3.1 Electronic banking Electronic banking has changed how businesses record transactions through the bank. Traditionally, a business bookkeeper would maintain a separate cash book in which all bank and cash transactions were recorded. At the end of each month, the bank would send the business a bank statement. The bookkeeper would then use the bank statement to check the transactions were correctly recorded and that no transactions were omitted. Electronic banking means businesses now have constant, real time access to their bank accounts and can use the information recorded by the bank to update their accounting records on a regular basis. Sophisticated accounting software packages can be integrated with the external banking system in such a way that bank transactions are automatically recorded in the relevant account codes. Such systems use Al to recognise known receipts and payments and match them against the relevant transaction. In such a case, the bookkeeper will receive a transaction report which details transactions already matched, and therefore already recorded, and others which still need to be matched. Any unknown transactions are recorded in a temporary account known as a suspense account (see Chapter 6 for more detail) and will be reported on an exception report, to be investigated by the accountant. Once identified, the suspense account will be removed and the transaction will be recorded in the correct account within the accounting system. Other software packages will not have direct access to the business banking system but can accept information held on reports that are extracted from the banking system. On a regular basis, the business will download a transaction report from the business banking system which shows all the receipts and payments in a given period. The transaction report is the source document for transactions through the business cash at bank account. The data on the transaction report is then uploaded into the accounting software. Many software packages will use Al to perform a match on known transactions and process these appropriately, in much the same way that a system that is integrated with the bank will. As was described above, unmatched transactions will appear on an exception report for further investigation. Transaction report UUppllooaaddeedd Accounting system Match Matches to transactions - system can suggest or Withdrawals manual Sales invoice 001 650 customer ABC 650 Once matched, accounting system processes Purchase invoice ( 900) supplier XYZ 900 Unmatched items require investigation Accountant discovers that Purchase invoice ( 1,220) prompt payment discount supplier JKL 1,300 taken hence amount paid is less than invoice total Figure 3.4: Electronic Banking matching --- Trang 100 --- Professional skills focus: Structuring problems and solutions You may b e faced with the situation in the Accounting exam in which there is a problem due to an unmatched bank transaction. You will need to work out how the transaction should have been recorded, what has or has not been recorded and therefore what correction is required. 3.2 Cash at bank account In the accounting system, the cash at bank account is used to record all receipts and payments made through the business bank account. We will assume that most business transactions take place through the electronic transfer of funds - either by payment card, digital wallet payment, direct bank transfer, standing order o r direct debit. Bank interest and charges made directly by the bank are also made electronically. These transactions will all be shown in the bank transaction report and are recorded in the accounting records (in the cash at bank account) as described in the above section. Businesses may also handle physical cash and cheques which must also b e recorded in the cash at bank account. The total amounts of cash withdrawn or paid into the bank will be shown o n the transaction report downloaded from the electronic banking system and are likely to be identified as unmatched exceptions by the accounting system. Once investigated and identified, these payments or deposits will be entered into the accounting system, in the cash at bank account, as described above. 3.3 Cheques ft Definition Cheques: A written order from an account holder to their bank directing the bank to pay a specified sum to a particular individual or organisation. If a business receives a cheque from a customer, it should record the amount received in the accounting system. The business will then take the physical document to the bank for processing or, if their online banking system allows, submit the cheque to its bank electronically by scanning or submitting a photo of the cheque. Once the bank has received the cheque, it cashes the cheque and the funds would show as received into the business bank account. This process can take several days. Cheques are still used by some smaller businesses and individuals, but they are becoming less common with the increasing use of online banking. Here is an example of a cheque. Blue Sky Tech Ltd is agreeing to pay 770.80 out of their Liberty Bank account to Southfield Electrical. Blue Sky Tech Ltd will post or hand this cheque to Southfield Electrical who will take it to their bank who will cash it for them. 17-54-18 liberty bank 00546 5489632 2.0 Oci-obey DDaattee 2.OXX I 32 Pines Road, London EC1 3LB Pay CD (D C zs o I 1 80420 Cheque No. Sort Code Account No, Blue Sky Tech Ltd 3.4 Petty cash Some cash, in notes and coins, might be kept o n the business premises in order to make occasional payments for o d d items of expense. This cash is usually accounted for separately in a petty cash book. Petty cash is not considered further o n this course. --- Trang 101 --- 4 The payroll Section overview (cid:127) The payroll is the record of employee wages and salaries and is the source document for expenses relating to employees. (cid:127) The amount actually paid to employees is called net pay; this is less than gross pay since the employer 1 pays over what the employee owes directly to HMRC (for income tax under PAYE, and employees Nl) and the pension plan (for any employee pension contribution). (cid:127) Gross payroll cost is more than employees gross pay since the employer has to pay additional employment tax (employer s Nl) to HMRC plus it may make additional employer pension contributions to the pension plan. 4.1 What is the payroll used for ftk Definition Payroll: The record of wages and salaries costs. The payroll records all the individual amounts that appear on employees payslips, namely: (cid:127) gross pay to employees: - PAYE income tax - employee s Nl contributions - employee s pension contributions - net pay (cash paid to employees) (cid:127) additional costs for the employer: - employer s Nl contributions - employer s pension contributions Gross pay is not the amount paid to the employee. The employer needs to make deductions from gross pay before paying net pay to the employee. The payroll is a source document as it contains information that is entered into the accounting system. Professional skills focus: Structuring problems and solutions Reporting information relating to tax, national insurance contributions and pensions is a key area in which an accountant communicates with external bodies. Often that information needs to be in a certain format or include specific details. Like all accounting, it is important for all information reported to external bodies to be accurate. Context example: Payroll Sunny Climes Ltd employs three people: Anja earns 36,000 a year; Mark earns 33,000 a year; and Dipak earns 30,000 a year. The gross pay in September for each employee is as follows: Anja 3,000 Mark 2,750 Dipak 2,500 However, these are not the amounts that each employee will receive. Sunny Climes Ltd first of all has to deduct income tax from gross pay under the PAYE scheme to be paid to HMRC. It deducts National Insurance (employees Nl) from gross pay, again to be paid to HMRC. As it runs a pension plan, it has to deduct each employee s pension contribution, to be paid to the pension plan. --- Trang 102 --- Deductions PAYE Nl EE pens Net pay Gross pay Anja 550 250 150 2,050 3,000 Mark 500 230 135 1,885 2,750 Dipak 460 210 125 1,705 2,500 1,510 690 410 5,640 8,250 Deductions Net pay Gross pay The employees will receive the net pay. The employer has deducted amounts the employees owe to other people from the gross pay the employer owes to them. This is not the end of the story, however; the employer also owes additional Nl to HMRC, and employer pension contributions to the pension plan, over and above the amount of gross pay. The final payroll will be as follows: Deductions Total EE ER Gross payroll PAYE Nl EE pens Net pay pay Nl ER pens cost Anja 550 250 150 2,050 3,000 310 200 3,510 Mark 500 230 135 1,885 2,750 265 180 3,195 Dipak 460 210 125 1,705 2,500 230 165 2,895 1,510 690 410 5,640 8,250 805 545 9,600 Gross pay Employer s Nl Employer pension Total payroll cost The total payroll cost for Sunny Climes Ltd is 9,600. This is paid out as follows: Employees (net pay) 5,640 HMRC: Income tax PAYE 1,510 HMRC: Employee and employer Nl (690 805) 1,495 Pension plan: Employee and employer pension (410 545) 955 Total payroll cost 9,600 Interactive question 4: Payroll Fantab Ltd has 10 employees who had gross pay of 19 0,000 per annum between them in 20X4. In that year, Fantab Ltd made net pay payments to employees of 12 9,200 and paid 20,900 to the pension plan. Its total payroll cost was 220,400. Requirement How much did Fantab Ltd pay to HMRC in respect of Nl and PAYE --- Trang 103 --- Summary Orders Orders Recording financial transactions Delivery notes GRNs Sales invoices Bank transaction Payroll Purchase invoices report Computerised accounting system Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning 1 Do you understand what is meant by the term cloud accounting (Topic 1 ) 2 Can you explain how a credit note is used Is it a source document (Topic 2) 3 On what occasions would a bank exception report be generated (Topic 3) 4 What payroll costs does an employer incur in addition to employees gross salary (Topic 4) 2 Chapter Self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Recording financial transactions chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. --- Trang 104 --- Self-test questions Answer the following questions. 1 Transactions are processed in the computerised accounting system at the point at which they occur is a description of batch processing in a computerised accounting system. Requirement Is this statement true or false A True B False 2 Sales orders are source documents that are recorded in the accounting system. Requirement Is this statement true or false A True B False 3 When an entity returns goods to a supplier it will expect to receive which of the following documents from the supplier: A An invoice B A credit note C A purchase order D A goods received note 4 Which of the following are source documents for credit purchases A Suppliers invoices and credit notes B Invoices and credit notes to customer C Delivery notes D Goods received notes 5 Which of the following documents would be issued by a supplier if it was discovered it had overcharged its customer by 400 A A remittance advice B A debit note C A credit note D A supplier invoice --- Trang 105 --- 6 Sepi downloads a report of her bank transactions for the day. The report shows a deposit of 1 50 which the computerised accounting system has not been able to match to a transaction. Requirement Which of the following transactions may have resulted in the cash receipt A A direct debit payment in respect of telephone expenses B A receipt from a customer who had purchased goods on credit C The purchase of a new office chair D The payment of a supplier invoice 7 The cost of employer s Nl contributions is part of a company s: A Net pay B Gross pay C Wages and salaries cost D Income tax charge Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 The correct answer is: D Al can identify unusual patterns in transactions, which might indicate fraud or error This statement is true. Al can analyse large amounts of data and identify anomalies that might suggest fraudulent activity or errors. Al can completely replace human bookkeepers in transaction processing This statement is false. While Al can process many transactions, it is unlikely to fully replace bookkeepers who will still need to deal with more complex items and situations requiring judgement. Al cannot be used to process bank transactions due to data security risk This statement is false. Al can be used securely with proper implementation of safeguards. Al needs to be trained on every different transaction type to be useful This statement is false. While Al may require initial training on common transaction types, it can often learn and adapt over time, reducing the need for extensive training on every single transaction type. Answer to Interactive question 2 Creative Supplies sends out a credit note to a credit customer in order to correct an error where a customer has been overcharged on a sales invoice --- Trang 106 --- Answer to Interactive question 3 From Elephant s perspective, there are two source documents: (1) sales invoices (2) credit note Elephant would issue a sales invoice at the point of selling the goods to Jackal. It would then issue a credit note when the goods are returned by Jackal. The credit note reduces the amount that Jackal owes to Elephant. Answer to Interactive question 4 Total payroll cost 220,400 Employees (net pay) (129,200) Pension plan (20,900) Amount paid to HMRC 70,300 Answers t o Self-test questions 1 B False This is a description of real-time processing. 2 B False The sales invoice is recorded in the accounting system. 3 B A credit note An invoice (A) is received in respect of the original purchase, after a purchase order (C) has been placed and a goods received note (D) has been created in respect of the delivery of goods. 1 4 A Suppliers invoices and credit notes 1 Suppliers invoices and credit notes are source documents for credit purchases. Customer invoices and credit notes (B) relate to credit sales. Delivery notes and goods received notes (C and D) are not source documents. --- Trang 107 --- 5 C A credit note A credit note should be issued by the supplier when it discovers it has overcharged its customer. 6 B A receipt from a customer who had purchased goods on credit The income must be a receipt of cash from the customer. The other options are all payments out of the bank account. 7 C Wages and salaries cost The cost of employer s 1X11 contributions is added to gross pay (B) (which includes net pay (A)) to form the gross wages and salaries cost. Payroll taxes are not included in the company s income tax charge (D). --- Trang 108 --- Chapter 4 ICAEW L e d g e r a c c o u n t i n g a n d d o u b l e e n t r y Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 Ledgers 2 The nominal ledger 3 Double entry bookkeeping 4 Journal entries 5 The receivables and payables ledgers 6 Accounting for discounts I I 7 Accounting for VAT Summary Further question practice Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 109 --- I n t r o d u c t i o n Learning outcomes (cid:127) Identify the sources of information for the preparation of accounting records and financial statements (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Prepare journals for nominal ledger entry to correct errors in draft financial statements Specific syllabus learning outcomes are: 1 c, d; 2c Syllabus links The material in this chapter will be developed further throughout the Accounting module, and then in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple choice questions, multi-part multiple choice or multiple-response questions, some of which may involve calculations. Very often double entry questions are phrased in terms of preparing a journal entry. In the exam you may be required to: (cid:127) identify the effect of debit and credit entries in ledger accounts for the elements of financial statements (cid:127) specify the double entry needed to record particular transactions (cid:127) identify entries in ledger accounts for VAT, payables and receivables Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Topic Study approach Exam approach Interactive questions Ledgers Approach In the exam you may be required to identify A ledger is simply the Topic 1 is a short the effect of debit and name given to the introduction to what is credit entries in meant by the term ledger accounts. We which transactions are ledger. Pay attention will continue to work recorded. It is a to the names of the towards this as we commonly used term key ledgers used. progress through in accountancy. Stop and think Accounting. Why might a business maintain a payables ledger and receivables ledger separate from the nominal ledger 2 The nominal ledger Approach In the exam you may be required to identify The nominal ledger is You can cover this the effect of debit and the main record in section reasonably credit entries in which accounting quickly. Pay attention ledger accounts. The transactions are to the t-account nominal ledger is recorded. It is format as it is used central to this. important that you frequently in understand the format Accounting. of a nominal ledger account. --- Trang 110 --- 3 Double entry Approach Double entry is central IQ1 Debits and bookkeeping to Accounting and credits I Double entry you will soon start to Double entry bookkeeping is at the This is an important think of all bookkeeping is a key core of the question which covers transactions in terms concept in Accounting syllabus. the rules of double of debits and credits. accounting. All You may not instantly entry bookkeeping. In the exam you may transactions entered understand double IQ2 Debits and be required to: into an accounting entry. Try not to worry; credits II system, whether take things slowly. You (cid:127) identify the effect This question gives computerised or need to learn the rules of debit and credit further practice of manual, mustfollow of double entry in entries in ledger thinking of the principles of terms of what a debit accounts for the transactions in terms double entry. In entry and a credit elements of of debits and credits. double entry entry can do to the financial bookkeeping, all elements of the statements; IQ3 Ledger accounts transactions financial statements. (cid:127) specify the double This question provides undertaken by a There are plenty of entry needed to good practise of business are captured worked examples and record particular preparing ledger in the accounting Interactive questions transactions accounts to record records by creating in this topic that you some common Double entry will also debit entries which should cover business transactions. be essential in the must be matched by thoroughly. long-form question. corresponding credit Stop and think entries. Consider the accounting equation. Why is it important to check the equation is still in balance after each transaction is recorded Journal entries Approach Very often double entry questions are Journal entries are Take your time to work phrased in terms of simply a standard way through the worked preparing a journal of presenting the example carefully. It is entry. You also need double entry required really just an extension to be able to prepare to record a of double entry. journal entries for the transaction. Stop and think long-form questions. Why is it good practice to include a description of each journal entry The receivables and Approach In the exam you may payables ledgers be required to identify Although this is a entries in ledger The receivables short narrative topic, it accounts for payables ledger is a listing of all contains important and receivables. We credit customer concepts that we will will also later meet balances. The revisit later in reconciliations which payables ledger is a Accounting. Ensure also use the list of all credit you understand that receivables and suppliers. It is these are payables ledgers. important to maintain memorandum these lists for the accounts only. purposes of credit Stop and think control and making Why would a business timely payments. want to maintain a list of all amounts owed by its credit customers --- Trang 111 --- Accounting for Approach In the exam, you will IQ5 Discounts I discounts be expected to There is a lot to This question requires accurately record Accurate recording of understand in this the calculation of trade and early sale and purchase topic. Start with trade trade and early settlement discounts transactions requires discounts, which is settlement discounts. using double entry us to record discounts simpler. You might IQ6 Discounts II and demonstrate that offered by sellers to find accounting for you understand how This question tests their customers. You settlement discounts discounts impact on you understand how must understand that more difficult. Work trade receivables and discounts are trade discounts are through the different trade payables reflected in the recorded differently scenarios in the balances. statement of profit or from early settlement worked examples loss. discounts. carefully. It is important to cover Stop and think both of these Why would a business questions to aid your offer a 5% early understanding of settlement discount to discounts. a customer Accounting for VAT Approach In the exam you may IQ7 VAT be required to identify VAT is an indirect tax You need to This is a good test of entries in ledger on the supply of understand howto your knowledge of accounts for VAT. This goods and services. It calculate VAT (from how to calculate VAT may mean you need is not income nor an net and gross when given the to record transactions expense of a VAT- amounts) and howto information in that include VAT or registered business. account for it. If you different forms. calculate the balance VAT is separately try to remember that it on the VAT account. accounted for in order is not income or an that it can be included expense of a VAT- on returns to HMRC. registered business, this should help with the accounting. Stop and think If a business collects VAT on its sales, why should it not be recorded in income Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. Ledgers Section overview (cid:127) The nominal ledger, receivables ledger and payables ledger are the main ledgers used in an accounting system. (cid:127) Records should be kept in ledgers in chronological order, with cumulative totals built up. Use of ledgers A business continually enters into transactions such as buying and selling goods, paying credit suppliers and collecting cash from credit customers. To prepare financial statements on the completion of every individual transaction would be a time consuming and cumbersome administrative task. --- Trang 112 --- Instead, businesses use ledgers to record and analyse the transactions undertaken. When the time comes to prepare the financial statements, the relevant information can be extracted easily from the ledgers. 1 1 Ledger is a historical term which simply means book . Traditionally, in a manual system of accounting, the business s transactions were recorded in three main books - the nominal ledge, the receivables ledger and the payables ledger. The nominal ledger contained a separate ledger account for each type of income, expense, asset and liability and for capital. The receivables ledger contained a separate ledger account for each credit customer and the payables ledger contained a separate ledger account for each credit supplier. We still use this terminology in a computerised accounting system because the underlying bookkeeping principles are the same. We will refer to the nominal ledger, the receivables ledger and the payables ledger throughout this Workbook. The transactions in ledger accounts should be recorded: (cid:127) In chronological order and dated so that transactions can be related to a particular period of time. (cid:127) Built up in cumulative totals. - day by day (eg, total sales on Monday, total sales on Tuesday) - week by week - month by month - year by year 2 The nominal ledger S Section overview (cid:127) The nominal ledger is the main accounting record in which financial transactions are recorded. (cid:127) The nominal ledger contains several ledger accounts that represent each of the categories of asset, liability, capital, income and expense of a business. (cid:127) A T-account is one way of recording which ledger accounts are affected by transactions. In a T-account, the left hand side is the debit side, and the right hand side is the credit side. 2.1 What is the nominal ledger used for Definition Nominal ledger: The main accounting record in which financial transactions are recorded. The nominal ledger contains details of assets, liabilities, capital, income and expenditure, and therefore profit and loss. It consists of a large number of different ledger accounts, each account having its own purpose or name and an identity or code. In a computerised accounting system, each ledger account is assigned a unique code. The codes are normally assigned in such a way that related or similar ledger accounts will have consistent coding. For example, administrative expenses may have the code 1 00000, telephone expenses may be 1 00100, rent expenses 1 00200 etc. This means that the expense categories will appear sequentially when data is extracted from the accounting system (see Chapter 5). Examples of ledger accounts in the nominal ledger include: (cid:127) plant and machinery at cost (non-current asset) (cid:127) plant and machinery, accumulated depreciation (deduction from non-current asset) (cid:127) motor vehicles at cost (non-current asset) (cid:127) motor vehicles, accumulated depreciation (deduction from non-current asset) (cid:127) owner s capital (capital) (cid:127) inventories (current asset) (cid:127) trade receivables (current asset) --- Trang 113 --- (cid:127) trade payables (current liability) (cid:127) wages and salaries (expense) (cid:127) rent and local taxes (expense) (cid:127) advertising expenses (expense) (cid:127) bank charges (expense) (cid:127) motor expenses (expense) (cid:127) telephone expenses (expense) (cid:127) sales (income) (cid:127) total cash/bank overdraft (current asset/liability) A computerised accounting system will use the code assigned to each nominal ledger account to automatically classify each account into the elements of the financial statements. The income and expense ledger accounts will together form the statement of profit or loss, while the asset, capital and liability ledger accounts will together form the statement of financial position. 113 Professional skills focus: Assimilating and using information The information included in the ledger accounts within the nominal ledger is the starting point to preparing the financial statements of a business. It is important that information is accurately recorded in the correct ledger accounts if the financial statements are to show a true and fair view. 2.2 The format of a ledger account An accounting record captures more than the amount of the transaction. At a minimum it will record the date, the amount of the transaction and a short description of the other side of the double entry. It may also include a unique reference number and/or a brief description of the transactions. Throughout Accounting and elsewhere in your ICAEW studies, we will use a T-account format to present the entry of a transaction into a ledger account. ADVERTISING EXPENSES Date Narrative (Ref.) Narrative Trade payables (JFK AAggeennccyy)) 2,500 There are two sides to the account, with an account heading on top. The lines form a T , so this is what we mean by T -account. (cid:127) On top of the account is its name. (cid:127) There is a left hand, or debit side. (cid:127) There is a right hand, or credit side. NAME OF ACCOUNT Debit side Credit side 3 D o u b l e e n t r y b o o k k e e p i n g Section overview (cid:127) The principle of double entry bookkeeping is that, for each transaction, every debit entry has an equal credit entry. --- Trang 114 --- (cid:127) Debit entries increase assets and expenses, and decrease liabilities, capital and income. (cid:127) Credit entries increase liabilities, capital and income, and decrease assets and expenses. (cid:127) A receipt of cash is a debit in the cash at bank account. (cid:127) A payment of cash is a credit in the cash at bank account. (cid:127) A credit sale is recorded as debit receivables (increase asset), credit sales (increase income). (cid:127) A credit purchase is recorded as debit purchases (increase expenses), credit payables (increase liabilities). Definition Double entry bookkeeping: Each transaction has an equal but opposite effect. Every accounting event must be entered in ledger accounts both as a debit and a credit. 3.1 Dual effect (duality concept) Double entry bookkeeping is the method used to record transactions in the nominal ledger accounts. Central to this process is the idea that every transaction has two effects, the dual effect (also known as the duality concept). This feature is not something peculiar to business. If you were to purchase a car for 1, 000 cash, for instance, you would be affected in two ways: (cid:127) You own a car (an asset) worth 1, 000. (cid:127) You have 1,000 less cash (an asset). If instead you got a bank loan to make the purchase: (cid:127) You own a car (an asset) worth 1, 000. (cid:127) You owe the bank 1, 000 (a liability). A month later if you pay a garage 50 to have the exhaust repaired: (cid:127) You have 50 less cash (an asset). (cid:127) You have incurred a repairs expense (an expense) of 50. Ledger accounts, with their debit and credit sides, are kept in a way which allows the two-sided nature of every transaction to be recorded. This is known as double entry bookkeeping, because every transaction is recorded twice in the ledger accounts. 3.2 The rules of double entry bookkeeping A debit entry will: (cid:127) increase an asset (cid:127) decrease a liability (cid:127) increase an expense (cid:127) decrease capital (cid:127) decrease income A credit entry will: (cid:127) decrease an asset (cid:127) increase a liability decrease an expense (cid:127) increase capital (cid:127) increase income The basic rule, which must always be observed, is that every financial transaction gives rise to (at least) two accounting entries, one a debit and the other a credit. The total value of debit entries in the nominal ledger is therefore always equal to the total value of credit entries. Which account receives the credit entry and which receives the debit entry depends on the nature of the transaction. (cid:127) An increase in an expense (eg, a purchase of stationery) or an increase in an asset (eg, a purchase of office furniture) is a debit. --- Trang 115 --- (cid:127) An increase in income (eg, a sale) or an increase in a liability (eg, buying goods on credit) or capital is a credit. (cid:127) A decrease in an asset (eg, making a cash payment) or a decrease in an expense is a credit. (cid:127) A decrease in a liability (eg, paying a credit supplier) or capital or income is a debit. In terms of T accounts, for assets, liabilities and capital: ASSET DEBIT CREDIT Increase Decrease LIABILITY DEBIT CREDIT Decrease Increase CAPITAL DEBIT CREDIT Decrease Increase For income and expenses, think about profit. Profit retained in the business increases capital. Income increases profit and expenses decrease profit. INCOME DEBIT CREDIT Decrease Increase EXPENSE DEBIT CREDIT Decrease Increase Interactive question 1 : Debits a n d credits I Complete the following table relating to the transactions of a bookshop. (The first two are done for you.) (a) Purchase of books on credit CREDIT payables (increase in liability) (cid:127) Payable increase DEBIT purchases (increase in (cid:127) Purchase increase expense) (b) Purchase of cash register by cheque DEBIT non-current (increase in asset asset) (cid:127) Own a cash register CREDIT cash at bank (decrease in (cid:127) Cash at bank decreases asset) --- Trang 116 --- (c) Payment received from a credit customer (cid:127) Receivables decrease (cid:127) Cash at bank account increases (d) Sell books for cash (cid:127) Revenue increases (cid:127) Cash at bank account increases 1 Note: The boxes in this question indicate where an answer is required. You can use the add comment function to record your workings and answers. 3.3 Double entry for cash transactions A good starting point is the cash at bank account in which receipts and payments of cash are recorded based on the transaction reports downloaded from the electronic banking system. (cid:127) A cash payment is a credit entry in the cash at bank account. Here cash (an asset) is decreasing. Cash may be paid out, for example to pay an expense (such as insurance) or to purchase an asset (such as a machine). The matching debit entry is therefore made in the appropriate expense or asset account. (cid:127) A cash receipt is a debit entry in the cash at bank account. Here cash (an asset) is increasing. Cash might be received, for example, by a retailer who makes a cash sale. The credit entry would then be made in the revenue (income) account (and the VAT account if relevant). Worked example: Cash transactions A business has the following transactions: (1) receive 250 in respect of a cash sale (2) pay a rent bill totalling 1 50 (3) pay 1 00 cash for goods (4) pay 200 cash for shelves Requirement Record these transactions in the nominal ledger accounts. Remember each transaction will be posted twice, in accordance with double entry rules. Solution Transactions: (1) The two sides of the transaction are: (cid:127) 250 cash is received (debit cash at bank account) (cid:127) sales increase by 250 (credit sales account) CASH AT BANK ACCOUNT Sales a/c 250 SALES ACCOUNT Cash at bank a/c 250 The cash at bank account entry is cross referenced to the sales account and vice versa. This enables a person looking at one of the ledger accounts to trace where the other half of the double entry is found. --- Trang 117 --- (2) The two sides of the transaction are: (cid:127) cash is paid (credit entry in the cash at bank account) (cid:127) rent expense increases by 1 50 (debit entry in the rent expense account) CASH AT BANK ACCOUNT Rent a/c 150 RENT ACCOUNT Cash at bank a/c 150 (3) The two sides of the transaction are: (cid:127) cash is paid (credit entry in the cash at bank account) (cid:127) purchases increase by 1 00 (debit entry in the pi jrchases expense account) CASH AT BANK ACCOUNT Purchases a/c 1 00 PURCHASES ACCOUNT Cash at bank a/c 100 (4) The two sides of the transaction are: (cid:127) cash is paid (credit cash at bank account) (cid:127) assets - in this case, shelves - increase by 200 (clebit fixtures and fittings account) CASH AT BANK ACCOUNT Fixtures and fittings a/c 200 FIXTURESAND FITTINGS ACCOUNT Cash at bank a/c 200 After all of these transactions have been posted, the cash at bank account of that business would end up j looking as follows: CASH AT BANK ACCOUNT Sales a/c 250 Rent a/c 150 Purchases a/c 100 Fixtures and fittings a/c 200 3.4 Double entry for credit transactions Not all transactions are settled immediately. A business can purchase goods or non-current assets on credit terms, so that balances owed to suppliers would be trade payables until settlement was made in cash at a later date. Equally, the business might grant credit terms to customers, so the balances owed by customers would then be trade receivables of the business. --- Trang 118 --- N o entries are made in the cash at bank account when a credit transaction occurs, because n o cash has been received or paid. Instead we use receivables and payables accounts. When a business acquires goods o r services o n credit, the credit entry is posted to the trade payables account instead of the cash account. The debit entry is posted to the expense o r asset account, exactly as in the case of cash transactions. Similarly, when a sale is made to a credit customer, the entry is a debit to the trade receivables account (instead of cash account), and a credit to the sales account. Worked example: Double entry for credit transactions A business entered into the following transactions: (1) The business sells goods o n credit to Alabama Ltd for 2,000. (2) The business buys goods o n credit from Baltimore Ltd for 1 00. Requirement How and where are these transactions posted in the ledger accounts Solution TRADE RECEIVABLES Sales a/c 2,000 SALES ACCOUNT Trade receivables a/c 2,000 TRADE PAYABLES Purchase a/c 100 PURCHASES ACCOUNT Trade payables a/c 100 3.4.1 Double entry when cash is paid by credit customers or to credit suppliers What happens when a credit transaction is eventually settled in cash Suppose that, in the example above, the business paid 1 0 0 to Baltimore Ltd one month after the goods were acquired. The two sides of this new transaction are: (cid:127) cash is paid (credit entry in the cash at bank account) (cid:127) the amount owing to trade payables is reduced (debit entry in the trade payables account) CASH AT BANK ACCOUNT Trade payables a/c 100 TRADE PAYABLES Cash at bank a/c 100 If we now bring together the two parts of this example, the original purchase of goods o n credit and the eventual settlement in cash, we find that the accounts appear as follows: --- Trang 119 --- CASH AT BANK ACCOUNT Trade payables a/c 100 PURCHASES ACCOUNT Trade payables a/c 100 TRADE PAYABLES Cash at bank a/c 100 Purchases a/c 100 The two entries in trade payables cancel each other out, indicating that no money is owing to Baltimore Ltd. A cash account credit entry of 1 00 and a purchases account debit entry of 100 remain. These are the same as the entries used to record a cash purchase of 100. This is what we would expect: after the business has paid off its trade payables, it is in exactly the same position as if it had made a cash purchase, and the accounting records reflect this. Similar reasoning applies when a customer settles a debt. In the example above, when Alabama Ltd pays its debt of 2,000 and it is recorded in the cash at bank account, the two sides of the transaction are: (a) cash is received (debit entry in the cash at bank account) (b) the amount owed by credit customers is reduced (credit entry in the trade receivables account) CASH AT BANK ACCOUNT Trade receivables 2,000 TRADE RECEIVABLES Cash at bank a/c 2,000 The accounts recording the sale to, and payment by, Mr Alabama now appear as follows: CASH AT BANK ACCOUNT Trade receivables 2,000 SALES ACCOUNT Trade receivables a/c 2,000 TRADE RECEIVABLES Sales a/c 2,000 Cash at bank a/c 2,000 The two trade receivables entries cancel each other out, while the entries in the cash at bank account and sales account reflect the same position as if the sale had been made for cash (see above). --- Trang 120 --- Interactive question 2: Debits and credits II Identify the debit and credit entries in the following transactions (ignore VAT). (1) bought a machine o n credit from A, cost 8,000 (2) bought goods o n credit from B, cost 500 (3) sold goods o n credit to C, value 1, 200 (4) paid D (a credit supplier) 300 (5) collected 180 from E, a credit customer (6) paid net wages 4,000 (7) received rent bill of 700 from landlord G (8) paid rent of 700 to landlord G (9) paid insurance premium 90 Interactive question 3 : Ledger entries Ryder set u p a business selling fitness equipment. They put 7,000 of their own money into a business bank account (transaction A) and in their first period of trading, the following transactions occurred. Transaction B Paid rent of shop for the period 3,500 C Purchased equipment (inventories) o n credit 5,000 D Loan from bank 1,000 E Purchase of shop fittings (for cash) 2,000 F Sales of equipment: cash 10,000 G Sales of equipment: o n credit 2,500 H Payments to credit suppliers 5,000 I Receipts from credit customers 2,500 J Interest o n loan (paid) 100 K Other expenses (all paid in cash) 1,900 Drawings 1,500 Ignore VAT. Requirement Prepare the ledger accounts for Ryder by opening u p the following accounts and completing them: (cid:127) cash at bank account (cid:127) rent (cid:127) purchases (cid:127) capital (cid:127) shop fittings (cid:127) loan interest (cid:127) loan (cid:127) sales (cid:127) other expenses (cid:127) trade payables (cid:127) trade receivables (cid:127) drawings --- Trang 121 --- 4 Journal entries Section overview (cid:127) Journal entries have a particular format that you should use. (cid:127) Journals can be used to record any type of financial transaction but are mainly used to record transactions that are one-off or unusual in nature. 4.1 What are journal entries used for A journal entry is a way of presenting the required double entry (debits and credits) for a transaction. Any transaction can be represented by a journal entry. However, journal entries are generally used to record unusual or one-off transactions, such as the correction of an error (covered in Chapter 6). In the Accounting exam, you may be asked for the journal entry to record a particular transaction. For whatever type of transaction is being recorded, the format of a journal entry is as follows: Date Debit Credit Account to be debited X Account to be credited X A narrative explanation should accompany each journal entry. It is required for audit and control, to indicate the purpose and authority of every transaction. A computerised accounting system will not allow a journal entry to be processed if the debit entries do not equal the credit entries. Worked example: Journal entries to record transactions The following is a summary of the transactions of Hair, a sole trader-owned hairdressing business: 1 January Put in cash of 20,000 as capital Purchased fixtures and fittings for cash of 5,000 Purchased equipment on credit for 2,000 30 January Paid three months rent to 31 March 1, 500 Collected and paid in takings 600 31 January Gave a regular customer a hair treatment for 80 on credit 31 January Took out 1 00 for personal expenses Requirement Show the transactions by means of journal entries. --- Trang 122 --- Solution Journal 1 January DEBIT Cash at bank account 20,000 CREDIT Capital account 20,000 Initial capital introduced 1 January DEBIT Fixtures and fittings (non-current asset) 5,000 CREDIT Cash at bank account 5,000 The purchase for cash of fixtures and fittings 1 January DEBIT Equipment (non-current asset) 2,000 CREDIT Trade payables 2,000 The purchase of equipment on credit 30 January DEBIT Rent expense account 1,500 CREDIT Cash at bank account 1,500 The payment of rent to 31 March 30 January DEBIT Cash at bank account 600 CREDIT Sales account 600 Cash takings 31 January DEBIT Trade receivables 80 CREDIT Sales account 80 The provision of hair treatment on credit 31 January DEBIT Drawings 100 CREDIT Cash at bank account 100 Owner s drawings --- Trang 123 --- 5 The receivables a n d p a y a b l e s l e d g e r s S Section overview (cid:127) The receivables ledger is where the individual ledger accounts for each credit customer (personal accounts) are listed. (cid:127) Atotal receivables account is held in the nominal ledger, called trade receivables. (cid:127) The payables ledger is where the individual ledger accounts for each credit supplier (personal accounts) are listed. (cid:127) Atotal payables account is held in the nominal ledger, called trade payables. 5.1 Nominal ledger accounts and personal accounts Nominal ledger accounts relate to types of income, expense, asset, capital and liability - rent, sales, trade receivables, payables and so on - but do not record individual details relating to the person or business to whom the money is paid or from whom it is received. Therefore, there is also a need for personal accounts, most commonly for receivables and payables, and these are contained in the receivables ledger and the payables ledger. These are memorandum accounts only, in memorandum ledgers; they are not part of the double entry system. Instead trade receivables and trade payables accounts are kept in the nominal ledger which record the totals of the receivables and payables ledgers. In a manual system of accounting, the receivables and payables ledgers would be updated separately from the nominal ledger. It was therefore possible that, due to errors, there would be differences between balances in the receivables and payables ledgers and the totals in the nominal ledger. In a computerised accounting system, sales and purchase invoices, credit notes and payments are recorded in the receivables and payables ledgers which will then automatically update trade receivables and trade payables in the nominal ledger. The total of the individual accounts in the receivables ledger at any point in time will be exactly equal to the total included in trade receivables, and the same will apply to the individual accounts in the payables ledger and trade payables. IBg Professional skills focus: Assimilating and using information The receivables and payables ledgers are a key source of information for the purpose of understanding who an entity s receivables and payables are and what the balance owed from and to them is. It is important for you to understand that whilst these accounts hold important accounting information, these are not part of the nominal ledger system. 5.2 Receivables ledger A business must also keep a record of how much money each individual credit customer owes, and what this total debt consists of. The need for a separate account (sometimes referred to as a personal account ) for each customer is a practical one. (cid:127) A customer might ask how much they currently owe. Staff must be able to tell them. (cid:127) It is a common practice to send out statements to credit customers at the end of each month, showing how much they owe, and itemising new invoices or credit notes sent out and payments received during the month. (cid:127) The business managers will want to check the credit position of individual customers, and to ensure that no customer is exceeding their credit limit. 5.3 Payables ledger The payables ledger, like the receivables ledger, consists of a number of personal accounts. These are separate accounts for each individual supplier, and they enable a business to keep a continuous record of how much it owes each supplier at any time. As we will see in Chapter 6, businesses regularly receive statements from their suppliers which show how much is owed at a point in time. --- Trang 124 --- 6 Accounting for discounts Section overview (cid:127) A trade discount is a percentage discount deducted from the list price of goods, owing to the nature of the trading transaction. (cid:127) An early settlement discount is a discount offered to credit customers/offered by credit suppliers which can be taken if an invoice is paid within a required timeframe. (cid:127) Sales are recorded net of trade discounts and, if they are taken, net of early settlement discounts. (cid:127) Similarly, purchases are recorded net of trade discounts, and if they are taken, net of early settlement discounts. There are two types of discount: trade discounts and early settlement discounts. 6.1 Trade discount Definition W Trade discount: A percentage discount deducted from the list price of goods owing to the nature of the trading transaction. A trade discount is a reduction in the amount of money initially demanded on an invoice. (cid:127) If a trade discount is received by a business for goods purchased from a supplier, the amount of money demanded from the business by the supplier will be net of discount (ie, it will be the list price less the discount). (cid:127) If a trade discount is given by a business for goods sold to a customer, the amount of money demanded of the customer by the business will be after deduction of the discount. 6.1. 1 Examples of trade discount (cid:127) A customer is quoted a price of 1 per unit for a particular item, but a lower price of 95p per unit if the item is bought in quantities of 1 00 units or more at a time. This is sometimes called bulk discount. (cid:127) An important customer or a regular customer is offered a discount on all the goods they buy, regardless of the size of each individual order, because the total volume of their purchases over time is so large. 6.1 .2 Accounting for trade discounts (cid:127) Purchases should be recorded net of trade discounts received from suppliers. (cid:127) Sales should be recorded net of trade discounts given to customers. Trade discounts should be deducted before any early settlement discount is calculated. 6.2 Early settlement discounts Businesses often offer discounts to credit customers to encourage them to settle amounts owed more quickly. These are known as early settlement discounts, prompt payment discounts or sometimes cash discounts. i k Definition Early settlement discount: A percentage reduction in the amount payable in return for payment within an agreed period. A customer can choose whether or not to take an early settlement discount offered by a supplier. If the customer decides to take the early settlement discount, the amount they must pay is reduced, provided they pay within the required timeframe. If the customer decides not to take the discount, they must pay the full amount of the invoice but will have a longer period in which to pay. --- Trang 125 --- For example; a supplier charges 1, 000 for goods with a normal credit period of 30 days but offers a discount of 5% if the goods are paid for within 1 0 days of the invoice date. If the customer decides to take the discount, they must pay 950 ( 1, 000 x 95%) within 1 0 days of the invoice date. If the customer decides not to take the discount, they must pay the full 1, 000, but have 30 days in which to make the payment. 6.2.1 Accounting for early settlement discounts offered to customers Sales should be recorded net of early settlement discounts taken by customers. However, at the point of invoice, when the sale is recorded in the accounting system, the business does not know whether or not the customer will take the early settlement discount offered. Therefore, when the sale is recorded, the business should determine whether they expect the customer to take the discount, or not, based on their knowledge of the customer and whether the customer has previously taken advantage of such discounts, and record the sale accordingly. If, when payment is made, the customer does not behave as expected, eg, does take a discount when they were not expected to, the accounting records are adjusted to reflect the full gross value of the goods sold. feS Professional skills focus: Applying judgement Determining whether a credit customer will or will not take advantage of an early settlement discount is matter of judgment for accountants in practice. In an exam question, that judgement will already have been made. You just need to know how to apply the correct accounting treatment. Worked example: Early settlement discounts - credit sales Finnie has normal credit terms of 30 days but offers a prompt payment discount of 5% to customers if they settle invoices within 1 0 days. At 1 9 April, Finnie sold goods totalling 500 to Rabia. Rabia normally takes advantage of the prompt payment discount offered. At 22 April, Finnie sold goods to Shu totalling 340. Shu normally takes a full 30 days to settle their invoices. Requirement Record the transactions in the ledger accounts of Finnie assuming that: (cid:127) Rabia pays within 1 0 days as expected (cid:127) Rabia pays in more than 1 0 days (cid:127) Shu pays after 30 days as expected (cid:127) Shu pays within 1 0 days Solution Accounting for the transaction with Ruby: At the point of invoice Finnie expects Rabia to take advantage of the prompt payment discount as they usually do so. Therefore, the sale should be recorded net of the prompt payment discount: 500 x 95% 475. The journal entry to record the sale is: DEBIT Trade receivables 475 CREDIT Revenue 475 The transaction is recorded in Finnie s ledger accounts as follows TRADE RECEIVABLES Revenue 475 REVENUE Trade receivables --- Trang 126 --- Rabia pays within 1 0 days as expected If Rabia does pay within the 1 0-day period and secures the prompt payment discount as expected, at the point of payment, Finnie will record: DEBIT Cash at bank account 475 CREDIT Trade receivables 475 TRADE RECEIVABLES Revenue 475 Cash at bank account 475 CASH AT BANK ACCOUNT Trade receivables 475 Rabia does not pay within 1 0 days However, if Rabia does not pay within 1 0 days and therefore does not take advantage of the prompt payment discount offered, they will be required to pay the full 500. An adjustment to revenue is therefore required to increase it to the full value of the sale. The journal entry to record the payment and the adjustment is: DEBIT Cash at bank account 500 CREDIT Trade receivables 475 CREDIT Revenue 25 TRADE RECEIVABLES Revenue 475 Cash at bank account 475 CASH AT BANK ACCOUNT Trade receivables 475 Sales 25 REVENUE Trade receivables 475 Cash at bank account 25 Accounting for the transaction with Shu: Based o n experience of past transactions with Shu, Finnie does not expect Shu to take advantage of the prompt payment discount. When the invoice to Shu is recorded, the discount should not be deducted and the full amount of the sale of 340 should be recorded in revenue and trade receivables. TRADE RECEIVABLES ---------------------------------------------------------------------- -------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- I ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------------- Revenue 340 --- Trang 127 --- REVENUE Trade receivables 340 Shu pays after 30 days as expected If Shu pays 340 after 30 days, as expected, the amount paid is recorded as per any other receipt from a credit customer and n o other entries are necessary: TRADE RECEIVABLES Revenue 340 Cash at bank account 340 CASH AT BANK ACCOUNT Trade receivables 340 Shu pays within 1 0 days If Shu unexpectedly pays within 1 0 days and secures the prompt payment discount, Shu will only pay 323 ( 340 x 95%). An adjustment to revenue and trade receivables is required to reduce the revenue recorded by the amount of the discount (5% x 340 1 7). The journal entry would be: DEBIT Cash at bank account 323 DEBIT Revenue 17 CREDIT Trade receivables 340 TRADE RECEIVABLES Revenue 340 Cash at bank account 323 Revenue 17 CASH AT BANK ACCOUNT Trade receivables 323 REVENUE Trade receivables 17 Trade receivables 340 6.2.2 Accounting for early settlement discounts received from suppliers Accounting for early settlement discounts offered to a business by its suppliers is consistent with the approach described above. Any early settlement discount received is offset against purchases or other appropriate expense category. A judgement should be made when the invoice is recorded as to whether or not the business is likely to take advantage of the early settlement discount offered. (Sk Worked example: Early settlement discounts - credit purchases Continuing the above example, prepare Rabia s ledger accounts to show how Rabia would record the purchase transaction assuming that they expected to take advantage of the early settlement discount but then d i d not pay within 10 days. --- Trang 128 --- Solution As Rabia expected to take advantage of the discount when the invoice was received, they should record the purchase net of the discount: PURCHASES Trade payables 475 TRADE PAYABLES Purchases As Rabia does not pay within the required 1 0 days, they must pay the full amount of the invoice of 500 as they will not be eligible for the prompt payment discount. Rabia must make an adjustment to purchases of 25 when the payment is made. PURCHASES Trade payables 475 Cash at bank account 25 TRADE PAYABLES Cash at bank account 475 Purchases 475 CASH AT BANK ACCOUNT Trade payables Purchases 6.2.3 Summary of accounting treatment for early settlement discounts Discounts offered to customers Discounts received from suppliers Early settlement discount is Deduct the amount of the Deduct the amount of the discount expected to be taken discount when recording the when recording the expense and revenue and receivable. payable. If payment is not received within If payment is not made within agreed terms and discount is not agreed terms and discount is not taken, increase revenue by the received, increase the expense by amount of the discount. the amount of the discount. Early settlement discount is not D o not deduct the amount of the Do not deduct the discount when expected to be taken discount when recording the recording the expense and revenue and receivable. payable. If the discount is unexpectedly If the discount is unexpectedly taken, reduce the revenue and taken, reduce the expense and receivable accordingly. payable accordingly. Trade discounts should be deducted before any cash discount is calculated. --- Trang 129 --- Interactive question 4: Discounts I Soft Supplies Co recently purchased from Hard Imports Co 1 0 printers originally priced at 200 each. A 1 0% trade discount was negotiated together with a 5% early settlement discount if payment is made within 1 4 days. It is expected that advantage of the early settlement discount will be taken. Requirements 4.1 Calculate the total of the trade discount. 4.2 Calculate the total of the early settlement discount. Interactive question 5: Discounts II You are required to prepare the statement of profit or loss of Seesaw Timber Merchants for the year ended 31 March 20X6, given the following information. Purchases at gross cost 120,000 Trade discounts received 4,000 Cash discounts received from suppliers 1 ,500 Cash sales 34,000 Credit sales at invoice price 1 50,000 Cash discounts provided to and taken by customers 8,000 Distribution costs 32,000 Administrative expenses 40,000 You should ignore VAT. Accounting for VAT Section overview 1 (cid:127) Standing data in computerised accounting systems will include a business VAT registration number and applicable VAT rates. This information is used to automatically calculate and record VAT o n invoices. A computerised accounting system will also support accurate record keeping for VAT purposes. (cid:127) VAT o n sales (output VAT) is debited to receivables and credited to the VAT control account (it is owed to HMRC). (cid:127) VAT o n purchases (input VAT) is debited to the VAT control account (it is due from HMRC) and credited to payables. (cid:127) The net amount of VAT owed to HMRC is paid to HMRC regularly. --- Trang 130 --- 7.1 What is VAT Value added tax (VAT) is an indirect tax on the supply of goods and services. Tax is collected at each transfer point in the chain from prime producer to final consumer. Eventually, the consumer bears the tax in full and any tax paid earlier in the chain can be recovered by a registered trader who paid it. 5 Worked example: VAT A manufacturing company, Aruba Ltd, purchases raw materials at a cost of 1, 000 plus VAT at the standard rate of 20%. From the raw materials Aruba Ltd makes finished products which it sells to a retail outlet, Beach pic, for 1, 600 plus VAT at 20%. Beach pic sells the products to customers at a total price of 2,000 plus VAT at 20%. Requirement How much VAT is paid at each stage in the chain Solution Value of goods sold VAT 2 0 % Supply to Aruba Ltd (Aruba Ltd pays 200 VAT but recovers it) 1,000 200 Value added by Aruba Ltd 600 Sale to Beach pic (Beach pic pays 320 VAT but recovers it) 1,600 320 Value added by Beach pic 400 1 Sale to consumers (customers pay 400 VAT, and cannot recover it) 2,000 400 7.2 How is VAT collected Although it is the final consumer who eventually bears the full VAT of 400, the sum is collected and paid by the traders who make up the chain, provided they are registered for VAT. Each trader must assume that his customer is the final consumer: (cid:127) They must collect and pay over VAT at the appropriate rate on the full sales value (known as output tax) of the goods sold. (cid:127) They are normally entitled to reclaim VAT paid on his own purchases of goods, expenses and non-current assets (known as input tax) and so makes a net payment to the HMRC equal to the tax on value added by himself. In the example above, the supplier of raw materials collects from Aruba Ltd output VAT of 200, all of which they pay over to HMRC. When Aruba Ltd sells goods to Beach pic, output VAT is charged at the rate of 20% on 1, 600 320. Only 120, however, is paid by Aruba Ltd to HMRC, because the company is entitled to deduct input tax of 200 suffered on its own purchases. Similarly, Beach pic must charge its customers 400 in output VAT, but need only pay over to HMRC the net amount of 80 after deducting the 320 input VAT suffered on its purchase from Aruba Ltd. 7.3 Registered and non-registered traders Traders whose sales (outputs) are below a certain level need not register for VAT although they may do so voluntarily. Unregistered traders neither charge VAT on their outputs nor are entitled to reclaim VAT on their inputs. They are in the same position as a final consumer. All outputs of registered traders are either taxable or exempt. Traders carrying on exempt activities (such as banks) cannot charge VAT on their outputs and consequently cannot reclaim VAT paid on their inputs. Taxable outputs are chargeable at one of three rates: (cid:127) zero rate (on printed books and newspapers for instance) (cid:127) reduced rate (5% on domestic fuel) (cid:127) standard rate: 20% --- Trang 131 --- HMRC identifies supplies falling into each category. Persons carrying on taxable activities (even activities taxable at zero rate) are entitled to reclaim VAT paid on their inputs. In Accounting, the standard rate of VAT is assumed. Businesses prepare a VAT return which is submitted to HMRC. The frequency with which businesses prepare a VAT return and make payments to/reclaim amounts from HMRC depends on the amount of the taxable sales of the business, alongside other conditions such as the type of business, the history of preparing VAT returns on time and the history of making payments on time. (cid:127) The most usual position is to have to pay the net balance to HMRC (when output tax exceeds input tax) ie, the amount owed to HMRC is a payable. (cid:127) A trader who makes zero-rated supplies will have paid more input tax than it has received output tax, so will recover cash from HMRC, ie, the amount due from HMRC is a receivable. 7.4 Accounting for VAT As a general principle the treatment of VAT in the trader s ledger accounts should reflect the trader s role as tax collector, so VAT should not be included in income or in expenses, whether of a capital or a revenue nature. j Pl Professional skills focus: Assimilating and using information Professional accountants must ensure that VAT is accurately recorded in the accounting records for the purposes of completing the VAT return and paying the correct amounts to/claiming the correct amount from HMRC. In a small business, the same accountant may be responsible for entering transactions in the accounting records and completing the VAT return. In larger and more complex businesses, a specialist tax accountant is likely to deal with VAT returns. Professional skills focus: Structuring problems and solutions You may be faced with a question in which VAT charged in a sales transaction or incurred in a purchase transaction has been recorded in income or expenses in error. You need to be able to calculate the VAT element of the transaction and correct the error. 7.4.1 Irrecoverable VAT Where the trader suffers irrecoverable VAT as a cost, as in the following cases, VAT should be included as an expense (it cannot be claimed as input tax). (cid:127) Traders not registered for VAT will suffer VAT on inputs as a cost. This will increase their expenses and the cost of any non-current assets they purchase. (cid:127) Registered traders who also carry on exempted activities may suffer VAT on certain inputs. This will increase the expense in respect of these inputs. (cid:127) Non-deductible inputs will be borne by all traders. - VAT on cars purchased and used in the business is not reclaimable (VAT on a car acquired new for resale, ie, by a car trader, is reclaimable). - VAT on business entertaining is not deductible as input tax other than VAT on entertaining staff. Where VAT is not recoverable it must be regarded as part of the cost of the items purchased and included in the statement of profit or loss or statement of financial position as appropriate. 7.5 VAT and irrecoverable debts Most registered persons are obliged to record VAT when a supply is made or received (effectively when a sales invoice is raised or a purchase invoice recorded). This may have the effect that output tax has to be paid to HMRC before it has all been received from customers. If an amount due from a customer is subsequently written off as irrecoverable, the VAT element may not be recoverable from HMRC for some time after the sale. --- Trang 132 --- 7.6 Summary of accounting entries for VAT Let us summarise how VAT is recorded in the nominal ledger accounts: (1) Sales shown in the statement of profit or loss must exclude output VAT. However, trade receivables will include VAT, as they reflect the total amount due from customers. The double entry for sales o n credit of 500, excluding VAT at 20% is: DEBIT Trade receivables (including VAT, called gross) 600 CREDIT Revenue (excluding VAT, called net) 500 VAT (20% x 500) - output tax 100 (2) Expenses shown in the statement of profit or loss must exclude input VAT. However, trade payables will include input VAT, as they reflect the total amount payable to suppliers. The double entry for credit purchases of 400, excluding VAT at 20%, is: DEBIT Purchases expense (net) 400 VAT a/c (20% x 400) - input tax 80 CREDIT Trade payables (gross) 480 (3) If sales were made or expenses were incurred in cash ratherthan o n credit, the sales and expenses would be recoded excluding the VAT and the cash amount would include VAT. (4) Irrecoverable VAT o n expenses or non-current assets must be included in the cost of the expense o r non- current asset in the statement of profit or loss o r statement of financial position. (5) The net amount d u e to (or from) HMRC should be included in other payables (or other receivables) in the statement of financial position. Professional skills focus: Structuring problems and solutions Output VAT and input VAT as shown in the nominal ledger will form the basis of the VAT return provided to HMRC. Although you d o not need to know about the VAT return in Accounting, you should be aware that it requires the accountant to compile and report specific information to the tax authorities. 7.7 Calculating VAT from a gross amount If you are told that an amount includes VAT at 20% (a gross amount), you can calculate the VAT element by multiplying the gross amount by 20%/1 20% or 1/6. Therefore, the net amount will always b e 5/6 of the gross amount. Context example: VAT calculation A sale of 200 attracts VAT at 20%, ie, 40. The gross amount is 240. To get back to the VAT element: 240 x 1 / 6 40 Interactive question 6: VAT Mussel is preparing financial statements for the year ended 31 May 20X9. Included in its statement of financial position as at 31 May 20X8 was a balance for VAT due from HMRC of 1 5,000. --- Trang 133 --- Mussel s summary statement of profit or loss for the year to 31 May 20X9 is as follows: 000 Sales (net) (all standard rated) 500 Purchases (net) (all standard rated) (1 20) Gross profit 380 Expenses (see note) (280) Net profit 100 000 Note: Expenses Wages and salaries (exempt of VAT) 162 Entertainment expenditure ( 40 irrecoverable VAT 8) 48 Other (net) (all standard rated at 20%) 70 280 VAT payments of 5,000, 1 5,000 and 20,000 have been made in the year to HMRC and a repayment of 1 2,000 was received. Requirement What is the balance for VAT in the statement of financial position as at 31 May 20X9 Assume a 20% standard rate of VAT. Note: Use a T account for VAT. --- Trang 134 --- Summary Orders Orders Recording financial transactions Delivery notes GRNs Bank transaction Sales invoices Payroll Purchase invoices report Computerised accounting system Duality concept Double entry bookkeeping Every transaction gives rise to two equal entries: Debit Credit ASSET EXPENSE Debit Credit Debit Credit Increase Decrease Increase Decrease CAPITAL Debit Credit Decrease Increase LIABILITY INCOME Debit Credit Debit Credit Decrease Increase Decrease Increase ______Debits (DR) ______ Credits (CR) Increase Assets/Expenses Liabilities/Capital/Incom Decrease Liabilities/Capital/Income Assets/Expenses Journal entry DR Account to be debited CR Account to be credited Narrative Further question practice Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 135 --- Confirm your learning 1 What is the nominal ledger (Topic 2) 2 What can a debit entry d o in terms of the elements of the financial statements (Topic 3) 3 What can a credit entry d o in terms of the elements of the financial statements (Topic 3) 4 What is the difference between a trade discount and an early settlement discount (Topic 7) 5 Where is output VAT recorded in the nominal ledger of a VAT- registered entity (Topic 8) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Ledger accounting and double entry chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you d i d not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move o n to the next chapter. Self-test questions Answer the following questions. 1 The credit side of a journal entry may: A Increase sales B Increase expenses C Decrease trade payables D Increase trade receivables 2 The nominal ledger: A Is the record of all transactions not directly recorded by the computerised accounting system B Is used to record only transactions relating to receivables C Is used to record only transactions relating to payables D Is the record of an entity s financial transactions 3 In a T account a debit entry would b e made in the: A Left hand side B Right hand side --- Trang 136 --- 4 A debit entry in a T account will: A Decrease an asset B Decrease an expense C Increase a liability D Decrease capital 5 A credit entry in a T account will: A Decrease an asset B Increase an expense C Decrease a liability D Decrease capital 6 When a credit customer pays an invoice for 120 including VAT at 20%, the credit entry in the VAT ledger account will be: A 120 B 100 C 20 D Nil 7 Early settlement discounts received from suppliers will: A Decrease purchases B Decrease sales C Increase trade payables D Increase trade receivables 8 A journal entry does not need to contain: A The name of the ledger account to be debited B The name of the ledger account to be credited C Narrative D The name of the source document from which the information was obtained 9 Individual credit customer accounts are kept in which ledger A Payables ledger B Trade receivables C Receivables ledger D Nominal ledger --- Trang 137 --- Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 (a) Purchase of books on credit CREDIT payables (increase in liability) (cid:127) Payable increase DEBIT purchases (increase in (cid:127) Purchase increase expense) (b) Purchase of cash register by cheque DEBIT non-current (increase in asset asset) (cid:127) Own a cash register CREDIT cash at bank (decrease in (cid:127) Cash at bank decreases asset) (c) Payment received from a credit customer CREDIT receivables (decrease in asset) (cid:127) Receivables decrease DEBIT cash at bank (increase in (cid:127) Cash at bank account increases asset) (d) Sell books for cash CREDIT sales (increase in income) (cid:127) Revenue increases DEBIT cash at bank (increase in (cid:127) Cash at bank account increases asset) Answer to Interactive question 2 DEBIT Machine account (non-current asset) 8,000 (1) CREDIT Trade payables 8,000 (2) DEBIT Purchases account 500 CREDIT Trade payables 500 (3) DEBIT Trade receivables 1,200 CREDIT Sales 1,200 (4) DEBIT Trade payables 300 CREDIT Cash at bank 300 (5) DEBIT Cash at bank 180 CREDIT Trade receivables 180 (6) DEBIT Wages account 4,000 CREDIT Cash at bank 4,000 --- Trang 138 --- (7) DEBIT Rent account 700 CREDIT Trade payables 700 (8) DEBIT Trade payables 700 CREDIT Cash at bank 700 (9) DEBIT Insurance expense 9 0 CREDIT Cash at bank 90 Answer to Interactive question 3 In this answer we have calculated the balancing figure o n the cash at bank account. We shall come back to this in Chapter 5. For now, just make sure that you completed all the necessary steps correctly. CASH AT BANK ACCOUNT Capital (A) 7,000 Rent (B) 3,500 Bank loan (D) 1,000 Shop fittings (E) 2,000 Sales (F) 10,000 Trade payables (H) 5,000 Trade receivables (I) 2,500 Bank loan interest (J) 100 Other expenses (K) 1,900 Drawings (L) 1,500 14,000 Balancing figure (the amount of cash left over after payments have been made) - carried down 6,500 20,500 20,500 Debit balance brought down 6,500 CAPITAL Cash at bank (A) 7,000 BANK LOAN Cash at bank (D) 1,000 PURCHASES Trade payables (C) 5,000 TRADE PAYABLES Cash at bank (H) 5,000 Purchases (C) 5,000 --- Trang 139 --- RENT Cash at bank (B) 3,500 SHOP Fl I IINGS Cash at bank (E) 2,000 SALES Cash at bank (F) 10,000 Trade receivables (G) 2,500 TRADE RECEIVABLES Sales (G) 2,500 Cash at bank (I) 2,500 BANK LOAN INTEREST Cash at bank (J) 1 00 OTHER EXPENSES Cash at bank (K) 1,900 DRAWINGS ACCOUNT Cash at bank (L) 1,500 If you want to make sure that this solution is complete, you should go through the transactions A to L and tick off each of them twice in the ledger accounts, once as a debit and once as a credit. When you have finished, all transactions in the T account should be ticked, with only totals and the balancing figure in the cash at bank account left over. 1 In fact, there is an easier way to check that the solution to this sort of problem does balance properly, which we will see in Chapter 5. On asset, capital and liability accounts, the debit or credit balance represents the amount of the asset, capital or liability outstanding at the period end. For example, on the cash at bank account, debits exceed credits by 6,500 and so there is a balance on the credit side carried down to be a debit balance of cash at bank of 6,500. On the capital account, there is a credit balance of 7,000 and so the business owes Ron 7,000. The balances on the income and expense accounts represent the total of each type of income or expense for the period. For example, sales revenue for the period totals 1 2,500. Answer to Interactive question 4 4.1 200 ( 200 x 10 x 10%) 4.2 90 ( 200 x 1 0 x 90% x 5%) --- Trang 140 --- Answer to Interactive question 5 Seesaw Timber Merchants Statement of profit or loss for the year ended 31 March 20X6 Revenue (1 50,000 34,000 - 8,000) 176,000 Purchases (1 20,000 - 4,000 - 1, 500) (114,500) Gross profit 61,500 Expenses Distribution costs 32,000 Administrative expenses 40,000 (72,000) Net loss transferred to the statement of financial position (10,500) Answer to Interactive question 6 VAT Output tax - ( 500,000 x Balance b/d 15,000 20%) 100,000 Input tax - Purchases ( 1 20,000 x 20%) 24,000 Cash at bank 12,000 Input tax - Other expenses ( 70,000 x 20%) 14,000 Cash at bank (5,000 1 5,000 20,000) 40,000 Balance c/d 19,000 112,000 112,000 Balance b/d 19,000 Therefore, there is a balance owing to HMRC of 1 9,000, which is shown on the statement of financial position as an other payable. Answers t o Self-test questions 1 A Increase sales A credit in a journal entry may increase sales. The other transactions would all be a debit entry. --- Trang 141 --- 2 D Is the record of an entity s financial transactions The nominal ledger is the accounting record in which all financial transactions are recorded. 3 A Left hand side A credit entry is made in the right-hand side. 4 D Decrease capital Answers A, B and C all describe credit entries. 5 A Decrease an asset Answers B, C and D all describe debit entries. 6 D Nil The VAT is recorded in the VAT account when the invoice is first entered in the nominal ledger, not when the customer pays. 7 A Decrease purchases A discount received from a supplier will decrease the amount of purchases. 8 D The name of the source document from which the information was obtained The name of the source document is not required. Items A, B and C are all required in a journal entry, though narrative is often omitted when the journal is routine. 9 C Receivables ledger The receivables ledger contains the individual customer accounts. The nominal ledger (D) contains the trade receivables account (B) which is the total of all the individual customer accounts. The payables ledger contains individual suppliers accounts. --- Trang 142 --- Chapter 5 ICAEW P r e p a r i n g b a s i c f i n a n c i a l s t a t e m e n t s Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 The initial trial balance 2 Balancing off ledger accounts 3 Preparing the statement of profit or loss 4 Preparing the statement of financial position 5 Preparing basic financial statements Summary J J J Further question practice Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 143 --- I n t r o d u c t i o n Learning outcomes (cid:127) Prepare a trial balance from accounting records and identify the uses of a trial balance (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcomes are: 1f; 3c Syllabus links The material in this chapter will be developed throughout the Accounting module, and then in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple- response questions, some of which may involve calculations. It is also the starting point to preparing financial statements which will be required in the long-form exam question. In the exam you may be required to: (cid:127) specify the nature of items in the statement of financial position: non-current and current assets, non- current and current liabilities, and capital (cid:127) identify the correct balances on ledger accounts (cid:127) identify how ledger account balances would appear in the trial balance (cid:127) process adjustments to the initial trial balance to calculate figures for inclusion in the basic financial statements Chapter study guidance Practical significance Study approach Exam approach Interactive questions The initial trial Approach In the long form balance question in the You will be given an Accounting exam, you The initial trial balance initial trial balance in will be required to is simply a list of all the long form process adjustments the nominal ledger (accounts preparation) to the initial trial account balances at a question in the exam, balance to calculate point in time. It has a so it is most important the figures for debit column and a to understand the inclusion in the basic credit column, which information contained financial statements. must be in the trial balance, equal. Adjustments the errors that can be You may also be are likely to be present and the asked to identify how required to the initial common adjustments ledger account trial balance before needed. It is important balances should be the financial to work carefully shown in the trial statements can be through the sections balance. prepared. relating to making adjustments and processing adjustments. Stop and think Why do you think computerised accounting systems mean there are fewer errors in initial trial balances --- Trang 144 --- Balancing off ledger Approach In the exam you may accounts be required to identify This is a short section the correct balances At the end of an that can be covered on ledger accounts. accounting period, quickly. Ensure you Balancing off ledger the balances on the understand the accounts is also an nominal ledger difference in the important step in accounts need to be approach to the preparing financial balanced off. This will statement of profit or statements. be done automatically loss ledger accounts in a computerised and the statement of accounting system, financial position but it is important that ledger accounts. you understand the Stop and think process. Why are statement of financial position balances carried forward to the next accounting period Preparing the Approach In the exam you may IQ1 Statement of statement of profit or be required to identify profit or loss Ensure you loss items which will understand howto This is a useful check appear in the We have met the identify statement of that you understand statement of profit or statement of profit or profit or loss account how to prepare a loss. loss (SPL) before and balances and how to basic SPL. you should be starting use them to calculate to become familiar profit. with its format and Stop and think content. We will now Other than on the look at how to identify statement of profit or the nominal ledger loss, where else does accounts required to the profit or loss for prepare the SPL. the year appear Preparing the Approach In the exam, you will IQ2 Statement of statement of financial be expected to financial position It is essential that you position correctly classify items understand that the This is a useful check in the statement of The statement of profit or loss for the that you understand financial position: financial position (SFP) period and any how to prepare a non-current and can be easily drawings are part of basic SFP. current assets, non- prepared using the the closing capital on current and current closing balances on the statement of liabilities, and the relevant nominal financial position. capital. This will be ledger accounts. The Stop and think required in the long- trickiest part of the Why are drawings a form question but process is likely to be may also be asked in deduction from the transfer of profit capital multiple choice, multi- for the year into the part multiple choice statement of financial or multiple response position. format. Preparing basic Approach You will need to IQ3 Preparing basic financial statements prepare financial financial statements Preparing financial statements in the You are now ready to statements is best If you are struggling long-form question in prepare a set of basic learned by example to work out how to the Accounting exam. financial statements. and practice. You record the There is a lot of must work through transactions, try information to handle the worked example writing out the when preparing slowly, ensuring you accounting equation --- Trang 145 --- understand where the as a starting point. so work carefully and numbers are coming methodically. from and what is happening at each stage. This may seem difficult at first but with practice you will become more comfortable with it. Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 The i n i t i a l t r i a l balance 9 Section overview (cid:127) At the end of a period the balances on all the nominal ledger accounts are listed on an initial trial balance: debit balances appear in the debit column and credit balances in the credit column. When added up, the totals of the two columns should be equal. (cid:127) Extracting an initial trial balance from the accounting system is the starting point for preparing the financial statements. (cid:127) Adjustments may be required to the initial trial balance to correct for errors or omissions and to record period end adjustments. (cid:127) Adjustments are made using journals which are processed against the initial trial balance to create a final trial balance. Financial statements are prepared from the final trial balance. Definition Initial trial balance: A list of nominal ledger account balances shown in debit and credit columns at a point in time, usually the end of the accounting year. The initial trial balance is not part of the double entry system, it is extracted from the double entry system. It is the starting point to preparing the financial statements. At the end of a reporting period (usually the year-end), a balance is extracted for each nominal ledger account. (cid:127) All debits and credits on the account, including opening balances, are totalled. (cid:127) If total debits exceed total credits, there is a debit balance on the account. (cid:127) If total credits exceed total debits the account has a credit balance. In Ryder s ledger accounts, which we drew up in Chapter 4, there was very little balancing to do. (cid:127) Both trade payables and trade receivables balanced off to zero. (cid:127) The cash at bank account has a debit balance of 6,530 (total debits exceed total credits). (cid:127) The total on the sales account is 12 ,500, which is a credit balance. Otherwise, the accounts have only one entry each, so there is no totalling to do to arrive at the balance on each account. We will continue to use Ryder s nominal ledger accounts to illustrate how the initial trial balance is prepared and used. In a computerised accounting system, an initial trial balance can be created very quickly and easily using the nominal ledger account balances at any point in time. In this Workbook, we assume a more manual approach to preparing and using a trial balance whereby an initial trial balance is created at the year-end date and any adjustments are processed against those initial balances to give a final trial balance. We do not assume that multiple trial balances are extracted. --- Trang 146 --- 1 .1 Listing ledger account balances in the initial trial balance Here are the balances on Ryder accounts: Debit Credit Cash at bank 6,500 Capital 7,000 Bank loan 1,000 Purchases 5,000 Trade payables 0 Rent 3,500 Shop fittings 2,000 Sales 12,500 Trade receivables 0 Bank loan interest 100 Other expenses 1,900 Drawings 1,500 20,500 20,500 It does not matter in what orderthe various accounts are listed in the initial trial balance. In a computerised system the order will be based on the account code assigned to each ledger account, which means that related items, eg, all non-current assets, are normally listed together. 1 .2 Potential errors in an initial trial balance The initial trial balance is said to balance when the total of the debit column equals the total of the credit column. In a manual accounting system the trial balance provides a good check that the rules of double entry have been maintained. In a computerised accounting system the initial trial balance will always balance as the system will only accept the entry of transactions in which the debits equal the credits. That does not, however, mean that the nominal ledger accounts are complete and error-free, and automation bias may lead users to believe that errors are less likely in a computerised system. An accountant would be expected to exercise professional scepticism when reviewing the trial balance to check for the reasonableness of each nominal ledger account balance. This reasonableness check can help to identify any errors or omissions that may have occurred in the accounting process. Some errors that can arise in a computerised accounting system include, but are not limited to: (cid:127) Users may make data entry errors, for example inputting 1 0,000 not 1 00,000. (cid:127) There could be bugs in the software leading to errors. In the early 2000 s subpostmasters employed by the Post Office reported problems with the Horizon software which was used to manage their accounts. The subpostmasters stated that the software contained bugs which caused apparent shortfalls. The Post Office argued the software to be accurate, and that the shortfalls were due to fraud by the subpostmasters. The Post Office took some subp ostmasters to court leading to hundreds of convictions. A group of subpostmasters subsequently sued the Post Office and it was ruled in 201 9 that the Horizon system did contain bugs, errors and defects. The Enquiry into the scandal is still ongoing in 2024. (cid:127) There could be inaccurate formulae in the software, for example tax or depreciation rates. (cid:127) Often the accounting system is integrated with other software packages for example payroll and inventory management. If there are integration errors, or errors in the other software this would lead to errors in the accounting data. Here are some specific types of errors which may arise in the ledger accounts. (cid:127) Transposition errors: two digits in an amount are accidently recorded the wrong way round. (cid:127) Omission errors: a transaction is completely omitted, either in the nominal ledger, orthe trial balance itself, so neither a debit nor a credit is made. --- Trang 147 --- (cid:127) Commission errors: a debit or credit is posted to the correct side of the nominal ledger, but to a wrong account, eg, wages paid are debited to the rent account instead of the wages account (cid:127) Compensating errors: one error is exactly cancelled by another error elsewhere. (cid:127) Errors of principle: such as cash paid in respect of machinery maintenance (an expense) being debited to machinery cost (an asset). We shall come back to these errors in Chapter 6. Professional skills focus: Structuring problems and solutions You may be faced with a question in which you are informed that the trial balance or other accounting information presented contains an error. You will need to identify what type of error is present then determine the journal entry required to correct it. Professional skills focus: Applying judgement Looking for errors in a trial balance that balances requires an accountant to apply their judgement as to whether any balances appear unusual or whether there are unexpected issues, such as a balance we would normally expect to be a debit presenting as a credit. 1 .3 Making adjustments after the initial trial balance is extracted We often need to make adjustments (eg, for omissions, errors or period end journals) after the initial trial balance has been extracted. These adjustments must be recorded in the nominal ledger accounts using adjustment journals. After the adjustment journals have been posted, rather than extracting another trial balance, we can instead adjust the initial trial balance already extracted to produce a final trial balance. Adjusting the initial trial balance in this way is the approach you are expected to take in the Accounting exam. Worked example: Initial trial balance and adjustment journals As at 31. 3.20X7, Hawk Ltd, which is not registered for VAT, has the following nominal ledger account balances: Balance Bank loan 12,000 Cash at bank 11,700 Capital 13,000 Rent 1,880 Trade payables 11,200 Purchases 12,400 Sales 34,600 Other payables 1,620 Trade receivables 12,000 Bank loan interest 1,400 Other expenses 11,020 Non-current assets 22,020 On 31. 3.X7 Hawk Ltd made the following transactions after the balances listed above had been calculated. --- Trang 148 --- (cid:127) Bought materials for 1, 000, half for cash and half on credit. (cid:127) Made sales of 1, 040, 800 of which were on credit. (cid:127) Paid wages to shop assistants of 260 in cash. Requirements Prepare an initial trial balance showing the balances as at the end of 31 .3.X7. (a) Prepare the adjustment journals for the transactions on 31 .3.X7 (b) Prepare the final trial balance at 31 .3.X7 Solution To prepare an initial trial balance we split the original balances into debit and credit balances. You need to use your knowledge of assets, capital, liabilities, expenses and income for this. Debit Credit Bank loan 12,000 Cash at bank 11,700 Capital 13,000 Rent 1,880 Trade payables 11,200 Purchases 12,400 Sales 34,600 Other payables 1,620 Trade receivables 12,000 Bank loan interest 1,400 Other expenses 11,020 Non-current assets 22,020 72,420 72,420 (a) DEBIT Purchases 1,000 CREDIT Cash at bank 500 Trade payables 500 DEBIT Cash at bank 240 Trade receivables 800 CREDIT Sales 1,040 DEBIT Other expenses 260 CREDIT Cash at bank 260 (b) Debit Credit Bank loan 12,000 Cash at bank (1 1, 700 hh 240 - 500 - 260) 11,180 Capital 13,000 --- Trang 149 --- Rent 1,880 Trade payables (1 1,200 500) 11,700 Purchases (1 2,400 1, 000) 13,400 Sales (34,600 1,040) 35,640 Other payables 1,620 Trade receivables (1 2,000 800) 12,800 Bank loan interest 1,400 Other expenses (1 1, 020 260) 11,280 Non-current assets 22,020 73,960 1 .4 Processing adjustments to the initial trial balance An alternative way of presenting the adjustments is using a columnar approach whereby an additional debit column and an additional credit column are created alongside the initial trial balance. A final trial balance is then created by adding across. (cid:127) To a debit balance in the trial balance, add debits and subtract credits. If the result is positive, insert it in the debit column of the final trial balance. If it is negative, insert it in the credit column of the final trial balance. (cid:127) To a credit balance in the trial balance, subtract debits and add credits. If the answer is positive, insert it in the credit column of the final trial balance. If it is negative, insert it in the debit column of the final trial balance. (cid:127) Using the balances from Hawk Ltd above: Ledger account Initial trial balance Adjustments Final trial balance Debit Credit Debit Credit Debit Credit Bank loan 12,000 12,000 Cash at bank 11,700 240 760 11,180 Capital 13,000 13,000 Rent 1,880 1,880 Trade payables 11,200 500 11,700 Purchases 12,400 1,000 13,400 Sales 34,600 1,040 35,640 Other payables 1,620 1,620 Trade receivables 12,000 800 12,800 Bank loan interest 1,400 1,400 Other expenses 11,020 260 11,280 Non-current assets 22,020 22,020 72,420 72,420 2,300 2,300 73,960 73,960 500 260 --- Trang 150 --- Professional skills focus: Assimilating and using information Processing adjustments against an initial trial balance requires you to work through various pieces of information. You will need to understand the information, prepare any necessary calculations, formulate the correct journal entry and process the journal against the initial trial balance. To successfully complete this, you will need to work methodically, working through each of the required adjustments one at a time. 2 Balancing off l e d g e r accounts Section overview (cid:127) At the end of a reporting period, once all adjustments have been posted, the accounts in the nominal ledger are balanced off. (cid:127) The balances o n asset, liability and capital accounts are carried down at the end of the current accounting period and brought down to the start of the following accounting period. (cid:127) The balances o n the income and expense accounts are taken to the statement of profit or loss and are not carried d o w n to the following accounting period. (cid:127) I n a computerised accounting system, the ledger accounts can be balanced off automatically and a statement of profit or loss and statement of financial position prepared at any date. The process is likely to be done automatically at the end of the year but may also be done at other times. At the end of a reporting period, when all adjustment journals have been posted, each nominal ledger account must be balanced off. Although computerised accounting systems can automatically balance off the ledger accounts, it is important that you understand the process. (cid:127) For income or expense accounts, the balance is transferred to the statement of profit o r loss, leaving a nil balance in the income or expense account. This is covered in section 3 below. (cid:127) For asset, liability or capital accounts, the balance o n the account is carried down and brought down to give the opening balance for the next accounting period. This is covered in section 4 below. Consider Ryder s cash at bank account which we completed in Interactive question 3 in Chapter 4: CASH AT BANK ACCOUNT Capital 7,000 Rent 3,500 Bank loan 1,000 Shop fittings 2,000 Sales 10,000 Trade payables 5,000 Trade receivables 2,500 Bank loan interest 100 Other expenses 1,900 Drawings 1,500 14,000 Balancing figure (the amount of cash left over after payments have been made) - c/d 6,500 20,500 20,500 Debit balance b/d 6,500 Let s consider the process undertaken to balance off the account: --- Trang 151 --- (cid:127) First, the debits are totalled giving 20,500, and then the credits are totalled giving 1 4,000. (cid:127) The largertotal ( 20,500) is placed in the total columns on both the debit side and credit side of the account. (cid:127) The smaller total ( 14 ,000) is then subtracted from the larger total ( 20,500), and this amount ( 6,500) is inserted as a balance on the side which had the smaller total. This is referred to as the balance carried down (often just written as Balance c/d). (cid:127) The balance carried down at the end of one reporting period becomes the balance brought down (Balance b/d) at the start of the following reporting period. 3 Preparing t h e s t a t e m e n t of profit o r loss Section overview (cid:127) To prepare the statement of profit or loss, a pro forma is first prepared with the relevant income and expenses headings included. (cid:127) All the income and expense balances in the trial balance are transferred to the pro forma. The statement of profit or loss is added down to calculate the profit or loss for the period. 3.1 How to prepare the statement of profit or loss A computerised system can automatically prepare financial statements when instructed to do so. However, it is important that you understand the steps that underlie this process. So, consistent with the manual approach taken to preparing the trial balance in section 1 , we will also explain a manual approach to preparing the financial statements. The first step to preparing the statement of profit or loss is to create a pro forma with all the relevant income and expense accounts. For example: Sales X Cost of sales (purchases) (X) Gross profit X Other income X Expenses (X) Profit/ (loss) for the year X/(X) The income and expense balances in the trial balance can then be transferred to the pro forma. (cid:127) Sales and purchases are included in calculating gross profit. (cid:127) All other income is added and all other expenses are deducted to arrive at profit or loss for the period. (cid:127) Remember drawings are not an expense, these are part of the capital for the year and included as part of the statement of financial position. PURCHASES Statement of profit or loss RENT Cash at bank a/c 3,500 Statement of profit or loss 3,500 --- Trang 152 --- SALES Statement of profit or loss 12,500 Cash at bank a/c 10,000 Trade receivables 2,500 12,500 12,500 BANK LOAN INTEREST Cash at bank a/c 100 Statement of profit or loss 100 OTHER EXPENSES Cash at bank a/c 1,900 Statement of profit or loss 1,900 4 Preparing t h e s t a t e m e n t of financial p o s i t i o n B Section overview (cid:127) To prepare the statement of financial position, a pro forma is first prepared with the relevant assets, capital and liabilities headings included. (cid:127) The assets, liabilities, opening capital and drawings are transferred from the trial balance to the statement of financial position proforma. (cid:127) The profit or loss for the year from the statement of profit or loss is then included as part of capital. (cid:127) The total assets are added and the total capital and liabilities are added. The total assets should equal the total capital and liabilities to show that the statement of financial position balances. 4.1 How to prepare the statement of financial position We have the cash, capital, drawings, bank loan, trade payables, non-current assets and trade receivables accounts to balance off. The balances on the accounts representing assets, capital and liabilities of the business (not income and expenses) are carried down in the accounting records of the business at the end of the current reporting period. They then become opening balances brought down for the next reporting period. The drawings are transferred to the capital account, and the profit or loss from the statement of profit or loss is also included in the capital account. This is so that the closing balance on the capital account at the end of one period is carried down to become the opening balance at the start of the next accounting period. CAPITAL Drawings 1,500 Cash at bank a/c 7,000 Profit (from statement of profit or Balance c/d 7,500 loss) 2,000 9,000 9,000 Balance b/d 7,500 Ryder therefore begins the new reporting period with a credit balance brought down of 7,500 on the capital account. --- Trang 153 --- Note that: (cid:127) A debit balance brought down denotes an asset. (cid:127) A credit balance brought down denotes a liability. This principle is illustrated by Ryder s bank loan account: BANK LOAN ACCOUNT Balance (c/d) 1,000 Cash at bank 1,000 1,000 1,000 Balance (b/d ) 1,000 Ryder therefore begins the new reporting period with a credit balance brought down of 1, 000 on the loan account. Interactive question 1: Statement of financial position Prepare Ryder s statement of financial position. 5 Preparing basic financial statements BJ Section overview (cid:127) To prepare the statement of profit or loss and statement of financial position together, you need to methodically follow the steps involved: - calculate balances on all nominal ledger accounts - prepare the initial trial balance to check accuracy - prepare and process journals in respect of any adjustments to create the final trial balance - set up pro forma statement of profit or loss and use income and expense balances in final trial balance to prepare the statement of profit or loss and calculate the profit/(loss) for the period - set up pro forma statement of financial position and use assets, liabilities and capital balances in the final trial balance to prepare the statement of financial position - transfer the profit or loss and drawings balance to capital account 5.1 Preparing financial statements We can now work through a full example of preparing a set of basic financial statements. This is the most important example in the Workbook so far. It covers all the accounting steps from recording transactions in the nominal ledger accounts to preparing the statement of profit or loss and statement of financial position. You must try this example yourself first, before carefully following through the solution. Worked example: Preparing financial statements A business is established with capital of 2,000 paid by the owner into a business bank account, which has an overdraft facility. During the first year s trading, the following transactions occurred: --- Trang 154 --- Purchases of goods for resale, on credit 4,300 Payments to credit suppliers 3,600 Sales, all on credit 5,800 Receipts from credit customers 3,200 Non-current assets purchased for cash 1 ,500 Other expenses, all paid in cash 900 Requirement Prepare nominal ledger accounts, a statement of profit or loss for the year and a statement of financial position as at the end of the year. Solution The first thing to do is to open ledger accounts. The accounts needed are: cash at bank; capital; trade payables; purchases; non-current assets; sales; trade receivables; other expenses. The next step is to perform the double entry bookkeeping for each transaction. Normally you would write them straight into the accounts, but to make this example easier to follow, they are listed below. Debit Credit 1 Establishing business ( 2,000) Cash at bank account Capital 2 Credit purchases ( 4,300) Pu rchases Trade payables 3 Payments to suppliers ( 3,600) Trade payables Cash at bank account 4 Credit sales ( 5,800) Trade receivables Sales 5 Payments from customers ( 3,200) Cash at bank account Trade receivables 6 Non-current assets ( 1,500) Non-current assets Cash at bank account 7 Other (cash) expenses ( 900) Other expenses Cash at bank account So far, the ledger accounts will look like this: CASH AT BANK ACCOUNT Capital 2,000 Trade payables 3,600 Trade receivables 3,200 Non-current assets 1,500 Other expenses 900 CAPITAL Cash at bank account 2,000 TRADE PAYABLES Cash at bank account 3,600 Purchases 4,300 PURCHASES Trade payables 4,300 --- Trang 155 --- NON-CURRENT ASSETS Cash at bank account SALES Trade receivables 5,800 TRADE RECEIVABLES Sales 5,800 Cash at bank account 3,200 OTHER EXPENSES Cash at bank account 900 Next, the accounts are balanced off as shown below so a trial balance can be prepared. In a computerised accounting system this would happen automatically. The ledger accounts will now look as follows: CASH AT BANK ACCOUNT Capital 2,000 Trade payables 3,600 Trade receivables 3,200 Non-current assets 1,500 Balance c/d 800 Other expenses 900 6,000 6,000 Balance b/d 800 A credit balance b/d on the cash at bank ledger account means that this cash item is a liability, not an asset. This indicates a bank overdraft of 800. CAPITAL Balance c/d 2,000 Cash at bank a/c 2,000 2,600 2,000 Balance b/d 2,000 TRADE PAYABLES Cash at bank a/c 3,600 Purchases 4,300 Balance c/d 700 4,300 4,300 Balance b/d 700 --- Trang 156 --- PPUURRCCHHAASSEESS AACCCCOOUUNNTT TTrraaddee ppaayyaabblleess 44,,330000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 44,,330000 NNOONN--CCUURRRRIIEENNTT AASSSSEETTSS CCaasshh aatt bbaannkk aa//cc 11 ,,550000 BBaallaannccee cc//dd 11 ,,550000 BBaallaannccee bb//dd 11,,550000 SSAALLEESS SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 55,,880000 TTrraaddee rreecceeiivvaabblleess 55,,880000 TTRRAADDEE RREECCEEIIVVAABBLLEESS SSaalleess 55,,880000 CCaasshh aatt bbaannkk aa//cc 33,,220000 BBaallaannccee cc//dd 22,,660000 55,,880000 55,,880000 BBaallaannccee bb//dd 22,,660000 OOTTHHEERR EEXXPPEENNSSEESS CCaasshh aatt bbaannkk aa//cc 990000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 990000 AAss wwee aarree ffoolllloowwiinngg aa mmaannuuaall aapppprrooaacchh ttoo pprreeppaarriinngg tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, aatt tthhiiss ssttaaggee wwee sshhoouulldd ddrraaww uu pp aa ttrriiaall bbaallaannccee ttoo mmaakkee ssuurree tthhee ddoouubbllee eennttrryy iiss aaccccuurraattee.. IInn aa ccoommppuutteerriisseedd ssyysstteemm tthhee ttrriiaall bbaallaannccee wwiillll aallwwaayyss bbaallaannccee.. TThhee ccoommppuutteerriisseedd ssyysstteemm wwoouulldd pprroodduuccee aa ttrriiaall bbaallaannccee ttoo aaiidd wwiitthh tthhee pprreeppaarraattiioonn ooff tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. DDeebbiitt CCrreeddiitt CCaasshh aatt bbaannkk 880000 CCaappiittaall 22,,000000 TTrraaddee ppaayyaabblleess 770000 PPuurrcchhaasseess 44,,330000 NNoonn--ccuurrrreenntt aasssseettss 11,,550000 SSaalleess 55,,880000 TTrraaddee rreecceeiivvaabblleess 22,,660000 OOtthheerr eexxppeennsseess 990000 99,,330000 99,,330000 TThhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ccaann tthheenn bbee pprreeppaarreedd aass ffoolllloowwss:: --- Trang 157 --- Statement of profit or loss Sales 5,800 Cost of sales (purchases) (4,300) Gross profit 1,500 Expenses (900) Profit for the year 600 Statement of financial position Assets Non-current assets 1,500 Current assets Trade receivables 2,600 Total assets 4,100 Capital and liabilities Capital At start of period 2,000 Profit for period 600 At end of period 2,600 Current liabilities Bank overdraft 800 Trade payables 700 1,500 Total capital and liabilities 4,100 We can now transfer the profit from the statement of profit or loss to the capital account as shown below. This year s carried down capital becomes next year s brought down capital. CAPITAL Balance c/d 2,600 Cash at bank a/c 2,000 Profit (from the statement of profit o r loss) 600 2,600 2,600 Balance b/d 2,600 --- Trang 158 --- Interactive question 2: Preparing basic financial statements Piper had the following transactions in the first year of trading as a beauty therapist visiting clients at home. 1.1.X 1 Opened a bank account with 400. Took out bank loan for 5,000 and agreed an overdraft limit of the same amount. 1.1.X 1 Bought a car for 2,500 cash. Insured it for 300 cash. Bought equipment for 1, 500, and consumable items for 500, both on credit. During year: Charged customers 15,945, all on credit. During year: Purchased further consumables for 3,690 on credit, and diesel for car for 650 in cash. During year: Took 1, 250 in cash from the bank for herself. By end of year: Received 12 ,935 from credit customers and paid 3,250 to credit suppliers. Requirements (a) Prepare Piper s ledger accounts in respect of the first year of trading. (b) Prepare Piper s statement of profit or loss for year ended 31 December 20X1 (the end of the first year of trading) Revenue (sales) Cost of sales (purchases) Gross profit Expenses Car expenses Insurance Profit for the year (c) Prepare Piper s statement of financial position at the end of the first year of trading Non-current assets Current assets Trade receivables Cash at bank Total assets --- Trang 159 --- Capital and liabilities Opening capital Profit for year Drawings Closing capital Non-current liabilities Bank loan Current liabilities Trade payables Total capital and liabilities Professional skills focus: Assimilating and using information The trial balance extracted from the computerised accounting system at the end of the period contains all the information required to prepare the financial statements. It is essential that you can take the information contained in the trial balance, identify the balances which are included in each of the primary financial statements and efficiently use the information to prepare those financial statements. In the exam you will be given a draft trial balance and a number of adjustments along with a pro forma statement of profit or loss and statement of financial position. A full example with the recommended methods to use in the exam is given in Chapter 1 2. --- Trang 160 --- S u m m a r y Preparing financial statements Post transactions to ledger accounts List balances on initial trial balance Debit Credit Expenses Income Assets Capital Liabilities Prepare and process required adjustment journals Produce final trial balance, then insert balances in Statement of profit or loss and __________ Statement of financial position --- Trang 161 --- FFuurrtthheerr qquueessttiioonn pprraaccttiiccee 11 KKnnoowwlleeddggee ddiiaaggnnoossttiicc BBeeffoorree yyoouu mmoovvee oonn ttoo qquueessttiioonn pprraaccttiiccee,, ccoonnffiirrmm yyoouu aarree aabbllee ttoo aannsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss hhaavviinngg ssttuuddiieedd tthhiiss cchhaapptteerr.. IIff nnoott,, yyoouu aarree aaddvviisseedd ttoo rreevviissiitt tthhee rreelleevvaanntt lleeaarrnniinngg ffrroomm tthhee ttooppiicc iinnddiiccaatteedd.. CCoonnffiirrmm yyoouurr lleeaarrnniinngg 1 Can you explain what a trial balance is and why it is used (Topic 1 ) 2 Can you explain what a commission error is (Topic 1 ) 3 CCaann yyoouu eexxppllaaiinn wwhhaatt aann eerrrroorr ooff pprriinncciippllee iiss ((TTooppiicc 11 )) 4 Which balances are carried down to the next accounting period (Topic 2) 22 CChhaapptteerr SSeellff--tteesstt qquueessttiioonn pprraaccttiiccee AAiimm ttoo ccoommpplleettee aallll tthhee sseellff--tteesstt qquueessttiioonnss aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. OOnnccee ccoommpplleetteedd,, aatttteemmpptt aallll tthhee qquueessttiioonnss iinn tthhee PPrreeppaarriinngg bbaassiicc ffiinnaanncciiaall ssttaatteemmeennttss cchhaapptteerr ooff tthhee AAccccoouunnttiinngg QQuueessttiioonn BBaannkk.. RReeffeerr bbaacckk ttoo tthhee lleeaarrnniinngg iinn tthhiiss cchhaapptteerr ffoorr aannyy qquueessttiioonnss wwhhiicchh yyoouu ddiidd nnoott aannsswweerr ccoorrrreeccttllyy oorr wwhheerree tthhee ssuuggggeesstteedd ssoolluuttiioonn hhaass nnoott pprroovviiddeedd ssuuffffiicciieenntt eexxppllaannaattiioonn ttoo aannsswweerr aallll yyoouurr qquueerriieess.. OOnnccee yyoouu hhaavvee aatttteemmpptteedd tthheessee qquueessttiioonnss,, yyoouu ccaann mmoovvee oonn ttoo tthhee nneexxtt cchhaapptteerr.. SSeellff--tteesstt qquueessttiioonnss AAnnsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss.. 11 IInnaa ppeerriioodd,, ssaalleess aarree 11 4400,,000000,, ppuurrcchhaasseess 7755,,000000 aanndd ootthheerr eexxppeennsseess 2255,,000000.. WWhhaatt iiss tthhee pprrooffiitt ffoorr tthhee ppeerriioodd ttoo bbee ttrraannssffeerrrreedd ttoo tthhee ccaappiittaall aaccccoouunntt AA 4400,,000000 BB 6655,,000000 C 7755,,000000 D 114400,,000000 22 DDuurriinngg MMaarrcchh,, CChhaann hhaadd tthhee ffoolllloowwiinngg iitteemmss iinn hhiiss ccaasshh aatt bbaannkk aaccccoouunntt:: BBaallaannccee aatt 11 MMaarrcchh ((oovveerrddrraawwnn)) 550000 RReecceeiippttss ffrroomm ccrreeddiitt ccuussttoommeerrss 1122,,000000 PPaayymmeennttss ttoo ccrreeddiitt ssuupppplliieerrss 77,,000000 PPaayymmeennttss ffoorr eexxppeennsseess 33,,000000 CCaasshh ddrraawwnn ffoorr oowwnn uussee 11,,220000 --- Trang 162 --- RReeqquuiriermemenetnt WWhhaatt iiss tthhee bbaallaannccee oonn CChhaann ss ccaasshh aatt bbaannkk aaccccoouunntt aatt 3311 MMaarrcchh AA DDeebbiitt 330000 BB CCrreeddiitt 330000 CC DDeebbiitt 11,,330000 DD CCrreeddiitt 11/,330000 33 WWhhiicchh ttwwoo ooff tthhee ffoolllloowwiinngg iitteemmss wwiillll bbee lliisstteedd aass aa ccrreeddiitt bbaallaannccee oonn aa ttrriiaall bbaallaannccee AA TTrraaddee ppaayyaabblleess BB PPuurrcchhaasseess CC SSuunnddrryy eexxppeennsseess DD CCaappiittaall EE DDrraawwiinnggss 44 SSeelleecctt wwhheetthheerr tthhee ffoolllloowwiinngg bbaallaanncceess wwiillll bbee iinn tthhee ddeebbiitt oorr tthhee ccrreeddiitt ccoolluummnnss ooff tthhee ttrriiaall bbaallaannccee.. DDeebbiitt oorr ccrreedditit MMaacchhiinneerryy TTrraaddee ppaayyaabblleess DDrraawwiinnggss SSaalleess BBaannkk oovveerrddrraafftt RReennttaall iinnccoommee 55 WWhheenn aann eerrrroorr iinn aa ddeebbiitt eennttrryy iiss ccaanncceelllleedd oouutt bbyy aann eerrrroorr iinn aa ccrreeddiitt eennttrryy,, tthhiiss iiss ccaalllleedd:: AA AA ccoommmmiissssiioonn eerrrroorr BB AA ccoommppeennssaattiinngg eerrrroorr CC AAnn oommiissssiioonn eerrrroorr DD AAnn eerrrroorr ooff pprriinncciippllee 66 AAnn eerrrroorr hhaass lleedd ttoo EEbboonnyy oommiittttiinngg bbaannkk cchhaarrggeess ooff 5500 ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss.. TThhiiss ccoouulldd hhaavvee bbeeeenn ccaauusseedd bbyy aann eerrrroorr ooff ccoommmmiissssiioonn.. AA TTrruuee BB FFaallssee --- Trang 163 --- 77 AA ssoollee ttrraaddeerr hhaass jjuusstt rreeaalliisseedd tthhaatt ddrraawwiinnggss ooff 11 0000 wweerree eenntteerreedd iinnttoo tthhee aaccccoouunnttiinngg rreeccoorrddss aass aa ddeebbiitt ttoo eexxppeennsseess aanndd aa ccrreeddiitt ttoo tthhee ccaasshh aatt bbaannkk aaccccoouunntt. WWhhaatt iiss tthhee jjoouurrnnaall eennttrryy rreeqquuiirreedd ttoo ccoorrrreecctt tthhiiss eerrrroorr AA DDeebbiitt CCaasshh aatt bbaannkk aaccccoouunntt 110000,, CCrreeddiitt DDrraawwiinnggss 11 0000 BB DDeebbiitt DDrraawwiinnggss 110000,, CCrreeddiitt CCaasshh aatt bbaannkk aaccccoouunntt 11 0000 CC DDeebbiitt EExxppeennsseess 11 0000,, CCrreeddiitt DDrraawwiinnggss 11 0000 DD DDeebbiitt DDrraawwiinnggss 110000,, CCrreeddiitt EExxppeennsseess 11 0000 7 88 AAtt 3311 DDeecceemmbbeerr 2200XX66 RReeyyeess ttoottaall aasssseettss aarree 2200,,337766 aanndd tthhee nnoonn--ccuurrrreenntt lliiaabbiilliittiieess aarree 11 00,,000000.. IIff tthhee ccuurrrreenntt lliiaabbiilliittiieess aarree 66,,229900 tthheenn tthhee ccaappiittaall bbaallaannccee aatt 3311 DDeecceemmbbeerr 2200XX66 mmuusstt bbee:: AA 44,,008866 BB 1166,,666666 CC 2244,,008866 DD 3366,,666666 NNooww gg oo bbaacckk ttoo tthhee IInnttrroodduuccttiioonn aanndd eennssuurree tthhaatt yyoouu hhaavvee aacchhiieevveedd tthhee LLeeaarrnniinngg oouuttccoommeess lliisstteedd ffoorr tthhiiss cchhaapptteerr.. AAnnsswweerrss tt oo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 11 RRyyddeerr SSttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aatt eenndd ooff ffiirrsstt ttrraaddiinngg ppeerriioodd AASSSSEETTSS NNoonn--ccuurrrreenntt aasssseettss 22,,000000 CCuurrrreenntt aasssseettss CCaasshh aatt bbaannkk 66,,550000 TToottaall aasssseettss 88,,550000 CCAAPPIITTAALL AA NN DD LLIIAABBIILLIITTIIEESS OOwwnneerr ss ccaappiittaall 77,,550000 NNoonn--ccuurrrreenntt lliiaabbiilliittiieess BBaannkk llooaann 11 ,,000000 TToottaall ccaappiittaall aanndd lliiaabbiillitiiteiess 88,,550000 --- Trang 164 --- AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 22 ((aa)) CCAASSHH AATT BBAANNKK AACCCCOOUUNNTT 11..11..XX11 CCaappiittaall 440000 11..11..XX 11 IInnssuurraannccee 330000 11..11..XX11 LLooaann 55,,000000 11..11..XX 11 NNoonn--ccuurrrreenntt aasssseettss 22,,550000 3311..1122..XX11 TTrraaddee rreecceeiivvaabblleess 1122,,993355 3311..1122..XX11II CCaarr eexxppeennsseess 665500 3311..1122..XX11II DDrraawwiinnggss 11,,225500 3311..1122..XX11II TTrraaddee ppaayyaabblleess 33,,225500 3311..1122..XX11II cc//dd 1100,,338855 1188,,333355 1188,,333355 3311..1122..XX11I bb//dd 1100,,338855 CCAAPPIITTAALL 3311..1122..XX11 cc//dd 440000 11..11..XX 11 CCaasshh aatt bbaannkk aaccccoouunntt 440000 440000 440000 3311..1122..XX11 bb//dd 440000 LLOOAANN 3311..1122..XX11 cc//dd 55,,000000 11..11..XX 11 CCaasshh aatt bbaannkk 55,,000000 55,,000000 55,,000000 3311..1122..XX11 bb//dd 55,,000000 NNOONN--CCUURRRREENNTT AASSSSEETTSS ((NNCCAA)) 11..11..XX 11 CCaasshh aatt bbaannkk 22,,550000 3311..1122..XX11 cc//dd 44,,000000 11..11..XX 11 TTrraaddee ppaayyaabblleess 11 ,,550000 44,,000000 44,,000000 3311..1122..XX11 bb//dd 44,,000000 TTRRAADDEE PPAAYYAABBLLEESS 3311..1122..XX 11 CCaasshh aatt bbaannkk 33,,225500 11..11..XX 11 NNCCAA 11,,550000 33 11..11 22..XX 11 cc//dd 22,,444400 11 ..11 ..XX 11 PPuurrcchhaasseess 550000 3311..1122..XX11I PPuurrcchhaasseess 33,,669900 55,,669900 55,,669900 3311..1122..XX11I bb//dd 22,,444400 --- Trang 165 --- INSURANCE Statement of profit or 1.1.X 1 Cash at bank 300 31.12.X1 loss 300 300 300 CAR EXPENSES Statement of profit or 31.12.X1 Cash at bank 650 31.12.X1 loss 650 650 650 PURCHASES Statement of profit or 1.1.X 1 Trade payables 500 31.12.X1 loss 4,190 31.12.X1 Trade payables 3,690 4,190 4,190 SALES Statement of profit or 31.12.X1 loss 15,945 31.12.X1 Trade receivables 1 5,945 15,945 15,945 TRADE RECEIVABLES 31.12.X1 Sales 15,945 31.12.X1 Cash at bank 12,935 31.12.X1 c/d 3,010 15,945 15,945 31.12.X1 b/d 3,010 DRAWINGS 31.12.X1 Cash at bank 1,250 31.12.X1 c/d 1,250 1,250 1,250 31.12.X1 b/d 1,250 --- Trang 166 --- (b) Revenue (sales) 15,945 Cost of sales (purchases) (4,190) Gross profit 11,755 Expenses Car expenses (650) Insurance (300) Profit for the year 10,805 (c) Non-current assets 4,000 Current assets Trade receivables 3,010 Cash at bank 10,385 13,395 Total assets 17,395 Capital and liabilities Opening capital 400 Profit for year 10,805 Drawings (1,250) Closing capital 9,955 Non-current liabilities Bank loan 5,000 Current liabilities Trade payables 2,440 Total capital and liabilities 17,395 We can now transfer drawings and the profit from the statement of profit or loss to the capital account as shown below. This year s carried down capital becomes next year s brought down capital. There will be a credit to the capital account as there is a profit for the year. If there was a loss this would be a debit entry. DRAWINGS 31.12.X1 Cash at bank 1,250 31.12.X1 Capital 1,250 1,250 1,250 CAPITAL 31.12.X1 Drawings 1,250 .X1 Cash at bank account 400 Profit (statement of 31.12.X1 c/d 9,955 31.12.X1 profit or loss) 10,805 11,205 ,205 31.12.X1 b/d 9,955 --- Trang 167 --- AAnnsswweerrss tt oo SSeellff--tteesstt qquueessttiioonnss 11 AA 4400,,000000 RReevveennuuee ((ssaalleess)) 114400,,000000 CCoosstt ooff ssaalleess ((ppuurrcchhaasseess)) GGrroossss pprrooffiitt 6655,,000000 EExxppeennsseess OOtthheerr eexxppeennsseess PPrrooffiitt ffoorr tthhee yyeeaarr 4400,,000000 22 AA DDeebbiitt 330000 CCAASSHH AATT BBAANNKK RReecceeiivvaabblleess 1122,,000000 bb//dd 550000 PPaayyaabblleess 77,,000000 EExxppeennsseess 33,,000000 DDrraawwiinnggss 11,,220000 cc//dd 330000 1122,,000000 1122,,000000 bb//dd 330000 33 AA TTrraaddee ppaayyaabblleess DD CCaappiittaall PPuurrcchhaasseess,, ssuunnddrryy eexxppeennsseess aanndd ddrraawwiinnggss aarree aallll ddeebbiitt bbaallaanncceess.. --- Trang 168 --- 44 DDeebbiti t oorr ccrreedditit MMaacchhiinneerryy DDeebbiitt TTrraaddee ppaayyaabblleess CCrreeddiitt DDrraawwiinnggss DDeebbiitt SSaalleess CCrreeddiitt BBaannkk oovveerrddrraafftt CCrreeddiitt RReennttaall iinnccoommee CCrreeddiitt 55 BB AA ccoommppeennssaattiinngg eerrrroorr AA ccoommmmiissssiioonn eerrrroorr ((AA)) ooccccuurrss wwhheenn tthhee ddoouubbllee eennttrryy iiss ccoommpplleettee,, bbuutt tthhee eennttrriieess aarree mmaaddee iinn tthhee wwrroonngg aaccccoouunntt((ss)).. AAnn oommiissssiioonn eerrrroorr ((CC)) ooccccuurrss wwhheenn aa ttrraannssaaccttiioonn iiss ccoommpplleetteellyy oommiitttteedd ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss.. AAnn eerrrroorr ooff pprriinncciippllee ((DD)) ooccccuurrss wwhheenn tthhee ddoouubbllee eennttrryy iiss ppeerrffoorrmmeedd bbuutt tthhee wwrroonngg ttrreeaattmmeenntt iiss aapppplliieedd ttoo aa ttrraannssaaccttiioonn.. 66 BB FFaallssee FFaallssee.. TThhiiss iiss aann eerrrroorr ooff oommiissssiioonn.. 77 DD DDeebbiitt DDrraawwiinnggss 11 0000,, CCrreeddiitt EExxppeennsseess 11 0000 TThhee 11 0000 ppaayymmeenntt wwaass ddeebbiitteedd ttoo eexxppeennsseess wwhheenn iitt sshhoouulldd hhaavvee bbeeeenn ddeebbiitteedd ttoo ddrraawwiinnggss.. TToo ccoorrrreecctt tthhee eerrrroorr,, wwee nneeeedd ttoo ccrreeddiitt eexxppeennsseess aanndd ddeebbiitt ddrraawwiinnggss.. 88 AA 44,,008866 2200,,337766 -- 11 00,,000000 -- 66,,229900 44,,008866 --- Trang 169 --- CChhaapptteerr 66 IICCAAEEWW EE rr rr oo rr ss aa nn dd cc oo rr rr ee cc tt ii oo nn ss tt oo aa cc cc oo uu nn tt ii nn gg rr ee cc oo rr dd ss aa nn dd ff ii nn aa nn cc ii aa ll ss tt aa tt ee mm ee nn tt ss IInnttrroodduuccttiioonn LLeeaarrnniinngg oouuttccoommeess SSyyllllaabbuuss lliinnkkss EExxaammiinnaattiioonn ccoonntteexxtt CChhaapptteerr ssttuuddyy gguuiiddaannccee LLeeaarrnniinngg ttooppiiccss 11 RReeccoonncciilliinngg ttoo eexxtteerrnnaall ddooccuummeennttss 22 BBaannkk rreeccoonncciilliiaattiioonnss 33 TTyyppeess ooff eerrrroorr iinn aaccccoouunnttiinngg 44 CCoorrrreeccttiinngg eerrrroorrss 55 AAddjjuussttiinngg tthhee iinniittiiaall ttrriiaall bbaallaannccee ffoorr eerrrroorrss I SSuummmmaarryy i 4- FFuurrtthheerr qquueessttiioonn pprraaccttiiccee is SSeellff--tteesstt qquueessttiioonnss AAnnsswweerrss ttoo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerrss ttoo SSeellff--tteesstt qquueessttiioonnss --- Trang 170 --- II nn tt rr oo dd uu cc tt ii oo nn LLeeaarrnniinngg oouuttccoommeess (cid:127) (cid:127) PPrreeppaarree aa ttrriiaall bbaallaannccee ffrroomm aaccccoouunnttiinngg rreeccoorrddss aanndd iiddeennttiiffyy tthhee uusseess ooff aa ttrriiaall bbaallaannccee (cid:127) (cid:127) IIddeennttiiffyy oommiissssiioonnss aanndd eerrrroorrss iinn aaccccoouunnttiinngg rreeccoorrddss aanndd ffiinnaanncciiaall ssttaatteemmeennttss aanndd ddeemmoonnssttrraattee hhooww tthhee rreeqquuiirreedd aaddjjuussttmmeennttss wwiillll aaffffeecctt ffiigguurreess iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) CCoorrrreecctt oommiissssiioonnss aanndd eerrrroorrss iinn aaccccoouunnttiinngg rreeccoorrddss aanndd ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) PPrreeppaarree jjoouurrnnaallss ffoorr nnoommiinnaall lleeddggeerr eennttrryy ttoo ccoorrrreecctt eerrrroorrss iinn ddrraafftt ffiinnaanncciiaall ssttaatteemmeennttss SSppeecciiffiicc ssyyllllaabbuuss lleeaarrnniinngg oouuttccoommeess aarree:: 11ff; ; 22aa,, bb,, cc SSyyllllaabbuuss lliinnkkss TThhee aaccccuurraaccyy ooff ffiinnaanncciiaall ssttaatteemmeennttss iiss tthhee bbeeddrroocckk oonn wwhhiicchh aarree bbuuiilltt tthhee rreesstt ooff yyoouurr ssttuuddiieess ffoorr tthhiiss eexxaamm,, aanndd ffoorr PPrrooffeessssiioonnaall LLeevveell FFiinnaanncciiaall AAccccoouunnttiinngg aanndd RReeppoorrttiinngg.. EExxaammiinnaattiioonn ccoonntteexxtt QQuueessttiioonnss oonn tthhee ttooppiiccss iinn tthhiiss cchhaapptteerr wwiillll bbee sseett aass mmuullttiippllee cchhooiiccee,, mmuullttii--ppaarrtt mmuullttiippllee cchhooiiccee oorr mmuullttiippllee-- rreessppoonnssee qquueessttiioonnss,, ssoommee ooff wwhhiicchh mmaayy iinnvvoollvvee ccaallccuullaattiioonnss.. VVeerryy oofftteenn ddoouubbllee eennttrryy qquueessttiioonnss aarree pphhrraasseedd iinn tteerrmmss ooff pprreeppaarriinngg aa jjoouurrnnaall.. IInn aaddddiittiioonn,, tthhee mmaatteerriiaall ccoovveerreedd iinn tthhiiss cchhaapptteerr mmaayy aallssoo bbee eexxaammiinneedd aass ppaarrtt ooff tthhee lloonngg ffoorrmm qquueessttiioonn.. IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo:: (cid:127) (cid:127) iiddeennttiiffyy ddiissttiinnccttiioonnss bbeettwweeeenn ddiiffffeerreenntt ttyyppeess ooff eerrrroorr (cid:127) (cid:127) iiddeennttiiffyy aa jjoouurrnnaall ttoo ccoorrrreecctt eerrrroorrss (cid:127) (cid:127) iiddeennttiiffyy tthhee ccoorrrreecctt jjoouurrnnaall ttoo cclleeaarr aa ssuussppeennssee aaccccoouunntt (cid:127) (cid:127) iiddeennttiiffyy tthhee eeffffeeccttss ooff ccoorrrreeccttiinngg eerrrroorrss oonn ddrraafftt ggrroossss oorr nneett pprrooffiitt,, aasssseettss oorr lliiaabbiilliittiieess oorr eeqquuiittyy (cid:127) (cid:127) uussee tthhee tteecchhnniiqquueess ooff bbaannkk rreeccoonncciilliiaattiioonnss ttoo iiddeennttiiffyy tthhee ccoorrrreecctt ccaasshh aatt bbaannkk bbaallaannccee iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) uussee rreeccoonncciilliiaattiioonn tteecchhnniiqquueess ttoo iiddeennttiiffyy tthhee ccoorrrreecctt ppaayyaabblleess bbaallaanncceess iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss CChhaapptteerr ssttuuddyy gguuiiddaannccee UUssee tthhiiss sscchheedduullee aanndd yyoouurr ssttuuddyy ttiimmeettaabbllee ttoo ppllaann tthhee ddaatteess oonn wwhhiicchh yyoouu wwiillll ccoommpplleettee yyoouurr ssttuuddyy ooff tthhiiss cchhaapptteerr.. TTooppiicc PPrraaccttiiccaall ssiiggnniiffiiccaannccee SSttuuddyy aapppprrooaacchh EExxaamm aapppprrooaacchh IInntteerraaccttiivvee qquueessttiioonnss 11 RReeccoonncciililningg ttoo AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy eexxtteerrnnaall ddooccuummeennttss bbee rreeqquuiirreedd ttoo iiddeennttiiffyy SSuupppplliieerr ssttaatteemmeenntt tthhee ccoorrrreecctt ppaayyaabblleess IItt iiss iimmppoorrttaanntt ffoorr aann rreeccoonncciilliiaattiioonnss iiss tthhee bbaallaannccee ffoorr iinncclluussiioonn eennttiittyy ttoo rreegguullaarrllyy kkeeyy lleeaarrnniinngg iinn tthhiiss iinn tthhee ffiinnaanncciiaall cchheecckk tthhaatt iitt hhaass sseeccttiioonn.. MMaakkee ssuurree ssttaatteemmeennttss.. YYoouu mmaayy aaccccuurraatteellyy rreeccoorrddeedd yyoouu wwoorrkk tthhrroouugghh tthhee nneeeedd ttoo uussee tthhee iittss ttrraannssaaccttiioonnss iinn tthhee wwoorrkkeedd eexxaammppllee iinn ssuupppplliieerr ssttaatteemmeenntt nnoommiinnaall lleeddggeerr.. OOnnee ddeettaaiill.. rreeccoonncciilliiaattiioonn ttoo ddoo wwaayy ttoo ddoo tthhiiss iiss ttoo SSttoopp aanndd tthhiinnkk ssoo.. rreeccoonncciillee kkeeyy WWhhyy iiss iitt iimmppoorrttaanntt ttoo bbaallaanncceess,, ssuucchh aass rreeccoonncciillee ttrraaddee ttrraaddee rreecceeiivvaabblleess aanndd ppaayyaabblleess oonn aa rreegguullaarr ttrraaddee ppaayyaabblleess,, ttoo bbaassiiss eexxtteerrnnaall ddooccuummeennttss.. BBaannkk rreeccoonncciilliiaattiioonnss AApppprrooaacchh BBaannkk rreeccoonncciilliiaattiioonnss IIQQ11 BBaannkk ffeeaattuurree rreegguullaarrllyy iinn rreeccoonncciilliiaattiioonn II BBaannkk rreeccoonncciilliiaattiioonnss EEnnssuurree yyoouu eexxaamm qquueessttiioonnss.. YYoouu aarree aa kkeeyy ccoonnttrrooll ffoorr uunnddeerrssttaanndd tthhee ttyyppeess TThhiiss qquueessttiioonn aasskkss yyoouu mmaayy bbee aasskkeedd ttoo uussee aa an entity. It is essential ooff eerrrroorr aanndd oommiissssiioonn ttoo ccoonnssiiddeerr tthhee iimmppaacctt --- Trang 171 --- bbaannkk rreeccoonncciilliiaattiioonn ttoo tthhaatt yyoouu uunnddeerrssttaanndd tthhaatt mmaayy ooccccuurr wwhheenn ooff cceerrtataini n ttrraannssaaccttiioonnss iiddeennttiiffyy tthhee ccoorrrreecctt tthhee ccoommmmoonn rreeccoorrddiinngg bbaannkk oonn tthhee bbaannkk ccaasshh aatt bbaannkk bbaallaannccee rreeccoonncciilliinngg iitteemmss aanndd ttrraannssaaccttiioonnss,, tthheenn ssttaatteemmeenntt.. ffoorr iinncclluussiioonn iinn tthhee hhooww ttoo ddeeaall wwiitthh ccoovveerr tthhee wwoorrkkeedd IIQQ22 BBaannkk ffiinnaanncciiaall ssttaatteemmeennttss oorr tthheemm.. eexxaammpplleess aanndd rreeccoonncciilliiaattiioonn IIII ttoo iiddeennttiiffyy ttrraannssaaccttiioonnss IInntteerraaccttiivvee qquueessttiioonnss tthhaatt nneeeedd ttoo bbee TThhiiss qquueessttiioonn rreeqquuiirreess iinn ddeettaaiill.. rreeccoorrddeedd iinn tthhee ccaasshh yyoouu ttoo pprreeppaarree aa SSttoopp aanndd tthhiinnkk aatt bbaannkk aaccccoouunntt.. ssiimmppllee bbaannkk HHooww ddoo yyoouu tthhiinnkk rreeccoonncciilliiaattiioonn.. eelleeccttrroonniicc bbaannkkiinngg hhaass cchhaannggeedd tthhee nnaattuurree ooff tthhee bbaannkk rreeccoonncciilliiaattiioonn DDoo wwee ssttiillll sseeee ttiimmiinngg ddiifffeferernecnesc es dduuee ttoo ttrraannssaaccttiioonnss bbeeiinngg rreeccoorrddeedd iinn tthhee aaccccoouunnttiinngg rreeccoorrddss bbeeffoorree bbeeiinngg rreeccooggnniisseedd iinn tthhee bbaannkk aaccccoouunntt TTyyppeess ooff eerrrroorr iinn AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy aaccccoouunnttiinngg bbee aasskkeedd ttoo iiddeennttiiffyy YYoouu nneeeedd ttoo bbee aabbllee wwhhaatt ttyyppee ooff eerrrroorr iiss WWhhiillsstt tthhee rriisskk aanndd ttoo iiddeennttiiffyy tthhee bbeeiinngg ddeessccrriibbeedd oorrt too ooccccuurrrreennccee ooff eerrrroorrss ddiifffefreernet nt ttyyppeess ooff eerrrroorr pprreeppaarree aa jjoouurrnnaall iinn rreeccoorrddiinngg ssoo eennssuurree yyoouu eennttrryy ttoo ccoorrrreecctt aann ttrraannssaaccttiioonnss hhaass uunnddeerrssttaanndd tthhee eerrrroorr.. ddeeccrreeaasseedd wwiitthh ddeeffiinniittiioonnss.. iinnccrreeaasseedd uussee ooff SSttoopp aanndd tthhiinnkk ccoommppuutteerriisseedd WWhhyy iiss iitt iimmppoortarntat nt ttoo aaccccoouunnttiinngg ssyysstteemmss,, iitt iiddeennttiiffyy aanndd ccoorrrreecctt iiss iimmpporotarntat nt ttoo eerrrroorrss ooff pprriinncciippllee iiff uunnddeerrssttaanndd tthhaatt eerrrroorrss tthheeyy ddoo nnoott iimmppaacctt oonn ccaann ssttiillll eexxiisstt.. tthhee aammoouunnttss rreeccoorrddeedd CCoorrrreeccttiinngg eerrrroorrss AApppprrooaacchh YYoouu nneeeedd ttoo bbee aabbllee IIQQ33 JJoouurrnnaall eennttrriieess ttoo iiddeennttiiffyy tthhee ttyyppee ooff OOnnccee yyoouu hhaavvee TThheerree iiss aa lloott ooff ddeettaaiill TThhiiss ggiivveess ggoooodd eerrrroorr tthhaatt hhaass iiddeennttiiffiieedd eerrrroorrss,, yyoouu iinn tthhiiss ttooppiicc ssoo yyoouu wwiillll pprraaccttiiccee ooff pprreeppaarriinngg ooccccuurrrreedd,, wwoorrkk oouutt nneeeedd ttoo kknnooww hhooww ttoo nneeeedd ttoo wwoorrkk tthhrroouugghh jjoouurrnnaall eennttrriieess ttoo hhooww ttoo ccoorrrreecctt iitt aanndd ccoorrrreecctt tthheemm.. IItt ccaann bbee iitt ccaarreeffuullllyy.. YYoouu wwiillll ccoorrrreecctt eerrrroorrss.. ppoosstt tthhee nneecceessssaarryy qquuiittee ttrriicckkyy ttoo nneeeedd ttoo ccrreeaattee jjoouurrnnaall IIQQ44 EErrrroorrss jjoouurrnnaall eennttrryy ffoorr tthhaatt uunnddeerrssttaanndd tthhee eennttrriieess iinn tthhiiss ttooppiicc ssoo ccoorrrreeccttiioonn.. YYoouu mmaayy AAnnootthheerr qquueessttiioonn iimmppaacctt ooff tthhee eerrrroorr yyoouu mmiigghhtt nneeeedd ttoo ddoo aallssoo nneeeedd ttoo ssttaattee hhooww wwhhiicchh ggiivveess ssoommee aanndd tthheenn wwoorrkk oouutt ssoommee qquuiicckk rreevviissiioonn ooff tthhee ccoorrrreeccttiioonn aaffffeecctsts pprraaccttiiccee oonn ccrreeaattiinngg hhooww ttoo ccoorrrreecctt iitt.. YYoouu tthhee aaccccoouunnttiinngg pprrooffiitt ffoorr tthhee ppeerriioodd jjoouurrnnaall eennttrriieess ttoo aallssoo nneeeedd ttoo eeqquuaattiioonn aanndd hhooww ttoo aanndd ootthheerr ffiigguurreess iinn ccoorrrreecctt eerrrroorrss,, bbuutt aallssoo uunnddeerrssttaanndd hhooww ccrreeaattee jjoouurrnnaallss.. tthhee ffiinnaanncciiaall aasskkss yyoouu ttoo ccoonnssiiddeerr ccoorrrreeccttiinngg aann eerrrroorr SSuussppeennssee aaccccoouunnttss ssttaatteemmeennttss.. TThhiiss iiss aann tthhee iimmppaacctt ooff tthhoossee ccaann aaffffeecct t pprrooffiitt.. aarree aann iimmppoortarntat nt iimmpporotarntat nt aarreeaa tthhaatt iiss eerrrroorrss oonn pprrooffiitt.. SSuussppeennssee aaccccoouunnttss,, ccoonncceepptt ssoo eennssuurree yyoouu ffrreeqquueennttllyy eexxaammiinneedd.. wwhhiillsstt nnoott nneecceessssaarriillyy uunnddeerrssttaanndd hhooww tthheeyy tthhee rreessuulltt ooff eerrrroorrss,, aarree aarree uusseedd aanndd tthhaatt tthheeyy iinncclluuddeedd hheerree aass tthheeyy mmuusstt bbee cclleeaarreedd.. mmuusstt bbee cclleeaarreedd ((iiee,, SSttoopp aanndd tthhiinnkk rreedduucceedd ttoo aa nniill WWhhyy iiss iitt iimmppoortarntat nt ffoorr bbaallaannccee)) bbeeffoorree tthhee tthhee oowwnneerr ooff aa ffiinnaanncciiaall ssttaatteemmeennttss bbuussiinneessss ttoo ccaann bbee pprreeppaarreedd.. --- Trang 172 --- uunnddeerrssttaanndd tthhee CClleeaarriinngg aa ssuussppeennssee iimmppaacctt ooff ccoorrrreeccttiioonnss aaccccoouunntt wwiillll aaffffeecct t oonn pprrooffiitt ootthheerr lleeddggeerr aaccccoouunnttss aanndd mmaayy rreessuulltt iinn aaddjjuussttmmeennttss ttoo pprrooffiitt.. AAddjjuussttiningg tthhee iinniittiaiall AApppprrooaacchh PPrreeppaarriinngg tthhee ffiinnaall ttrriiaall ttrriiaall bbaallaannccee ffoorr eerrrroorrss bbaallaannccee iiss aa kkeeyy sstteepp TThhiiss iiss aa sshhoorrtt,, iinn pprreeppaarriinngg tthhee ffiinnaall TThhee llaasstt ttooppiicc iinn tthhiiss eexxaammppllee--lleedd ttooppiicc tthhaatt ffiinnaanncciiaall ssttaatteemmeennttss,, CChhaapptteerr llooookkss aatt hhooww iiss iimmppoorrttaanntt iinn tthhee wwhhiicchh wwiillll bbee rreeqquuiirreedd ttoo pprroocceessss pprreeppaarraattiioonn ooff iinn tthhee lloonngg ffoorrmm aaddjjuussttmmeennttss aaggaaiinnsstt ffiinnaanncciiaall ssttaatteemmeennttss.. IItt qquueessttiioonn.. tthhee iinniittiiaall ttrriiaall bbaallaannccee sshhoouulldd nnoott ccaauussee yyoouu ttoo pprroodduuccee tthhee ffiinnaall mmaannyy pprroobblleemmss iiff yyoouu ttrriiaall bbaallaannccee.. wwoorrkk mmeetthhooddiiccaallllyy tthhrroouugghh tthhee wwoorrkkeedd eexxaammppllee.. SSttoopp aanndd tthhiinnkk WWhhaatt mmuusstt bbee eeqquuaall ttoo tthhee ttoottaall ooff tthhee ddeebbiitt ccoolluummnn iinn tthhee ffiinnaall ttrriiaall bbaallaannccee OOnnccee yyoouu hhaavvee wwoorrkkeedd tthhrroouugghh tthhiiss gguuiiddaannccee yyoouu aarree rreeaaddyy ttoo aatttteemmpptt tthhee ffuurrtthheerr qquueessttiioonn pprraaccttiiccee iinncclluuddeedd aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. 11 RReeccoonncciilliinngg tt oo ee xx tteerrnnaall dd oo cc uu mm ee nn tt ss BB SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) IInnaa ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm,, aatt aannyy ppooiinntt iinn ttiimmee tthhee ttoottaall ooff tthhee ppeerrssoonnaall aaccccoouunnttss ooff eeaacchh ccrreeddiitt ccuussttoommeerr iinn tthhee rreecceeiivvaabblleess lleeddggeerr,, aanndd ooff eeaacchh ccrreeddiitt ssuupppplliieerr iinn tthhee ppaayyaabblleess lleeddggeerr,, wwiillll bbee eeqquuaall ttoo tthhee ttoottaall ttrraaddee rreecceeiivvaabblleess aanndd ttoottaall ttrraaddee ppaayyaabblleess bbaallaanncceess rreessppeeccttiivveellyy.. (cid:127) (cid:127) CCoommppaanniieess mmaayy vveerriiffyy tthhee aaccccuurraaccyy ooff tthheeiirr aaccccoouunnttiinngg rreeccoorrddss uussiinngg eexxtteerrnnaall ddooccuummeennttss.. RReeccoonncciilliiaattiioonn ooff tthhee lleeddggeerr bbaallaanncceess ttoo eexxtteerrnnaall ddooccuummeennttss ccaann hheellpp ttoo iiddeennttiiffyy eerrrroorrss iinn aaccccoouunnttiinngg rreeccoorrddss.. (cid:127) (cid:127) TThhee eexxtteerrnnaall ddooccuummeennttss mmoosstt ccoommmmoonnllyy uusseedd ffoorr tthhiiss ppuurrppoossee aarree bbaannkk ssttaatteemmeennttss aanndd ssuupppplliieerr ssttaatteemmeennttss.. DDeeffiinniittiioonnss TTrraaddee rreecceeiivvaabblleess aaccccoouunntt:: IInn tthhee nnoommiinnaall lleeddggeerr,, tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt iiss uusseedd ttoo rreeccoorrdd ttrraannssaaccttiioonnss rreellaattiinngg ttoo ccrreeddiitt ccuussttoommeerrss iinn ttoottaall.. TThhee bbaallaannccee ooff tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt aatt aannyy ttiimmee wwiillll bbee tthhee ttoottaall aammoouunntt dduuee ttoo tthhee bbuussiinneessss ffrroomm aallll iittss ccrreeddiitt ccuussttoommeerrss.. RReecceeiivvaabblleess lleeddggeerr:: TThhee rreecceeiivvaabblleess lleeddggeerr iiss aa lliissttiinngg ooff aallll ttrraannssaaccttiioonnss wwiitthh eeaacchh iinnddiivviidduuaall ccrreeddiitt ccuussttoommeerr.. TThhee rreecceeiivvaabblleess lleeddggeerr iiss ddiivviiddeedd iinnttoo iinnddiivviidduuaall ((ppeerrssoonnaall)) aaccccoouunnttss,, oonnee ffoorr eeaacchh ccrreeddiitt ccuussttoommeerr,, aanndd sshhoowwss tthhee ttoottaall bbaallaannccee dduuee ffrroomm tthhaatt ccuussttoommeerr aatt aannyy ppooiinntt iinn ttiimmee.. TThhee rreecceeiivvaabblleess lleeddggeerr iiss sseeppaarraattee ttoo tthhee nnoommiinnaall lleeddggeerr aanndd ddooeess nnoott ffoorrmm ppaarrtt ooff tthhee ddoouubbllee eennttrryy ssyysstteemm.. IItt iiss uusseedd ffoorr rreeccoorrdd-- kkeeeeppiinngg ppuurrppoosseess oonnllyy aanndd iiss tthheerreeffoorree oofftteenn rreeffeerrrreedd ttoo aass aa mmeemmoorraanndduumm lleeddggeerr.. TTrraaddee ppaayyaabblleess aaccccoouunntt:: IInn tthhee nnoommiinnaall lleeddggeerr,, tthhee ttrraaddee ppaayyaabblleess aaccccoouunntt iiss uusseedd ttoo rreeccoorrdd ttrraannssaaccttiioonnss iinnvvoollvviinngg ccrreeddiitt ssuupppplliieerrss iinn ttoottaall,, aanndd tthhee bbaallaannccee oonn tthhiiss aaccccoouunntt aatt aannyy ttiimmee wwiillll bbee tthhee ttoottaall aammoouunntt oowweedd bbyy tthhee bbuussiinneessss ttoo aallll iittss ccrreeddiitt ssuupppplliieerrss.. TThhee ppaayyaabblleess lleeddggeerr:: TThhee ppaayyaabblleess lleeddggeerr iiss aa lliissttiinngg ooff aallll ttrraannssaaccttiioonnss wwiitthh eeaacchh iinnddiivviidduuaall ccrreeddiitt ssuupppplliieerr.. CCoonnssiisstteenntt wwiitthh tthhee rreecceeiivvaabblleess lleeddggeerr ddeessccrriibbeedd aabboovvee,, tthhee ppaayyaabblleess lleeddggeerr iinncclluuddeess aa ppeerrssoonnaall aaccccoouunntt ffoorr eeaacchh ccrreeddiitt ssuupppplliieerr wwhhiicchh sshhoowwss tthhee ttoottaall aammoouunntt oowweedd ttoo tthhaatt ssuupppplliieerr aatt aannyy ppooiinntt iinn ttiimmee.. CCoonnssiisstteenntt wwiitthh tthhee rreecceeiivvaabblleess lleeddggeerr,, tthhee ppaayyaabblleess lleeddggeerr iiss sseeppaarraattee ttoo tthhee nnoommiinnaall lleeddggeerr,, ddooeess nnoott ffoorrmm ppaartr t ooff tthhee ddoouubbllee--eennttrryy ssyysstteemm aanndd iiss mmaaiinnttaaiinneedd ffoorr rreeccoorrdd--kkeeeeppiinngg ppuurrppoosseess oonnllyy.. --- Trang 173 --- IInn aa mmaannuuaall ssyysstteemm ooff aaccccoouunnttiinngg,, tthhee ppeerrssoonnaall aaccccoouunnttss iinn tthhee rreecceeiivvaabblleess lleeddggeerr aarree uuppddaatteedd iinnddeeppeennddeennttllyy ooff tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt iinn tthhee nnoommiinnaall lleeddggeerr.. TThhiiss mmeeaannss tthhaatt ddiiffffeerreenncceess bbeettwweeeenn tthhee ttwwoo ccoouulldd aarriissee.. RReeccoonncciililningg tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt ttoo tthhee rreecceeiivvaabblleess lleeddggeerr iiss tthheerreeffoorree aann iimmppoorrttaanntt ppaarrtt ooff eennssuurriinngg tthhee aaccccoouunnttiinngg rreeccoorrddss aarree aaccccuurraattee.. TThhee ssaammee aallssoo aapppplliieess ttoo tthhee ppaayyaabblleess lleeddggeerr aanndd tthhee ttrraaddee ppaayyaabblleess aaccccoouunntt.. IInn aa ccoommppuutteerriisseedd ssyysstteemm,, ttrraannssaaccttiioonnss eenntteerreedd iinnttoo tthhee ppeerrssoonnaall aaccccoouunntt ooff aa ccrreeddiitt ccuussttoommeerr iinn tthhee rreecceeiivvaabblleess lleeddggeerr aarree aauuttoommaattiiccaallllyy ppoosstteedd ttoo tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt iinn tthhee nnoommiinnaall lleeddggeerr.. TThheerreeffoorree,, wwhhiillsstt aa rreeccoonncciilliiaattiioonn iiss ssttiillll aa uusseeffuull ccoonnttrrooll mmeecchhaanniissmm,, tthheerree iiss uunnlliikkeellyy ttoo bbee ddiiffffeerreenncceess bbeettwweeeenn tthhee ttrraaddee rreecceeiivvaabblleess aaccccoouunntt aanndd tthhee rreecceeiivvaabblleess lleeddggeerr.. TThhee ssaammee aallssoo aapppplliieess ttoo tthhee ppaayyaabblleess lleeddggeerr aanndd tthhee ttrraaddee ppaayyaabblleess aaccccoouunntt iinn aa ccoommppuutteerriisseedd ssyysstteemm.. HHoowweevveerr,, iitt iiss ssttiillll uusseeffuull ffoorr aa bbuussiinneessss tthhaatt uusseess aa ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm ttoo vveerriiffyy tthhaatt tthhee rreeccoorrddss iitt kkeeeeppss aarree ccoommpplleettee aanndd aaccccuurraattee bbyy rreeccoonncciilliinngg cceerrtataini n iinnffoorrmmaattiioonn ttoo eexxtteerrnnaall ddooccuummeennttss.. YYoouu sshhoouulldd bbee aawwaarree ooff tthhee ffoolllloowwiinngg rreeccoonncciilliiaattiioonnss aanndd hhooww tthheeyy aarree uusseedd bbyy bbuussiinneesssseess:: (cid:127) (cid:127) BBaannkk rreeccoonncciilliiaattiioonnss -- aass ddiissccuusssseedd iinn CChhaapptteerr 33,, eelleeccttrroonniicc bbaannkkiinngg nnooww mmeeaannss tthhaatt bbuussiinneesssseess aarree aabbllee ttoo aacccceessss tthheeiirr bbaannkk iinnffoorrmmaattiioonn aanndd ddoowwnnllooaadd ttrraannssaaccttiioonn rreeppoortsr ts aatt aannyy ppooiinntt iinn ttiimmee.. TThhee tteerrmmss bbaannkk ttrraannssaaccttiioonn rreeppoort rt aanndd bbaannkk ssttaatteemmeenntt wwiillll bbee uusseedd tthhrroouugghhoouutt tthhee WWoorrkkbbooookk ttoo rreeffeerr ttoo tthhee ttrraannssaaccttiioonnss aanndd bbaallaanncceess rreeccoorrddeedd bbyy tthhee bbaannkk.. TThhee bbaannkk ssttaatteemmeennttss aarree uusseedd ((11 )) aass aa ssoouurrccee ddooccuummeenntt ffoorr eennttrriieess iinnttoo tthhee aaccccoouunnttiinngg ssyysstteemm;; aanndd ((22)) aass aann eexxtteerrnnaall rreeccoorrdd aaggaaiinnsstt wwhhiicchh tthhee aaccccoouunnttiinngg rreeccoorrddss ooff aa bbuussiinneessss ccaann bbee cchheecckkeedd.. TThhee lliinneess hhaavvee bblluurrrreedd bbeettwweeeenn uussiinngg tthhee bbaannkk ssttaatteemmeenntt ffoorr rreeccoorrddiinngg ttrraannssaaccttiioonnss aanndd ffoorr cchheecckkiinngg tthhee aaccccuurraaccyy ooff tthhee aaccccoouunnttiinngg rreeccoorrddss.. (cid:127) (cid:127) SSuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonnss -- ssuupppplliieerr ssttaatteemmeennttss aarree pprreeppaarreedd bbyy ccrreeddiitt ssuupppplliieerrss aanndd sseenntt ttoo tthheeiirr ccuussttoommeerrss oonn aa rreegguullaarr bbaassiiss,, uussuuaallllyy aatt tthhee eenndd ooff eeaacchh mmoonntthh oorr eeaacchh qquuaartretre, r, aanndd lliisstt aallll ttrraannssaaccttiioonnss ((iinnvvooiicceess,, rreettuurrnnss,, ddiissccoouunnttss aanndd ppaayymmeennttss)) tthhaatt hhaavvee ooccccuurrrreedd ssiinnccee tthhee ddaattee ooff tthhee pprreevviioouuss ssuupppplliieerr ssttaatteemmeenntt.. AA bbuussiinneessss rreecceeiivviinngg aa ssuupppplliieerr ssttaatteemmeenntt wwiillll rreeccoonncciillee tthhee ttrraannssaaccttiioonnss aanndd cclloossiinngg bbaallaannccee oonn tthhee ssttaatteemmeenntt ttoo tthhee ppaayyaabblleess lleeddggeerr aanndd aannyy oommiissssiioonnss oorr eerrrroorrss iiddeennttiiffiieedd iinn tthhee aaccccoouunnttiinngg rreeccoorrddss ccaann tthheenn bbee ccoorrrreecctteedd.. CCoonntteexxtt eexxaammppllee:: SSuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonn SSuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonn VViioolleett hhaass rreecceeiivveedd aa ssuupppplliieerr ssttaatteemmeenntt ffrroomm JJaaddee wwhhiicchh sshhoowwss aallll ttrraannssaaccttiioonnss bbeettwweeeenn VViioolleett aanndd JJaaddee ffoorr tthhee mmoonntthh ooff MMaarrcchh 2200XX88.. JJaaddee SSuupppplliieerr ssttaatteemmeenntt ffoorr VViioolelet t ffoorr tthhee mmoonntthh eennddeedd 33 11 MMaarrcchh 2200XX88 BBaallaannccee (( )) DDaattee DDeettaaiillss DDeebbiitt (( )) CCrreeddiitt (( )) DDeebbiitt//((CCrreeddiitt)) BBaallaannccee bbrroouugghhtt 11 //33//XX 88 ffoorrwwaarrdd 449922..2222 55//33//XX88 IInnvvooiiccee 11 33228877 112299..4400 662211..6622 77//33//XX88 IInnvvooiiccee 11 33229999 2222..7722 664444..3344 11 00//33//XX88 PPaayymmeenntt rreecceeiivveedd 661155..1177 2299..1177 11 88//33//XX88 IInnvvooiiccee 11 4411 00 11 339944..9955 442244..1122 BBaallaannccee ccaarrrriieedd 3311//33//XX88 ffoorrwwaarrdd 442244..1122 TThhee ssuupppplliieerr ssttaatteemmeenntt iiss pprreeppaarreedd ffrroomm tthhee ppooiinntt ooff vviieeww ooff tthhee ssuupppplliieerr.. BBaallaanncceess oowweedd bbyy VViioolleett,, ttoo JJaaddee,, aarree sshhoowwnn aass ddeebbiitt bbaallaanncceess oonn tthhee ssttaatteemmeenntt bbeeccaauussee tthheeyy aarree rreecceeiivvaabblleess bbaallaanncceess ffrroomm JJaaddee ss ppooiinntt ooff vviieeww.. VViioolleett hhaass eexxttrraacctteedd aa rreeppoort rt ffrroomm tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm wwhhiicchh sshhoowwss JJaaddee ss ppeerrssoonnaall aaccccoouunntt iinn tthhee ppaayyaabblleess lleeddggeerr.. --- Trang 174 --- PPAAYYAABBLLEESS LLEEDDGGEERR EEXXTTRRAACCTT AACCCCOOUUNNTT NNAAMMEE:: JJaaddee DDaattee TTrraannssaacctitoino n ((DDeebbiitt))//CCrreeddiitt OOppeenniinngg bbaallaannccee 449922..2222 55..33..XX 88 IInnvvooiiccee 1133228877 112299..4400 v 77..33..XX 88 IInnvvooiiccee 1133229999 2222..7722 v 1100..33..XX 88 PPaayymmeenntt ((661155..1177)) 1100..33..XX 88 EEaarrllyy sseettttlleemmeenntt ddiissccoouunntt rree IInnvv.. 11 33228877 ((66..4455)) 1188..33..XX 88 IInnvvooiiccee 1144110011 339944..9944 1199..33..XX 88 RReettuurrnnss ((6644..4400)) CClloossiinngg bbaallaannccee 335533..2277 TThhee ssuupppplliieerr ssttaatteemmeenntt sshhoowwss tthhaatt VViioolleett hhaass aann oouuttssttaannddiinngg bbaallaannccee ooff 442244..112 2.. HHoowweevveerr,, VViioolleett ss ppaayyaabblleess lleeddggeerr sshhoowwss aann oouuttssttaannddiinngg bbaallaannccee oowweedd ttoo JJaaddee ooff 335533..2277.. IInn oorrddeerr ttoo eexxppllaaiinn tthhee ddiiffffeerreennccee,, VViioolleett mmuusstt ccoommppaarree tthhee ttrraannssaaccttiioonnss rreeccoorrddeedd iinn tthhee ppaayyaabblleess lleeddggeerr ttoo tthhoossee ddeettaaiilleedd oonn tthhee ssttaatteemmeenntt rreecceeiivveedd.. WWee ccaann sseeee oonn tthhee ppaayyaabblleess lleeddggeerr eexxttrraacctt tthhaatt VViioolleett hhaass ttiicckkeedd tthhee iitteemmss tthhaatt ccaann bbee mmaattcchheedd ttoo tthhee ssuupppplliieerr ssttaatteemmeenntt.. TThhee iitteemmss tthhaatt ddoo nnoott aaggrreeee aarree aass ffoolllloowwss:: (cid:127) (cid:127) TThhee eeaarrllyy sseettttlleemmeenntt ddiissccoouunntt ooff 66..4455 ttaakkeenn bbyy VViioolleett iiss nnoott sshhoowwnn oonn tthhee ssuupppplliieerr ssttaatteemmeenntt.. OOnn ffuurrtthheerr iinnvveessttiiggaattiioonn,, VViioolleett ccoonnffiirrmmeedd tthhaatt aalltthhoouugghh tthheeyy ddiidd nnoott eexxppeecctt ttoo ttaakkee tthhiiss ddiissccoouunntt wwhheenn tthhee iinnvvooiiccee wwaass iinniittiiaallllyy rreeccoorrddeedd,, ppaayymmeenntt wwaass mmaaddee wwiitthhiinn tthhee rreeqquuiirreedd ttiimmeeffrraammee aanndd tthheerreeffoorree tthhee ddiissccoouunntt wwaass rreeccoorrddeedd aapppprroopprriiaatteellyy.. TThhiiss iissssuuee sshhoouulldd bbee rraaiisseedd wwiitthh JJaaddee.. (cid:127) (cid:127) TThhee rreettuurrnn ooff 6644..4400 sshhoowwnn iinn tthhee ppeerrssoonnaall aaccccoouunntt iiss nnoott iinncclluuddeedd oonn tthhee ssuupppplliieerr ssttaatteemmeenntt.. OOnn ffuurrtthheerr iinnvveessttiiggaattiioonn,, VViioolleett iiddeennttiiffiieedd tthhaatt tthheerree iiss aa ddiissppuuttee rreeggaarrddiinngg tthhee rreettuurrnneedd iitteemmss.. TThhiiss iissssuuee sshhoouulldd aallssoo bbee rraaiisseedd wwiitthh JJaaddee.. SSuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonn AAccccoouunntt:: JJaaddee DDaattee 3311.. 33..2200XX88 BBaallaannccee ppeerr ssuupppplliieerr ss ssttaatteemmeenntt 442244..11 22 LLeessss:: EEaarrllyy sseettttlleemmeenntt ddiissccoouunntt nnoott oonn ssttaatteemmeenntt ((66..4455)) RReettuurrnnss iinn ddiissppuuttee nnoott oonn ssttaatteemmeenntt ((6644..4400)) BBaallaannccee ppeerr ppaayyaabblleess lleeddggeerr 335533..2277 AAllssoo,, ppaarrtt ooff tthhee rreeccoonncciilliiaattiioonn pprroocceessss iiss ccuussttoommeerr ssttaatteemmeennttss,, wwhhiicchh aarree pprroodduucceedd bbyy tthhee bbuussiinneessss aanndd sseenntt ttoo iittss ccrreeddiitt ccuussttoommeerrss.. TThheessee aarree nnoott eexxtteerrnnaall ddooccuummeennttss aass tthheeyy aarree pprroodduucceedd bbyy tthhee bbuussiinneessss,, bbuutt tthheeyy ccaann bbee aa uusseeffuull cchheecckk aass ttoo tthhee aaccccuurraaccyy ooff ttrraaddee rreecceeiivvaabblleess aass tthhee ccrreeddiitt ccuussttoommeerr mmaayy rreessppoonndd ttoo tthhee bbuussiinneessss ttoo aalleerrtt iitt ttoo aannyy ddiissccrreeppaanncciieess oorr iinnccoonnssiisstteenncciieess iinn tthhee ssttaatteemmeenntt.. TThhiiss iiss lleessss uusseeffuull tthhaann tthhee ssuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonn aass tthhee bbuussiinneessss wwiillll nnoott kknnooww iiff tthhee ccrreeddiitt ccuussttoommeerr hhaass iiddeennttiiffiieedd ddiissccrreeppaanncciieess oorr jjuusstt nnoott ccoommmmuunniiccaatteedd tthheemm.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAssssiimmiillaattiinngg aanndd uussiinngg iinnffoorrmmaattiioonn SSuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonnss iinnvvoollvvee uussiinngg iinnffoorrmmaattiioonn ffrroomm ttwwoo ssoouurrcceess -- tthhee ppaayyaabblleess lleeddggeerr aanndd tthhee ssuupppplliieerr ssttaatteemmeenntt.. IItt iiss iimmppoorrttaanntt ttoo mmaattcchh tthhee ddeettaaiillss ccaarreeffuullllyy iinn oorrddeerr ttoo iiddeennttiiffyy tthhee ddiiffffeerreenncceess aanndd ddeetteerrmmiinnee wwhheetthheerr tthheerree iiss aa nneeeedd ffoorr aaddjjuussttmmeenntt iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. --- Trang 175 --- 22 BB aa nn kk rreeccoonncciilliiaattiioonnss BS SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TThhee ccaasshh aatt bbaannkk aaccccoouunntt aanndd tthhee bbaannkk ssttaatteemmeenntt bbootthh rreefflleecctt ttrraannssaaccttiioonnss tthhrroouugghh tthhee bbuussiinneessss ss bbaannkk aaccccoouunntt.. (cid:127) (cid:127) TThhee ccaasshh aatt bbaannkk aaccccoouunntt nneeeeddss ttoo bbee rreegguullaarrllyy rreeccoonncciilleedd ttoo tthhee bbaannkk ssttaatteemmeenntt ttoo iiddeennttiiffyy aannyy ddiiffffeerreenncceess.. IInnffoorrmmaattiioonn rreellaattiinngg ttoo ddeeppoossiittss aanndd wwiitthhddrraawwaallss sshhoowwnn oonn tthhee bbaannkk ttrraannssaaccttiioonn rreeppoorrtt wwiillll bbee mmaattcchheedd ttoo ttrraannssaaccttiioonnss uunnddeerrttaakkeenn bbyy tthhee bbuussiinneessss aanndd rreeccoorrddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. 22..11 CCaasshh aatt bbaannkk aaccccoouunntt aanndd tthhee bbaannkk ssttaatteemmeenntt TThhee ccaasshh aatt bbaannkk aaccccoouunntt iiss oonnee ooff aa bbuussiinneessss ss nnoommiinnaall lleeddggeerr aaccccoouunnttss.. TThhee bbaallaannccee oonn tthhee ccaasshh aatt bbaannkk aaccccoouunntt wwiillll bbee rreeppoorrtteedd aass aa ccuurrrreenntt aasssseett oopp iinn tthhee ccaassee ooff aann oovveerrddrraafftt,, aa ccuurrrreenntt lliiaabbiilliittyy iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. AAss ddeessccrriibbeedd iinn CChhaapptteerr 33,, ssoommee aaccccoouunnttiinngg ssooffttwwaarree ppaacckkaaggeess aarree nnooww iinntteeggrraatteedd wwiitthh aa bbuussiinneessss ss eelleeccttrroonniicc bbaannkkiinngg ssyysstteemm iinn ssuucchh aa wwaayy tthhaatt tthhee bbaannkk ttrraannssaaccttiioonnss aarree mmaattcchheedd ttoo kknnoowwnn ttrraannssaaccttiioonnss aanndd aarree tthheerreeffoorree aauuttoommaattiiccaallllyy rreeccoorrddeedd iinn tthhee bbuussiinneessss ss ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm.. IInn ootthheerr ppaacckkaaggeess,, aa bbooookkkkeeeeppeerr wwiillll rreegguullaarrllyy ((mmoosstt lliikkeellyy ddaaiillyy)) eexxttrraacctt tthhee bbaannkk ttrraannssaaccttiioonn rreeppoort rt wwhhiicchh ddeettaaiillss aallll ddeeppoossiittss aanndd wwiitthhddrraawwaallss iinnttoo tthhee bbuussiinneessss ss bbaannkk aaccccoouunntt dduurriinngg tthhee ppeerriioodd.. IInnffoorrmmaattiioonn ffrroomm tthhee bbaannkk ttrraannssaaccttiioonn rreeppoort rt wwiillll tthheenn bbee uuppllooaaddeedd iinnttoo tthhee bbuussiinneessss ss ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm aanndd,, aass ddeessccrriibbeedd aabboovvee,, tthhee ddeeppoossiittss aanndd wwiitthhddrraawwaallss aarree tthheenn aauuttoommaattiiccaallllyy mmaattcchheedd ttoo kknnoowwnn ttrraannssaaccttiioonnss aanndd rreeccoorrddeedd iinn tthhee aapppprroopprriiaattee nnoommiinnaall lleeddggeerr aaccccoouunnttss.. MMoosstt ddeeppoossiittss aanndd wwiitthhddrraawwaallss tthhaatt aarree mmaaddee bbyy eelleeccttrroonniicc ffuunnddss ttrraannssffeerr wwiillll iinncclluuddee aa uunniiqquuee rreeffeerreennccee nnuummbbeerr wwhhiicchh hheellppss wwiitthh tthhee mmaattcchhiinngg pprroocceessss.. TThheerree wwiillll bbee ssoommee ttrraannssaaccttiioonnss tthhaatt tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm ccaannnnoott aauuttoommaattiiccaallllyy mmaattcchh.. TThheessee uunnmmaattcchheedd ttrraannssaaccttiioonnss aarree ppoosstteedd ttoo aa tteemmppoorraarryy aaccccoouunntt ((ccaalllleedd aa ssuussppeennssee aaccccoouunntt -- sseeee SSeeccttiioonn 44)) aanndd aarree rreeppoorterdte d oonn aann eexxcceeppttiioonn rreeppoorrtt ffoorr tthhee aaccccoouunnttaanntt ttoo iinnvveessttiiggaattee.. OOnnccee iiddeennttiiffiieedd,, jjoouurrnnaall eennttrriieess aarree pprreeppaarreedd ttoo cclleeaarr tthhee ssuussppeennssee aaccccoouunntt aanndd ppoosstt tthhee ttrraannssaaccttiioonnss ttoo tthhee ccoorrrreecctt aaccccoouunnttss.. EEvveenn tthhoouugghh tthhee pprroocceessss iiss llaarrggeellyy aauuttoommaattiicc,, yyoouu aarree ssttiillll rreeqquuiirreedd ttoo uunnddeerrssttaanndd tthhee mmeecchhaanniiccss ooff wwhhaatt tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm iiss ddooiinngg.. TThhaatt iiss tthhee pprroocceessss ooff ccoommppaarriinngg tthhee ccaasshh aatt bbaannkk aaccccoouunntt ttoo tthhee bbaannkk ssttaatteemmeenntt aanndd tthheenn uuppddaattiinngg tthhee aaccccoouunnttiinngg rreeccoorrddss bbaasseedd oonn tthhee iinnffoorrmmaattiioonn sshhoowwnn iinn tthhee bbaannkk ssttaatteemmeenntt.. Sftk DDeeffiinniittiioonn BBaannkk ssttaatteemmeentn: t: AA rreeccoorrdd ooff ttrraannssaaccttiioonnss oonn tthhee bbuussiinneessss ss bbaannkk aaccccoouunntt mmaaiinnttaaiinneedd bbyy tthhee bbaannkk iinn iittss oowwnn aaccccoouunnttiinngg rreeccoorrddss.. TThhee bbaannkk ssttaatteemmeenntt iiss tthhee mmiirrrroorr iimmaaggee ooff tthhee bbuussiinneessss ss ccaasshh aatt bbaannkk aaccccoouunntt.. (cid:127) (cid:127) CCaasshh aatt bbaannkk iiss aann aasssseett ((aa ddeebbiitt bbaallaannccee)) iinn tthhee bbuussiinneessss ss lleeddggeerr aaccccoouunnttss.. FFrroomm tthhee ppeerrssppeeccttiivvee ooff tthhee bbaannkk,, tthhee aammoouunnttss ddeeppoossiitteedd bbyy aa bbuussiinneessss rreepprreesseenntt mmoonneeyy tthhaatt tthhee bbaannkk oowweess ttoo tthhaatt bbuussiinneessss.. TThhuuss,, eevveerryy iitteemm rreeccoorrddeedd aass aa ddeebbiitt iinn tthhee bbuussiinneessss ss bbooookkss -- aa ppoossiittivivee bbaannkk bbaallaannccee,, aanndd aannyy rreecceeiippttss ooff ccaasshh -- wwiillll bbee sshhoowwnn aass aa ccrreeddiitt oonn tthhee bbaannkk ssttaatteemmeenntt.. (cid:127) (cid:127) WWhheenn tthheerree iiss aa bbaannkk oovveerrddrraafftt,, wwhhiicchh iiss aa lliiaabbiilliittyy ((aa ccrreeddiitt bbaallaannccee)) iinn tthhee bbuussiinneessss ss lleeddggeerr aaccccoouunnttss,, aass ffaarr aass tthhee bbaannkk iiss ccoonncceerrnneedd iitt iiss oowweedd mmoonneeyy ffrroomm tthhee bbuussiinneessss.. TThhuuss,, eevveerryy ccrreeddiitt eennttrryy iinn tthhee bbuussiinneessss ss ccaasshh aatt bbaannkk aaccccoouunntt -- aa nneeggaattiivvee bbaannkk bbaallaannccee ((aann oovveerrddrraafftt)),, aanndd aannyy ppaayymmeennttss ooff ccaasshh -- wwiillll bbee sshhoowwnn aass aa ddeebbiitt oonn tthhee bbaannkk ssttaatteemmeenntt.. 22..22 CChheeqquueess SSoommee ssmmaalllleerr bbuussiinneesssseess uussee cchheeqquueess,, aalltthhoouugghh tthheeiirr uussaaggee hhaass ddeecclliinneedd ssiiggnniiffiiccaannttllyy iinn rreecceenntt yyeeaarrss dduuee ttoo tthhee iinnccrreeaassiinngg ppooppuullaarriittyy ooff eelleeccttrroonniicc ppaayymmeenntt mmeetthhooddss.. MMoorree iinnffoorrmmaattiioonn oonn cchheeqquueess ccaann bbee ffoouunndd iinn cchhaapptteerr 33,, bbuutt tthheeyy aarree nnoott ccoonnssiiddeerreedd ffuurrthtehre r iinn AAccccoouunnttiinngg.. --- Trang 176 --- 22..33 TThhee bbaannkk rreeccoonncciilliiaattiioonn DDeeffiinniittiioonn BBaannkk rreeccoonncciilliiaattiioonn:: AA ccoommppaarriissoonn ooff aa bbaannkk ssttaatteemmeenntt ((uussuuaallllyy ddaaiillyy bbuutt ppeerrhhaappss wweeeekkllyy oorr mmoonntthhllyy ffoorr aa ssmmaalllleerr bbuussiinneessss)) wwiitthh tthhee ccaasshh aatt bbaannkk aaccccoouunntt. DDiiffffeerreenncceess bbeettwweeeenn tthhee bbaallaannccee oonn tthhee bbaannkk ssttaatteemmeenntt aanndd tthhee ccaasshh aatt bbaannkk aaccccoouunntt sshhoouulldd bbee iiddeennttiiffiieedd aanndd ssaattiissffaaccttoorriillyy rreeccoonncciilleedd.. TThhee ccaasshh aatt bbaannkk aaccccoouunntt sshhoouulldd bbee uuppddaatteedd aaccccoorrddiinnggllyy,, uussuuaallllyy bbyy ppoossttiinngg aa jjoouurrnnaall eennttrryy.. TThhee rreeccoonncciilliiaattiioonn ooff tthhee bbaannkk ssttaatteemmeenntt ttoo tthhee ccaasshh aatt bbaannkk aaccccoouunntt mmaayy iiddeennttiiffyy tthhee ffoolllloowwiinngg eerrrroorrss aanndd oommiissssiioonnss:: ((aa)) EErrrroorrss iinn rreeccoorrddiinngg ttrraannssaaccttiioonnss iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, ssuucchh aass ttrraannssppoossiittiioonn eerrrroorrss ((eegg,, aa ppaayymmeenntt rreecceeiivveedd ffoorr 336600 iiss mmaannuuaallllyy rreeccoorrddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt aass 663300)) oorr ppaayymmeennttss mmaaddee wwhhiicchh hhaavvee bbeeeenn oommiitttteedd ffrroomm tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. AAnnyy eerrrroorrss oorr oommiissssiioonnss ffrroomm tthhee ccaasshh aatt bbaannkk aaccccoouunntt mmuusstt bbee ccoorrrreecctteedd uussiinngg aa jjoouurrnnaall eennttrryy.. ((bb)) CCoorrrreecctitoinosn s aanndd aaddjjuussttmmeennttss ttoo tthhee ccaasshh aatt bbaannkk aaccccoouunntt ((11)) DDeeppoossiittss iinnttoo oorr wwiitthhddrraawwaallss ffrroomm tthhee bbaannkk aaccccoouunntt bbyy wwaayy ooff ddeebbiitt ccaarrdd,, ddiiggiittaall wwaalllleett ppaayymmeenntt,, ssttaannddiinngg oorrddeerr,, ddiirreecctt ddeebbiitt oorr oonnlliinnee ttrraannssffeerr wwhhiicchh hhaavvee nnoott yyeett bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt. MMoosstt ooff tthheessee wwiillll bbee mmaattcchheedd aauuttoommaattiiccaallllyy bbyy tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm,, bbuutt tthheerree mmaayy bbee uunnuussuuaall oorr uunneexxppeecctteedd ddeeppoossiittss oorr wwiitthhddrraawwaallss tthhaatt ccaannnnoott bbee mmaattcchheedd.. ((22)) BBaannkk iinntteerreesstt aanndd bbaannkk cchhaarrggeess nnoott yyeett eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((33)) DDiisshhoonnoouurreedd ppaayymmeennttss nnoott yyeett eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((cc)) EErrrroorrss iinn tthhee bbaannkk ssttaatteemmeenntt,, ssuucchh aass ttrraannssppoossiittiioonn eerrrroorrss,, ppaayymmeennttss oorr rreecceeiippttss rreeccoorrddeedd ttwwiiccee oorr iinntteerreesstt aanndd ffeeeess ddeedduucctteedd iinnccoorrrreeccttllyy.. TThhee ccoorrrreecctt aammoouunntt aappppeeaarrss iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt aanndd tthhee bbaallaannccee ppeerr tthhee bbaannkk ssttaatteemmeenntt mmuusstt bbee ccoorrrreecctteedd bbyy nnoottiiffyyiinngg tthhee bbaannkk ooff tthhee eerrrroorr.. TThheerree iiss nnoo nneeeedd ttoo rreeccoorrdd aannyytthhiinngg iinn tthhee aaccccoouunnttiinngg rreeccoorrddss iinn rreessppeecctt ooff bbaannkk eerrrroorrss.. ((dd)) IItteemmss rreeccoonncciilliinngg tthhee ccoorrrreecctt ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee ttoo tthhee bbaannkk ssttaatteemmeenntt ((ttiimmiinngg ddiiffffeerreenncceess)) ((11)) PPaayymmeennttss mmaaddee bbyy tthhee bbuussiinneessss wwhhiicchh hhaavvee bbeeeenn ccrreeddiitteedd ttoo tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk ssttaatteemmeenntt.. SSoommee eelleeccttrroonniicc ppaayymmeennttss ddoo nnoott iinnssttaannttllyy cclleeaarr tthhee bbaannkk ssttaatteemmeenntt aanndd tthheerree mmaayy bbee ssoommee ooccccaassiioonnss wwhheenn ppaayymmeennttss aarree rreeccoorrddeedd bbyy tthhee bbuussiinneessss aanndd ccrreeddiitteedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt wwhhiicchh ddoo nnoott yyeett aappppeeaarr oonn tthhee bbaannkk ssttaatteemmeenntt.. TThheessee aarree kknnoowwnn aass uunncclleeaarreedd ppaayymmeennttss.. ((22)) PPaayymmeennttss rreecceeiivveedd bbyy tthhee bbuussiinneessss aanndd ddeebbiitteedd ttoo tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, bbuutt wwhhiicchh hhaavvee nnoott 1 yyeett bbeeeenn cclleeaarreedd bbyy tthhee bbaannkk aanndd ssoo ddoo nnoott yyeett aappppeeaarr oonn tthhee bbaannkk ssttaatteemmeenntt.. TThheessee aarree kknnoowwnn aass uunncclleeaarreedd rreecceeiippttss oorr llooddggeemmeennttss.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: SSttrruuccttuurriinngg pprroobblleemmss aanndd ssoolluuttiioonnss WWhheenn yyoouu aarree ffaacceedd wwiitthh aa bbaannkk rreeccoonncciilliiaattiioonn,, iitt iiss iimmppoorrttaanntt tthhaatt yyoouu ccaann iiddeennttiiffyy wwhhiicchh rreeccoonncciilliinngg iitteemmss iimmppaacctt oonn tthhee bbaannkk ssttaatteemmeenntt aanndd wwhhiicchh iimmppaacctt oonn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. WWhheenn yyoouu hhaavvee wwoorrkkeedd oouutt tthhoossee tthhaatt iimmppaacctt oonn tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, yyoouu nneeeedd ttoo tthheenn pprreeppaarree aa jjoouurrnnaall eennttrryy ttoo ccoorrrreecctt tthhee aaccccoouunntt.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAssssiimmiillaattiinngg aanndd uussiinngg iinnffoorrmmaattiioonn AAnn aaccccoouunnttaanntt iiss rreeqquuiirreedd ttoo uussee iinnffoorrmmaattiioonn wwiitthhiinn tthhee eennttiittyy ss oowwnn aaccccoouunnttiinngg ssyysstteemm aanndd iinnffoorrmmaattiioonn pprroovviiddeedd bbyy tthhee bbaannkk.. IItt iiss iimmpporotarntat nt ttoo bbee aabbllee ttoo ccoommppaarree tthhee ssaammee iinnffoorrmmaattiioonn ffrroomm ttwwoo ddiiffffeerreenntt ssoouurrcceess ttoo uunnddeerrssttaanndd tthhee ddiiffffeerreenncceess bbeettwweeeenn tthheemm,, wwhhiicchh wwiillll bbee tthhee rreeccoonncciilliinngg iitteemmss.. WWoorrkkeedd eexxaammppllee:: BBaannkk rreeccoonncciilliiaattiioonn II AAtt 3300 SSeepptteemmbbeerr 2200XX66,, tthhee bbaallaannccee iinn WWoordrdswsowrtoh rth CCoo ss ccaasshh aatt bbaannkk aaccccoouunntt wwaass 880055..11 55 ddeebbiitt.. AA bbaannkk ssttaatteemmeenntt aatt 3300 SSeepptteemmbbeerr 2200XX66 sshhoowweedd WWoordrdswsowrtoh rth CCoo ttoo bbee iinn ccrreeddiitt aatt tthhee bbaannkk bbyy 11,,11 11 22..3300.. OOnn iinnvveessttiiggaattiioonn ooff tthhee ddiiffffeerreennccee,, iitt wwaass eessttaabblliisshheedd tthhaatt:: --- Trang 177 --- RReeqquuiirreemmeenntt 11 AA ccuussttoommeerr ppaaiidd 9900 bbyy eelleeccttrroonniicc ttrraannssffeerr iinn sseettttlleemmeenntt ooff aann iinnvvooiiccee wwhhiicchh wwaass nnoott mmaattcchheedd bbyy tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm aanndd hhaass nnoott yyeett bbeeeenn rreeccoorrddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. RReeqquuiirreemmeenntt CCoorrrreecctt tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee.. 22 AA ffuunnddss ttrraannssffeerr rreecceeiivveedd ffrroomm aa ccuussttoommeerr bbuutt nnoott yyeett cclleeaarreedd bbyy tthhee bbaannkk ttoottaalllleedd 220088..2200;; aanndd ppaayymmeennttss mmaaddee ttoo ssuupppplliieerrss wwhhiicchh hhaavvee nnoott cclleeaarreedd tthhee bbaannkk wweerree 442255..3355.. RReeqquuiirreemmeenntt PPrreeppaarree tthhee bbaannkk rreeccoonncciilliiaattiioonn.. SSoolluuttiioonn 11 CCaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee bbrroouugghhtt ffoorrwwaarrdd 880055..1155 AAdddd RReecceeiipptt ffrroomm ccuussttoommeerr 9900..0000 CCoorrrreecctteedd ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee 889955..1155 BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt 11,,111122..3300 AAdddd UUnncclleeaarreedd rreecceeiippttss 220088..2200 11,,332200..5500 LLeessss UUnncclleeaarreedd ppaayymmeennttss ((442255..3355)) BBaallaannccee ppeerr ccoorrrreecctteedd ccaasshh aatt bbaannkk aaccccoouunntt 889955..1155 WWoorrkkeedd eexxaammppllee:: BBaannkk rreeccoonncciilliiaattiioonn IIII AAtt hhiiss yyeeaarr eenndd ooff 3300 JJuunnee 2200XX00,, CCooookk ss ccaasshh aatt bbaannkk aaccccoouunntt sshhoowweedd tthhaatt hhee hhaadd aa ccrreeddiitt bbaallaannccee iinn rreessppeecctt ooff aann oovveerrddrraafftt ooff 33110 0 oonn hhiiss ccuurrrreenntt aaccccoouunntt aatt tthhee bbaannkk.. TThhee bbaannkk ssttaatteemmeenntt aass aatt 3300 JJuunnee 2200XX00 sshhoowweedd tthhaatt CCooookk hhaass aann oovveerrddrraafftt ooff 7700.. OO nn rreeccoonncciilliinngg tthhee ccaasshh aatt bbaannkk aaccccoouunntt aanndd tthhee bbaannkk ssttaatteemmeenntt yyoouu ffiinndd tthhee ffoolllloowwiinngg:: ((11)) PPaayymmeennttss mmaaddee ttoo ssuupppplliieerrss aammoouunnttiinngg ttoo 550000,, hhaadd bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk.. ((22)) EElleeccttrroonniicc ttrraannssffeerrss rreecceeiivveedd,, aammoouunnttiinngg ttoo 440000,, hhaadd bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, bbuutt hhaadd nnoott yyeett cclleeaarreedd tthhee bbaannkk.. ((33)) BBaannkk cchhaarrggeess ooff 3355 sshhoowwnn iinn tthhee bbaannkk ssttaatteemmeenntt hhaadd nnoott bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((44)) DDiivviiddeennddss rreecceeiivveedd ooff 222255 hhaadd bbeeeenn ppaaiidd ddiirreeccttllyy iinnttoo tthhee bbaannkk aanndd nnoott eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((55)) AAnn eelleeccttrroonniicc ppaayymmeenntt ffoorr 5500 rreecceeiivveedd ffrroomm SSuunniill wwaass rreeccoorrddeedd aanndd bbaannkkeedd oonn 22 99 JJuunnee.. TThhiiss wwaass rreettuurrnneedd uunnppaaiidd bbyy SSuunniill ss bbaannkk oonn 3300 JJuunnee aanndd tthheenn sshhoowwnn aass aa ddeebbiitt oo nn tthhee bbaannkk ssttaatteemmeenntt.. NN oo eennttrryy hhaass bbeeeenn mmaaddee iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt ffoorr tthhee ddiisshhoonnoouurreedd ppaayymmeenntt.. RReeqquuiirreemmeennttss RReeqquuiirreemmeenntt MMaakkee tthhee aapppprroopprriiaattee aaddjjuussttmmeennttss iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, tthheenn pprreeppaarree aa ssttaatteemmeenntt rreeccoonncciilliinngg tthhee aammeennddeedd ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee wwiitthh tthhaatt sshhoowwnn oo nn tthhee bbaannkk ssttaatteemmeenntt.. --- Trang 178 --- SSoolluuttiioonn TThhee ccaasshh aatt bbaannkk aaccccoouunntt sshhoouulldd bbee ccoorrrreecctteedd ffoorr tthhee iitteemmss iinn nnootteess ((44)) aanndd ((55)).. BBaannkk cchhaarrggeess ((nnoottee ((33)))) aallssoo ccaallllss ffoorr aann aaddjjuussttmmeenntt.. CCAASSHH AATT BBAANNKK AACCCCOOUUNNTT 33 00 JJuunnee 3300 JJuunnee 2200XX00 2200XX00 BBaallaannccee bb//dd 331100 DDiivviiddeennddss ppaaiidd ddiirreecctt ttoo bbaannkk ((dd)) 222255 BBaannkk cchhaarrggeess ((cc)) 3355 DDiisshhoonnoouurreedd ppaayymmeenntt ((ee)) 5500 BBaallaannccee cc//dd 117700 339955 339955 BBaannkk rreeccoonncciilliiaattiioonn aatt 3300 JJuunnee 2200XX00 BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt ((7700)) AAdddd RReecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 440000 333300 LLeessss PPaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk ((550000)) BBaallaannccee ppeerr ccoorrrreecctteedd ccaasshh aatt bbaannkk aaccccoouunntt ((117700)) PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAssssiimmiillaattiningg aanndd uussiinngg iinnffoorrmmaattiioonn AAnn eexxaamm qquueessttiioonn tthhaatt aasskkss yyoouu ttoo pprreeppaarree aa bbaannkk rreeccoonncciilliiaattiioonn rreeqquuiirreess yyoouu wwoorrkk ttwwoo ssoouurrcceess ooff iinnffoorrmmaattiioonn.. YYoouu nneeeedd ttoo wwoorrkk wwiitthh bbootthh tthhee bbaannkk ssttaatteemmeenntt aanndd tthhee ccaasshh aatt bbaannkk aaccccoouunntt aanndd kknnooww hhooww tthheeyy iinntteerraacctt,, ffoorr eexxaammppllee,, uunnddeerrssttaanndd tthhaatt aa ccrreeddiitt ttrraannssaaccttiioonn iinn tthhee bbaannkk ssttaatteemmeenntt iiss aa ddeebbiitt ttrraannssaaccttiioonn iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. YYoouu aallssoo nneeeedd ttoo uunnddeerrssttaanndd wwhheetthheerr aa ttrraannssaaccttiioonn rreeqquuiirreess aann aaccccoouunnttiinngg aaddjjuussttmmeenntt.. WWoorrkkiinngg llooggiiccaallllyy aanndd mmeetthhooddiiccaallllyy iiss eesssseennttiiaall.. IInntteerraaccttiivvee qquueessttiioonn 11:: BBaannkk rreeccoonncciilliiaattiioonn II AA bbaannkk rreeccoonncciilliiaattiioonn ssttaatteemmeenntt iiss bbeeiinngg pprreeppaarreedd.. TThhee cclloossiinngg bbaallaannccee sshhoowwnn bbyy tthhee bbaannkk ssttaatteemmeenntt iiss aa ppoossiittiivvee bbaallaannccee ooff 338888.. TThhee ccaasshh aatt bbaannkk aaccccoouunntt hhaass aa ppoossiittiivvee bbaallaannccee ooff 11 0066.. --- Trang 179 --- RReeqquuiirreemmeennttss 11 ..11 UUssiinngg tthhee ttaabbllee bbeellooww,, sseelleecctt tthhee eeffffeecct t ooff eeaacchh iitteemm oonn tthhee cclloossiinngg bbaallaannccee sshhoowwnn bbyy tthhee bbaannkk ssttaatteemmeenntt.. IInnccrreeaassee//DDeeccrreeaassee//NNoo eeffffeecctt TThhee bbaannkk hhaass mmaaddee aa mmiissttaakkee iinn ccrreeddiittiinngg tthhee aaccccoouunntt wwiitthh 111100 bbeelloonnggiinngg ttoo aannootthheerr ccuussttoommeerr -- aann eerrrroorr nnoott yyeett rreeccttiiffiieedd.. 112200 rreecceeiivveedd bbyy tthhee bbaannkk uunnddeerr aa ssttaannddiinngg oorrddeerr aarrrraannggeemmeenntt hhaass nnoott bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. AAnn eelleeccttrroonniicc ppaayymmeenntt ttoottaalllliinngg 55,,662299 hhaass bbeeeenn mmaaddee ttoo aa ssuupppplliieerr aanndd eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt iiss nnoott yyeett pprreesseenntteedd oonn tthhee bbaannkk ttrraannssaaccttiioonn rreeppoorrtt.. CCaasshh rreecceeiippttss ffrroomm ccuussttoommeerrss ttoottaalllliinngg 55,,557777 hhaavvee bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt hhaavvee nnoott yyeett bbeeeenn ccrreeddiitteedd iinn tthhee bbaannkk ssttaatteemmeenntt.. 11 ..22 AAddjjuusstt tthhee ccaasshh aatt bbaannkk aaccccoouunntt aanndd pprreeppaarree tthhee bbaannkk rreeccoonncciilliiaattiioonn.. IInntteerraaccttiivvee qquueessttiioonn 22:: BB aannkk rreeccoonncciilliiaattiioonn IIII TTiillffeerr ss bbaannkk ssttaatteemmeenntt sshhoowwss 7711 55 ddiirreecctt ddeebbiittss aanndd 335533 ffiinnaannccee iinnccoommee wwhhiicchh hhaavvee nnoott bbeeeenn aauuttoommaattiiccaallllyy rreeccoorrddeedd bbyy tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm aanndd aarree tthheerreeffoorree nnoott iinncclluuddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. TThhee bbaannkk ssttaatteemmeenntt ddooeess nnoott sshhooww aa rreecceeiipptt ffrroomm aa ccuussttoommeerr ffoorr 887755 eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt oonn tthhee llaasstt ddaayy ooff tthhee rreeppoorrttiinngg ppeerriioodd.. TThhee ccaasshh aatt bbaannkk aaccccoouunntt hhaass aa ccrreeddiitt bbaallaannccee ooff 661100.. RReeqquuiirreemmeennttss RReeqquuiirreemmeenntt WWhhaatt bbaallaannccee iiss sshhoowwnn oonn tthhee bbaannkk ssttaatteemmeenntt 33 TTyyppeess ooff eerrrroorr iinn aaccccoouunnttiinngg SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) EErrrroorrss ccaann bbee ccllaassssiiffiieedd aass:: ttrraannssppoossiittiioonn eerrrroorrss,, eerrrroorrss ooff oommiissssiioonn,, eerrrroorrss ooff pprriinncciippllee,, eerrrroorrss ooff ccoommmmiissssiioonn aanndd ccoommppeennssaattiinngg eerrrroorrss.. AAss aaccccoouunnttiinngg ssooffttwwaarree ppaacckkaaggeess bbeeccoommee iinnccrreeaassiinnggllyy ssoopphhiissttiiccaatteedd,, tthhee rriisskk aanndd ooccccuurrrreennccee ooff eerrrroorrss iiss ddeeccrreeaasseedd.. IItt rreemmaaiinnss iimmppoorrttaanntt hhoowweevveerr ffoorr aann aaccccoouunnttaanntt ttoo bbee aabbllee ttoo iiddeennttiiffyy aanndd ccoorrrreecctt eerrrroorrss iinn tthhee aaccccoouunnttiinngg ssyysstteemm.. TThheerree aarree ffiivvee bbrrooaadd ttyyppees s ooff eerrrroorr aass ffoolllloowwss:: (cid:127) (cid:127) ttrraannssppoossiittiioonn eerrrroorrss (cid:127) (cid:127) eerrrroorrss ooff oommiissssiioonn --- Trang 180 --- (cid:127) errors of principle (cid:127) errors of commission (cid:127) compensating errors Once an error has been detected, it needs to be put right via a journal entry. 3.1 Transposition errors Definition Transposition errors: When two digits in an amount are accidentally recorded the wrong way round. (cid:127) A sale is credited in the sales account and trade receivables as 6,843, but the amount should have been 6,483. The debits and credits will still be equal but will be stated at the wrong amount. 3.2 Errors of omission Sk Definition Error of omission: Failing to record a transaction at all. (cid:127) A business receives an invoice from a supplier for 250, and the transaction is omitted from the accounting records. As a result, both total debits and credits will be wrong by 250. 3.3 Errors of principle Definition Error of principle: Posting a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the rules of an accounting principle or concept. A typical example of such an error is to treat revenue expenditure incorrectly as capital expenditure. (cid:127) Machine repairs costing 1 50 (which should be treated as revenue expenditure) are debited to the cost of a non-current asset (capital expenditure). Although total debits still equal total credits, the repairs account is understated by 1 50 and the cost of the non-current asset is overstated by 1 50. (cid:127) A business owner takes 280 cash out of the till for his personal use. The bookkeeper incorrectly debits sales by 280, when they should have debited drawings. This is an error of principle, so that drawings and sales are both understated by 280. 3.4 Errors of commission Definition Error of commission: A mistake is made in recording transactions in the ledger accounts by recording a debit entry or a credit entry in the wrong account. (cid:127) Telephone expenses of 540 are debited to the electricity expense account, an error of commission. Although total debits and credits balance, telephone expenses are understated by 540 and electricity expense is overstated by the same amount. 3.5 Compensating errors Definition Compensating errors: Errors which are, coincidentally, equal and opposite to one another. Compensating errors hide trial balance errors. (cid:127) Administrative expenses of 2,800 are entered as 2,200 in the administrative expenses ledger account. At the same time, distribution costs have been entered as 4,700 but should have been 4,1 00. Administrative expenses are understated by 600 and distribution costs are overstated by 600, but the two amounts cancel each other out. --- Trang 181 --- 4 Correcting errors Section overview (cid:127) Errors are corrected using a journal entry. (cid:127) A suspense account may be used when a bookkeeper does not know where to post one side of an entry or when the computerised accounting system cannot match a transaction on a bank transaction report to the relevant nominal ledger account. (cid:127) Suspense accounts are always temporary and should never appear in financial statements. Financial statements should not be prepared until the errors have been corrected and the suspense account has been cleared. (cid:127) Some corrections of errors will result in adjustments to a draft profit calculated while there were still errors in the accounts. In a computerised accounting system, the total of the debit entries will always be equal to the total of the credit entries as the system will not allow a one-sided entry or an imbalanced entry to be recorded. That does not mean, however, that the accounting records are complete and free from error. If an error is identified, it must be corrected via a journal entry. Context example: Correcting errors A bookkeeper accidentally posts an invoice for 40 to the local property taxes account instead of to the electricity account. A journal entry is required to correct the misposting error as follows: DEBIT Electricity account 40 CREDIT Local property taxes account 40 To correct a misposting of 40 from the local property taxes account to electricity account. One approach to the correction of errors is to: (cid:127) identify the original incorrect entry (what did the business do ) (cid:127) identify what the entry should have been (what should the business have done ) (cid:127) create a correcting journal entry (what does the business need to do now ) Interactive question 3 : Journal entries Write out the journal entries which would correct these errors: Requirements 3.1 A business received an invoice for 250 from a supplier which it omitted from its accounting records entirely. 3.2 Repairs worth 150 were incorrectly debited to the non-current asset (machinery) account instead of the repairs account. 3.3 The bookkeeper of a business reduced cash sales by 280 because he was not sure what the 280 represented. In fact, it was drawings. 3.4 Telephone expenses of 540 were incorrectly debited to the electricity account. 4.1 Suspense accounts Definition Suspense account: A temporary account used when the computerised accounting system or the bookkeeper is unsure of how to record one side of a transaction. --- Trang 182 --- AA ssuussppeennssee aaccccoouunntt iiss aa tteemmppoorraarryy aaccccoouunntt wwhhiicchh aalllloowwss aa ttrraannssaaccttiioonn ttoo bbee rreeccoorrddeedd iinn tthhee aaccccoouunnttiinngg ssyysstteemm,, eevveenn tthhoouugghh tthhee lleeddggeerr aaccccoouunntt ffoorr oonnee ssiiddee ooff tthhee ttrraannssaaccttiioonn iiss nnoott yyeett ccoonnffiirrmmeedd.. AA ssuussppeennssee aaccccoouunntt ccaann bbee ooppeenneedd bbyy tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm ((wwhheenn iitt ccaannnnoott mmaattcchh aa ttrraannssaaccttiioonn ddeettaaiilleedd oonn tthhee bbaannkk ttrraannssaaccttiioonn rreeppoorrtt)) oorr bbyy tthhee bbooookkkkeeeeppeerr ((wwhheenn tthheeyy aarree uunnssuurree ooff wwhhiicchh lleeddggeerr aaccccoouunntt ttoo uussee)).. OOnnccee tthhee iissssuuee hhaass bbeeeenn rreessoollvveedd,, iiee,, tthhee ttrraannssaaccttiioonn hhaass bbeeeenn mmaattcchheedd oorr tthhee ccoorrrreecctt aaccccoouunntt hhaass bbeeeenn iiddeennttiiffiieedd,, tthhee ssuussppeennssee aaccccoouunntt sshhoouulldd bbee cclleeaarreedd uussiinngg aa jjoouurrnnaall eennttrryy.. CCoonntteexxtt eexxaammppllee:: SSuussppeennssee aaccccoouunntt WWiinnddffaallll GGaarrmmeennttss rreecceeiivveedd aa bbaannkk ttrraannssffeerr ooff 662200.. TThhee aaccccoouunnttiinngg ssyysstteemm hhaass nnoott bbeeeenn aabbllee ttoo mmaattcchh tthhee ttrraannssaaccttiioonn aanndd ssoo tthhee aammoouunntt hhaass bbeeeenn ccrreeddiitteedd ttoo tthhee ssuussppeennssee aaccccoouunntt aanndd lliisstteedd oonn aann eexxcceeppttiioonn rreeppoorrtt.. DDEEBBIITT CCaasshh aatt bbaannkk aaccccoouunntt 662200 CCRREEDDIITT SSuussppeennssee aaccccoouunntt 662200 AAfftteerr iinnvveessttiiggaattiioonn,, iitt iiss ddiissccoovveerreedd tthhaatt tthhee aammoouunntt rreecceeiivveedd iiss ppaartr t ppaayymmeenntt ffrroomm aa ccrreeddiitt ccuussttoommeerr.. TThhee ssuussppeennssee aaccccoouunntt ccaann nnooww bbee cclleeaarreedd,, aass ffoolllloowwss:: DDEEBBIITT SSuussppeennssee aaccccoouunntt 662200 CCRREEDDIITT TTrraaddee rreecceeiivvaabblleess 662200 44..22 SSuussppeennssee aaccccoouunnttss mmiigghhtt ccoonnttaaiinn sseevveerraall iitteemmss AAss aallll uunnmmaattcchheedd aanndd uunniiddeennttiiffiieedd ttrraannssaaccttiioonnss iinn aa rreeppoortirntgi ng ppeerriioodd aarree aaccccoouunntteedd ffoorr iinn aa ssiinnggllee ssuussppeennssee aaccccoouunntt,, tthhee bbaallaannccee oonn tthhee ssuussppeennssee aaccccoouunntt mmaayy ccoonnttaaiinn sseevveerraall ddiiffffeerreenntt iitteemmss.. AAllll ooff tthhee iitteemmss sshhoouulldd bbee iinnvveessttiiggaatteedd aanndd ccoorrrreeccttiinngg eennttrriieess mmaaddee.. SSeevveerraall jjoouurrnnaall eennttrriieess mmaayy bbee rreeqquuiirreedd ttoo cclleeaarr tthhee ssuussppeennssee aaccccoouunntt.. AAnn eexxaamm qquueessttiioonn mmiigghhtt ggiivvee yyoouu aa ssuussppeennssee aaccccoouunntt bbaallaannccee,, ttooggeetthheerr wwiitthh iinnffoorrmmaattiioonn ttoo mmaakkee ccoorrrreeccttiioonnss wwhhiicchh wwiillll lleeaavvee aa nniill bbaallaannccee oonn tthhee ssuussppeennssee aaccccoouunntt aanndd ccoorrrreecctt bbaallaanncceess oonn tthhee nnoommiinnaall lleeddggeerr aaccccoouunnttss.. 44..33 SSuussppeennssee aaccccoouunnttss aarree tteemmppoorraarryy IItt mmuusstt bbee ssttrreesssseedd tthhaatt aa ssuussppeennssee aaccccoouunntt sshhoouulldd oonnllyy bbee tteemmppoorraarryy.. TThheerree sshhoouulldd bbee nnoo ssuussppeennssee aaccccoouunntt wwhheenn iitt ccoommeess ttoo pprreeppaarriinngg tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. TThhee ssuussppeennssee aaccccoouunntt sshhoouulldd bbee cclleeaarreedd aanndd aallll ccoorrrreeccttiinngg eennttrriieess mmaaddee bbeeffoorree tthhee ffiinnaall ffiinnaanncciiaall ssttaatteemmeennttss aarree ddrraawwnn uupp.. 3 Professional skills focus: Applying judgement M3 Professional skills focus: Applying judgement AA ssuussppeennssee aaccccoouunntt sshhoouulldd oonnllyy bbee uusseedd iiff oonnee ssiiddee ooff tthhee aaccccoouunnttiinngg ttrraannssaaccttiioonn iiss nnoott kknnoowwnn.. YYoouu sshhoouulldd NNOOTT uussee aa ssuussppeennssee aaccccoouunntt wwhheenn pprreeppaarriinngg jjoouurrnnaall eennttrriieess iinn tthhee lloonngg--ffoorrmm qquueessttiioonn iinn tthhee AAccccoouunnttiinngg eexxaamm.. IIff aa ssuussppeennssee aaccccoouunntt iiss pprreesseenntt iinn tthhee ttrriiaall bbaallaannccee,, yyoouu mmuusstt mmaakkee ssuurree tthhaatt tthhee jjoouurrnnaall eennttrriieess yyoouu ppoosstt cclleeaarr iitt ttoo nniill.. 44..44 AAddjjuussttmmeenntt ooff pprrooffiittss ffoorr eerrrroorrss CCoorrrreeccttiinngg eerrrroorrss ccaann aaffffeecctt eeiitthheerr tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn oorr tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, oorr ssoommeettiimmeess bbootthh.. AAnn eerrrroorr ooff oommiissssiioonn ccoorrrreecctteedd bbyy ddeebbiittiinngg ssaalleess aanndd ccrreeddiittiinngg ttrraaddee rreecceeiivvaabblleess wwiitthh 9900 mmeeaanntt tthhaatt ssaalleess ddeeccrreeaasseedd,, ssoo ggrroossss pprrooffiitt wwaass rreedduucceedd bbyy 9900 aass aa rreessuulltt ooff tthhee eerrrroorr bbeeiinngg ccoorrrreecctteedd.. IIff eerrrroorrss aarree ddiissccoovveerreedd aafftteerr tthhee ffiinnaall ttrriiaall bbaallaannccee aanndd ddrraafftt ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn hhaavvee bbeeeenn pprreeppaarreedd,, tthheenn ccoorrrreeccttiioonnsswwiillll aalltteerr tthhoossee ddrraafftt ffiinnaanncciiaall ssttaatteemmeennttss.. YYoouu mmaayy nneeeedd ttoo ddeemmoonnssttrraattee hhooww ddrraafftt ffiinnaanncciiaall ssttaatteemmeennttss aarree aaffffeecctteedd bbyy eerrrroorr ccoorrrreeccttiioonnss bbyy ccaallccuullaattiinngg:: (cid:127) (cid:127) hhooww mmuucchh ggrroossss oorr nneett pprrooffiitt iiss iinnccrreeaasseedd oorr rreedduucceedd aass aa rreessuulltt ooff eerrrroorr ccoorrrreeccttiioonn;; aanndd (cid:127) (cid:127) tthhee ffiinnaall ggrroossss oorr nneett pprrooffiitt aafftteerr tthhee eerrrroorr ccoorrrreeccttiioonn.. --- Trang 183 --- PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAppppllyyiinngg jjuuddggeemmeenntt AAnn aaccccoouunnttaanntt sshhoouulldd aappppllyy pprrooffeessssiioonnaall sscceeppttiicciissmm iiff tthheeyy ffiinndd aa nnuummbbeerr ooff aaddjjuussttmmeennttss ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss tthhaatt iimmppaacctt oonn pprrooffiitt aass iitt mmaayy iinnddiiccaattee tthhaatt tthhee eerrrroorrss oorr oommiissssiioonnss wweerree iinntteennttiioonnaall aanndd tthhaatt tthhee ffiinnaanncciiaall ssttaatteemmeennttss hhaavvee bbeeeenn ssuubbjjeecctt ttoo mmaanniippuullaattiioonn,, ppeerrhhaappss ttoo aacchhiieevvee aa cceerrttaaiinn rreevveennuuee oorr pprrooffiitt ttaarrggeett.. IInntteerraaccttiivvee qquueessttiioonn 44:: EErrrroorrss DDoowwnn CCoo hhaass tthhee ffoolllloowwiinngg eerrrroorrss aanndd oommiissssiioonnss iinn iittss aaccccoouunnttiinngg rreeccoorrddss:: ((11)) AA ssaallee ooff ggooooddss oonn ccrreeddiitt ffoorr 11,, 000000 hhaass nnoott bbeeeenn rreeccoorrddeedd.. ((22)) DDeelliivveerryy ccoossttss ooff 224400 oonn aa nneeww iitteemm ooff ppllaanntt hhaass bbeeeenn rreeccoorrddeedd aass rreevveennuuee eexxppeennddiittuurree iinn tthhee ddiissttrriibbuuttiioonn ccoossttss aaccccoouunntt.. ((33)) CCaasshh ddiissccoouunntt ooff 11 5500 hhaadd bbeeeenn ttaakkeenn oonn ppaayyiinngg aa ssuupppplliieerr,, JJWW,, eevveenn tthhoouugghh tthhee ppaayymmeenntt wwaass mmaaddee oouuttssiiddee tthhee ttiimmee lliimmiitt.. JJWW iiss iinnssiissttiinngg tthhaatt 115500 iiss ssttiillll ppaayyaabbllee.. ((44)) AA rraaww mmaatteerriiaallss ppuurrcchhaassee ooff 335500 ((oonn ccrreeddiitt)) hhaass bbeeeenn rreeccoorrddeedd aass 885500.. RReeqquuiirreemmeennttss eeaacchh nnoott 44..11 PPrreeppaarree jjoouurrnnaall eennttrriieess ttoo ccoorrrreecctt ooff tthhee aabboovvee eerrrroorrss.. NNaarrrraattiivveess aarree rreeqquuiirreedd.. 44..22 BBeeffoorree tthhee eerrrroorrss wweerree ccoorrrreecctteedd,, DDoowwnn CCoo ss ggrroossss pprrooffiitt wwaass ccaallccuullaatteedd aatt 3355,,775500 aanndd tthhee nneett pprrooffiitt ffoorr tthhee yyeeaarr aatt 11 88,,550000.. CCaallccuullaattee tthhee rreevviisseedd ggrroossss aanndd nneett pprrooffiitt ffiigguurreess aafftteerr ccoorrrreeccttiioonn ooff tthhee eerrrroorrss.. 55 AA dd jj uu ss tt ii nn gg tt hh ee ii nn ii tt iiaall tt rr ii aa ll bbaallaannccee ff oo rr eerrrroorrss BB SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TThhee iinniittiiaall ttrriiaall bbaallaannccee ccaann bbee aaddjjuusstteedd ffoorr eerrrroorrss ((aanndd ppeerriioodd eenndd aaddjjuussttmmeennttss)) tthhaatt ccoommee ttoo lliigghhtt aafftteerr tthhee iinniittiiaall ttrriiaall bbaallaannccee hhaass bbeeeenn eexxttrraacctteedd.. IInn CChhaapptteerr 55 wwee ssaaww hhooww aann iinniittiiaall ttrriiaall bbaallaannccee iiss pprroodduucceedd aatt tthhee yyeeaarr--eenndd ddaattee aanndd iiss tthheenn aaddjjuusstteedd ttoo rreefflleecctt iinnffoorrmmaattiioonn tthhaatt ccoommeess ttoo lliigghhtt aafftteerr tthhee yyeeaarr eenndd.. OOnnee wwaayy ttoo pprroocceessss tthhee aaddjjuussttmmeennttss iiss bbyy ccrreeaattiinngg ddeebbiitt aanndd ccrreeddiitt aaddjjuussttmmeennttss ccoolluummnnss aaggaaiinnsstt tthhee iinniittiiaall ttrriiaall bbaallaannccee.. TThhiiss iiss aa uusseeffuull aapppprrooaacchh wwhheenn rreeccoorrddiinngg ccoorrrreeccttiinngg jjoouurrnnaallss mmaaddee aatt tthhee ffiinnaall ssttaaggeess ooff pprreeppaarriinngg ffiinnaanncciiaall ssttaatteemmeennttss,, aafftteerr tthhee iinniittiiaall ttrriiaall bbaallaannccee hhaass bbeeeenn pprreeppaarreedd.. S CCoonntteexxtt eexxaammppllee:: EErrrroorr ccoorrrreeccttiioonn aanndd tthhee ttrriiaall bbaallaannccee HHaannddllee eexxttrraacctteedd iittss iinniittiiaall ttrriiaall bbaallaannccee,, wwhhiicchh iinncclluuddeedd aa ssuussppeennssee aaccccoouunntt ooff 66,,440000 CCrr,, aass ffoolllloowwss:: --- Trang 184 --- Ledger account Initial trial balance Adjustments Final trial balance Debit Credit Debit Credit Debit Credit Cash at bank 5,415 Opening capital 10,000 Loan 5,000 Non-current assets 30,000 Trade payables 18,689 Expenses 6,781 Purchases 21,569 Sales 38,974 Trade receivables 9,445 Suspense account 6,400 Drawings 5,853 Net profit 79,063 79,063 Handle has now discovered the following matters: (a) An amount of 1, 000 was credited o n the bank statement in the year and automatically entered in the cash at bank account by the computerised accounting system, but it could not match the amount to a known transaction and a credit entry was made to the suspense account. The bookkeeper subsequently discovered that the amount was a part-payment from a credit customer. (b) A non-current asset was purchased o n credit just before the year end for 5,400. This was correctly entered in the non-current asset account but as the bookkeeper was unsure how to categorise the amount payable, the credit entry was posted to the suspense account. To correct these errors Handle uses the following journals: 1 DEBIT Suspense 1,000 CREDIT Trade receivables 1,000 2 DEBIT Suspense 5,400 CREDIT Trade payables 5,400 These journals are entered in the adjustments columns, and then each row is added across to produce Handle s final trial balance. --- Trang 185 --- LLeeddggeerr aaccccoouunntt IInniittiaial l TTrriiaall BBaallaannccee AAddjjuusstmtmenetnsts FFiinnaall TTrriiaall BBaallaannccee DDeebbiitt CCrreedditit DDeebbiitt CCrreedditit DDeebbiitt CCrreedditit CCaasshh aatt bbaannkk 55,,441155 55,,441155 OOppeenniinngg ccaappiittaall 1100,,000000 1100,,000000 LLooaann 55,,000000 55,,000000 NNoonn--ccuurrrreenntt aasssseettss 3300,,000000 3300,,000000 TTrraaddee ppaayyaabblleess 1188,,668899 55,,440000 2244,,008899 EExxppeennsseess 66,,778811 66,,778811 PPuurrcchhaasseess 2211,,556699 2211,,556699 SSaalleess 3388,,997744 3388,,997744 TTrraaddee rreecceeiivvaabblleess 99,,444455 11,,000000 88,,444455 SSuussppeennssee 66,,440000 66,,440000 DDrraawwiinnggss 55,,885533 55,,885533 7799,,006633 7799,,006633 66,,440000 66,,440000 7788,,006633 7788,,006633 NNoo bbaallaannccee rreemmaaiinnss oonn tthhee ssuussppeennssee aaccccoouunntt.. --- Trang 186 --- SSuummmmaarryy VVeerriiffyy aaccccuurraaccyy MMeemmoorraanndduumm aaccccoouunnttss BBaacckk rreeccoonncciilliiaattiioonn NNOOTT ppaarrtt ooff ddoouubbllee eennttrryy UUsseedd ffoorr rreeccoorrdd kkeeeeppiinngg BBaallaannccee rreeccoonncciilliiaattiioonn CCaasshh aatt bbaacckk aaccccoouunntt bbaallaannccee xxxxxx AAdddd//ddeedduucctt:: EErrrroorrss aanndd oommiissssiioonnss xxxxxx//((xxxxxx)) RReecceeiivvaabblleess lleeddggeerr PPaayyaabblleess lleeddggeerr CCoorrrreecctteedd ccaasshh aatt bbaacckk aaccccoouunntt bbaallaannccee xxxxxx SSeeppaarraattee aaccccoouunntt ffoorr SSeeppaarraattee aaccccoouunntt ffoorr BBaallaannccee ppeerr bbaannkk ttrraannssaaccttiioonn rreeppoorrtt xxxxxx eeaacchh ccrreeddiitt ccuussttoommeerr eeaacchh ccrreeddiitt ssuupppplliieerr AAdddd:: RReecceeiippttss wwhhiicchh hhaavvee nnoott yyeett SShhoowwss aammoouunntt oowweedd SShhoowwss aammoouunntt oowweedd cclleeaarreedd tthhee bbaannkk xxxxxx bbyy eeaacchh ccuussttoommeerr aatt bbyy eeaacchh ssuupppplliieerr aatt LLeessss:: PPaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett aannyy ppooiinntt iinn ttiimmee aannyy ppooiinntt iinn ttiimmee cclleeaarreedd tthhee bbaannkk ((xxxxxx)) BBaallaannccee ppeerr ccoorrrreecctteedd bbaasshh aatt bbaannkk aaccccoouunntt xxxxxx SSuupppplliieerr ssttaatteemmeenntt NNoottee tthhaatt tthheessee bbaallaanncceess wwiillll bbee nneeggaattiivvee iiff tthheerree rreeccoonncciilliiaattiioonn iiss aann oovveerrddrraafftt CCoorrrreeccttiinngg eerrrroorrss TTyyppeess ooff eerrrroorr PPrriinncciippllee CCoommmmiissssiioonn TTrraannssppoossiittiioonn OOmmiissssiioonn CCoommppeennssaattiinngg 11 .. IIddeennttiiffyy oorriiggiinnaall ((iinnccoorrrreecctt)) eennttrryy 22.. IIddeennttiiffyy wwhhaatt tthhee eennttrryy sshhoouulldd hhaavvee bbeeeenn 33.. CCrreeaattee ccoorrrreeccttiinngg jjoouurrnnaall eennttrryy IIddeennttiiffyy eeffffeecctt ooff ccoorrrreeccttiioonn oonn pprrooffiitt FFuurrtthheerr qquueessttiioonn pprraaccttiiccee KKnnoowwlleeddggee ddiiaaggnnoossttiicc BBeeffoorree yyoouu mmoovvee oonn ttoo qquueessttiioonn pprraaccttiiccee,, ccoonnffiirrmm yyoouu aarree aabbllee ttoo aannsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss hhaavviinngg ssttuuddiieedd tthhiiss cchhaapptteerr.. IIff nnoott,, yyoouu aarree aaddvviisseedd ttoo rreevviissiitt tthhee rreelleevvaanntt lleeaarrnniinngg ffrroomm tthhee ttooppiicc iinnddiiccaatteedd.. --- Trang 187 --- CCoonnffiirrmm yyoouurr lleeaarrnniinngg 11 CCaann yyoouu eexxppllaaiinn hhooww ttoo pprreeppaarree aa ssuupppplliieerr ssttaatteemmeenntt rreeccoonncciilliiaattiioonn ((TTooppiicc 11 )) 22 IIss aa ppaayymmeenntt wwhhiicchh hhaass nnoott yyeett cclleeaarreedd tthhee bbaannkk aa rreeccoonncciilliinngg iitteemm ffoorr tthhee ccaasshh aatt bbaannkk aaccccoouunntt oorr tthhee bbaannkk ssttaatteemmeenntt ((TTooppiicc 22)) 33 CCaann yyoouu ddeessccrriibbee tthhee ffiivvee ttyyppeess ooff eerrrroorr ((TTooppiicc 33)) 44 AA ssuussppeennssee aaccccoouunntt sshhoouulldd nnoott bbee sshhoowwnn iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. CCaann yyoouu eexxppllaaiinn wwhhyy ((TTooppiicc 44)) 55 IIff tthheerree iiss aa bbaallaannccee oonn aa ssuussppeennssee aaccccoouunntt aatt tthhee yyeeaarr eenndd,, wwhhaatt sshhoouulldd bbee ddoonnee bbeeffoorree tthhee ffiinnaanncciiaall ssttaatteemmeennttss aarree pprreeppaarreedd ((TTooppiicc 44)) 22 CChhaapptteerr sseellff--tteesstt qquueessttiioonn pprraaccttiiccee AAiimm ttoo ccoommpplleettee aallll tthhee sseellff--tteesstt qquueessttiioonnss aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. OOnnccee ccoommpplleetteedd,, aatttteemmpptt aallll tthhee qquueessttiioonnss iinn tthhee EErrrroorrss aanndd ccoorrrreeccttiioonnss ttoo aaccccoouunnttiinngg rreeccoorrddss aanndd ffiinnaanncciiaall ssttaatteemmeennttss cchhaapptteerr ooff tthhee AAccccoouunnttiinngg QQuueessttiioonn BBaannkk,. RReeffeerr bbaacckk ttoo tthhee lleeaarrnniinngg iinn tthhiiss cchhaapptteerr ffoorr aannyy qquueessttiioonnss wwhhiicchh yyoouu ddiidd nnoott aannsswweerr ccoorrrreeccttllyy oorr wwhheerree tthhee ssuuggggeesstteedd ssoolluuttiioonn hhaass nnoott pprroovviiddeedd ssuuffffiicciieenntt eexxppllaannaattiioonn ttoo aannsswweerr aallll yyoouurr qquueerriieess.. OOnnccee yyoouu hhaavvee aatttteemmpptteedd tthheessee qquueessttiioonnss,, yyoouu ccaann mmoovvee oonn ttoo tthhee nneexxtt cchhaapptteerr.. SSeellff--tteesstt qquueessttiioonnss AAnnsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss.. 11 AA CCoo ss ttrraaddee rreecceeiivvaabblleess lleeddggeerr aaccccoouunntt ccoommpprriisseess:: ssaalleess 112 2 55,,000000,, ccaasshh rreecceeiivveedd 5500,,000000,, aanndd eeaarrllyy sseettttlleemmeenntt ddiissccoouunnttss ttaakkeenn uunneexxppeecctteeddllyy bbyy ccuussttoommeerrss ttoottaalllliinngg 22,,000000.. TThhee bbaallaannccee ccaarrrriieedd ddoowwnn iiss 9955,,000000.. WWhhaatt wwaass tthhee ooppeenniinngg bbaallaannccee aatt tthhee bbeeggiinnnniinngg ooff tthhee ppeerriioodd AA 2222,,000000 ddeebbiitt BB 2222,,000000 ccrreeddiitt CC 1188,,000000 ddeebbiitt DD 2200,,000000 ddeebbiitt 22 AA bbaannkk ssttaatteemmeenntt sshhoowwss aa bbaallaannccee ooff 11,, 220000 iinn ccrreeddiitt.. AAnn eexxaammiinnaattiioonn ooff tthhee aaccccoouunnttiinngg rreeccoorrddss sshhoowwss 550000 ppaaiidd iinn ppeerr tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt nnoott yyeett oonn tthhee bbaannkk ssttaatteemmeenntt aanndd 11,, 225500 ccaarrdd ppaayymmeenntt mmaaddee ttoo aa ssuupppplliieerr wwhhiicchh iiss nnoott yyeett oonn tthhee bbaannkk ssttaatteemmeenntt.. IInn aaddddiittiioonn,, tthhee ccaasshh aatt bbaannkk aaccccoouunntt sshhoowwss tthhee oowwnneerr ss ccoorrrreecctt ccaallccuullaattiioonn ooff ssaavviinnggss iinntteerreesstt ooff 5500 wwhhiicchh sshhoouulldd hhaavvee bbeeeenn rreecceeiivveedd,, bbuutt wwhhiicchh iiss nnoott oonn tthhee ssttaatteemmeenntt.. WWhhaatt iiss tthhee bbaallaannccee ppeerr tthhee ccaasshh aatt bbaannkk aaccccoouunntt AA 11,, 990000 oovveerrddrraawwnn BB 550000 oovveerrddrraawwnn CC 11,, 990000 iinn hhaanndd DD 550000 iinn hhaanndd --- Trang 188 --- 33 AA ppaayymmeenntt iinn rreessppeecctt ooff rreenntt hhaass bbeeeenn ccoorrrreeccttllyy rreeccoorrddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt tthhee eexxppeennssee hhaass bbeeeenn rreeccoorrddeedd aass aa ddiissttrriibbuuttiioonn ccoosstt rraatthheerr tthhaann aaddmmiinniissttrraattiivvee eexxppeennssee.. WWhhaatt ttyyppee ooff eerrrroorr iiss tthhiiss AA AAnn eerrrroorr ooff ccoommmmiissssiioonn BB AA ttrraannssppoossiittiioonn eerrrroorr CC AAnn eerrrroorr ooff pprriinncciippllee DD AA ccoommppeennssaattiinngg eerrrroorr 44 AAsshh iinnccoorrrreeccttllyy rreeccoorrddeedd aa ppuurrcchhaassee ooff ttyyrreess ffoorr tthheeiirr ppeerrssoonnaall uussee aass ppuurrcchhaasseess ooff tthhee bbuussiinneessss.. WWhhaatt ttyyppee ooff eerrrroorr iiss tthhiiss AA AAnn eerrrroorr ooff ccoommmmiissssiioonn BB AA ttrraannssppoossiittiioonn eerrrroorr CC AAnn eerrrroorr ooff pprriinncciippllee DD AA ccoommppeennssaattiinngg eerrrroorr 55 CChhaarrlliiee ppuurrcchhaasseedd ooffffiiccee cchhaaiirrss aatt aa ccoosstt ooff 774455.. TThheeyy iinnccoorrrreeccttllyy rreeccoorrddeedd tthhiiss ttrraannssaaccttiioonn aass 447755.. WWhhaatt ttyyppee ooff eerrrroorr iiss tthhiiss AA AAnn eerrrroorr ooff ccoommmmiissssiioonn BB AA ttrraannssppoossiittiioonn eerrrroorr CC AAnn eerrrroorr ooff pprriinncciippllee DD AA ccoommppeennssaattiinngg eerrrroorr 66 HHaarrppss hhaass aa ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee ooff 338800 ccrreeddiitt oonn 2233 JJuullyy 2200XX77.. HHaarrppss eexxttrraaccttss aa ttrraannssaaccttiioonn rreeppoorrtt ffrroomm tthhee eelleeccttrroonniicc bbaannkkiinngg ssyysstteemm tthhaatt ddaayy wwhhiicchh sshhoowwss bbaannkk iinntteerreesstt ooff 3344 wwaass ccrreeddiitteedd ttoo tthhee aaccccoouunntt,, aa ddiirreecctt ddeebbiitt ffoorr 224400 iinn rreessppeecctt ooff tteelleepphhoonnee eexxppeennsseess wwaass wwiitthhddrraawwnn aanndd aa ppaayymmeenntt ffoorr 5500,, wwhhiicchh hhaass aallrreeaaddyy bbeeeenn rreeccoorrddeedd iinn tthhee nnoommiinnaall lleeddggeerr aaccccoouunnttss,, cclleeaarreedd tthhee bbaannkk.. WWhhaatt iiss tthhee aaddjjuusstteedd ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee aafftteerr ttaakkiinngg aaccccoouunntt ooff tthheessee ttrraannssaaccttiioonnss AA 117744 ccrreeddiitt BB 558866 ccrreeddiitt CC 663366 ccrreeddiitt DD 112244 ccrreeddiitt 77 AAtt 3311 JJaannuuaarryy 2200XX88,, RRaannddaallll ss ccaasshh aatt bbaannkk aaccccoouunntt bbaallaannccee ffoorr iittss ccuurrrreenntt aaccccoouunntt sshhoowweedd aa ccrreeddiitt bbaallaannccee ooff 115500 wwhhiicchh ddiidd nnoott aaggrreeee wwiitthh tthhee bbaannkk ssttaatteemmeenntt bbaallaannccee.. IInn ppeerrffoorrmmiinngg tthhee rreeccoonncciilliiaattiioonn tthhee ffoolllloowwiinngg ppooiinnttss ccoommee ttoo lliigghhtt.. NNoott rreeccoorrddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt BBaannkk cchhaarrggeess TTrraannssffeerr ffrroomm ssaavviinnggss aaccccoouunntt ttoo ccuurrrreenntt aaccccoouunntt 550000 --- Trang 189 --- NNoott rreeccoorrddeedd oonn tthhee bbaannkk ssttaatteemmeenntt PPaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 111166 RReecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 663300 IItt wwaass aallssoo ddiissccoovveerreedd tthhaatt tthhee bbaannkk hhaadd ddeebbiitteedd RRaannddaallll ss aaccccoouunntt wwiitthh 440000 iinn eerrrroorr.. TThhiiss sshhoouulldd hhaavvee bbeeeenn ddeebbiitteedd ttoo HHooppkkiirrkk ss aaccccoouunntt.. RReeqquuiirreemmeenntt WWhhaatt wwaass tthhee oorriiggiinnaall bbaallaannccee oonn tthhee bbaannkk ssttaatteemmeenntt AA 220000 DDRR BB 442288 DDRR CC 660000 DDRR DD 11,,660000 CCRR 88 AA bbaannkk rreeccoonncciilliiaattiioonn ffoorr WWoorrtthh LLttdd aatt 3311 DDeecceemmbbeerr 2200YY11 iiss iinn ccoouurrssee ooff pprreeppaarraattiioonn.. IInn tthhee lliigghhtt ooff tthhee iinnffoorrmmaattiioonn ggiivveenn bbeellooww,, ccoommppuuttee tthhee ffiinnaall bbaallaannccee sshhoowwnn bbyy tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((11)) OOvveerrddrraawwnn bbaallaannccee ppeerr bbaannkk ssttaatteemmeenntt iiss 11,, 0011 99 .. ((22)) AAnn aammoouunntt ooff 225500 ccrreeddiitteedd iinn tthhee bbaannkk ssttaatteemmeenntt uunnddeerr aa ssttaannddiinngg oorrddeerr aarrrraannggeemmeenntt hhaass nnoott bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((33)) PPaayymmeennttss ttoo aa ssuupppplliieerr mmaaddee bbyy ddeebbiitt ccaarrdd eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt nnoott yyeett iinncclluuddeedd iinn tthhee bbaannkk ssttaatteemmeenntt ttoottaall 22,,446677.. ((44)) BBaannkk cchhaarrggeess ooff 11 ,, 887755 ddeebbiitteedd bbyy tthhee bbaannkk hhaavvee nnoott bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. ((55)) CCaasshh rreecceeiivveedd aanndd eenntteerreedd iinn tthhee aaccccoouunnttiinngg rreeccoorrddss bbuutt nnoott ccrreeddiitteedd iinn tthhee bbaannkk ssttaatteemmeenntt ttoottaall 44,,998866.. ((66)) AAnn uunnccoorrrreecctteedd bbaannkk eerrrroorr hhaass rreessuulltteedd iinn 339977 ddeebbiitteedd ttoo WWoorrtthh ss aaccccoouunntt iinn eerrrroorr.. RReeqquuiirreemmeenntt TThhee ffiinnaall bbaallaannccee sshhoowwnn bbyy tthhee ccaasshh aatt bbaannkk aaccccoouunntt,, aafftteerr mmaakkiinngg aallll nneecceessssaarryy ccoorrrreeccttiioonnss,, sshhoouulldd bbee:: AA 66,,883311 DDRR BB 33,,114411 DDRR CC 11,,889977 DDRR DD 222288 DDRR 99 JJaammiiee iiss tthhee bbooookkkkeeeeppeerr ffoorr TTrraaddeerr.. TTrraaddeerr ss ddrraafftt pprrooffiitt ffoorr tthhee yyeeaarr iiss 1122 ,,998800.. JJaammiiee hhaass ddoowwnnllooaaddeedd aann eexxcceeppttiioonn rreeppoorrtt ffrroomm tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm wwhhiicchh sshhoowwss tthhaatt aa ssuussppeennssee aaccccoouunntt ooff 22,,11 3300 ccrreeddiitt hhaass bbeeeenn ooppeenneedd uupp iinn rreessppeecctt ooff aa nnuummbbeerr ooff uunnmmaattcchheedd ttrraannssaaccttiioonnss wwhhiicchh hhaavvee nnoott bbeeeenn iinncclluuddeedd iinn tthhee ddrraafftt pprrooffiitt.. JJaammiiee hhaass nnooww iinnvveessttiiggaatteedd tthhee eexxcceeppttiioonnss aanndd iiddeennttiiffiieedd tthhee ffoolllloowwiinngg:: DDeeppoossiitt//WWiitthhddrraawwaall AAmmoouunntt (( )) DDeettaaiillss DDeeppoossiitt 663300 DDiivviiddeennddss rreecceeiivveedd DDeeppoossiitt 22,,220000 RReecceeiipptt ffrroomm aa ccrreeddiitt ccuussttoommeerr iinn ppaarrtt ppaayymmeenntt ooff iinnvvooiiccee 11 22//334455 WWiitthhddrraawwaall 770000 DDrraawwiinnggss ttaakkeenn bbyy tthhee oowwnneerr --- Trang 190 --- RReeqquuiirreemmeenntt WWhhaatt iiss TTrraaddeerr ss ccoorrrreecctteedd pprrooffiitt ffoorr tthhee yyeeaarr aafftteerr aaccccoouunnttiinngg ffoorr tthhee aabboovvee ttrraannssaaccttiioonnss AA 1155,,881100 BB 1133,,661100 CC 1122,,228800 DD 1122,,991100 11 00 AAhhmmaall iiss tthhee bbooookkkkeeeeppeerr ffoorr PPeeaacchh.. AAhhmmaall hhaass ddoowwnnllooaaddeedd aann eexxcceeppttiioonn rreeppoort rt ffrroomm PPeeaacchh ss ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm wwhhiicchh sshhoowwss aa ssuussppeennssee aaccccoouunntt ooff 2233,,550000 ddeebbiitt iinn rreessppeecctt ooff aa ssiinnggllee uunnmmaattcchheedd bbaannkk ppaayymmeenntt.. AAhhmmaall hhaass iiddeennttiiffiieedd tthhaatt tthhiiss wwaass aa ccaasshh ppaayymmeenntt ffoorr aa nneeww ddeelliivveerryy vvaann wwhhiicchh wwaass ppuurrcchhaasseedd dduurriinngg tthhee yyeeaarr.. RReeqquuiirreemmeenntt WWhhiicchh ooff tthhee ffoolllloowwiinngg jjoouurrnnaallss iiss rreeqquuiirreedd ttoo rreemmoovvee tthhee ssuussppeennssee aaccccoouunntt aanndd rreeccoorrdd tthhee vvaann AA DDeebbiitt ppuurrcchhaasseess,, CCrreeddiitt ssuussppeennssee aaccccoouunntt BB DDeebbiitt nnoonn--ccuurrrreenntt aasssseettss,, CCrreeddiitt ssuussppeennssee aaccccoouunntt CC DDeebbiitt nnoonn--ccuurrrreenntt aasssseettss,, CCrreeddiitt ccaasshh aatt bbaannkk aaccccoouunntt DD DDeebbiitt ssuussppeennssee aaccccoouunntt,, CCrreeddiitt ppuurrcchhaasseess NNooww ggoo bbaacckk ttoo tthhee IInnttrroodduuccttiioonn aanndd eennssuurree tthhaatt yyoouu hhaavvee aacchhiieevveedd tthhee LLeeaarrnniinngg oouuttccoommeess lliisstteedd ffoorr tthhiiss cchhaapptteerr.. AAnnsswweerrss tt oo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 11 IInnccrreeaassee//DDeeccrreeaassee//NNoo eeffffeecctt TThhee bbaannkk hhaass mmaaddee aa mmiissttaakkee iinn ccrreeddiittiinngg tthhee aaccccoouunntt wwiitthh 111100 DDeeccrreeaassee bbeelloonnggiinngg ttoo aannootthheerr ccuussttoommeerr -- aann eerrrroorr nnoott yyeett rreeccttiiffiieedd.. 112200 rreecceeiivveedd bbyy tthhee bbaannkk uunnddeerr aa ssttaannddiinngg oorrddeerr aarrrraannggeemmeenntt NNoo eeffffeecctt hhaass nnoott bbeeeenn eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. AAnn eelleeccttrroonniicc ppaayymmeenntt ttoottaalllliinngg 55,,662299 hhaass bbeeeenn mmaaddee ttoo aa DDeeccrreeaassee ssuupppplliieerr aanndd eenntteerreedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt iiss nnoott yyeett pprreesseenntteedd oonn tthhee bbaannkk ttrraannssaaccttiioonn rreeppoort.rt. CCaasshh rreecceeiippttss ffrroomm ccuussttoommeerrss ttoottaalllliinngg 55,,557777 hhaavvee bbeeeenn eenntteerreedd IInnccrreeaassee iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt hhaavvee nnoott yyeett bbeeeenn ccrreeddiitteedd iinn tthhee bbaannkk ssttaatteemmeenntt.. TThhee bbaannkk eerrrroorr hhaass iinnccoorrrreeccttllyy iinnccrreeaasseedd ((ccrreeddiitteedd)) tthhee bbaannkk bbaallaannccee aanndd mmuusstt bbee aaddjjuusstteedd.. TThhee ssttaannddiinngg oorrddeerr ppaayymmeenntt hhaass bbeeeenn ccoorrrreeccttllyy rreeccoorrddeedd bbyy tthhee bbaannkk aanndd nnooww mmuusstt aallssoo bbee rreefflleecctteedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. --- Trang 191 --- TThhee eelleeccttrroonniicc ppaayymmeennttss hhaavvee ddeeccrreeaasseedd tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt hhaavvee nnoott yyeett iimmppaacctteedd oonn tthhee bbaannkk ssttaatteemmeenntt aanndd mmuusstt bbee aaddjjuusstteedd.. TThhee ccaasshh rreecceeiivveedd hhaass iinnccrreeaasseedd tthhee ccaasshh aatt bbaannkk aaccccoouunntt bbuutt hhaass nnoott yyeett iimmppaacctteedd oonn tthhee bbaannkk ssttaatteemmeenntt aanndd mmuusstt bbee aaddjjuusstteedd.. 11 ..22 CCAASSHH AATT BBAANNKK AACCCCOOUUNNTT bb//dd 110066 cc//dd 222266 SSttaannddiinngg oorrddeerr 11 2200 ------ 222266 222266 BBaannkk rreeccoonncciilliiaattiioonn BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt 338888 PPaayymmeenntt wwhhiicchh hhaass nnoott yyeett cclleeaarreedd tthhee bbaannkk ((55,,662299)) RReecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 55,,557777 BBaannkk eerrrroorr ((111100)) BBaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt 222266 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 22 BBaannkk rreeccoonncciilliiaattiioonn BBaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt ((6611 00)) IItteemmss oonn ssttaatteemmeenntt,, nnoott iinn ccaasshh aatt bbaannkk aaccccoouunntt:: DDiirreecctt ddeebbiittss ((771155)) IInnvveessttmmeenntt iinnccoommee 335533 ((336622)) CCoorrrreecctteedd bbaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt ((997722)) IItteemm iinn ccaasshh aatt bbaannkk aaccccoouunntt nnoott oonn ssttaatteemmeenntt:: RReecceeiipptt wwhhiicchh hhaass nnoott yyeett cclleeaarreedd tthhee bbaannkk ((887755)) BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt (1,847) (1,847) AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 33 33..11 DDEEBBIITT PPuurrcchhaasseess 225500 CCRREEDDIITT TTrraaddee ppaayyaabblleess 225500 AA ttrraannssaaccttiioonn pprreevviioouussllyy oommiitttteedd --- Trang 192 --- 33..22 DDEEBBIITT RReeppaaiirrss aaccccoouunntt 115500 CCRREEDDIITT NNoonn--ccuurrrreenntt aasssseett ((mmaacchhiinneerryy)) aaccccoouunntt 115500 TThhee ccoorrrreeccttiioonn ooff aann eerrrroorr ooff pprriinncciippllee:: rreeppaaiirrss ccoossttss iinnccoorrrreeccttllyy aaddddeedd ttoo nnoonn--ccuurrrreenntt aasssseett ccoossttss DDEEBBIITT DDrraawwiinnggss 228800 CCRREEDDIITT SSaalleess 228800 AAnn eerrrroorr ooff pprriinncciippllee,, iinn wwhhiicchh ssaalleess wweerree rreedduucceedd ttoo ccoommppeennssaattee ffoorr ccaasshh ddrraawwiinnggss nnoott aaccccoouunntteedd ffoorr 33..44 DDEEBBIITT TTeelleepphhoonnee eexxppeennsseess 554400 CCRREEDDIITT EElleeccttrriicciittyy aaccccoouunntt 554400 CCoorrrreeccttiioonn ooff aann eerrrroorr ooff ccoommmmiissssiioonn:: tteelleepphhoonnee eexxppeennsseess wwrroonnggllyy cchhaarrggeedd ttoo tthhee eelleeccttrriicciittyy aaccccoouunntt AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 44 44..11 DDRR CCRR SSaallee DDEEBBIITT TTrraaddee rreecceeiivvaabbllee 11,,000000 CCRREEDDIITT SSaalleess 11,,000000 DDeelliivveerryy DDEEBBIITT NNoonn--ccuurrrreenntt aasssseett 224400 CCRREEDDIITT DDiissttrriibbuuttiioonn ccoossttss 224400 DDiissccoouunntt DDEEBBIITT PPuurrcchhaasseess 115500 CCRREEDDIITT TTrraaddee ppaayyaabblleess 115500 PPuurrcchhaassee DDEEBBIITT TTrraaddee ppaayyaabblleess 550000 CCRREEDDIITT PPuurrcchhaasseess 550000 GGrroossss pprrooffiitt oorriiggiinnaallllyy rreeppoorrtteedd 3355,,775500 SSaalleess oommiitttteedd ((11 )) 11,,000000 DDiissccoouunntt ttaakkeenn iinn eerrrroorr ((33)) ((115500)) IInnccoorrrreecctt rreeccoorrddiinngg ooff ppuurrcchhaasseess ((44)) 550000 AAddjjuusstteedd ggrroossss pprrooffiitt 3377,,110000 NNeett pprrooffiitt oorriiggiinnaallllyy rreeppoorrtteedd 1188,,550000 AAddjjuussttmmeennttss ttoo ggrroossss pprrooffiitt ((3377,,11 0000 -- 3355,,775500)) 11,,335500 NNoonn--ccuurrrreenntt aasssseett ccoossttss wwrroonnggllyy ccllaassssiiffiieedd 224400 AAddjjuusstteedd nneett pprrooffiitt 2200,,009900 --- Trang 193 --- AAnnsswweerrss tt oo SSeellff--tteesstt qquueessttiioonnss 11 AA 2222,,000000 ddeebbiitt TTRRAADDEE RREECCEEIIVVAABBLLEESS BBaall bb//ff ((bbaall ffiigguurree)) 2222,,000000 CCaasshh 5500,,000000 SSaalleess 112255,,000000 DDiissccoouunnttss ggiivveenn ttoo ccuussttoommeerrss 22,,000000 BBaall cc//ff 9955,,000000 114477,,000000 114477,,000000 IIff yyoouu hhaadd aannsswweerreedd BB,, yyoouu rreevveerrsseedd tthhee ddoouubbllee eennttrryy aanndd ssoo pprroodduucceedd tthhee ttrraaddee ppaayyaabblleess aaccccoouunntt.. IInn aannsswweerr DD,, yyoouu oommiitttteedd tthhee ddiissccoouunnttss ggiivveenn ttoo ccuussttoommeerrss ffiigguurree;; wwhhiillee iinn aannsswweerr CC yyoouu ppuutt ddiissccoouunnttss ggiivveenn ttoo ccuussttoommeerrss oo nn tthhee ddeebbiitt iinnsstteeaadd ooff tthhee ccrreeddiitt ssiiddee ooff tthhee aaccccoouunntt.. 22 DD 550000 iinn hhaanndd BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt 11,,220000 AAdddd rreecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 550000 AAdddd ddeeppoossiitt iinntteerreesstt nnoott yyeett ccrreeddiitteedd 5500 555500 11,,775500 LLeessss ppaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk ((11,,225500)) BBaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt 550000 33 AA AAnn eerrrroorr ooff ccoommmmiissssiioonn PPoossttiinngg aa ttrraannssaaccttiioonn ttoo tthhee iinnccoorrrreecctt nnoommiinnaall lleeddggeerr aaccccoouunntt iiss aann eerrrroorr ooff ccoommmmiissssiioonn.. 44 CC AAnn eerrrroorr ooff pprriinncciippllee 11 AAnn eerrrroorr ooff pprriinncciippllee ooccccuurrss wwhheenn tthhee rruulleess ooff aaccccoouunnttiinngg aarree bbrrookkeenn.. HHeerree,, tthhee bbuussiinneessss eennttiittyy ccoonncceepptt hhaass nnoott bbeeeenn ffoolllloowweedd.. 55 BB AA ttrraannssppoossiittiioonn eerrrroorr AA ttrraannssppoossiittiioonn eerrrroorr ooccccuurrss wwhheenn tthhee iinnccoorrrreecctt aammoouunntt iiss rreeccoorrddeedd iinn nnoommiinnaall lleeddggeerr aaccccoouunnttss,, oofftteenn bbyy mmiixxiinngg uu pp tthhee ddiiggiittss iinn aa vvaalluuee,, aass hhaass ooccccuurrrreedd iinn tthhiiss qquueessttiioonn.. --- Trang 194 --- 66 BB 558866 ccrreeddiitt CCAASSHH AATT BBAANNKK AACCCCOOUUNNTT BBaallaannccee bb//dd 338800 IInntteerreesstt 3344 EExxppeennsseess 240 BBaallaannccee cc//dd 586 620 662200 NNoottee:: NNoottee tthhaatt tthhee ppaayymmeenntt ffoorr 5500 hhaass aallrreeaaddyy bbeeeenn iinncclluuddeedd iinn tthhee nnoommiinnaall lleeddggeerr aaccccoouunnttss aanndd iiss nnooww bbeeiinngg pprreesseenntteedd ttoo tthhee bbaannkk.. IItt ddooeess nnoott rreeqquuiirree ttoo bbee iinncclluuddeedd iinn tthhee ccaasshh aatt bbaannkk aaccccoouunntt aaggaaiinn.. 77 CC 660000 DDRR BBaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt 331144 AAdddd ppaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 11 11 66 LLeessss rreecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk ((663300)) LLeessss eerrrroorr bbyy bbaannkk ((440000)) BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt ((660000)) OOnn tthhee bbaannkk ssttaatteemmeenntt aa ddeebbiitt iiss aa ppaayymmeenntt oouutt ooff tthhee aaccccoouunntt.. AA nneeggaattiivvee ((oovveerrddrraawwnn)) bbaallaannccee iiss pprreesseenntteedd iinn tthhee bbaannkk ssttaatteemmeenntt aass aa DDeebbiitt bbaallaannccee.. 88 CC 11,,889977 DDRR BBaallaannccee ppeerr bbaannkk ssttaatteemmeenntt ((11, ,0011 99 )) oo//dd PPaayymmeennttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk ((22,,446677)) ((33,,448866)) RReecceeiippttss wwhhiicchh hhaavvee nnoott yyeett cclleeaarreedd tthhee bbaannkk 44,,998866 11,,550000 BBaannkk eerrrroorr 339977 DDeebbiitt bbaallaannccee ppeerr ccaasshh aatt bbaannkk aaccccoouunntt 11 ,,889977 --- Trang 195 --- NNoottee:: NNoottee tthhaatt tthhee 225500 ssttaannddiinngg oorrddeerr iiss aann oommiissssiioonn ffrroomm tthhee ccaasshh aatt bbaannkk aaccccoouunntt.. BByy uussiinngg tthhee bbaannkk ssttaatteemmeenntt bbaallaannccee ttoo aarrrriivvee aatt ccaasshh aatt bbaannkk,, wwee ddoo nnoott nneeeedd ttoo aaddjjuusstt ffoorr tthhee 225500.. 99 BB 1133,,661100 OOnnllyy tthhee ddiivviiddeenndd iinnccoommee rreecceeiivveedd wwiillll iimmppaacctt oonn tthhee ddrraafftt pprrooffiitt.. TThhee ppaarrt t ppaayymmeenntt ffrroomm aa ccrreeddiitt ccuussttoommeerr ddooeess nnoott aaffffeecctt pprrooffiitt oorr lloossss aanndd ddrraawwiinnggss aarree nnoott aann eexxppeennssee.. 1100 BB DDeebbiitt nnoonn--ccuurrrreenntt aasssseettss,, CCrreeddiitt ssuussppeennssee aaccccoouunntt TThhee ddeelliivveerryy vvaann iiss ccaappiittaall eexxppeennddiittuurree aanndd tthheerreeffoorree nneeeeddss ttoo bbee iinncclluuddeedd aass aa nnoonn--ccuurrrreenntt aasssseett aanndd tthhee ssuussppeennssee aaccccoouunntt rreemmoovveedd.. --- Trang 196 --- CChhaapptteerr 77 IICCAAEEWW CCoosstt ooff ssaalleess aa nn dd ii nn vv ee nn tt oo rr ii ee ss IInnttrroodduuccttiioonn LLeeaarrnniinngg oouuttccoommeess SSyyllllaabbuuss lliinnkkss EExxaammiinnaattiioonn ccoonntteexxtt CChhaapptteerr ssttuuddyy gguuiiddaannccee LLeeaarrnniinngg ttooppiiccss 11 IIAASS 22,, IInnvveennttoorriieess ((FFRRSS 11 0022 ss113 3)) 22 CCoosstt ooff ssaalleess 33 AAccccoouunnttiinngg ffoorr ooppeenniinngg aanndd cclloossiinngg iinnvveennttoorriieess 44 AAddjjuussttiinngg tthhee iinniittiiaall ttrriiaall bbaallaannccee 55 CCoouunnttiinngg iinnvveennttoorriieess __ r t 66 VVaalluuiinngg iinnvveennttoorriieess J F 77 UUssiinngg mmaarrkk--uupp//mmaarrggiinn ppeerrcceennttaaggeess ttoo eessttaabblliisshh ccoosstt E 3 F 88 IInnvveennttoorryy ddrraawwiinnggss SSuummmmaarryy 2 FFuurrtthheerr qquueessttiioonn pprraaccttiiccee SSeellff--tteesstt qquueessttiioonnss AAnnsswweerrss ttoo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerrss ttoo SSeellff--tteesstt qquueessttiioonnss --- Trang 197 --- II nn tt rr oo dd uu cc tt ii oo nn LLeeaarrnniinngg oouuttccoommeess (cid:127) (cid:127) RReeccoorrdd aanndd aaccccoouunntt ffoorr ttrraannssaaccttiioonnss aanndd eevveennttss rreessuullttiinngg iinn iinnccoommee,, eexxppeennsseess,, aasssseettss,, lliiaabbiilliittiieess aanndd eeqquuiittyy iinn aaccccoorrddaannccee wwiitthh tthhee aapppprroopprriiaattee bbaassiiss ooff aaccccoouunnttiinngg aanndd tthhee llaawwss,, rreegguullaattiioonnss aanndd aaccccoouunnttiinngg ssttaannddaarrddss aapppplliiccaabbllee ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) IIddeennttiiffyy tthhee mmaaiinn ccoommppoonneennttss ooff aa sseett ooff ffiinnaanncciiaall ssttaatteemmeennttss aanndd ssppeecciiffyy tthheeiirr ppuurrppoossee aanndd iinntteerrrreellaattiioonnsshhiipp (cid:127) (cid:127) PPrreeppaarree aanndd pprreesseenntt aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn,, ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, ssttaatteemmeenntt ooff cchhaannggeess iinn eeqquuiittyy aanndd ssttaatteemmeenntt ooff ccaasshh fflloowwss ((oorr eexxttrraaccttss)) ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss aanndd ttrriiaall bbaallaannccee iinn aa ffoorrmmaatt wwhhiicchh ssaattiissffiieess tthhee iinnffoorrmmaattiioonn rreeqquuiirreemmeennttss ooff tthhee eennttiittyy SSppeecciiffiicc ssyyllllaabbuuss lleeaarrnniinngg oouuttccoommeess aarree:: 11dd;; 33aa,, cc SSyyllllaabbuuss lliinnkkss TThhee mmaatteerriiaall iinn tthhiiss cchhaapptteerr wwiillll bbee ddeevveellooppeedd ffuurrtthheerr tthhee AAccccoouunnttiinngg mmoodduullee,, aanndd llaatteerr iinn PPrrooffeessssiioonnaall lleevveell FFiinnaanncciiaall AAccccoouunnttiinngg aanndd RReeppoorrttiinngg.. EExxaammiinnaattiioonn ccoonntteexxtt QQuueessttiioonnss oonn tthhee ttooppiiccss iinn tthhiiss cchhaapptteerr wwiillll bbee sseett aass mmuullttiippllee cchhooiiccee,, mmuullttii--ppaarrtt mmuullttiippllee cchhooiiccee oorr mmuullttiippllee-- rreessppoonnssee qquueessttiioonnss,, ssoommee ooff wwhhiicchh mmaayy iinnvvoollvvee ccaallccuullaattiioonnss.. VVeerryy oofftteenn ddoouubbllee eennttrryy qquueessttiioonnss aarree pphhrraasseedd iinn tteerrmmss ooff pprreeppaarriinngg aa jjoouurrnnaall.. IInn aaddddiittiioonn,, tthhee mmaatteerriiaall ccoovveerreedd iinn tthhiiss cchhaapptteerr mmaayy aallssoo bbee eexxaammiinneedd aass ppaarrtt ooff aa lloonngg ffoorrmm qquueessttiioonn.. IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo:: (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg pprriinncciipplleess bbeehhiinndd ccoosstt ooff ssaalleess (cid:127) (cid:127) ssppeecciiffyy tthhee ccoommppoonneennttss ooff ccoosstt ooff ssaalleess iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss (cid:127) (cid:127) uussee mmaarrggiinn aanndd mmaarrkk--uupp ttoo ccaallccuullaattee rreevveennuuee oorr ccoosstt ooff ssaalleess (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg pprriinncciipplleess bbeehhiinndd aaccccoouunnttiinngg ffoorr iinnvveennttoorryy (cid:127) (cid:127) iiddeennttiiffyy tthhee ppuurrppoossee ooff aann iinnvveennttoorryy ccoouunntt (cid:127) (cid:127) ssppeecciiffyy wwhhaatt iiss iinncclluuddeedd iinn tthhee ccoosstt ooff iinnvveennttoorryy (cid:127) (cid:127) ccaallccuullaattee tthhee ccoosstt ooff iinnvveennttoorryy uussiinngg FFIIFFOO aanndd AAVVCCOO (cid:127) (cid:127) ccaallccuullaattee nneett rreeaalliissaabbllee vvaalluueess (cid:127) (cid:127) uussee mmaarrggiinn aanndd mmaarrkk--uupp ttoo ccaallccuullaattee cclloossiinngg iinnvveennttoorryy (cid:127) (cid:127) iiddeennttiiffyy hhooww ttoo aaccccoouunntt ffoorr ddrraawwiinnggss ooff iinnvveennttoorryy aanndd ffoorr ssuubbssttaannttiiaall lloosssseess ooff iinnvveennttoorryy (cid:127) (cid:127) iiddeennttiiffyy hhooww ttoo aaccccoouunntt ffoorr cclloossiinngg iinnvveennttoorryy iinn tthhee lleeddggeerr aaccccoouunnttss (cid:127) (cid:127) ccaallccuullaattee tthhee ffiigguurree iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ffoorr iinnvveennttoorryy (cid:127) (cid:127) iiddeennttiiffyy tthhee eeffffeeccttss ooff ooppeenniinngg aanndd cclloossiinngg iinnvveennttoorryy oonn ggrroossss aanndd nneett pprrooffiitt iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss CChhaapptteerr ssttuuddyy gguuiiddaannccee UUssee tthhiiss sscchheedduullee aanndd yyoouurr ssttuuddyy ttiimmeettaabbllee ttoo ppllaann tthhee ddaatteess oonn wwhhiicchh yyoouu wwiillll ccoommpplleettee yyoouurr ssttuuddyy ooff tthhiiss cchhaapptteerr.. TTooppiicc PPrraaccttiiccaall ssiiggnniiffiiccaannccee SSttuuddyy aapppprrooaacchh EExxaamm aapppprrooaacchh Interactive questions 1 IIAASS 22,, IInnvveennttoorriieess AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy ((FFRRSS110022 ss1133)) bbee rreeqquuiirreedd ttoo iiddeennttiiffyy TThhiiss iiss aa sshhoorrtt sseeccttiioonn tthhee aaccccoouunnttiinngg TThhiiss cchhaapptteerr iiss tthhee ffiirrsstt iinnttrroodduucciinngg tthhee pprriinncciipplleess bbeehhiinndd wwhhiicchh llooookkss aatt tthhee rreelleevvaanntt aaccccoouunnttiinngg aaccccoouunnttiinngg ffoorr aaccccoouunnttiinngg ssttaannddaarrddss ssttaannddaarrdd ffoorr iinnvveennttoorryy.. AAccccoouunnttiinngg tthhaatt aarree aapppplliieedd wwhheenn iinnvveennttoorriieess.. YYoouu nneeeedd for inventory is --- Trang 198 --- aaccccoouunnttiinngg ffoorr ttoo kknnooww wwhhaatt iiss ffrreeqquueennttllyy eexxaammiinneedd ttrraannssaaccttiioonnss aanndd iinncclluuddeedd iinn tthhee iinn AAccccoouunnttiinngg.. bbaallaanncceess iinn tthhee ddeeffiinniittiioonn ooff iinnvveennttoorryy.. ffiinnaanncciiaall SSttoopp aanndd tthhiinnkk ssttaatteemmeennttss.. IIAASS 22 iiss aann WWhheerree iiss iinnvveennttoorryy IIFFRRSS AAccccoouunnttiinngg pprreesseenntteedd iinn tthhee SSttaannddaarrdd aanndd ssoo uusseess ffiinnaanncciiaall ssttaatteemmeennttss iinntteerrnnaattiioonnaall tteerrmmiinnoollooggyy.. CCoosstt ooff ssaalleess AApppprrooaacchh CCoosstt ooff ssaalleess iiss aa kkeeyy IIQQ11 GGrroossss pprrooffiitt nnuummbbeerr wwiitthhiinn tthhee CCoosstt ooff ssaalleess iiss aann TThheerree iiss aa lloott ooff TThhiiss qquueessttiioonn iiss ffiinnaanncciiaall ssttaatteemmeennttss iimmppoorrttaanntt ccoonncceepptt iimmppoorrttaanntt ddeettaaiill iinn tthhiiss iimmppoorrttaanntt aass iitt aanndd ssoo wwiillll bbee tteesstteedd wwhhiicchh aarriisseess dduuee ttoo ttooppiicc.. YYoouu mmuusstt wwoorrkk rreemmiinnddss yyoouu ooff hhooww iinn tthhee lloonngg--ffoorrmm tthhee aapppplliiccaattiioonn ooff tthhrroouugghh tthhee ttooppiicc iinnvveennttoorryy iimmppaaccttss oonn qquueessttiioonn.. YYoouu wwiillll aaccccrruuaall aaccccoouunnttiinngg.. ccaarreeffuullllyy,, ffooccuussiinngg oonn ggrroossss pprrooffiitt.. nneeeedd ttoo uussee tthhee wwoorrkkeedd IItt iiss eesssseennttiiaall tthhaatt yyoouu IIQQ22 DDiirreecctt llaabboouurr iinnffoorrmmaattiioonn pprroovviiddeedd eexxaammpplleess.. PPaayy uunnddeerrssttaanndd hhooww ttoo ccoossttss iinn tthhee qquueessttiioonn ttoo ppaarrttiiccuullaarr aatttteennttiioonn ttoo ccaallccuullaattee ccoosstt ooff ssaalleess ccaallccuullaattee tthhee ccoosstt ooff TThhiiss qquueessttiioonn aasskkss yyoouu tthhee ccoosstt ooff ssaalleess ffoorr bbuussiinneesssseess tthhaatt ssaalleess bbaallaannccee.. YYoouu ttoo ccaallccuullaattee tthhee ddiirreecctt ccaallccuullaattiioonn aass yyoouu wwiillll pprroovviiddee pprroodduuccttss ((aanndd mmaayy aallssoo bbee aasskkeedd llaabboouurr ccoossttss ffoorr uussee tthhiiss ffrreeqquueennttllyy.. tthheerreeffoorree aaddjjuusstt ffoorr wwhhaatt tthhee iimmppaacctt ooff iinncclluussiioonn iinn tthhee ccoosstt ooff iinnvveennttoorryy wwhheenn SSttoopp aanndd tthhiinnkk cchhaannggiinngg ccoosstt ooff ssaalleess ssaalleess ooff aa sseerrvviiccee ccaallccuullaattiinngg tthhee ccoosstt ooff WWhhyy ddoo wwee ddeedduucctt iiss oonn ggrroossss aanndd nneett pprroovviiddeerr.. ssaalleess)) aanndd bbuussiinneesssseess cclloossiinngg iinnvveennttoorryy pprrooffiitt.. tthhaatt pprroovviiddee sseerrvviicceess.. wwhheenn ccaallccuullaattiinngg ccoosstt ooff ssaalleess WWhhyy aarree eemmppllooyyeeeess ooff pprrooffeessssiioonnaall sseerrvviicceess ffiirrmmss aasskkeedd ttoo ccoommpplleettee ttiimmeesshheeeettss oonn aa rreegguullaarr bbaassiiss 3 AAccccoouunnttiinngg ffoorr AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy IIQQ44 JJoouurrnnaallss ffoorr ooppeenniinngg aanndd cclloossiinngg bbee aasskkeedd ttoo iiddeennttiiffyy iinnvveennttoorryy CCoovveerr tthhee wwoorrkkeedd iinnvveennttoorriieess tthhee eeffffeeccttss ooff ooppeenniinngg eexxaammppllee iinn ddeettaaiill.. YYoouu TThhiiss qquueessttiioonn tteessttss aanndd cclloossiinngg iinnvveennttoorryy TThhiiss ttooppiicc ccoonnssiiddeerrss mmaayy aallrreeaaddyy hhaavvee yyoouurr uunnddeerrssttaannddiinngg ooff oonn ggrroossss aanndd nneett hhooww wwee bbrriinngg ffoorrwwaarrdd ccoonnssiiddeerreedd hhooww ttoo tthhee jjoouurrnnaall eennttrriieess ffoorr pprrooffiitt iinn tthhee ssttaatteemmeenntt ooppeenniinngg iinnvveennttoorriieess mmaakkee tthheessee iinnvveennttoorriieess.. ooff pprrooffiitt oorr lloossss.. aanndd ccaarrrryy ffoorrwwaarrdd aaddjjuussttmmeennttss wwhheenn AAccccoouunnttiinngg ffoorr cclloossiinngg iinnvveennttoorriieess wwoorrkkiinngg tthhrroouugghh tthhee iinnvveennttoorriieess iiss uussiinngg lleeddggeerr ccoosstt ooff ssaalleess iimmppoorrttaanntt aass tthhee aaccccoouunnttiinngg aanndd ccaallccuullaattiioonn.. iinnvveennttoorriieess bbaallaannccee jjoouurrnnaallss.. IItt llaarrggeellyy SSttoopp aanndd tthhiinnkk iimmppaaccttss oonn bbootthh tthhee ffoorrmmaalliisseess tthhee WWhhyy aarree cclloossiinngg ssttaatteemmeenntt ooff ffiinnaanncciiaall aaddjjuussttmmeennttss aallrreeaaddyy iinnvveennttoorriieess pprreesseenntteedd ppoossiittiioonn aanndd ddiissccuusssseedd wwhheenn wwee ssttaatteemmeenntt ooff pprrooffiitt oorr aass ccuurrrreenntt aasssseettss llooookkeedd aatt tthhee ccoosstt ooff lloossss.. ssaalleess ccaallccuullaattiioonn.. AAddjjuussttiinngg tthhee ttrriiaall AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy bbaallaannccee bbee rreeqquuiirreedd ttoo iiddeennttiiffyy TThhiiss ttooppiicc wwiillll ggiivvee yyoouu hhooww ttoo aaccccoouunntt ffoorr YYoouu hhaavvee ccoovveerreedd hhooww ssoommee pprraaccttiissee ooff cclloossiinngg iinnvveennttoorryy iinn ttoo aaddjjuusstt tthhee ttrriiaall pprroocceessssiinngg tthhee lleeddggeerr aaccccoouunnttss.. bbaallaannccee iinn tthhee aaddjjuussttmmeennttss aaggaaiinnsstt AAddjjuussttiinngg tthhee ttrriiaall pprreevviioouuss tthhee iinniittiiaall ttrriiaall bbaallaannccee iiss aann cchhaapptteerr.. HHeerree,, tthhee bbaallaannccee.. PPaayy aatttteennttiioonn iimmppoorrttaanntt ppaarrtt ooff ffooccuuss iiss oonn aappppllyyiinngg ttoo tthhee ffaacctt tthhaatt pprreeppaarriinngg tthhee ffiinnaanncciiaall tthhee aapppprrooaacchh ttoo ppuurrcchhaasseess aarree cclleeaarreedd ssttaatteemmeennttss,, wwhhiicchh iiss iinnvveennttoorryy ttoo nniill aanndd aa nneeww ccoosstt rreeqquuiirreedd iinn tthhee lloonngg-- aaddjjuussttmmeennttss.. ooff ssaalleess lliinnee iiss ffoorrmm qquueessttiioonn.. --- Trang 199 --- iinnttrroodduucceedd,, wwhhiicchh ffoolllloowwss tthhee aapppprrooaacchh iinn tthhee ccoosstt ooff ssaalleess ccaallccuullaattiioonn.. CCoouunnttiinngg iinnvveennttoorriieess AApppprrooaacchh YYoouu mmaayy bbee aasskkeedd ttoo iiddeennttiiffyy tthhee ppuurrppoossee YYoouu mmaayy hhaavvee hheeaarrdd TThhiiss iiss aa sshhoorrtt,, ooff aann iinnvveennttoorryy ccoouunntt.. ooff tthhee tteerrmm ssttoocckk-- tthheeoorreettiiccaall sseeccttiioonn 11 ttaakkee .. AA ssttoocckk--ttaakkee iiss tthhaatt jjuusstt nneeeeddss aa qquuiicckk tthhee UUKK tteerrmm ffoorr aann rreeaadd.. iinnvveennttoorryy ccoouunntt.. TThhee SSttoopp aanndd tthhiinnkk ccoouunnttiinngg ooff CCaann yyoouu tthhiinnkk ooff aa iinnvveennttoorriieess iiss aa bbuussiinneessss tthhaatt mmiigghhtt nneecceessssaarryy ppaarrtt ooff pprreeffeerr ttoo ddoo eessttaabblliisshhiinngg tthhee ccoonnttiinnuuoouuss rraatthheerr tthhaann vvaalluuaattiioonn ooff cclloossiinngg ppeerriiooddiicc iinnvveennttoorryy iinnvveennttoorriieess.. ccoouunnttss VVaalluuiinngg iinnvveennttoorriieess AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy IIQQ44 IInnvveennttoorryy bbee rreeqquuiirreedd ttoo vvaalluuaattiioonn IIAASS 22 pprroovviiddeess aann TThheerree aarree aa ffeeww ccaallccuullaattee bbootthh tthhee ccoosstt iimmppoorrttaanntt rruullee tthhaatt iimmppoorrttaanntt ccoonncceeppttss TThhiiss qquueessttiioonn iiss aa aanndd NNRRVV ooff iinnvveennttoorryy.. mmuusstt bbee ffoolllloowweedd wwiitthhiinn tthhiiss ttooppiicc.. WWoorrkk ggoooodd rreemmiinnddeerr tthhaatt wwhheenn aaccccoouunnttiinngg ffoorr tthhrroouugghh tthhee nnaarrrraattiivvee FFoorr ccoosstt,, yyoouu sshhoouulldd tthhee ccoosstt vv NNRRVV tteesstt iiss iinnvveennttoorriieess -- aanndd tthhee wwoorrkkeedd bbee aabbllee ttoo ssppeecciiffyy ccaarrrriieedd oouutt ffoorr eeaacchh iinnvveennttoorriieess sshhoouulldd eexxaammpplleess ccaarreeffuullllyy wwhhaatt iiss iinncclluuddeedd iinn tthhee ttyyppee ooff iinnvveennttoorryy,, nnoott aallwwaayyss bbee vvaalluueedd aatt aanndd eennssuurree yyoouu ccoosstt ooff iinnvveennttoorryy aanndd tthhee oovveerraallll iinnvveennttoorryy tthhee lloowweerr ooff ccoosstt aanndd uunnddeerrssttaanndd:: iiddeennttiiffyy tthhee ccoorrrreecctt bbaallaannccee.. nneett rreeaalliissaabbllee vvaalluuee ccoosstt ffoorr iinnvveennttoorryy ((aa)) tthhaatt iinnvveennttoorryy iiss IIQQ55 FFIIFFOO ((NNRRVV)).. IItt iiss iimmppoorrttaanntt uussiinngg FFIIFFOO aanndd AAVVCCOO.. hheelldd aatt tthhee lloowweerr TThhiiss qquueessttiioonn wwiillll tteesstt tthhaatt yyoouu lleeaarrnn tthhee rruullee ooff ccoosstt aanndd NNRRVV YYoouu sshhoouulldd aallssoo bbee yyoouurr uunnddeerrssttaannddiinngg ooff aanndd ccoorrrreeccttllyy aappppllyy iitt.. ccoonnffiiddeenntt iinn ((bb)) wwhhaatt iiss iinncclluuddeedd tthhee FFIIFFOO mmeetthhoodd.. IIAASS 22 ssppeecciiffiieess wwhhiicchh ccaallccuullaattiinngg NNRRVV.. iinn tthhee ccoosstt ooff ccoossttss ccaann bbee iinncclluuddeedd iinnvveennttoorryy YYoouu sshhoouulldd bbee aabbllee ttoo iinn tthhee ccoosstt ooff aann iitteemm ssttaattee tthhee ccoorrrreecctt ffiigguurree ((cc)) hhooww ttoo aappppllyy ooff iinnvveennttoorryy aass wwee ssaaww iinn tthhee ssttaatteemmeenntt ooff FFIIFFOO aanndd AAVVCCOO iinn ttooppiicc 11 .. IInn tthhiiss ttooppiicc ffiinnaanncciiaall ppoossiittiioonn ffoorr aanndd wwhhaatt tthhee wwee ccoonnssiiddeerr wwhhaatt ccaann iinnvveennttoorryy bbaasseedd oonn iimmppaacctt iiss oonn bbee iinncclluuddeedd iinn tthhee tthhee lloowweerr ooff ccoosstt aanndd pprrooffiitt.. ccoosstt ooff mmaannuuffaaccttuurreedd NNRRVV.. ggooooddss aanndd hhooww ttoo SSttoopp aanndd tthhiinnkk ddeetteerrmmiinnee tthhee ccoosstt ooff WWhhyy mmiigghhtt tthhee uussee ooff iinntteerrcchhaannggeeaabbllee iitteemmss ccoosstt eessttiimmaattiioonn ((eegg,, ssccrreewwss aanndd nnaaiillss)).. tteecchhnniiqquueess ssuucchh aass WWhheerree iitteemmss ooff FFIIFFOO aanndd AAVVCCOO bbee iinnvveennttoorryy aarree nneecceessssaarryy ffoorr ssoommee iinntteerrcchhaannggeeaabbllee,, IIAASS 22 eennttiittiieess ppeerrmmiittss ttwwoo mmeetthhooddss ooff eessttiimmaattiinngg tthhee ccoosstt,, ffiirrsstt iinn,, ffiirrsstt oouutt ((FFIIFFOO)) aanndd aavveerraaggee ccoosstt ((AAVVCCOO)).. UUssiinngg mmaarrkk-- AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy IIQQ66 MMaarrkk--uupp aanndd uupp//mmaarrggiinn bbee rreeqquuiirreedd ttoo uussee mmaarrggiinn YYoouu nneeeedd ttoo kknnooww ppeerrcceennttaaggeess ttoo mmaarrggiinn aanndd mmaarrkk--uupp wwhhaatt iiss mmeeaanntt bbyy TThhiiss iiss aa sshhoorrtt eessttaabblliisshh ccoosstt ttoo ccaallccuullaattee tthhee mmaarrkk--uupp aanndd mmaarrggiinn qquueessttiioonn ttoo cchheecckk yyoouu cclloossiinngg iinnvveennttoorryy IItt iiss ccoommmmoonn ffoorr aanndd bbee aabbllee ttoo uunnddeerrssttaanndd hhoowwttoo bbaallaannccee.. eennttiittiieess ttoo sseett pprriicceess ccaallccuullaattee rreevveennuuee,, ccaallccuullaattee mmaarrkk uupp aanndd bbyy aappppllyyiinngg aa cceerrttaaiinn ccoosstt ooff ssaalleess aanndd ggrroossss mmaarrggiinn.. mmaarrkk--uupp oonn tthhee ccoosstt ooff pprrooffiitt uussiinngg tthhee mmaarrkk-- iinnvveennttoorriieess oorr tthhee uupp aanndd mmaarrggiinn --- Trang 200 --- ddeessiirree ttoo eeaarrnn aa eeqquuaattiioonnss.. IIff yyoouu cceerrtatiani n mmaarrggiinn.. uunnddeerrssttaanndd hhooww ggrroossss pprrooffiitt iiss ccaallccuullaatteedd,, iitt YYoouu nneeeedd ttoo sshhoouulldd nnoott ccaauussee aannyy uunnddeerrssttaanndd hhooww ttoo pprroobblleemmss.. ccaallccuullaattee mmaarrkk uupp aanndd mmaarrggiinn.. SSttoopp aanndd tthhiinnkk WWhhyy ddoo ssoommee eennttiittiieess sseellll ggooooddss aatt vveerryy llooww mmaarrggiinnss 8 IInnvveennttoorryy ddrraawwiinnggss AApppprrooaacchh YYoouu mmaayy bbee rreeqquuiirreedd ttoo iiddeennttiiffyy hhooww ttoo WWee hhaavvee ccoovveerreedd ccaasshh YYoouu mmuusstt uunnddeerrssttaanndd aaccccoouunntt ffoorr ddrraawwiinnggss ddrraawwiinnggss tthhee jjoouurrnnaall eennttrryy ffoorr ooff iinnvveennttoorryy aanndd ffoorr pprreevviioouussllyy.. IInnvveennttoorryy iinnvveennttoorryy ddrraawwiinnggss.. ssuubbssttaannttiiaall lloosssseess ooff ddrraawwiinnggss ffoollllooww tthhee SSttoopp aanndd tthhiinnkk iinnvveennttoorryy.. ssaammee pprriinncciipplleess.. WWhhyy ddoo wwee ccrreeddiitt ccoosstt ooff ssaalleess rraatthheerr tthhaann aaddjjuussttiinngg iinnvveennttoorryy OOnnccee yyoouu hhaavvee wwoorrkkeedd tthhrroouugghh tthhiiss gguuiiddaannccee yyoouu aarree rreeaaddyy ttoo aatttteemmpptt tthhee ffuurrthtehre r qquueessttiioonn pprraaccttiiccee iinncclluuddeedd aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. 11 IIAASS 22,, IInnv veenntot roiense s ((FFRR SS 11 00 22 ss11 33 )) B SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) IIAASS 22 pprreessccrriibbeess tthhee aaccccoouunnttiinngg ttrreeaattmmeenntt ffoorr iinnvveennttoorriieess.. (cid:127) (cid:127) IInnvveennttoorriieess aarree aasssseettss tthhaatt aarree:: -- hheelldd ffoorr ssaallee iinn tthhee oorrddiinnaarryy ccoouurrssee ooff bbuussiinneessss;; -- iinn tthhee pprroocceessss ooff pprroodduuccttiioonn ffoorr ssuucchh ssaallee;; oorr -- iinn tthhee ffoorrmm ooff mmaatteerriiaallss oorr ssuupppplliieess ttoo bbee ccoonnssuummeedd iinn tthhee pprroodduuccttiioonn pprroocceessss oorr iinn tthhee rreennddeerriinngg ooff sseerrvviicceess.. UK GAAP alert U K GAAP alert TThhee rreeqquuiirreemmeennttss ooff FFRRSS 11 0022 ((UUKK GGAAAAPP)) aarree tthhee ssaammee aass tthhee IIAASS 22 rreeqquuiirreemmeennttss wwhhiicchh aarree ccoovveerreedd iinn AAccccoouunnttiinngg.. 11..11 OObbjjeeccttiivvee TThhee oobbjjeeccttiivvee ooff IIAASS 22,, IInnvveennttoorriieess iiss ttoo pprreessccrriibbee tthhee aaccccoouunnttiinngg ttrreeaattmmeenntt ffoorr iinnvveennttoorriieess.. IInn ppaarrtitciuclaurl ar iitt pprroovviiddeess gguuiiddaannccee oonn tthhee ddeetteerrmmiinnaattiioonn ooff ccoosstt aanndd iittss ssuubbsseeqquueenntt rreeccooggnniittiioonn aass aann eexxppeennssee,, iinncclluuddiinngg aannyy wwrriittee--ddoowwnn ttoo nneett rreeaalliissaabbllee vvaalluuee.. 11..22 IInnvveennttoorriieess Definition Definition IInnvveennttoorriieess:: AAsssseettss:: (cid:127) (cid:127) hheelldd ffoorr ssaallee iinn tthhee oorrddiinnaarryy ccoouurrssee ooff bbuussiinneessss;; (cid:127) (cid:127) iinn tthhee pprroocceessss ooff pprroodduuccttiioonn ffoorr ssuucchh ssaallee;; oorr (cid:127) (cid:127) iinn tthhee ffoorrmm ooff mmaatteerriiaallss oorr ssuupppplliieess ttoo bbee ccoonnssuummeedd iinn tthhee pprroodduuccttiioonn pprroocceessss oorr iinn tthhee rreennddeerriinngg ooff sseerrvviicceess.. --- Trang 201 --- IInnvveennttoorriieess ccaann iinncclluuddee:: (cid:127) (cid:127) ggooooddss ppuurrcchhaasseedd aanndd hheelldd ffoorr rreessaallee (cid:127) (cid:127) ffiinniisshheedd ggooooddss (cid:127) (cid:127) wwoorrkk iinn pprrooggrreessss ((ppaarrtt ccoommpplleetteedd ggooooddss)) (cid:127) (cid:127) rraaww mmaatteerriiaallss aawwaaiittiinngg uussee 22 CCoosstt ooff ssaalleess BB SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) CCoosstt ooff ssaalleess ccoommpprriisseess:: OOppeenniinngg iinnvveennttoorryy XX AAdddd ccoosstt ooff ppuurrcchhaasseess ((oorr,, ffoorr aa mmaannuuffaaccttuurriinngg ccoommppaannyy,, tthhee ccoosstt ooff pprroodduuccttiioonn)) XX DDeelliivveerryy iinnwwaarrddss XX CClloossiinngg iinnvveennttoorryy ((XX)) CCoosstt ooff ssaalleess XX (cid:127) (cid:127) CCoosstt ooff ssaalleess iiss ddeedduucctteedd ffrroomm rreevveennuuee ((ssaalleess)) ttoo aarrrriivvee aatt ggrroossss pprrooffiitt.. (cid:127) (cid:127) WWhheenn aa llaarrggee aammoouunntt ooff ppuurrcchhaasseedd oorr mmaannuuffaaccttuurreedd iitteemmss aarree ssttoolleenn oorr lloosstt,, wwee mmuusstt rreemmoovvee tthheemm ffrroomm tthhee ccoosstt ooff ssaalleess aanndd ttrreeaatt tthheemm aass aann aaddmmiinniissttrraattiivvee eexxppeennssee,, ssoo aass nnoott ttoo ddiissttoorrtt ggrroossss pprrooffiitt.. TThhee ccoosstt ooff ssaalleess iiss ddeedduucctteedd ffrroomm rreevveennuuee iinn aann eennttiittyy ss ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. BBeeccaauussee iitt rreessuullttss iinn tthhee ggrroossss pprrooffiitt iitt hhaass lloonngg bbeeeenn rreeggaarrddeedd aass aa kkeeyy ffiigguurree iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. DDeeffiinniittiioonn CCoosstt ooff ssaalleess:: OOppeenniinngg iinnvveennttoorryy ppuurrcchhaasseess ddeelliivveerryy iinnwwaarrddss -- cclloossiinngg iinnvveennttoorryy ccoosstt ooff ssaalleess.. TThhiiss aammoouunntt iiss tthheenn ddeedduucctteedd ffrroomm rreevveennuuee ttoo aarriissee aatt tthhee bbuussiinneessss ss ggrroossss pprrooffiitt.. IInnvveennttoorryy,, bbootthh ooppeenniinngg aanndd cclloossiinngg,, ffeeaattuurreess iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. YYoouu mmiigghhtt hhaavvee eexxppeecctteedd iitt ttoo ffeeaattuurree oonnllyy iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aa ccuurrrreenntt aasssseett hhoowweevveerr,, iinncclluuddiinngg tthhee ccoosstt ooff iinnvveennttoorryy ssoolldd iinn tthhee ppeerriioodd iinn pprrooffiitt oorr lloossss iiss aann aapppplliiccaattiioonn ooff aaccccrruuaall aaccccoouunnttiinngg.. 22..11 UUnnssoolldd ggooooddss aatt tt hh ee eenndd ooff aa rreeppoorrttiinngg ppeerriioodd GGooooddss mmiigghhtt bbee uunnssoolldd aatt tthhee eenndd ooff aa rreeppoorrttiinngg ppeerriioodd aanndd ssoo ssttiillll bbee hheelldd iinn iinnvveennttoorryy.. UUnnddeerr tthhee aaccccrruuaallss ccoonncceepptt,, tthhee ccoosstt ooff tthheessee ggooooddss sshhoouulldd nnoott bbee iinncclluuddeedd iinn ccoosstt ooff ssaalleess aass tthheeyy hhaavvee nnoott ccoonnttrriibbuutteedd ttoo rreevveennuuee ggeenneerraattiioonn.. IInnsstteeaadd,, tthhee ggooooddss sshhoouulldd bbee ccaarrrriieedd ffoorrwwaarrdd aanndd mmaattcchheedd aaggaaiinnsstt rreevveennuuee iinn ssuubbsseeqquueenntt ppeerriiooddss wwhheenn tthheeyy aarree ssoolldd.. WWoorrkkeedd eexxaammppllee:: CClloossiinngg iinnvveennttoorryy TThhee UUmmbbrreellllaa SShhoopp ss ffiinnaanncciiaall yyeeaarr eennddss oonn 3300 SSeepptteemmbbeerr eeaacchh yyeeaarr.. OOnn 11 OOccttoobbeerr 2200XX44 iitt hhaadd nnoo ggooooddss iinn iinnvveennttoorryy.. DDuurriinngg tthhee yyeeaarr ttoo 3300 SSeepptteemmbbeerr 2200XX55,, iitt ppuurrcchhaasseedd 3300,,000000 uummbbrreellllaass ccoossttiinngg 6600,,000000 ffrroomm iittss ssuupppplliieerrss.. IItt rreessoolldd tthhee uummbbrreellllaass ffoorr 55 eeaacchh,, aanndd ssaalleess ffoorr tthhee yyeeaarr aammoouunntteedd ttoo 11 0 000,,000000 ((2200,,000000 uummbbrreellllaass)).. AAtt 3300 SSeepptteemmbbeerr 2200XX55 tthheerree wweerree 11 00,,000000 uunnssoolldd uummbbrreellllaass lleefftt iinn iinnvveennttoorryy,, vvaalluueedd aatt ccoosstt ooff 22 eeaacchh.. RReeqquuiirreemmeenntt WWhhaatt wwaass TThhee UUmmbbrreellllaa SShhoopp ss ggrroossss pprrooffiitt ffoorr tthhee yyeeaarr --- Trang 202 --- SSoolluuttiioonn TThhee UUmmbbrreellllaa SShhoopp ppuurrcchhaasseedd 3300,,000000 uummbbrreellllaass,, bbuutt oonnllyy ssoolldd 2200,,000000.. PPuurrcchhaassee ccoossttss ooff 6600,,000000 aanndd ssaalleess ooff 11 0000,,000000 dd oo nnoott rreellaattee ttoo tthhee ssaammee qquuaannttiittyy ooff ggooooddss.. 1 TThhee ggrroossss pprrooffiitt ffoorr tthhee yyeeaarr sshhoouulldd bbee ccaallccuullaatteedd bbyy mmaattcchhiinngg tthhee ssaalleess vvaalluuee ooff 2200,,000000 uummbbrreellllaass ssoolldd wwiitthh tthhee ccoosstt ooff tthhoossee 2200,,000000 uummbbrreellllaass.. TThhee ccoosstt ooff ssaalleess iinn tthhiiss eexxaammppllee iiss tthheerreeffoorree tthhee ccoosstt ooff ppuurrcchhaasseess mmiinnuuss tthhee ccoosstt ooff ggooooddss iinn iinnvveennttoorryy aatt tthhee yyeeaarr eenndd.. SSaalleess ((2200,,000000 uunniittss aatt 55)) 110000,,000000 PPuurrcchhaasseess 3300,,000000 uunniittss aatt 22 6600,,000000 LLeessss cclloossiinngg iinnvveennttoorryy ((1100,,000000)) uunniittss aatt 22 ((2200,,000000)) CCoosstt ooff ssaalleess 2200,,000000 uunniittss aatt 22 ((4400,,000000)) GGrroossss pprrooffiitt 6600,,000000 WWoorrkkeedd eexxaammppllee:: OOppeenniinngg aanndd cclloossiinngg iinnvveennttoorryy IInn iittss nneexxtt rreeppoorrttiinngg ppeerriioodd,, 11 OOccttoobbeerr 2200XX55 ttoo 3300 SSeepptteemmbbeerr 2200XX66,, TThhee UUmmbbrreellllaa SShhoopp ppuurrcchhaasseedd 4400,,000000 uummbbrreellllaass aatt aa ttoottaall ccoosstt ooff 9955,,000000 aanndd ssoolldd 4455,,000000 uummbbrreellllaass ffoorr 223300,,000000.. AAtt 3300 SSeepptteemmbbeerr 2200XX66 iitt hhaadd ((11 00,,000000 4400,,000000 -- 4455,,000000)) 55,,000000 uummbbrreellllaass lleefftt iinn iinnvveennttoorryy,, wwhhiicchh ttooggeetthheerr hhaadd ccoosstt 11 22,,000000.. RReeqquuiirreemmeenntt WWhhaatt wwaass TThhee UUmmbbrreellllaa SShhoopp ss ggrroossss pprrooffiitt ffoorr tthhee yyeeaarr ttoo 3300 SSeepptteemmbbeerr 2200XX66 SSoolluuttiioonn IInn tthhiiss rreeppoorrttiinngg ppeerriioodd,, iitt ppuurrcchhaasseedd 4400,,000000 uummbbrreellllaass ttoo aa dd dd ttoo tthhee 11 00,,000000 iitt aallrreeaaddyy hhaadd iinn iinnvveennttoorryy aatt tthhee ssttaarrtt ooff tthhee yyeeaarr.. IItt ssoolldd 4455,,000000,, lleeaavviinngg 55,,000000 uummbbrreellllaass iinn iinnvveennttoorryy aatt tthhee yyeeaarr eenndd.. OOnnccee aaggaaiinn,, ggrroossss pprrooffiitt sshhoouulldd bb ee ccaallccuullaatteedd bbyy mmaattcchhiinngg tthhee vvaalluuee ooff 4455,,000000 uunniittss ooff ssaalleess wwiitthh tthhee ccoosstt ooff tthhoossee 4455,,000000 uunniittss.. TThhee ccoosstt ooff ssaalleess iiss tthhee vvaalluuee ooff tthhee 11 00,,000000 uummbbrreellllaass iinn iinnvveennttoorryy aatt tthhee bbeeggiinnnniinngg ooff tthhee ppeerriioodd,, pplluuss tthhee ccoosstt ooff tthhee 4400,,000000 uummbbrreellllaass ppuurrcchhaasseedd,, lleessss tthhee ccoosstt ooff tthhee 55,,000000 uummbbrreellllaass iinn iinnvveennttoorryy aatt tthhee ppeerriioodd eenndd.. SSaalleess ((4455,,000000 uunniittss)) 223300,,000000 OOppeenniinngg iinnvveennttoorryy 1100,,000000 uunniittss aatt 22 2200,,000000 AAdddd ppuurrcchhaasseess 4400,,000000 uunniittss 9955,,000000 LLeessss cclloossiinngg iinnvveennttoorryy ((55,,000000)) uunniittss ((1122,,000000)) CCoosstt ooff ssaalleess 4455,,000000 uunniittss ((110033,,000000)) GGrroossss pprrooffiitt 112277,,000000 TTaakkeenn ffrroomm tthhee cclloossiinngg iinnvveennttoorryy vvaalluuee ooff tthhee pprreevviioouuss rreeppoorrttiinngg ppeerriioodd.. 22..22 CCoosstt ooff ssaalleess OOppeenniinngg iinnvveennttoorryy vvaalluuee XX AAdddd ccoosstt ooff ppuurrcchhaasseess ((oorr,, ffoorr aa mmaannuuffaaccttuurriinngg ccoommppaannyy,, tthhee ccoosstt ooff pprroodduuccttiioonn)) XX AAdddd ccoosstt ooff ddeelliivveerryy iinnwwaarrddss ((sseeee bbeellooww)) XX LLeessss cclloossiinngg iinnvveennttoorryy vvaalluuee ((XX)) EEqquuaallss ccoosstt ooff ssaalleess XX IInn ootthheerr wwoorrddss,, ttoo mmaattcchh ssaalleess aanndd ccoosstt ooff ssaalleess ,, iitt iiss nneecceessssaarryy ttoo aaddjjuusstt tthhee ccoosstt ooff ggooooddss ppuurrcchhaasseedd oorr mmaannuuffaaccttuurreedd ttoo aallllooww ffoorr iinnccrreeaasseess oorr rreedduuccttiioonnss iinn iinnvveennttoorryy lleevveellss dduurriinngg tthhee ppeerriioodd.. --- Trang 203 --- IInntteerraaccttiivvee qquueessttiioonn 11 :: GGrroossss pprrooffiitt OO nn 11 JJaannuuaarryy 2200XX66,, GGrraanndd UUnniioonn FFoooodd SSttoorreess hhaadd ggooooddss iinn iinnvveennttoorryy vvaalluueedd aatt 66,,000000.. DDuurriinngg 2200XX66 iitt ppuurrcchhaasseedd ssuupppplliieess ccoossttiinngg 5500,,000000.. SSaalleess ffoorr tthhee yyeeaarr ttoo 3311 DDeecceemmbbeerr 2200XX66 aammoouunntteedd ttoo 8800,,000000.. TThhee ccoosstt ooff ggooooddss iinn iinnvveennttoorryy aatt 3311 DDeecceemmbbeerr 2200XX66 wwaass 11 22,,550000.. RReeqquuiirreemmeenntt 1 CCaallccuullaattee GGrraanndd UUnniioonn FFoooodd SSttoorreess ggrroossss pprrooffiitt ffoorr tthhee yyeeaarr.. 22..33 DDeelliivveerryy ccoossttss DDeelliivveerryy ccoossttss rreeffeerr ttoo aallll ccoossttss ooff ttrraannssppoorrttiinngg ppuurrcchhaasseedd ggooooddss ffrroomm tthhee ssuupppplliieerr ttoo tthhee ccuussttoommeerr.. OOnnee ppaarrttyy hhaass ttoo ppaayy ffoorr tthheessee ddeelliivveerryy ccoossttss:: ssoommeettiimmeess tthhee ssuupppplliieerr ppaayyss ((iinn wwhhiicchh ccaassee tthhee ccuussttoommeerr hhaass nn oo ccoossttss ttoo rreeccoorrdd)) aanndd ssoommeettiimmeess tthhee ccuussttoommeerr ppaayyss.. WWhheenn tthhee ssuupppplliieerr ppaayyss,, tthhee ccoosstt ttoo tthhee ssuupppplliieerr iiss kknnoowwnn aass ddeellivivereyr y oouuttwwaardrsd s aass tthhee ggooooddss aarree ggooiinngg oouutt ooff tthhee bbuussiinneessss.. WWhheenn tthhee ccuussttoommeerr ppaayyss,, tthhee ccoosstt ttoo tthhee ccuussttoommeerr iiss kknnoowwnn aass ddeelliivveerryy iinnwwaarrddss aass tthhee ggooooddss aarree ccoommiinngg iinnttoo tthhee bbuussiinneessss.. (cid:127) (cid:127) TThhee ccoosst t ooff ddeelliivveerryy oouuttwwaarrddss iiss aa ddiissttrriibbuuttiioonn ccoosstt ddeedduucctteedd ffrroomm ggrroossss pprrooffiitt iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. (cid:127) (cid:127) TThhee ccoosst t ooff ddeelliivveerryy iinnwwaarrddss iiss aaddddeedd ttoo tthhee ccoosst t ooff ppuurrcchhaasseess aanndd iiss tthheerreeffoorree iinncclluuddeedd iinn tthhee ccaallccuullaattiioonn ooff ccoosstt ooff ssaalleess aanndd ggrroossss pprrooffiitt.. WWoorrkkeedd eexxaammppllee:: DDeelliivveerryy ccoossttss CClloocckkeerrss iiss aa ccoommppaannyy wwhhiicchh iimmppoorrttss aanndd rreesseellllss cclloocckkss.. IItt ppaayyss ffoorr tthhee ccoossttss ooff ddeelliivveerriinngg tthhee cclloocckkss ffrroomm iittss ssuupppplliieerr iinn SSwwiittzzeerrllaanndd ttoo tthhee sshhoopp iinn WWaalleess.. CClloocckkeerrss rreesseellllss cclloocckkss ttoo ootthheerr ttrraaddeerrss tthhrroouugghhoouutt tthhee ccoouunnttrryy,, ppaayyiinngg ddeelliivveerryy ccoossttss ffoorr ddeelliivveerriieess ffrroomm iittss bbuussiinneessss pprreemmiisseess ttoo tthhee ccuussttoommeerrss.. OO nn 11 JJuullyy 2200XX55,, CClloocckkeerrss hhaadd cclloocckkss iinn iinnvveennttoorryy vvaalluueedd aatt 11 77,,000000.. DDuurriinngg tthhee yyeeaarr ttoo 3300 JJuunnee 2200XX66 iitt ppuurrcchhaasseedd mmoorree cclloocckkss ffoorr 7755,,000000.. DDeelliivveerryy iinnwwaarrddss aammoouunntteedd ttoo 22,,000000.. SSaalleess ffoorr tthhee yyeeaarr wweerree 11 6622,,11 0000.. OOtthheerr bbuussiinneessss eexxppeennsseess aammoouunntteedd ttoo 5566,,000000,, eexxcclluuddiinngg ddeelliivveerryy oouuttwwaarrddss wwhhiicchh ccoosstt 22,,550000.. TThhee vvaalluuee ooff cclloocckkss iinn iinnvveennttoorryy aatt 3300 JJuunnee 2200XX66 wwaass 11 55,,440000.. RReeqquuiirreemmeenntt PPrreeppaarree tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ooff CClloocckkeerrss ffoorr tthhee yyeeaarr eennddeedd 3300 JJuunnee 2200XX66.. SSoolluuttiioonn CClloocckkeerrss SSttaatteemmenetn t ooff pprrooffiti t oorr lloossss ffoorr tthhee yyeeaarr eennddeedd 33 00 JJuunnee 2200XX66 SSaalleess 116622,,110000 OOppeenniinngg iinnvveennttoorryy 1177,,000000 PPuurrcchhaasseess 7755,,000000 DDeelliivveerryy iinnwwaarrddss 22,,000000 9944,,000000 LLeessss cclloossiinngg iinnvveennttoorryy ((1155,,440000)) CCoosstt ooff ssaalleess ((7788,,660000)) GGrroossss pprrooffiitt 8833,,550000 DDeelliivveerryy oouuttwwaarrddss 22,,550000 OOtthheerr eexxppeennsseess 5566,,000000 ((5588,,550000)) NNeett pprrooffiitt 2255,,000000 --- Trang 204 --- 2.4 Service organisations SSoo ffaarr,, wwee hhaavvee ccoonnssiiddeerreedd ccoosstt ooff ssaalleess ffoorr bbuussiinneesssseess tthhaatt sseellll pprroodduuccttss ttoo ccuussttoommeerrss,, aanndd tthheerreeffoorree hhaavvee ttoo mmaakkee aaddjjuussttmmeennttss ffoorr ooppeenniinngg aanndd cclloossiinngg iinnvveennttoorriieess wwhheenn ccaallccuullaattiinngg ccoosstt ooff ssaalleess.. MMaannyy bbuussiinneesssseess,, ssuucchh aass pprrooffeessssiioonnaall sseerrvviicceess ffiirrmmss oorr pprroovviiddeerrss ooff ddaattaa aannaallyyttiiccss sseerrvviicceess,, pprroovviiddee tthheeiirr ccuussttoommeerrss ((oorr mmoorree aaccccuurraatteellyy cclliieennttss)) wwiitthh sseerrvviicceess rraatthheerr tthhaann pprroodduuccttss aanndd tthheerreeffoorree nneeeedd ttoo ccaallccuullaattee tthheeiirr ccoosstt ooff ssaalleess ddiiffffeerreennttllyy.. CCoosstt ooff ssaalleess ffoorr aa sseerrvviiccee oorrggaanniissaattiioonn ttyyppiiccaallllyy iinncclluuddeess tthhee ffoolllloowwiinngg:: (cid:127) (cid:127) DDiirreecctt llaabboouurr ccoossttss -- tthhiiss iiss tthhee ccoosstt ooff aannyy llaabboouurr sseerrvviicceess ddiirreeccttllyy rreellaatteedd ttoo tthhee sseerrvviiccee pprroovviiddeedd.. IIff,, ffoorr eexxaammppllee,, aa ggrraapphhiicc ddeessiiggnn ccoommppaannyy hhaass bbeeeenn ccoommmmiissssiioonneedd ttoo ccrreeaattee nneeww bbrraannddiinngg ffoorr aa bbuussiinneessss ss ssoocciiaall mmeeddiiaa ppaaggeess,, tthhee llaabboouurr ccoosstt ooff tthhee ddeessiiggnneerr wwoouulldd bbee iinncclluuddeedd,, bbuutt tthhee llaabboouurr ccoosstt ooff tthhee ppaayyrroollll mmaannaaggeerr ooff tthhee ggrraapphhiicc ddeessiiggnn ccoommppaannyy wwoouulldd nnoott bbee iinncclluuddeedd.. (cid:127) (cid:127) SSaalleess ccoommmmiissssiioonn -- iiff aa bbuussiinneessss ppaayyss iittss eemmppllooyyeeeess aa ccoommmmiissssiioonn oorr bboonnuuss rreellaatteedd ttoo sseeccuurriinngg wwoorrkk,, tthhee ccoosstt ooff tthhee ccoommmmiissssiioonn ppaaiidd sshhoouulldd bbee iinncclluuddeedd iinn ccoosstt ooff ssaalleess.. (cid:127) (cid:127) MMaatteerriiaallss uusseedd -- ssoommee sseerrvviiccee oorrggaanniissaattiioonnss wwiillll hhaavvee ssoommee mmaatteerriiaallss ccoossttss ddeessppiittee bbeeiinngg sseerrvviiccee pprroovviiddeerrss.. FFoorr eexxaammppllee,, tthhee ggrraapphhiicc ddeessiiggnn ccoommppaannyy rreeffeerreenncceedd aabboovvee mmiigghhtt iinnccuurr pprriinnttiinngg ccoossttss iinn pprroodduucciinngg hhaarrdd ccooppiieess ooff tthhee nneeww bbrraannddiinngg oorr llooggooss ffoorr pprreesseennttaattiioonn ttoo tthhee cclliieenntt.. 3k WWoorrkkeedd eexxaammppllee:: SSeerrvviiccee--rreellaatteedd ccoosstt ooff ssaalleess SSkkiillllss LLttdd pprroovviiddeess wwoorrkkppllaaccee ttrraaiinniinngg ffoorr tthhee eemmppllooyyeeeess ooff bbuussiinneesssseess ooppeerraattiinngg iinn tthhee hhoossppiittaalliittyy sseeccttoorr.. SSkkiillllss LLttdd ooppeerraatteess ffrroomm aa ssiinnggllee ooffffiiccee llooccaattiioonn oonn wwhhiicchh mmoonntthhllyy rreennttaall ppaayymmeennttss aarree mmaaddee.. TTrraaiinniinngg iiss aallwwaayyss ccaarrrriieedd oouutt rreemmootteellyy aanndd tthhee ooffffiiccee iiss nnoott uusseedd ttoo ddeelliivveerr ttrraaiinniinngg.. SSkkiillllss LLttdd hhaass aa rreecceeppttiioonniisstt aanndd aa nnuummbbeerr ooff ssaalleess aaggeennttss wwhhoo aarree eeaacchh ppaaiidd aann aannnnuuaall ssaallaarryy.. TThhee ssaalleess aaggeennttss aarree ppaaiidd ccoommmmiissssiioonn ffoorr eevveerryy nneeww ccoonnttrraacctt tthheeyy sseeccuurree.. SSkkiillllss LLttdd uusseess ffrreeeellaannccee eexxppeertsrt s wwhhoo aarree ppaaiidd aa ffllaatt rraattee ppeerr ddaayy ttoo ddeessiiggnn aanndd rruunn tthhee ttrraaiinniinngg ccoouurrsseess rreeqquuiirreedd bbyy iittss cclliieennttss.. SSoommee cclliieennttss rreeqquueesstt tthhaatt aa hhaarrdd ccooppyy ooff lleeaarrnniinngg mmaatteerriiaallss iiss pprriinntteedd bbyy SSkkiillllss LLttdd aanndd ddeelliivveerreedd ttoo tthheemm iinn aaddvvaannccee ooff tthhee ccoouurrssee.. RReeqquuiirreemmeenntt EExxppllaaiinn wwhheetthheerr tthhee ccoossttss iinnccuurrrreedd bbyy SSkkiillllss LLttdd ccaann bbee iinncclluuddeedd iinn iittss ccoosstt ooff ssaalleess.. SSoolluuttiioonn CCoosstt IInncclluuddeedd iinn ccoosstt ooff ssaalleess EExxppllaannaattiioonn OOffffiiccee rreennttaall NNoo TThhee ooffffiiccee rreennttaall ccoossttss aarree nnoott ddiirreecctt ccoossttss iinnccuurrrreedd iinn pprroovviiddiinngg tthhee sseerrvviiccee aass tthhee ooffffiiccee iiss nnoott uusseedd ttoo pprroovviiddee ttrraaiinniinngg.. RReecceeppttiioonniisstt ssttaaffff ssaallaarryy NNoo TThhee rreecceeppttiioonniisstt ss ssaallaarryy iiss nnoott aa ddiirreecctt llaabboouurr ccoosstt iinnccuurrrreedd iinn pprroovviiddiinngg tthhee sseerrvviiccee aass tthhee ssaallaarryy iiss ppaaiidd rreeggaarrddlleessss ooff wwhheetthheerr tthhee sseerrvviiccee iiss uunnddeertartkaenk.en. SSaalleess aaggeenntt ssaallaarriieess NNoo TThhee ssaalleess aaggeenntt ssaallaarriieess aarree nnoott ddiirreecctt llaabboouurr ccoossttss iinnccuurrrreedd iinn pprroovviiddiinngg tthhee sseerrvviiccee.. SSaalleess aaggeenntt ccoommmmiissssiioonn YYeess TThhee ccoommmmiissssiioonn iiss oonnllyy ppaaiidd wwhheenn aa nneeww ccoonnttrraacctt iiss sseeccuurreedd aanndd iiss tthheerreeffoorree iinnccrreemmeennttaall ttoo tthhee ccoonnttrraacctt.. FFrreeeellaannccee eexxppeert rt ffeeeess YYeess FFrreeeellaannccee eexxppeertsr ts aarree aappppooiinntteedd ttoo ddeessiiggnn aanndd ddeelliivveerr ccoouurrsseess aass rreeqquuiirreedd bbyy cclliieennttss aanndd aarree tthheerreeffoorree iinnccrreemmeennttaall ttoo tthhee ccoonnttrraacctt.. --- Trang 205 --- PPrriinnttiinngg aanndd ddeelliivveerryy ooff hhaarrdd ccooppyy TThhee ccoossttss ooff pprriinnttiinngg aanndd lleeaarrnniinngg mmaatteerriiaallss ddeelliivveerriinngg tthhee hhaarrdd ccooppyy mmaatteerriiaallss aarree ddiirreecctt mmaatteerriiaallss ccoossttss aanndd sshhoouulldd bbee iinncclluuddeedd iinn ccoosstt ooff ssaalleess NNoottee:: CCoossttss wwhhiicchh ccaannnnoott bbee pprreesseenntteedd iinn ccoosstt ooff ssaalleess aarree iinncclluuddeedd iinn ootthheerr eexxppeennssee ccaatteeggoorriieess iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. AAddmmiinniissttrraattiivvee eexxppeennsseess aarree oofftteenn uusseedd.. IInntteerraaccttiivvee qquueessttiioonn 22:: DDiirreectc t llaabboouurr ccoossttss AABBCC AAccccoouunnttaannttss ooffffeerrss aaccccoouunnttiinngg aanndd ttaaxx sseerrvviicceess ttoo iittss cclliieennttss.. AABBCC AAccccoouunnttaannttss iiss pprreeppaarriinngg iittss ffiinnaanncciiaall ssttaatteemmeennttss ffoorr tthhee yyeeaarr eenndd 3311 AAuugguusstt 2200XX55 aanndd pprroovviiddeess sseerrvviicceess ttoo iittss cclliieennttss wwhhiicchh ssppaann iittss yyeeaarr--eenndd.. TThhee ffoolllloowwiinngg iinnffoorrmmaattiioonn iiss rreelleevvaanntt ttoo tthhee pprreeppaarraattiioonn ooff tthhee ffiinnaanncciiaall ssttaatteemmeennttss aanndd ttaaxx rreettuurrnn ffoorr aa cclliieenntt eennggaaggeemmeenntt wwhhiicchh ssppaannss AABBCC AAccccoouunnttaannttss yyeeaarr eenndd.. SSttaaffff mmeemmbbeerr HHoouurrllyy ccoosstt (( )) BBuuddggeetteedd hhoouurrss HHoouurrss iinnccuurrrreedd PPaarrttnneerr 110000 44 11 MMaannaaggeerr 4400 88 22 SSttuuddeenntt aaccccoouunnttaanntt 2200 2200 1144 TTaaxx mmaannaaggeerr 5500 44 00 RReeqquuiirreemmeenntt CCaallccuullaattee tthhee aammoouunntt tthhaatt sshhoouulldd bbee iinncclluuddeedd iinn AABBCC AAccccoouunnttaannttss ccoosstt ooff ssaalleess aatt 3311 AAuugguusstt 2200XX55.. SSttaaffff mmeemmbbeerr HHoouurrllyy ccoosstt (( )) HHoouurrss iinnccuurrrreedd LLaabboouurr ccoosstt (( )) PPaarrttnneerr 110000 MMaannaaggeerr 4400 SSttuuddeenntt aaccccoouunnttaanntt 2200 TToottaall 22..55 IInnvveennttoorryy wwrriitttteenn ooffff oorr wwrriitttteenn ddoowwnn AA bbuussiinneessss mmiigghhtt bbee uunnaabbllee ttoo sseellll aallll tthhee ggooooddss ppuurrcchhaasseedd,, bbeeccaauussee bbeeffoorree tthheeyy ccaann bbee ssoolldd tthheeyy mmiigghhtt:: (cid:127) (cid:127) bbee lloosstt oorr ssttoolleenn (cid:127) (cid:127) bbee ddaammaaggeedd aanndd bbeeccoommee wwoorrtthhlleessss (cid:127) (cid:127) bbeeccoommee oobbssoolleettee oorr oouutt ooff ffaasshhiioonn;; tthheessee mmiigghhtt bbee tthhrroowwnn aawwaayy,, oorr ssoolldd ooffff aatt aa llooww pprriiccee WWhheenn ggooooddss aarree lloosstt,, ssttoolleenn oorr tthhrroowwnn aawwaayy aass wwoorrtthhlleessss,, tthhee bbuussiinneessss wwiillll mmaakkee aa lloossss oonn tthhoossee ggooooddss bbee 1 ccaauussee tthheeiirr ssaalleess vvaalluuee wwiillll bbee nniill.. SSiimmiillaarrllyy,, wwhheenn ggooooddss lloossee vvaalluuee bbeeccaauussee tthheeyy hhaavvee bbeeccoommee oobbssoolleettee oorr oouutt ooff ffaasshhiioonn aanndd aarree ssoolldd ooffff aatt aa llooww pprriiccee,, tthhee bbuussiinneessss wwiillll mmaakkee aa lloossss iiff tthheeiirr nneett rreeaalliissaabbllee vvaalluuee iiss lleessss tthhaann ccoosstt.. FFoorr eexxaammppllee,, iiff ggooooddss wwhhiicchh oorriiggiinnaallllyy ccoosstt 550000 aarree nnooww oobbssoolleettee aanndd ccoouulldd oonnllyy bbee ssoolldd ffoorr 115500,, tthhee bbuussiinneessss wwoouulldd ssuuffffeerr aa lloossss ooff 335500.. --- Trang 206 --- IIff,, aatt tthhee eenndd ooff aa rreeppoorrttiinngg ppeerriioodd,, aa bbuussiinneessss ssttiillll hhaass ggooooddss iinn iinnvveennttoorryy wwhhiicchh aarree eeiitthheerr wwoorrtthhlleessss oorr wwoortrhth lleessss tthhaann tthheeiirr oorriiggiinnaall ccoosstt,, tthhee ccoosstt ooff tthhee iinnvveennttoorriieess sshhoouulldd bbee wwrriitttteenn ddoowwnn ttoo:: (cid:127) (cid:127) nnootthhiinngg,, iiff tthheeyy aarree wwoorrththlelsess; s; oorr (cid:127) (cid:127) tthheeiirr nneett rreeaalliissaabbllee vvaalluuee ((sseeee sseeccttiioonn 66)),, iiff tthhiiss iiss lleessss tthhaann tthheeiirr oorriiggiinnaall ccoosstt., AA jjoouurrnnaall eennttrryy iinnttoo tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm wwiillll bbee rreeqquuiirreedd ttoo aaccccoouunntt ffoorr tthhee wwrriittee ddoowwnn.. TThhee ccoosstt ooff iinnvveennttoorryy wwrriitttteenn ooffff oorr wwrriitttteenn ddoowwnn ddooeess nnoott uussuuaallllyy ccaauussee aannyy pprroobblleemmss iinn ccaallccuullaattiinngg tthhee ggrroossss pprrooffiitt ooff aa bbuussiinneessss,, bbeeccaauussee tthhee ccoosstt ooff ssaalleess aallrreeaaddyy iinncclluuddeess tthhee ccoosstt ooff iinnvveennttoorriieess wwrriitttteenn ooffff oorr wwrriitttteenn ddoowwnn,, aass tthhee ffoolllloowwiinngg eexxaammppllee sshhoowwss.. WWoorrkkeedd eexxaammppllee:: IInnvveenntotroiersie s wwrriitttteenn ooffff aanndd wwrritittetne n ddoowwnn WWaagggg eennddss iittss ffiinnaanncciiaall yyeeaarr oo nn 3311 MMaarrcchh.. AAtt 11 AApprriill 2200XX55 iitt hhaadd ggooooddss iinn iinnvveennttoorryy vvaalluueedd aatt 88,,880000.. DDuurriinngg tthhee yyeeaarr ttoo 3311 MMaarrcchh 2200XX66,, iitt ppuurrcchhaasseedd ggooooddss ccoossttiinngg 4488,,000000.. FFaasshhiioonn ggooooddss wwhhiicchh ccoosstt 22,,11 0000 wweerree hheelldd iinn iinnvveennttoorryy aatt 3311 MMaarrcchh 2200XX66,, aanndd WWaagggg bbeelliieevveess tthhaatt tthheessee ccaann oonnllyy nnooww bbee ssoolldd aatt aa ssaallee pprriiccee ooff 440000.. GGooooddss ssttiillll hheelldd iinn iinnvveennttoorryy aatt 3311 MMaarrcchh 2200XX66 ((iinncclluuddiinngg tthhee ffaasshhiioonn ggooooddss)) hhaadd aann oorriiggiinnaall ppuurrcchhaassee ccoosstt ooff 77,,660000.. SSaalleess ffoorr tthhee yyeeaarr wweerree 8811,, 440000.. RReeqquuiirreemmeenntt CCaallccuullaattee WWaagggg ss ggrroossss pprrooffiitt ffoorr tthhee yyeeaarr eennddeedd 3311 MMaarrcchh 2200XX66.. SSoolluuttiioonn IInniittiiaall ccaallccuullaattiioonn ooff cclloossiinngg iinnvveennttoorryy vvaalluueess:: AAmmoouunntt wwrriitttteenn AAtt ccoosstt RReeaalliissaabbllee vvaalluuee ddoowwnn FFaasshhiioonn ggooooddss 22,,110000 440000 11,,770000 OOtthheerr ggooooddss ((bbaallaanncciinngg ffiigguurree)) 55,,550000 77,,660000 WWaagggg GGrroossss pprrooffiitt ffoorr tthhee yyeeaarr eennddeedd 3311 MMaarrcchh 2200XX66 RReevveennuuee 8811,,440000 OOppeenniinngg iinnvveennttoorryy 88,,880000 PPuurrcchhaasseess 4488,,000000 LLeessss cclloossiinngg iinnvveennttoorryy ((440000 55,,550000)) ((55,,990000)) CCoosstt ooff ssaalleess ((5500,,990000)) GGrroossss pprrooffiitt 3300,,550000 BByy uussiinngg tthhee ffiigguurree ooff 55,,990000 ffoorr cclloossiinngg iinnvveennttoorriieess,, tthhee ccoosstt ooff ssaalleess aauuttoommaattiiccaallllyy iinncclluuddeess tthhee iinnvveennttoorryy wwrriittee--ddoowwnn ooff 11,,770000.. 22..66 IInnvveennttoorryy ddeessttrrooyyeedd oorr ssttoolleenn aanndd ssuubbjjeecctt ttoo aann iinnssuurraannccee ccllaaiimm WWhheerree aa mmaatteerriiaall aammoouunntt ooff iinnvveennttoorryy hhaass bbeeeenn ssttoolleenn oo rr ddeessttrrooyyeedd,, iinncclluuddiinngg iittss ccoosstt iinn ggrroossss pprrooffiitt wwiillll ggiivvee aa vveerryy ddiisstotortertde d iiddeeaa ooff tthhee bbuussiinneessss ss bbaassiicc pprrooffiittaabbiilliittyy:: (cid:127) (cid:127) PPuurrcchhaasseess wwiillll iinncclluuddee tthhee ccoosstt ooff ggooooddss tthhaatt ccoouulldd nnoott bbee ssoolldd,, ssoo tthhee aaccccrruuaall pprriinncciippllee iiss bbrrookkeenn,, yyeett tthheeyy aarree nnoott iinn cclloossiinngg iinnvveennttoorryy eeiitthheerr,, ssoo iitt wwiillll llooookk aass iiff tthhee bbuussiinneessss ss ggrroossss mmaarrggiinn oo nn ssaalleess hhaass ffaalllleenn ccaattaassttrroopphhiiccaallllyy.. (cid:127) (cid:127) TThheerree mmaayy bbee aann aammoouunntt ooff iinnccoommee aass aa rreessuulltt ooff aann iinnssuurraannccee ccllaaiimm,, wwhhiicchh ccaannnnoott bbee iinncclluuddeedd iinn ccoosstt ooff ssaalleess uunnddeerr tthhee nnoo ooffffsseettttiinngg pprriinncciippllee.. --- Trang 207 --- TThheessee pprroobblleemmss aarree oovveerrccoommee bbyy ttaakkiinngg tthhee ccoosstt ooff ggooooddss ssttoolleenn oorr ddeessttrrooyyeedd oouutt ooff ppuurrcchhaasseess aanndd iinncclluuddiinngg iitt uunnddeerr aaddmmiinniissttrraattiivvee eexxppeennsseess.. TThhee aaccccoouunnttaanntt wwiillll mmaakkee ssuucchh aann aaddjjuussttmmeenntt bbyy ppoossttiinngg aa jjoouurrnnaall iinnttoo tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm.. AAnn iinnssuurraannccee ccllaaiimm iiss ttrreeaatteedd aass ootthheerr iinnccoommee iinn ccaallccuullaattiinngg nneett pprrooffiitt;; iiff iitt hhaass nnoott yyeett bbeeeenn rreecceeiivveedd iinn tthhee ffoorrmm ooff ccaasshh iitt iiss ddiisscclloosseedd aass ootthheerr rreecceeiivvaabblleess oonn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. IItt sshhoouulldd oonnllyy bbee rreeccoorrddeedd iiff iitt iiss rreeaassoonnaabbllyy cceerrttaaiinn tthhaatt tthhee aammoouunntt wwiillll bbee rreecceeiivveedd,, wwhhiicchh wwiillll bbee eevviiddeenncceedd bbyy hhaavviinngg aa vvaalliidd iinnssuurraannccee ppoolliiccyy aanndd ccoonnffiirrmmaattiioonn ffrroomm tthhee iinnssuurreerr tthhaatt tthhee ccllaaiimm wwiillll bbee sseettttlleedd.. WWoorrkkeedd eexxaammppllee:: MMaatteerriiaall aammoouunntt ooff iinnvveennttoorryy ssttoolleenn FFrraannkkiiee hhaadd 11 55/,000000 ooff iinnvveennttoorryy aass aatt 11 JJaannuuaarryy 2200XX22.. DDuurriinngg tthhee yyeeaarrttoo 3311 DDeecceemmbbeerr 2200XX22 tthheeyy ppuurrcchhaasseedd iinnvveennttoorryy ffoorr 9988,,000000/, iinnccuurrrriinngg ddeelliivveerryy iinnwwaarrddss ooff 11 5500.. TThheeyy mmaaddee ssaalleess ooff 11 5500,,000000,, iinnccuurrrriinngg ddeelliivveerryy ccoossttss ttoo hheerr ccuussttoommeerrss ooff 22,,440000.. AAtt 3311 DDeecceemmbbeerr 2200XX22 FFrraannkkiiee rreeaalliisseess tthhaatt iinnvveennttoorryy ccoossttiinngg oonnllyy 220000 iiss lleefftt;; ggooooddss ccoossttiinngg 1188,,000000 hhaavvee bbeeeenn ssttoolleenn.. RReeqquuiirreemmeenntt PPrreeppaarree FFrraannkkiiee ss ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aassssuummiinngg:: ((11)) FFrraannkkiiee hhaass rreelleevvaanntt iinnssuurraannccee aanndd tthhee iinnssuurreerr hhaass aaggrreeeedd ttoo ppaayy aa ccllaaiimm ffoorr 7755%% ooff tthhee ccoosstt;; aanndd ((22)) FFrraannkkiiee ddooeess nnoott hhaavvee aannyy iinnssuurraannccee.. SSoolluuttiioonn ((11)) ((22)) RReevveennuuee 115500,,000000 115500,,000000 OOppeenniinngg iinnvveennttoorryy 1155,,000000 1155,,000000 PPuurrcchhaasseess 9988,,000000 9988,,000000 DDeelliivveerryy iinnwwaarrddss 115500 115500 IInnvveennttoorryy ssttoolleenn ((1188,,000000)) ((1188,,000000)) CClloossiinngg iinnvveennttoorryy ((220000)) ((220000)) CCoosstt ooff ssaalleess ((9944,,995500)) ((9944,,995500)) GGrroossss pprrooffiitt 5555,,005500 5555,,005500 OOtthheerr iinnccoommee ((1188 ,,000000 xx 7755%%)) 1133,,550000 NN//AA CCoosstt ooff ggooooddss ssttoolleenn ((1188,,000000)) ((1188,,000000)) DDiissttrriibbuuttiioonn ccoossttss ((ddeelliivveerryy oouuttwwaarrddss)) ((22,,440000)) ((22,,440000)) NNeett pprrooffiitt 4488,,115500 3344,,665500 IInntteerraaccttiivvee qquueessttiioonn 33 :: IInnssuurraannccee ccllaaiimm IInnvveennttoorryy tthhaatt ccoosstt WWaassaa LLttdd 6644,,550000 wwaass ddeessttrrooyyeedd iinn aa ffiirree.. TThhee iinnvveennttoorryy wwaass iinnssuurreedd ffoorr 6600%% ooff iittss ccoosstt.. WWaassaa LLttdd mmaaddee aa ccllaaiimm oonn iittss iinnssuurraannccee ppoolliiccyy aanndd tthhee iinnssuurraannccee ccoommppaannyy aaggrreeeedd ttoo sseettttllee tthhee ccllaaiimm.. NNoo aammoouunnttss wweerree rreecceeiivveedd ffrroomm tthhee iinnssuurraannccee ccoommppaannyy bbeeffoorree tthhee yyeeaarr eenndd.. RReeqquuiirreemmeenntt PPrreeppaarree aa jjoouurrnnaall eennttrryy ttoo aaccccoouunntt ffoorr tthhiiss iinn WWaassaa LLttdd ss aaccccoouunnttiinngg rreeccoorrddss.. --- Trang 208 --- 33 AA cc cc oo uu nn tt ii nn gg ff oo rr oo pp ee nn ii nn gg aa nn dd cclloossiinngg iinnvveennttoorriiee ss SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) IInn eeaacchh rreeppoortirntgi ng ppeerriioodd,, ooppeenniinngg iinnvveennttoorryy iiss iinncclluuddeedd iinn ccoosstt ooff ssaalleess,, wwhhiicchh iiss aann eexxppeennssee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss:: DDEEBBIITT CCoosstt ooff ssaalleess XX CCRREEDDIITT IInnvveennttoorryy aaccccoouunntt ((ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX (cid:127) (cid:127) CClloossiinngg iinnvveennttoorryy iiss ddeedduucctteedd ffrroomm ccoosstt ooff ssaalleess iinn tthhee rreeppoortirntgi ng ppeerriioodd,, ssoo iitt ccaann bbee ccaarrrriieedd ffoorrwwaarrdd aanndd mmaattcchheedd aaggaaiinnsstt tthhee rreevveennuuee iitt eeaarrnnss iinn tthhee nneexxtt ppeerriioodd:: DDEEBBIITT IInnvveennttoorryy aaccccoouunntt ((ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX CCRREEDDIITT CCoosstt ooff ssaalleess XX AAss wwee hhaavvee sseeeenn aabboovvee,, tthhee ccoosstt ooff ssaalleess ffiigguurree iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss iiss ssuummmmaarriisseedd aass:: OOppeenniinngg iinnvveennttoorryy XX PPlluuss ppuurrcchhaasseess XX PPlluuss ddeelliivveerryy iinnwwaarrddss XX LLeessss cclloossiinngg iinnvveennttoorryy ((XX)) CCoosstt ooff ssaalleess XX HHoowweevveerr,, tthhiiss ffoorrmmuullaa hhiiddeess tthhrreeee bbaassiicc pprroobblleemmss:: (cid:127) (cid:127) HHooww ddoo yyoouu mmaannaaggee ttoo ggeett aa pprreecciissee ccoouunntt ooff iinnvveennttoorriieess hheelldd aatt aannyy oonnee ttiimmee (cid:127) (cid:127) OOnnccee ccoouunntteedd,, hhooww ddoo yyoouu vvaalluuee tthhee iinnvveennttoorriieess (cid:127) (cid:127) AAssssuummiinngg tthhee iinnvveennttoorriieess aarree ggiivveenn aa vvaalluuee,, hhooww ddooeess tthhee ddoouubbllee eennttrryy bbooookkkkeeeeppiinngg ffoorr iinnvveennttoorriieess wwoorrkk TThhee ppuurrppoossee ooff tthhiiss cchhaapptteerr iiss ttoo aannsswweerr aallll tthhrreeee ooff tthheessee qquueessttiioonnss.. IInn oorrddeerr ttoo mmaakkee tthhee pprreesseennttaattiioonn aa lliittttllee eeaassiieerr ttoo ffoollllooww,, wwee sshhaallll ttaakkee tthhee llaasstt qquueessttiioonn ffiirrsstt 33..11 LLeeddggeerr aaccccoouunnttiinngg ffoorr iinnvveennttoorriieess AAss wwee ssaaww aabboovvee,, ccoosstt ooff ssaalleess iiss pprreesseenntteedd iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss bbuutt iiss ccaallccuullaatteedd bbaasseedd oonn tthhee ttoottaallss ooff ootthheerr lleeddggeerr bbaallaanncceess.. AAlltthhoouugghh aa ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm wwiillll ccaallccuullaattee ccoosstt ooff ssaalleess aauuttoommaattiiccaallllyy,, iitt iiss iimmppoortarntat nt tthhaatt yyoouu uunnddeerrssttaanndd tthhee uunnddeerrllyyiinngg aaddjjuussttmmeennttss tthhaatt aarree bbeeiinngg pprroocceesssseedd.. AAss iinnvveennttoorryy iiss aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn bbaallaannccee,, cclloossiinngg iinnvveennttoorryy aatt tthhee eenndd ooff oonnee ppeerriioodd bbeeccoommeess ooppeenniinngg iinnvveennttoorryy aatt tthhee ssttaartr t ooff tthhee nneexxtt ppeerriioodd.. OOppeenniinngg iinnvveennttoorryy nneeeeddss ttoo bbee ttrraannssffeerrrreedd ffrroomm tthhee iinnvveennttoorryy aaccccoouunntt ttoo tthhee ccoosstt ooff ssaalleess aaccccoouunntt ((aass iitt wwiillll bbee ssoolldd iinn tthhee ppeerriioodd)) uussiinngg tthhee ffoolllloowwiinngg jjoouurrnnaall:: DDEEBBIITT CCoosstt ooff ssaalleess XX CCRREEDDIITT CCuurrrreenntt aasssseettss -- iinnvveennttoorryy X PPuurrcchhaasseess ooff iinnvveennttoorriieess aarree ttrraannssffeerrrreedd ttoo aa ccoosstt ooff ssaalleess lleeddggeerr aaccccoouunntt vviiaa tthhee ffoolllloowwiinngg ddoouubbllee eennttrryy:: DDEEBBIITT CCoosstt ooff ssaalleess X CCRREEDDIITT PPuurrcchhaasseess aaccccoouunntt XX --- Trang 209 --- TThhee ooppeenniinngg iinnvveennttoorriieess aanndd tthhee ppuurrcchhaasseess rreepprreesseenntt tthhee ttoottaall aammoouunntt ooff iinnvveennttoorryy tthhaatt aa bbuussiinneessss ccaann sseellll iinn aa ppeerriioodd.. TThhee iinnvveennttoorryy aaccccoouunntt iiss oonnllyy uusseedd aatt tthhee eenndd ooff aa rreeppoorrtitning g ppeerriioodd,, wwhheenn tthhee bbuussiinneessss ccoouunnttss aanndd vvaalluueess cclloossiinngg iinnvveennttoorryy,, dduurriinngg tthhee iinnvveennttoorryy ccoouunntt.. AAtt tthhee iinnvveennttoorryy ccoouunntt ddaattee,, aann iinnvveennttoorryy lliissttiinngg iiss eexxttrraacctteedd ffrroomm tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm aanndd aa pphhyyssiiccaall ccoouunntt ttaakkeess ppllaaccee ttoo vveerriiffyy tthhee aaccccuurraaccyy aanndd ccoommpplleetteenneessss ooff tthhee lliissttiinngg.. OOnnccee aann iinnvveennttoorryy ccoouunntt hhaass bbeeeenn ccaarrrriieedd oouutt aanndd tthhee bbuussiinneessss hhaass aa vvaalluuee ffoorr iittss cclloossiinngg iinnvveennttoorryy,, tthhee ddoouubbllee eennttrryy iiss:: DDEEBBIITT CCuurrrreenntt aasssseettss -- iinnvveennttoorryy CCRREEDDIITT CCoosstt ooff ssaalleess XX TThhee cclloossiinngg iinnvveennttoorryy rreedduucceess ccoosstt ooff ssaalleess ((aass iitt rreepprreesseennttss aammoouunnttss tthhaatt hhaavvee nnoott bbeeeenn ssoolldd iinn tthhee ppeerriioodd)).. TThhee ddeebbiitt bbaallaannccee oonn tthhee cclloossiinngg iinnvveennttoorryy aaccccoouunntt rreepprreesseennttss aa ccuurrrreenntt aasssseett iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. TThhee bbaallaannccee oonn tthhee ccoosstt ooff ssaalleess lleeddggeerr aaccccoouunntt sshhoouulldd tthheenn bbee ttrraannssffeerrrreedd ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aass aa ccoommppoonneenntt ooff tthhee pprrooffiitt ccaallccuullaattiioonn aatt tthhee eenndd ooff tthhee ppeerriioodd.. WWoorrkkeedd eexxaammppllee:: AAccccoouunnttiinngg ffoorr iinnvveennttoorriieess AA bbuussiinneessss hhaass ooppeenniinngg ccaappiittaall ooff 22,,000000,, rreepprreesseenntteedd eennttiirreellyy bbyy iinnvveennttoorryy.. DDuurriinngg tthhee ffiirrsstt yyeeaarr ss ttrraaddiinngg,, wwhheenn tthhee oowwnneerr ttooookk nnoo ddrraawwiinnggss,, tthhee ffoolllloowwiinngg ttrraannssaaccttiioonnss ooccccuurrrreedd.. PPuurrcchhaasseess ooff ggooooddss ffoorr rreessaallee,, oonn ccrreeddiitt 44,,330000 PPaayymmeennttss ffoorr ttrraaddee ppaayyaabblleess 33,,660000 SSaalleess,, aallll oonn ccrreeddiitt 88,,000000 RReecceeiippttss ffrroomm ttrraaddee rreecceeiivvaabblleess 33,,220000 NNoonn--ccuurrrreenntt aasssseettss ppuurrcchhaasseedd ffoorr ccaasshh 11 ,,550000 OOtthheerr eexxppeennsseess,, aallll ppaaiidd iinn ccaasshh 990000 AAllll ootthheerr eexxppeennsseess rreellaattee ttoo tthhee ccuurrrreenntt yyeeaarr.. CClloossiinngg iinnvveennttoorryy iiss vvaalluueedd aatt 11,, 880000.. RReeqquuiirreemmeennttss 11 PPrreeppaarree tthhee lleeddggeerr aaccccoouunnttss,, iinncclluuddiinngg aa ccoosstt ooff ssaalleess lleeddggeerr aaccccoouunntt,, ffoorr tthhee 11 22--mmoonntthh rreeppoorrttiinngg ppeerriioodd.. 22 PPrreeppaarree aa ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt tthhee eenndd ooff tthhee rreeppoorrttiinngg ppeerriioodd.. SSoolluuttiioonn 1 CCAASSHH AATT BBAANNKK AACCCCOOUUNNTT TTrraaddee rreecceeiivvaabblleess 33,,220000 TTrraaddee ppaayyaabblleess 33,,660000 BBaallaannccee cc//dd 22,,880000 NNoonn--ccuurrrreenntt aasssseettss 11,,550000 OOtthheerr eexxppeennsseess 990000 66,,000000 66,,000000 BBaallaannccee bb//dd 22,,880000 CAPITAL Balance c/d 2,000 Inventory 2,000 2,000 2,000 Balance b/d 2,000 --- Trang 210 --- TTRRAADDEE PPAAYYAABBLLEESS CCaasshh aatt bbaannkk aaccccoouunntt 33,,660000 PPuurrcchhaasseess 44,,330000 BBaallaannccee cc//dd 770000 44,,330000 44,,330000 BBaallaannccee bb//dd 770000 PPUURRCCHHAASSEESS TTrraaddee ppaayyaabblleess 44,,330000 CCoosstt ooff ssaalleess 44,,330000 NNOONN--CCUURRRREENNTT AASSSSEETTSS CCaasshh aatt bbaannkk aaccccoouunntt 11,,550000 BBaallaannccee cc//dd 11 ,,550000 BBaallaannccee bb//dd 11,,550000 SSAALLEESS SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 88,,000000 TTrraaddee rreecceeiivvaabblleess 88,,000000 TTRRAADDEE RREECCEEIIVVAABBLLEESS SSaalleess 88,,000000 AAtt bbaannkk aaccccoouunntt 33,,220000 BBaallaannccee cc//dd 44,,880000 88,,000000 88,,000000 BBaallaannccee bb//dd 44,,880000 OOTTHHEERR EEXXPPEENNSSEESS CCaasshh aatt bbaannkk aaccccoouunntt 990000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 990000 IINNVVEENNTTOORRYY CCaappiittaall 22,,000000 CCoosstt ooff ssaalleess ((ooppeenniinngg iinnvveennttoorryy)) 22,,000000 CCoosstt ooff ssaalleess ((cclloossiinngg iinnvveennttoorryy)) 11,,880000 BBaallaannccee cc//dd ((cclloossiinngg iinnvveennttoorryy)) 11,,880000 33,,880000 33,,880000 BBaallaannccee bb//dd 11,,880000 CCOOSSTT OOFF SSAALLEESS IInnvveennttoorryy ((ooppeenniinngg iinnvveennttoorryy)) 22,,000000 IInnvveennttoorryy ((cclloossiinngg iinnvveennttoorryy)) 11,,880000 PPuurrcchhaasseess 44,,330000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 44,,550000 66,,330000 66,,330000 --- Trang 211 --- 22 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss RReevveennuuee 88,,000000 CCoosstt ooff ssaalleess ((44,,550000)) GGrroossss pprrooffiitt 33,,550000 EExxppeennsseess -- OOtthheerr eexxppeennsseess ((990000)) PPrrooffiitt ffoorr tthhee yyeeaarr 22,,660000 SSttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt tthhee eenndd ooff tthhee ppeerriioodd AASSSSEETTSS NNoonn--ccuurrrreenntt aasssseettss 11, ,550000 CCuurrrreenntt aasssseettss IInnvveennttoorryy 11,,880000 TTrraaddee rreecceeiivvaabblleess 44,,880000 66,,660000 TToottaall aasssseettss 88,,110000 CCAAPPIITTAALL AANNDD LLIIAABBIILLIITTIEIESS CCaappiittaall AAtt ssttaarrtt ooff ppeerriioodd 22,,000000 PPrrooffiitt ffoorr ppeerriioodd 22,,660000 AAtt eenndd ooff ppeerriioodd 44,,660000 CCuurrrreenntt lliiaabbiilliittiieess BBaannkk oovveerrddrraafftt 22,,880000 TTrraaddee ppaayyaabblleess 770000 33,,550000 TToottaall ccaappiittaall aanndd lliiaabbiilliittiieess 88,,11 0000 TThhee cclloossiinngg ddeebbiitt bbaallaannccee oonn tthhee iinnvveennttoorryy aaccccoouunntt iiss 11,, 880000,, wwhhiicchh iiss sshhoowwnn iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aa ccuurrrreenntt aasssseett.. WWee ccaann nnooww ttrraannssffeerr tthhee pprrooffiitt ffrroomm tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ttoo tthhee ccaappiittaall aaccccoouunntt aass sshhoowwnn bbeellooww.. TThhiiss yyeeaarr ss ccaarrrriieedd ddoowwnn ccaappiittaall bbeeccoommeess nneexxtt yyeeaarr ss bbrroouugghhtt ddoowwnn ccaappiittaall.. CCAAPPIITTAALL BBaallaannccee cc//dd 44,,660000 IInnvveennttoorryy 22,,000000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 22,,660000 44,,660000 44,,660000 BBaallaannccee bb//dd 44,,660000 --- Trang 212 --- IInntteerraaccttiivvee qquueessttiioonn 44:: JJoouurrnnaallss ffoorr iinnvveennttoorryy IInn iittss nnoommiinnaall lleeddggeerr WWiicckkhhaamm ppiicc hhaadd aa bbaallaannccee oonn iittss iinnvveennttoorryy aaccccoouunntt aatt 11 JJuullyy 2200XX22 ooff 2233,,449900.. AAtt tthhee eenndd ooff tthhee rreeppoorrttiinngg ppeerriioodd,, 3300 JJuunnee 2200XX33,, iitt hhaadd iinnvveennttoorryy ooff 4400,,228855.. RReeqquuiirreemmeennt t PPrreeppaarree tthhee jjoouurrnnaall eennttrriieess ttoo rreeccoorrdd tthhee ssiittuuaattiioonn aass aatt tthhee eenndd ooff tthhee rreeppoortirntgi ng ppeerriioodd iinn tthhee nnoommiinnaall lleeddggeerr ooff WWiicckkhhaamm ppiicc.. 44 AA dd jjuussttiinngg tthh ee iinniittiiaall ttrriiaall bbaallaannccee SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TThhee cclloossiinngg iinnvveennttoorryy iiss oofftteenn aaccccoouunntteedd ffoorr aafftteerr tthhee iinniittiiaall ttrriiaall bbaallaannccee hhaass bbeeeenn pprreeppaarreedd.. (cid:127) (cid:127) AA jjoouurrnnaall eennttrryy iiss rreeqquuiirreedd ttoo aaddjjuusstt tthhee iinniittiiaall ttrriiaall bbaallaannccee ttoo ttrraannssffeerr ooppeenniinngg iinnvveennttoorriieess aanndd ppuurrcchhaasseess ttoo ccoosstt ooff ssaalleess aanndd rreeccoorrdd cclloossiinngg iinnvveennttoorryy.. (cid:127) (cid:127) AA nneeww ccoosstt ooff ssaalleess lliinnee iiss aaddddeedd ttoo tthhee ttrriiaall bbaallaannccee aass aa rreessuulltt ooff tthhee jjoouurrnnaall eennttrriieess ppoosstteedd.. IInn tthhee pprreevviioouuss sseeccttiioonn wwee ssaaww hhooww cclloossiinngg iinnvveennttoorryy iiss aaccccoouunntteedd ffoorr iinn tthhee lleeddggeerr aaccccoouunnttss.. HHoowweevveerr,, iinn aa mmaannuuaall aaccccoouunnttiinngg ssyysstteemm,, tthhee aaddjjuussttmmeenntt ffoorr cclloossiinngg iinnvveennttoorryy iiss oofftteenn nnoott aaccccoouunntteedd ffoorr uunnttiill aafftteerr tthhee iinniittiiaall ttrriiaall bbaallaannccee hhaass bbeeeenn eexxttrraacctteedd.. TThheerreeffoorree,, ooppeenniinngg iinnvveennttoorryy aanndd ppuurrcchhaasseess aappppeeaarr oonn tthhee iinniittiiaall ttrriiaall bbaallaannccee.. TThhee iinniittiiaall ttrriiaall bbaallaannccee nneeeeddss ttoo bbee aaddjjuusstteedd ttoo rreefflleecctt tthhaatt tthhee bbuussiinneessss nnoo lloonnggeerr hhaass ooppeenniinngg iinnvveennttoorriieess ((tthheessee hhaavvee bbeeeenn ssoolldd iinn tthhee yyeeaarr)) aanndd iinnsstteeaadd hhaass cclloossiinngg iinnvveennttoorriieess ((wwhhiicchh aarree ccaarrrriieedd ffoorrwwaarrdd aass ccuurrrreenntt aasssseettss ttoo bbee ssoolldd iinn tthhee ffoolllloowwiinngg yyeeaarr)) aanndd tthhaatt ppuurrcchhaasseess hhaavvee ttrraannssffeerrrreedd ttoo ccoosstt ooff ssaalleess.. TThhee aapppprrooaacchh iiss aass ffoolllloowwss:: (cid:127) (cid:127) CCaallccuullaattee tthhee vvaalluuee ooff cclloossiinngg iinnvveennttoorriieess ((sseeee bbeellooww)).. (cid:127) (cid:127) PPrreeppaarree tthhee yyeeaarr--eenndd jjoouurrnnaallss ffoorr ooppeenniinngg iinnvveennttoorriieess,, ppuurrcchhaasseess aanndd cclloossiinngg iinnvveennttoorriieess ((sseeee aabboovvee)) aanndd eenntteerr tthhee jjoouurrnnaallss aass aaddjjuussttmmeenntt ttoo tthhee iinniittiiaall TTBB.. WWoorrkkeedd eexxaammppllee:: AAddjjuussttiinngg tthhee iinniittiiaall ttrriiaall bbaallaannccee ffoorr iinnvveennttoorriieess SSaamm ss MMuussiicc SShhoopp iinniittiiaall ttrriiaall bbaallaannccee aass aatt 3311 DDeecceemmbbeerr 2200XX55 iiss aass ffoolllloowwss:: LLeeddggeerr bbaallaannccee IInniittiiaall ttrriiaall bbaallaannccee DDeebbiitt CCrreedditit CCaasshh aatt bbaannkk 55,,112233 OOppeenniinngg ccaappiittaall 1100,,000000 LLooaann 1122,,000000 NNoonn--ccuurrrreenntt aasssseettss 2200,,000000 TTrraaddee ppaayyaabblleess 66,,880000 EExxppeennsseess 1122,,778855 PPuurrcchhaasseess 1188,,442255 SSaalleess 3388,,774455 TTrraaddee rreecceeiivvaabblleess 33,,554466 --- Trang 213 --- IInnvveennttoorriieess aatt 11 ..11 .,XX55 88,,775544 DDrraawwiinnggss 99,,115588 7722,,666688 7722,,666688 CClloossiinngg Iinnvveennttoorriieess aatt 3311 DDeecceemmbbeerr 2200XX55 ccoosstt 11 33,,885555.. RReeqquuiirreemmeenntt AAddjjuusstt SSaamm ss iinniittiiaall ttrriiaall bbaallaannccee ttoo rreefflleecctt cclloossiinngg iinnvveennttoorriieess aanndd ccaallccuullaattee hhiiss nneett pprrooffiitt ffoorr tthhee yyeeaarr.. SSoolluuttiioonn TThhee ffiirrsstt sstteepp iinn aaddjjuussttiinngg tthhee ttrriiaall bbaallaannccee iiss ttoo pprreeppaarree tthhee rreelleevvaanntt jjoouurrnnaall eennttrriieess aass ffoolllloowwss:: PPrreeppaarree tthhee jjoouurrnnaall eennttrryy ttoo ttrraannssffeerr ooppeenniinngg iinnvveennttoorriieess ttoo ccoosstt ooff ssaalleess:: DDEEBBIITT CCoosstt ooff ssaalleess 88,,775544 CCRREEDDIITT IInnvveennttoorriieess ((ooppeenniinngg)) 88,,775544 RReeccoorrddiinngg ooppeenniinngg iinnvveennttoorriieess aass aa ccoommppoonneenntt ooff ccoosstt ooff ssaalleess PPrreeppaarree tthhee jjoouurrnnaall eennttrryy ttoo ttrraannssffeerr ppuurrcchhaasseess ttoo ccoosstt ooff ssaalleess:: DDEEBBIITT CCoosstt ooff ssaalleess 1188,,442255 CCRREEDDIITT PPuurrcchhaasseess 1188,,442255 RReeccoorrddiinngg ppuurrcchhaasseess aass aa ccoommppoonneenntt ooff ccoosstt ooff ssaalleess PPrreeppaarree tthhee jjoouurrnnaall eennttrryy ffoorr cclloossiinngg iinnvveennttoorryy:: DDEEBBIITT IInnvveennttoorriieess ((cclloossiinngg)) 1133,,885555 CCRREEDDIITT CCoosstt ooff ssaalleess 1133,,885555 RReeccoorrddiinngg cclloossiinngg iinnvveennttoorriieess aass aann aasssseett aatt tthhee yyeeaarr eenndd NNeexxtt,, yyoouu sshhoouulldd aaddjjuusstt tthhee iinniittiiaall ttrriiaall bbaallaannccee ttoo ttaakkee aaccccoouunntt ooff tthheessee jjoouurrnnaallss aanndd ccaallccuullaattee tthhee ffiinnaall ttrriiaall bbaallaannccee.. SSaamm ss ffiinnaall ttrriiaall bbaallaannccee wwiillll bbee aass ffoolllloowwss:: LLeeddggeerr bbaallaannccee IInniittiiaall ttrriiaall bbaallaannccee AAddjjuussttmmeennttss FFiinnaall ttrriiaall bbaallaannccee DDeebbiitt CCrreeddiitt DDeebbiitt CCrreeddiitt DDeebbiitt CCrreeddiitt CCaasshh aatt bbaannkk 55,,112233 55,,112233 OOppeenniinngg ccaappiittaall 1100,,000000 1100,,000000 LLooaann 1122,,000000 1122,,000000 NNoonn--ccuurrrreenntt aasssseettss 2200,,000000 2200,,000000 TTrraaddee ppaayyaabblleess 66,,880000 66,,880000 EExxppeennsseess 1122,,778855 1122,,778855 PPuurrcchhaasseess 1188,,442255 1188,,442255 SSaalleess 3388,,774455 3388,,774455 TTrraaddee rreecceeiivvaabblleess 33,,554466 33,,554466 --- Trang 214 --- IInnvveennttoorriieess 88,,775544 1133,,885555 88,,775544 1133,,885555 DDrraawwiinnggss 99,,115588 99,,115588 1188,,442255 CCoosstt ooff ssaalleess 88,,775544 1133,,885555 1133,,332244 7722,,666688 7722,,666688 4411,,003344 4411,,003344 7722,,666688 72,668 FFiinnaallllyy,, tthhee eexxtteennddeedd ttrriiaall bbaallaannccee ccaann bbee uusseedd ttoo pprreeppaarree tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. SSaamm ss MMuussiicc SShhoopp SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee yyeeaarr eennddeedd 3311 DDeecceemmbbeerr 2200XX55 RReevveennuuee 3388,,774455 CCoosstt ooff ssaalleess ((1133,,332244)) GGrroossss pprrooffiitt 2255,,442211 EExxppeennsseess ((1122,,778855)) NNeett pprrooffiitt 1122,,663366 NNoottee tthhaatt tthhee ccoosstt ooff ssaalleess bbaallaannccee ccoommpprriisseess tthhee ooppeenniinngg iinnvveennttoorriieess ppuurrcchhaasseess -- cclloossiinngg iinnvveennttoorriieess,, ccoonnssiisstteenntt wwiitthh tthhee ccaallccuullaattiioonn iinnttrroodduucceedd pprreevviioouussllyy.. SSaamm ss MMuussiicc SShhoopp SSttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt 33 11 DDeecceemmbbeerr 2200XX55 AASSSSEETTSS NNoonn--ccuurrrreenntt aasssseettss 2200,,000000 CCuurrrreenntt aasssseettss IInnvveennttoorriieess 1133,,885555 TTrraaddee rreecceeiivvaabblleess 33,,554466 1177,,440011 TToottaall aasssseettss 3377,,440011 CCAAPPIITTAALL AANNDD LLIIAABBIILLIITTIIEESS OOppeenniinngg ccaappiittaall 1100,,000000 PPrrooffiitt ffoorr yyeeaarr 1122,,663366 DDrraawwiinnggss ((99,,115588)) CClloossiinngg ccaappiittaall 1133,,447788 NNoonn--ccuurrrreenntt lliiaabbiilliittiieess BBaannkk llooaann 1122,,000000 CCuurrrreenntt lliiaabbiilliittiieess TTrraaddee ppaayyaabblleess 66,,880000 BBaannkk oovveerrddrraafftt 55,,112233 1111,,992233 TToottaall ccaappiittaall aanndd lliiaabbiilliittiieess 3377,,440011 --- Trang 215 --- 55 CC oo uu nn tt ii nn gg ii nn vv ee nn tt oo rr ii ee ss B J SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TThhee iinnvveennttoorryy ccoouunntt eessttaabblliisshheess qquuaannttiittiieess hheelldd iinn iinnvveennttoorryy aatt tthhee eenndd ooff tthhee rreeppoorrttiinngg ppeerriioodd.. BBuussiinneessss ttrraaddiinngg iiss aa ccoonnttiinnuuoouuss aaccttiivviittyy,, bbuutt ffiinnaanncciiaall ssttaatteemmeennttss mmuusstt bbee ddrraawwnn uupp aatt aa ppaarrttiiccuullaarr ddaattee.. IInn 1 pprreeppaarriinngg aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn iitt iiss nneecceessssaarryy ttoo ffrreeeezzee tthhee aaccttiivviittyy ooff aa bbuussiinneessss ssoo aass ttoo ddeetteerrmmiinnee iittss aasssseettss,, ccaappiittaall aanndd lliiaabbiilliittiieess aatt tthhaatt ggiivveenn mmoommeenntt.. TThhiiss iinncclluuddeess eessttaabblliisshhiinngg tthhee qquuaannttiittiieess ooff iinnvveennttoorriieess hheelldd.. IInn vveerryy ssmmaallll bbuussiinneesssseess,, wwhheenn aa bbuussiinneessss hhoollddss eeaassiillyy ccoouunntteedd aanndd rreellaattiivveellyy ssmmaallll aammoouunnttss ooff iinnvveennttoorryy,, qquuaannttiittiieess ooff iinnvveennttoorriieess hheelldd aatt tthhee ddaattee ooff tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ccaann bbee ddeetteerrmmiinneedd bbyy pphhyyssiiccaallllyy ccoouunnttiinngg tthheemm iinn aann iinnvveennttoorryy ccoouunntt.. IItt iiss mmoorree lliikkeellyy,, hhoowweevveerr,, tthhaatt aa bbuussiinneessss wwiillll hhoolldd ccoonnssiiddeerraabbllee qquuaannttiittiieess ooff vvaarriieedd iinnvveennttoorryy aanndd wwiillll uussee iittss ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm ttoo mmaaiinnttaaiinn ccoonnttiinnuuoouuss iinnvveennttoorryy rreeccoorrddss.. TThhiiss mmeeaannss tthhaatt tthhee aaccccoouunnttiinngg ssyysstteemm kkeeeeppss aa rreeccoorrdd ffoorr eeaacchh lliinnee ooff iinnvveennttoorryy iitteemm,, sshhoowwiinngg ppuurrcchhaasseess aanndd iissssuueess ffrroomm tthhee ssttoorreess,, aanndd aa rruunnnniinngg ttoottaall.. AA ffeeww iinnvveennttoorryy lliinnee iitteemmss aarree ccoouunntteedd eeaacchh ddaayy ttoo mmaakkee ssuurree tthhee rreeccoorrddss aarree ccoorrrreecctt -- tthhiiss iiss 11 ccaalllleedd aa ccoonnttiinnuuoouuss ccoouunntt bbeeccaauussee iitt iiss sspprreeaadd oouutt oovveerr tthhee rreeppoorrttiinngg ppeerriioodd rraatthheerr tthhaann ccoommpplleetteedd iinn oonnee ccoouunntt aatt aa ddeessiiggnnaatteedd ttiimmee.. OOnnccee tthhee qquuaannttiittyy ooff iinnvveennttoorriieess iiss ddeetteerrmmiinneedd tthheenn aa ppoolliiccyy iiss rreeqquuiirreedd ffoorr vvaalluuiinngg tthhee iinnvveennttoorryy.. 66 VV aa ll uu ii nn gg ii nn vv ee nn tt oo rr ii ee ss B SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) IInnvveennttoorryy iiss vvaalluueedd aatt tthhee lloowweerr ooff ((hhiissttoorriiccaall)) ccoosstt ooff ppuurrcchhaassee,, aanndd nneett rreeaalliissaabbllee vvaalluuee ((NNRRVV)).. (cid:127) (cid:127) NNRRVV iiss tthhee eexxppeecctteedd sseelllliinngg pprriiccee lleessss aannyy ccoossttss ttoo bbee iinnccuurrrreedd iinn aacchhiieevviinngg tthhaatt ssaallee.. (cid:127) (cid:127) CCoosstt ccoommpprriisseess:: ppuurrcchhaassee pprriiccee,, ddeelliivveerryy,, iimmppoorrtt ttaaxxeess aanndd dduuttiieess,, aanndd ccoonnvveerrssiioonn ccoossttss ttoo bbrriinngg tthhee iitteemm ttoo iittss pprreesseenntt llooccaattiioonn aanndd ccoonnddiittiioonn.. 66..11 BBaassiicc vvaalluuaattiioonn:: lloowweerr ooff ccoosstt aanndd NNRRVV IInnvveennttoorryy iiss nnoorrmmaallllyy vvaalluueedd aatt iittss hhiissttoorriiccaall ccoosstt ((tthhee ccoosstt aatt wwhhiicchh tthhee iinnvveennttoorryy wwaass oorriiggiinnaallllyy bboouugghhtt)).. TThhee oonnllyy ttiimmee wwhheenn ((hhiissttoorriiccaall)) ccoosstt iiss nnoott uusseedd iiss wwhheenn ccoosstt nneeeeddss ttoo bbee rreedduucceedd ttoo nneett rreeaalliissaabbllee vvaalluuee ((tthhee eexxppeecctteedd sseelllliinngg pprriiccee,, lleessss aannyy ccoossttss ssttiillll ttoo bbee iinnccuurrrreedd iinn ggeettttiinngg tthhee iinnvveennttoorryy rreeaaddyy ffoorr ssaallee aanndd iinn mmaakkiinngg tthhee ssaallee)).. IInn aaccccoorrddaannccee wwiitthh IIAASS 22,, iinnvveenntotoryry sshhoouulldd bbee vvaalluueedd aatt tthhee lloowweerr ooff ccoosstt aanndd nneett rreeaalliissaabbllee vvaalluuee.. 0 PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAppppllyyiinngg jjuuddggeemmeenntt TThhee aaccccoouunnttaanntt mmuusstt aappppllyy jjuuddggeemmeenntt iinn ddeetteerrmmiinniinngg tthhee eexxppeecctteedd sseelllliinngg pprriiccee aanndd aannyy ccoossttss tthhaatt aarree ssttiillll ttoo bbee iinnccuurrrreedd.. TThheeyy wwiillll uussee iinnffoorrmmaattiioonn ssuucchh aass ppaasstt ssaalleess ooff ssiimmiillaarr pprroodduuccttss aanndd aannyy kknnoowwnn uuppccoommiinngg pprroommoottiioonnss ttoo aarrrriivvee aatt eessttiimmaatteedd sseelllliinngg pprriiccee aanndd wwiillll bbee rreeqquuiirreedd ttoo aaddjjuusstt tthhiiss iinnffoorrmmaattiioonn ttoo rreefflleecctt ccuurrrreenntt ccoonnddiittiioonnss.. CCoonntteexxtt eexxaammppllee:: LLoowweerr ooff ccoosstt aanndd NNRRVV AA ttrraaddeerr bbuuyyss aann iitteemm ooff iinnvveennttoorryy ccoossttiinngg 110000.. TThhee iitteemm ccaann uussuuaallllyy bbee ssoolldd ffoorr 114400.. TThhee ttrraaddeerr iinnccuurrss 55 ooff sseelllliinngg eexxppeennsseess ffoorr eeaacchh iitteemm ssoolldd.. NNooww ssuuppppoossee tthhaatt tthhee mmaarrkkeett sslluummppss aanndd tthhee eexxppeecctteedd sseelllliinngg pprriiccee iiss 9900.. TThhee iitteemm ss NNRRVV iiss tthheenn ((9900 -- 55)) 8855 aanndd tthhee bbuussiinneessss wwiillll mmaakkee aa lloossss ooff 11 5 5 (( 1100 00 -- 8855)) oonn tthhee iitteemm.. AAsssseettss sshhoouulldd nnoott bbee oovveerrssttaatteedd,, ssoo tthhee ssoo lloossss wwiillll bbee rreeccooggnniisseedd bbyy vvaalluuiinngg tthhee iitteemm iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aatt iittss NNRRVV ooff 8855.. --- Trang 216 --- 66..22 AAppppllyyiinngg tthhee lloowweerr ooff ccoosstt aanndd NNRRVV IIff aa bbuussiinneessss hhaass mmaannyy iinnvveennttoorryy iitteemmss oonn hhaanndd tthhee ccoommppaarriissoonn ooff ccoosstt aanndd NNRRVV sshhoouulldd bbee ccaarrrriieedd oouutt ffoorr eeaacchh iitteemm sseeppaarraatteellyy.. IItt iiss nnoott ssuuffffiicciieenntt ttoo ccoommppaarree tthhee ttoottaall ccoosstt ooff aallll iinnvveennttoorryy iitteemmss wwiitthh tthheeiirr ttoottaall NNRRVV,, uunnlleessss tthhee iitteemmss aarree iinntteerrcchhaannggeeaabbllee ssuucchh aass nnuuttss oorr bboollttss.. CCoonntteexxtt eexxaammppllee:: VVaalluuiinngg eeaacchh iinnvveennttoorryy iitteemm sseeppaarraatteellyy AA ccoommppaannyy hhaass ffoouurr iitteemmss ooff iinnvveennttoorryy aatt tthhee eenndd ooff iittss rreeppoorrttiinngg ppeerriioodd.. TThheeiirr ccoossttss aanndd NNRRVVss aarree aass ffoolllloowwss:: LLoowweerr ooff IInnvveennttoorryy iitteemm CCoosstt NNRRVV ccoosstt//NNRRVV 11 2277 3322 2277 22 1144 88 88 33 4433 5555 4433 44 2299 4400 2299 111133 113355 110077 IItt wwoouulldd bbee iinnccoorrrreecctt ttoo ccoommppaarree ttoottaall ccoosstt (( 1111 33)) wwiitthh ttoottaall NNRRVV (( 11 3355)) aanndd ttoo ssttaattee iinnvveennttoorriieess aatt 11 1 1 33 iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. TThhee ccoommppaannyy ccaann ffoorreesseeee aa lloossss ooff 66 oonn iitteemm 22 aanndd tthhiiss sshhoouulldd bbee rreeccooggnniisseedd iimmmmeeddiiaatteellyy.. IIff tthhee ffoouurr iitteemmss aarree ttaakkeenn ttooggeetthheerr iinn ttoottaall tthhee lloossss oonn iitteemm 22 iiss mmaasskkeedd bbyy tthhee aannttiicciippaatteedd pprrooffiittss oonn tthhee ootthheerr iitteemmss.. BByy ppeerrffoorrmmiinngg tthhee ccoosstt//NNRRVV ccoommppaarriissoonn ffoorr eeaacchh iitteemm sseeppaarraatteellyy tthhee aapppprroopprriiaattee vvaalluuaattiioonn ooff 11 0077 ccaann bbee ddeerriivveedd.. TThhiiss iiss tthhee vvaalluuee wwhhiicchh sshhoouulldd aappppeeaarr iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAssssiimmiillaattiningg aanndd uussiinngg iinnffoorrmmaattiioonn AAnn aaccccoouunnttaanntt wwiillll uussee iinnffoorrmmaattiioonn ffrroomm vvaarriioouuss ssoouurrcceess ttoo ddeetteerrmmiinnee tthhee NNRRVV ooff iinnvveennttoorryy.. IItt iiss iimmpporotarntat nt ttoo eessttaabblliisshh nnoott jjuusstt tthhee eexxppeecctteedd sseelllliinngg pprriiccee ffoorr tthhee ggooooddss bbuutt aallssoo tthhee ccoosstt ooff mmaakkiinngg tthhoossee ssaalleess,, ssuucchh aass aannyy ccoommmmiissssiioonn ttoo bbee ppaaiidd ttoo ssaalleess ssttaaffff oorr aannyy ddeelliivveerryy ccoossttss ttoo bbee iinnccuurrrreedd.. TThhee vvaalluuaattiioonn ooff iinnvveennttoorryy iiss aann aarreeaa iinn wwhhiicchh tthheerree iiss ppootteennttiiaallllyy ssccooppee ffoorr mmaanniippuullaattiioonn ooff tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. IInnvveennttoorryy iimmppaaccttss oonn tthhee ccaarrrryyiinngg aammoouunntt ooff aasssseettss aanndd oonn ggrroossss aanndd nneett pprrooffiitt.. IIff aa bbuussiinneessss iiss uunnddeerr pprreessssuurree ttoo iinnccrreeaassee iittss aasssseett vvaalluuee oorr rreeppoort rt ssttrroonngg pprrooffiittss,, ppeerrhhaappss ttoo sseeccuurree bbaannkk ffuunnddiinngg oorr ttoo aacchhiieevvee ttaarrggeettss,, iitt wwiillll wwaanntt ttoo aavvooiidd wwrriittiinngg iinnvveennttoorryy ddoowwnn bbeellooww iittss ccoosstt.. PPrrooffeessssiioonnaall aaccccoouunnttaannttss mmuusstt eennssuurree tthhaatt tthhee NNRRVV hhaass bbeeeenn ccoorrrreeccttllyy ddeetteerrmmiinneedd aanndd tthhaatt tthhee lloowweerr ooff ccoosstt aanndd NNRRVV pprriinncciippllee iiss aaddhheerreedd ttoo.. IInntteerraaccttiivvee qquueessttiioonn 55 :: IInnvveennttoorryy vvaalluuaattiioonn TThhee ffoolllloowwiinngg ffiigguurreess rreellaattee ttoo iinnvveennttoorryy hheelldd aatt tthhee eenndd ooff tthhee rreeppoortirntgi ng ppeerriioodd.. IItteemm IItteemm IItteemm AA BB CC CCoosstt 2200 99 1144 SSeelllliinngg pprriiccee 3300 1122 2222 MMooddiiffiiccaattiioonn ccoosstt ttoo eennaabbllee ssaallee 22 88 SSeelllliinngg ccoossttss 77 22 22 UUnniittss hheelldd 220000 115500 330000 RReeqquuiirreemmeenntt CCaallccuullaattee tthhee vvaalluuee ooff iinnvveennttoorryy ffoorr iinncclluussiioonn iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss.. --- Trang 217 --- 66..33 DDeetteerrmmiinniinngg tthhee ccoosstt ooff iinnvveennttoorryy IInnvveennttoorriieess mmaayy bbee:: (cid:127) (cid:127) rraaww mmaatteerriiaallss oorr ccoommppoonneennttss bboouugghhtt ffrroomm ssuupppplliieerrss (cid:127) (cid:127) ffiinniisshheedd ggooooddss wwhhiicchh hhaavvee bbeeeenn mmaaddee bbyy tthhee bbuussiinneessss bbuutt nnoott yyeett ssoolldd (cid:127) (cid:127) ppaarrtt ccoommpplleetteedd iitteemmss (cid:127) (cid:127) ggooooddss ppuurrcchhaasseedd aanndd hheelldd ffoorr rreessaallee DDeeffiinniittiioonnss CCoosstt ooff iinnvveennttoorriieess:: AAllll ccoossttss ooff ppuurrcchhaassee,, ooff ccoonnvveerrssiioonn ((eegg,, llaabboouurr)) aanndd ooff ootthheerr ccoossttss iinnccuurrrreedd iinn bbrriinnggiinngg tthhee iitteemmss ttoo tthheeiirr pprreesseenntt llooccaattiioonn aanndd ccoonnddiittiioonn.. CCoosstt ooff ppuurrcchhaassee:: TThhee ppuurrcchhaassee pprriiccee,, iimmppoorrtt dduuttiieess aanndd ootthheerr nnoonn--rreeccoovveerraabbllee ttaaxxeess,, ttrraannssppoorrtt,, hhaannddlliinngg aanndd ootthheerr ccoossttss ddiirreeccttllyy aattttrriibbuuttaabbllee ttoo tthhee aaccqquuiissiittiioonn ooff ffiinniisshheedd ggooooddss aanndd mmaatteerriiaallss.. 66..33.1.1 WWhhaatt iiss iinncclluuddeedd iinn tthhee ttoottaall ccoosstt ooff aann iitteemm ooff iinnvveennttoorryy TThhee ttoottaall ccoosstt ooff aann iitteemm ooff iinnvveennttoorryy iinncclluuddeess aallll ccoossttss iinnccuurrrreedd iinn bbrriinnggiinngg tthhee iitteemm ttoo iittss pprreesseenntt llooccaattiioonn aanndd ccoonnddiittiioonn.. TThhiiss ccoonnssiissttss ooff:: (cid:127) (cid:127) tthhee ppuurrcchhaassee ccoosstt ooff rraaww mmaatteerriiaallss (cid:127) (cid:127) ddeelliivveerryy iinnwwaarrddss (cid:127) (cid:127) iimmppoorrtt ttaaxxeess aanndd dduuttiieess (cid:127) (cid:127) ccoonnvveerrssiioonn ccoossttss DDeeffiinniittiioonn CCoonnvveerrssiioonn ccoossttss:: AAnnyy ccoossttss iinnvvoollvveedd iinn ccoonnvveerrttiinngg rraaww mmaatteerriiaallss iinnttoo ffiinnaall pprroodduucctt,, iinncclluuddiinngg llaabboouurr,, eexxppeennsseess ddiirreeccttllyy rreellaatteedd ttoo tthhee pprroodduucctt aanndd aann aapppprroopprriiaattee sshhaarree ooff pprroodduuccttiioonn oovveerrhheeaaddss ((bbuutt nnoott ssaalleess,, aaddmmiinniissttrraattiivvee oorr ggeenneerraall oovveerrhheeaaddss)).. CCoonntteexxtt eexxaammppllee:: CCoosstt ooff mmaannuuffaaccttuurreedd ggooooddss AA bbuussiinneessss hhaass tthhee ffoolllloowwiinngg ddeettaaiillss rreellaattiinngg ttoo pprroodduuccttiioonn aanndd ssaalleess ffoorr aa rreeppoorrttiinngg ppeerriioodd:: SSaalleess:: 990000 uunniittss aatt 660000 eeaacchh 11,,000000 uunniittss aarree pprroodduucceedd wwiitthh tthhee ffoolllloowwiinngg ccoossttss bbeeiinngg iinnccuurrrreedd:: OOppeenniinngg iinnvveennttoorryy ooff rraaww mmaatteerriiaallss:: 220000 uunniittss aatt 11 0000 eeaacchh PPuurrcchhaasseess ooff rraaww mmaatteerriiaallss:: 11 ,,005500 uunniittss aatt 110000 eeaacchh CClloossiinngg iinnvveennttoorryy ooff rraaww mmaatteerriiaallss:: 225500 uunniittss aatt 11 0000 eeaacchh PPrroodduuccttiioonn wwaaggeess 115500,,000000 PPrroodduuccttiioonn oovveerrhheeaaddss 110000,,000000 GGeenneerraall aaddmmiinniissttrraattiioonn,, sseelllliinngg aanndd ddiissttrriibbuuttiioonn ccoossttss 11 0000,,000000 TThhee ccoosstt ooff pprroodduuccttiioonn sshhoouulldd iinncclluuddee aann aapppprroopprriiaattee sshhaarree ooff pprroodduuccttiioonn wwaaggeess aanndd pprroodduuccttiioonn oovveerrhheeaaddss,, bbuutt nnoott nnoonn--pprroodduuccttiioonn eexxppeennsseess.. TThhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ooff tthhiiss bbuussiinneessss ffoorr tthhee rreeppoorrttiinngg ppeerriioodd iiss aass ffoolllloowwss:: SSaalleess ((990000 uunniittss xx 660000)) 554400,,000000 CCoosstt ooff pprroodduuccttiioonn ((11,, 000000 uunniittss)) IInnvveennttoorriieess OOppeenniinngg iinnvveennttoorryy ((220000 xx 110000)) 2200,,000000 PPuurrcchhaasseess ((11,, 005500 xx 110000)) 110055,,000000 --- Trang 218 --- LLeessss cclloossiinngg iinnvveennttoorryy ((225500 xx 110000)) ((2255,,000000)) CCoosstt ooff rraaww mmaatteerriiaallss uusseedd 110000,,000000 PPrroodduuccttiioonn wwaaggeess 115500,,000000 PPrroodduuccttiioonn oovveerrhheeaaddss 110000,,000000 CCoosstt ooff pprroodduuccttiioonn ((11,, 000000 uunniittss ccoosstt 335500,,000000//11,, 000000 335500 eeaacchh)) 335500,,000000 LLeessss cclloossiinngg iinnvveennttoorryy,, ffiinniisshheedd ggooooddss ((11 0000 xx 335500)) ((3355,,000000)) CCoosstt ooff ssaalleess ((331155,,000000)) GGrroossss pprrooffiitt 222255,,000000 GGeenneerraall aaddmmiinniissttrraattiioonn,, sseelllliinngg aanndd ddiissttrriibbuuttiioonn ccoossttss ((110000,,000000)) NNeett pprrooffiitt 112255,,000000 TThhee ccoosstt ooff pprroodduuccttiioonn iiss sspprreeaadd oovveerr tthhee uunniittss pprroodduucceedd.. AAnnyy uunnssoolldd uunniittss aarree vvaalluueedd aatt aa ffiigguurree tthhaatt rreefflleeccttss aa sshhaarree ooff tthheessee ccoossttss.. WWhheenn tthhee iinnvveennttoorryy iiss eevveennttuuaallllyy ssoolldd,, tthhee pprroodduuccttiioonn oovveerrhheeaaddss aassssoocciiaatteedd wwiitthh iittss mmaannuuffaaccttuurree wwiillll bbee tthheerreebbyy pprrooppeerrllyy mmaattcchheedd wwiitthh tthhee rreevveennuueess eeaarrnneedd.. 66..33..22 WWhhaatt iiss tthhee ttoottaall ccoosstt ooff iitteemmss lleefftt iinn iinnvveennttoorryy AA bbuussiinneessss mmaayy bbee ccoonnttiinnuuaallllyy aaddddiinngg iitteemmss ttoo ffiinniisshheedd ggooooddss iinnvveennttoorryy oorr ppuurrcchhaassiinngg aa ppaarrttiiccuullaarr ccoommppoonneenntt.. AAss eeaacchh ccoonnssiiggnnmmeenntt iiss rreecceeiivveedd ffrroomm ssuupppplliieerrss,, oorr eeaacchh ffiinniisshheedd ggooooddss bbaattcchh iiss aaddddeedd ttoo iinnvveennttoorryy,, tthheeyy aarree ssttoorreedd iinn tthhee aapppprroopprriiaattee ppllaaccee,, wwhheerree tthheeyy wwiillll bbee mmiinngglleedd wwiitthh iitteemmss aallrreeaaddyy tthheerree.. TThheessee ggooooddss aarree ccoonnssiiddeerreedd iinntteerrcchhaannggeeaabbllee iinn tthhaatt tthhee ssttoorreekkeeeeppeerr wwoouulldd nnoott ddiissttiinngguuiisshh bbeettwweeeenn iitteemmss wwhheenn tthheeyy iissssuuee iitteemmss ttoo pprroodduuccttiioonn oorr ttoo ddeessppaattcchh.. TThheeyy wwiillll ssiimmppllyy ppuullll oouutt tthhee nneeaarreesstt iitteemm ttoo hhaanndd,, wwhhiicchh mmaayy hhaavvee aarrrriivveedd iinn tthhee llaatteesstt ccoonnssiiggnnmmeenntt//bbaattcchh,, iinn aann eeaarrlliieerr ccoonnssiiggnnmmeenntt//bbaattcchh oorr iinn sseevveerraall ddiiffffeerreenntt ccoonnssiiggnnmm eennttss//bbaattcchheess.. TThheerree aarree sseevveerraall tteecchhnniiqquueess wwhhiicchh aarree uusseedd iinn pprraaccttiiccee ttoo aattttrriibbuuttee aa ccoosstt ttoo iinntteerrcchhaannggeeaabbllee iinnvveennttoorryy iitteemmss;; rreemmeemmbbeerr tthhaatt aaccttuuaall mmaatteerriiaallss,, ccoommppoonneennttss aanndd ffiinniisshheedd ggooooddss iitteemmss ccaann bbee iissssuueedd iinn aannyy oorrddeerr iirrrreessppeeccttiivvee ooff wwhheenn eeaacchh oonnee eenntteerreedd iinnvveennttoorryy.. DDeeffiinniittiioonnss FFIIFFOO ((ffiirrsstt iinn,, ffiirrsstt oouutt)):: IItteemmss aarree aassssuummeedd ttoo bbee uusseedd iinn tthhee oorrddeerr iinn wwhhiicchh tthheeyy aarree rreecceeiivveedd ffrroomm ssuupppplliieerrss,, ssoo oollddeesstt iitteemmss aarree iissssuueedd ffiirrsstt.. IInnvveennttoorryy rreemmaaiinniinngg iiss tthheerreeffoorree tthhee nneewweerr iitteemmss aanndd ccoosstt iiss mmeeaassuurreedd aass ssuucchh.. LLIIFFOO ((llaasstt iinn,, ffiirrsstt oouutt)):: IItteemmss iissssuueedd aarree aassssuummeedd ttoo bbee ppaartr t ooff tthhee mmoosstt rreecceenntt ddeelliivveerryy,, wwhhiillee oollddeesstt ccoonnssiiggnnmmeennttss aarree aassssuummeedd ttoo rreemmaaiinn iinn tthhee ssttoorreess.. LLIIFFOO iiss nnoott aalllloowweedd uunnddeerr IIFFRRSS AAccccoouunntitningg SSttaannddaarrddss aanndd iitt nnoott ccoonnssiiddeerreedd ffuurrtthheerr iinn AAccccoouunnttiinngg.. AAVVCCOO ((aavveerraaggee ccoosstt)):: AAss ppuurrcchhaassee pprriicceess ccaann cchhaannggee wwiitthh eeaacchh nneeww ccoonnssiiggnnmmeenntt rreecceeiivveedd,, tthhee aavveerraaggee ccoosstt ooff aann iitteemm iiss ccoonnssttaannttllyy cchhaannggiinngg.. EEaacchh iitteemm aatt aannyy mmoommeenntt iiss aassssuummeedd ttoo hhaavvee bbeeeenn ppuurrcchhaasseedd aatt tthhee aavveerraaggee pprriiccee ooff aallll tthhee iitteemmss ttooggeetthheerr,, ssoo tthhee ccoosstt ooff iinnvveennttoorryy rreemmaaiinniinngg iiss tthheerreeffoorree ccaallccuullaatteedd aatt tthhee mmoosstt rreecceenntt aavveerraaggee pprriiccee.. IInn tthhee eexxaamm yyoouu mmaayy bbee aasskkeedd ttoo uussee tthhee FFIIFFOO oorr AAVVCCOO mmeetthhoodd ttoo ddeetteerrmmiinnee tthhee ccoosstt ooff iinnvveenntotoryry iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aanndd tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAppppllyyiinngg jjuuddggeemmeenntt TThhee aaccccoouunnttaanntt mmuusstt uussee pprrooffeessssiioonnaall jjuuddggeemmeenntt ttoo ddeetteerrmmiinnee wwhhiicchh iinnvveennttoorryy ccoosstt eessttiimmaattiioonn tteecchhnniiqquuee ttoo uussee.. TThhee ddeecciissiioonn mmaaddee wwiillll iimmppaacctt oonn tthhee rreeppoorrtteedd pprrooffiitt aanndd tthhee ccaarrrryyiinngg aammoouunntt ooff iinnvveennttoorryy iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss aanndd iiss tthheerreeffoorree aann iimmppoorrttaanntt mmaatttteerr.. YYoouu mmaayy bbee aasskkeedd ttoo ccoommmmeenntt oonn tthhee iimmppaacctt ooff ddiiffffeerreenntt ccoosstt eessttiimmaattiioonn tteecchhnniiqquueess oonn pprrooffiitt.. WWoorrkkeedd eexxaammppllee:: FFIIFFOO aanndd AAVVCCOO TToo iilllluussttrraattee tthhee FFIIFFOO aanndd AAVVCCOO mmeetthhooddss ooff ccaallccuullaattiinngg tthhee ccoosstt ooff iinnvveennttoorryy,, tthhee ffoolllloowwiinngg ttrraannssaaccttiioonnss wwiillll bbee uusseedd.. --- Trang 219 --- TTrraannssaaccttiioonnss dduurriinngg MMaayy 2200XX77 QQuuaanntittiyty UUUUnnnniiiitttt ccccoooosssstttt TToottaall ccoosstt UUnniittss OOppeenniinngg bbaallaannccee 11 MMaayy 110000 22..0000 220000 GGooooddss iinn 33 MMaayy 440000 22..1100 884400 GGooooddss oouutt 44 MMaayy 220000 GGooooddss iinn 99 MMaayy 330000 2.12 663366 GGooooddss oouutt 11 11 MMaayy 440000 GGooooddss iinn 11 88 MMaayy 110000 22..4400 224400 GGooooddss oouutt 2200 MMaayy 110000 CClloossiinngg bbaallaannccee 3311 MMaayy 220000 11,,991166 GGooooddss iinn mmeeaannss ggooooddss aarree rreecceeiivveedd iinnttoo ssttoorree.. GGooooddss oouutt rreepprreesseennttss tthhee iissssuuee ooff ggooooddss ffrroomm ssttoorree iiee,, tthhee ccoosstt ooff ggooooddss ssoolldd.. TThhee pprroobblleemm iiss wwiitthh ppuuttttiinngg aa ffiigguurree oo nn tthhee ffoolllloowwiinngg:: ((11)) tthhee ccoosstt ooff ggooooddss ssoolldd ((22)) tthhee ccoosstt ooff cclloossiinngg iinnvveennttoorryy NNoottee:: FFoorr aa mmaannuuffaaccttuurreerr tthhee ccoosstt ooff ggooooddss ssoolldd iiss tthhee ccoosstt ooff rraaww mmaatteerriiaallss pplluuss ccoossttss ooff ccoonnvveerrttiinngg tthhoossee mmaatteerriiaallss iinn tthhee ffiinnaall pprroodduucctt.. HHooww wwoouulldd ccoosstt ooff ggooooddss ssoolldd aanndd cclloossiinngg iinnvveennttoorryy bbee mmeeaassuurreedd uussiinngg:: RReeqquuiirreemmeennttss 11 FFIIFFOO 22 AAVVCCOO SSoolluuttiioonn 11 FFIIFFOO aassssuummeess tthhaatt ggooooddss aarree iissssuueedd oouutt ooff iinnvveennttoorryy iinn tthhee oorrddeerr iinn wwhhiicchh tthheeyy wweerree ddeelliivveerreedd iinnttoo iinnvveennttoorryy iiee,, tthhee ccoosstt ooff ggooooddss ssoolldd iiss ddeeeemmeedd ttoo bbee aatt tthhee ccoosstt ooff tthhee eeaarrlliieesstt ddeelliivveerryy rreemmaaiinniinngg iinn iinnvveennttoorryy,, aanndd tthhee ccoosstt ooff iinnvveennttoorryy iiss tthhaatt ooff tthhee mmoosstt rreecceenntt ppuurrcchhaasseess.. TThhee ccoosstt ooff ggooooddss ssoolldd aanndd ooff cclloossiinngg iinnvveennttoorryy uussiinngg FFIIFFOO wwoouulldd bbee aass ffoolllloowwss:: NNuummbbeerr ooff uunniittss ssoolldd CCoosstt ooff uunniittss DDaattee ((ggooooddss oouutt)) ssoolldd TToottaall ccoosstt 44 MMaayy 220000 110000 aatt 22..0000 220000 110000 aatt 22..1100 221100 220000 441100 1111 MMaayy 440000 330000 aatt 22..1100 663300 110000 aatt 22..1122 221122 440000 884422 2200 MMaayy 110000 110000 aatt 22..1122 221122 11,,446644 CClloossiinngg iinnvveennttoorryy 220000 110000 aatt 22..1122 221122 110000 aatt 22..4400 224400 220000 445522 11,,991166 --- Trang 220 --- NNoottee tthhaatt tthhee ccoosstt ooff ggooooddss ssoolldd pplluuss tthhee ccoosstt ooff tthhee cclloossiinngg iinnvveennttoorryy eeqquuaallss tthhee ccoosstt ooff ppuurrcchhaasseess pplluuss tthhee ccoosstt ooff ooppeenniinngg iinnvveennttoorryy (( 11,, 99116 6)).. 22 AAVVCCOO mmaayy bbee uusseedd iinn vvaarriioouuss wwaayyss iinn ccoossttiinngg iinnvveennttoorryy iissssuueess.. TThhee mmoosstt ccoommmmoonn iiss tthhee ccuummuullaattiivvee wweeiigghhtteedd aavveerraaggee pprriicciinngg mmeetthhoodd iilllluussttrraatteedd bbeellooww.. (cid:127) (cid:127) AA wweeiigghhtteedd aavveerraaggee ccoosstt ffoorr aallll uunniittss iinn iinnvveennttoorryy iiss ccaallccuullaatteedd.. TThhee ccoosstt ooff iitteemmss ssoolldd iiss ccaallccuullaatteedd aatt tthhiiss aavveerraaggee ccoosstt,, aanndd tthhee bbaallaannccee ooff iinnvveennttoorryy rreemmaaiinniinngg hhaass tthhee ssaammee uunniitt ccoosstt.. (cid:127) (cid:127) AA nneeww wweeiigghhtteedd aavveerraaggee ccoosstt iiss ccaallccuullaatteedd wwhheenneevveerr aa nneeww ddeelliivveerryy ooff ggooooddss iinn iiss rreecceeiivveedd.. SSoolldd TToottaall CCoosstt ooff iinnvveennttoorryy RReecceeiivveedd ((ggooooddss ggooooddss DDaattee ((ggooooddss iinn)) oouutt)) BBaallaannccee ccoosstt UUnniitt ccoosstt ssoolldd UUnniittss UUnniittss UUnniittss OOppeenniinngg iinnvveennttoorryy 110000 220000 22..0000 33 MMaayy 440000 884400 22..1100 550000 11,,004400 22..0088 44 MMaayy 220000 ((441166)) 22..0088 441166 330000 662244 22..0088 99 MMaayy 330000 663366 22..1122 660000 11,,226600 22..1100 1111 MMaayy 440000 ((884400)) 22..1100 884400 220000 442200 22..1100 11 88 MMaayy 110000 224400 22..4400 330000 666600 22..2200 2200 MMaayy 110000 ((222200)) 22..2200 222200 11,,447766 CClloossiinngg iinnvveennttoorryy ccoosstt 220000 444400 22..2200 444400 11,,991166 AA nneeww uunniitt ccoosstt iiss ccaallccuullaatteedd wwhheenneevveerr mmoorree ggooooddss aarree ppuurrcchhaasseedd.. WWhheenneevveerr ggooooddss aarree ssoolldd,, tthhee uunniitt ccoosstt ooff tthhee iitteemmss ssoolldd iiss tthhee ccuurrrreenntt wweeiigghhtteedd aavveerraaggee ccoosstt ppeerr uunniitt aatt tthhee ttiimmee ooff tthhee ssaallee.. FFoorr tthhiiss mmeetthhoodd ttoooo,, tthhee ccoosstt ooff ggooooddss ssoolldd pplluuss tthhee ccoosstt ooff cclloossiinngg iinnvveennttoorryy eeqquuaallss tthhee ccoosstt ooff ppuurrcchhaasseess pplluuss tthhee ccoosstt ooff ooppeenniinngg iinnvveennttoorryy (( 11,, 991166 )).. 66..44 IInnvveennttoorryy ccoosstt mmeetthhoodd aanndd pprrooffiitt FFIIFFOO aanndd AAVVCCOO eeaacchh pprroodduucceedd ddiiffffeerreenntt ccoossttss,, bbootthh ooff cclloossiinngg iinnvveennttoorriieess aanndd aallssoo ooff ccoosstt ooff ggooooddss ssoolldd.. SSiinnccee rraaww mmaatteerriiaall ccoossttss aaffffeecctt tthhee ccoosstt ooff pprroodduuccttiioonn,, aanndd tthhee ccoosstt ooff pprroodduuccttiioonn wwoorrkkss tthhrroouugghh eevveennttuuaallllyy iinnttoo tthhee ccoosstt ooff ssaalleess,, iitt ffoolllloowwss tthhaatt ddiiffffeerreenntt mmeetthhooddss ooff iinnvveennttoorryy vvaalluuaattiioonn wwiillll pprroovviiddee ddiiffffeerreenntt pprrooffiitt ffiigguurreess.. --- Trang 221 --- 77 UUssiinngg mmaarrkk--uupp//mmaarrggiinn ppeerrcceennttaaggeess tt oo eessttaabblliisshh ccoosstt B SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) MMaarrkk--uupp iiss ccaallccuullaatteedd oonn ccoosstt (cid:127) (cid:127) MMaarrggiinn iiss ccaallccuullaatteedd oonn ssaalleess.. (cid:127) (cid:127) MMaarrggiinn aanndd mmaarrkk--uupp ccaann hheellpp uuss ttoo eessttaabblliisshh tthhee ccoosstt ooff aann iitteemm ooff iinnvveennttoorryy.. IItt iiss ccoommmmoonn ttoo eessttaabblliisshh ssttaannddaarrdd ggrroossss pprrooffiitt ppeerrcceennttaaggeess iinn rreellaattiioonn ttoo ccoosstt ttoo sseett tthhee ssaalleess pprriiccee:: (cid:127) (cid:127) IInnvveennttoorryy tthhaatt ccoosstt 112200 mmaayy bbee ssoolldd aatt aa mmaarrggiinn ooff 4400%%,, ssoo tthhee ssaalleess vvaalluuee iiss 112 2 00 xx 11 0000//6600 220000,, aanndd tthhee pprrooffiitt iiss 112200 xx 4400//6600 8800.. (cid:127) (cid:127) IInnvveennttoorryy tthhaatt ccoosstt 112200 mmaayy bbee ssoolldd aatt aa mmaarrkk--uupp ooff 4400%% ttoo rreeaacchh aa ssaalleess pprriiccee ooff 11 6688 ((11 22 00 xx 11 4400//1100 00)).. TThheessee ssttaannddaarrdd ppeerrcceennttaaggeess ccaann bbee sseett oouutt aass ffoolllloowwss,, uussiinngg tthhee aabboovvee aass aann eexxaammppllee:: MMaarrggiinn oonn ssaalleess MMaarrkk--uupp oonn ccoosstt ((ssaalleess iiss tthhee 11 0000%% ffiigguurree)) ((ccoosstt iiss tthhee 11 0000%% ffiigguurree)) % % % % SSaalleess 110000 220000 112200 xx 110000//6600 114400 116688 112200 xx 114400//110000 CCoosstt ((6600)) ((112200)) ((110000)) 112200 GGrroossss pprrooffiitt 4400 8800 112200 xx 4400//6600 4400 4488 112200 xx 4400//110000 PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: SSttrruuccttuurriinngg pprroobblleemmss aanndd ssoolluuttiioonnss IInn tthhee eexxaamm,, yyoouu mmaayy bbee ffaacceedd wwiitthh aa qquueessttiioonn iinn wwhhiicchh tthhee iinnvveennttoorryy iiss nnoott kknnoowwnn oorr hhaass bbeeeenn rreeccoorrddeedd iinnccoorrrreeccttllyy.. YYoouu ccaann uussee ggrroossss pprrooffiitt ppeerrcceennttaaggeess iinn oorrddeerr ttoo ddeetteerrmmiinnee tthhee ccoorrrreecctt aammoouunntt ooff iinnvveennttoorryy aatt tthhee eenndd ooff aa rreeppoortirntgi ng ppeerriioodd.. IInntteerraaccttiivvee qquueessttiioonn 66:: MMaarrkk--uupp aanndd mmaarrggiinn AA bbuussiinneessss hhaass iinnvveennttoorriieess wwiitthh aa ttoottaall sseelllliinngg pprriiccee ooff 11, ,000000.. RReeqquuiirreemmeenntt WWhhaatt iiss tthhee ccoosstt ooff tthhee cclloossiinngg iinnvveennttoorryy aassssuummiinngg tthhee bbuussiinneessss ooppeerraatteess:: ((11)) oonn aa mmaarrggiinn ooff 2255%% ((22)) oonn aa mmaarrkk--uupp ooff 2255%% 88 IInnvveennttoorryy ddrraawwiinnggss SSeeccttiioonn oovveerrvviieeww WWhheenn aann oowwnneerr ttaakkeess iinnvveennttoorryy ffoorr tthheeiirr oowwnn uussee,, iitt mmuusstt bbee rreeccoorrddeedd aass aa ddrraawwiinnggss:: ddeebbiitt ddrraawwiinnggss,, ccrreeddiitt ccoosstt ooff ssaalleess.. --- Trang 222 --- 8.1 Inventory drawings If an owner takes items of inventory from the business as drawings, we do not need to adjust opening or closing inventory at all. Instead, we reduce the cost of sales with the cost of items withdrawn. DEBIT Drawings CREDIT Cost of sales Professional skills focus: Structuring problems and solutions It is important that inventory drawings are correctly recorded as drawings rather than an inventory write-off in order for the financial statements to show a true and fair view. You should be alert to questions which say that inventory has been used or removed from the business by the owner and ensure you account for it as a drawing. Summary Accounting for inventories Opening inventory: Purchases: Closing inventory: DR Cost of sales (statement DR Cost of sales (statement DR Inventory (statement of of profit or loss) of financial position) financial position) CR Inventory (statement of CR Purchases CR Cost of sales (statement financial position) of profit or loss) Accounting for inventories Opening inventory: Purchases: Closing inventory: DR Cost of sales (statement DR Cost of sales (statement DR Inventory (statement of of profit or loss) of financial position) financial position) CR Inventory (statement of CR Purchases CR Cost of sales (statement financial position) of profit or loss) Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 223 --- Confirm your learning 1 How is cost of sales calculated (Topic 2) 2 What is the journal entry to record opening inventory in cost of sales (Topic 3) 3 What is the difference between a periodic and continuous stock count (Topic 5) 4 What are the acceptable cost estimation techniques under IAS 2 (Topic 7) 5 If the margin is 20%, what is the mark-up (Topic 7) 2 Chapter Self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Cost of sales and inventories chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you d i d not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move o n to the next chapter. Self-test questions Answer the following questions. 1 Which of the following is the correct calculation for cost of sales A Sales - purchases B Opening inventory purchases closing inventory delivery inwards C Opening inventory purchases - closing inventory delivery inwards D Sales - opening inventory - purchases closing inventory - delivery inwards 2 Cost of sales is 1 4,000. Purchases for the period are 1 4,000, delivery inwards is 1, 000, delivery outwards is 1, 500 and closing inventory is 1 3,000. What was the opening inventory figure A 10,500 B 11,500 C 12,000 D 13,000 3 Give three reasons why inventory might have to be written off. --- Trang 224 --- 4 Carlisle has the following inventory movements during May. Units Opening inventory 40 2 May - Goods in 60 10 1 0 May - Goods out 50 1 5 May - Goods in 70 1 8 May - Goods out 45 24 May - Goods in 80 Requirement Assuming that the business calculates the cost of inventory on a FIFO basis, what will be the cost of closing inventory at the end of the month 1,700 1,705 5 A trader used the LIFO method to calculate the cost of inventory at the end of July at 3,11 0. Sales and purchases in July were as follows: Date Purchases (units) Sales (units) 3 July 1 00 at 20/unit 6 July 80 1 0 July 40 15 July 50 at 22/unit 22 July 20 27 July 80 at 25/unit The opening inventory at 1 July was 50 units valued at 1 5 per unit. The trader needs to adopt the FIFO method. Requirement What is the effect of this change on the trader s profit A 190 decrease B 420 decrease C 420 increase D 190 increase --- Trang 225 --- 6 The inventory records for Simmons last month were as follows: Date Purchases (units) Sales (units) 2 February 500 1 3 February 800 21 February 400 29 February 200 Opening inventory was 600 units valued at 1 2,000. Purchases in February were at 31. 25 per unit. Requirement The total cost of sales in February, using the AVCO method, is (to the nearest ): A 37,000 B 28,000 C 17,625 D 22,000 7 What would be the effect on a business s profit of discovering that inventory with a cost of 1, 250 and a net realisable value of 1,000 had been omitted from the inventory count at the end of the reporting period A An increase of 1, 250 B An increase of 1, 000 C A decrease of 250 D No effect 8 June Ltd has three lines of inventory at the end of its reporting period. X Y Z Original purchase price (per unit) 1.50 6.50 5.00 Estimated future selling price (per unit) 4.25 8.00 3.50 Selling and distribution costs (per unit) 0.75 2.00 0.50 Units in inventory 100 200 250 Requirement What is the carrying amount of inventory in the financial statements at the end of the reporting period A 2,700 B 2,325 C 2,300 D 2,100 9 Brecon manufactures cosmetics and toiletries. It has decided to repackage its body lotion product in new covers and discount the selling price. The details of body lotion are as follows: --- Trang 226 --- Per item Cost of manufacture 2.50 Repackaging cost to be incurred 0.75 Selling price 3.00 Discount o n selling price 10% Requirement At what amount should each item of body lotion be included in inventory A 3.00 B 2.70 C 2.25 D 1.95 1 0 During the reporting period Morgan took items with a selling price of 280 for their own use. Morgan trades at a 40% mark-up and had a draft profit of 1 5,800 before making any adjustments for this matter. The adjusted profit is: A 15,520 B 15,800 C 15,600 D 16,000 1 1 Readlt Co is a book wholesaler. Commission of 4% o n selling price is payable by Readlt Co for each sale. The following information is available in respect of total inventory of three of his most popular titles at the end of his reporting period. Cost Selling Price Henry VIII - Shakespeare 2,280 2,900 Dissuasion - Jane Armstrong-Siddeley 4,080 4,000 Pilgrim s Painful Progress - John Bunion 1,280 1,300 Requirement What is the total carrying amount of these inventories in Readlt Co s statement of financial position A 7,368 B 7,400 C 7,560 D 7,640 12 Jo is a sole trader operating as a tattoo artist from a room in a shared studio space. They pay a fixed rate of 400 per month for the room. The shared studio space has a part-time receptionist who is paid a salary of 1 5,000 per annum. Jo pays the receptionist a fee of 20 for every client the receptionist passes to Jo rather than the other tattoo artists sharing the studio. Jo incurs costs for needles and ink for each client. Jo draws 3,000 per month as a salary. --- Trang 227 --- Requirement Which TWO of the following costs are included in Jo s cost of sales A Room rental costs B Share of receptionist s salary C Client referral fee paid to receptionist D M ate ri aI s costs i n cu rred E Salary drawn by Jo 1 3 Jack had 1 00 litres of foam liquid at 1 October 20X2, purchased at 3 per litre. During the month to 31 October 20X2 the following changes occurred. Cost per Date Quantity litre (litres) Purchases 7 October 20X2 200 2.50 1 4 October 20X2 300 3.00 21 October 20X2 50 4.00 28 October 20X2 100 3.50 650 Issues 4 October 20X2 80 1 1 October 20X2 70 1 8 October 20X2 250 25 October 20X2 200 600 Requirement Calculate the cost of Jack s closing inventory of foam liquid at 31 October 20X2 using the FIFO basis and the AVCO basis. Cost of closing inventory: FIFO basis AVCO basis Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. --- Trang 228 --- Answers t o Interactive questions Answer to Interactive question 1 Grand Union Food Stores Statement of profit or loss (extract) for the year ended 31 December 20X6 Revenue 80,000 Opening inventories 6,000 Add purchases 50,000 Less closing inventories (12,500) Cost of sales (43,500) Gross profit 36,500 Answer to Interactive question 2 Staff member Hourly cost ( ) Hours incurred Labour cost ( ) Partner 100 1 100 Manager 40 2 80 Student accountant 20 14 280 Total 460 The direct labour cost to be included in cost of sales is calculated by applying the hourly cost to the number of hours incurred to the period end. Note that the hourly cost is the cost to ABC Accountants of the staff members gross salary, employers national insurance and any other employee costs. It is not the same as the amount charged to the client, which will include a profit element. Answer to Interactive question 3 DEBIT Expenses 64,500 CREDIT Purchases 64,500 Being cost of destroyed inventory DEBIT Other receivables (64,500 x 60%) 38,700 CREDIT Other income 38,700 Being insurance claim --- Trang 229 --- Answer to Interactive question 4 DEBIT Cost of sales 23,490 CREDIT Inventory (opening) 23,490 Clearing opening inventory to cost of sales DEBIT Inventory (closing) 40,285 CREDIT Cost of sales 40,285 Recording closing inventory as an asset at the end of the reporting period Answer to Interactive question 5 Item Cost NRV Lower of cost/NRV Quantity Total value Units A(NRV: 3 0 - 7 ) 20 23 20 200 4,000 B(NRV: 1 2 - 2 - 2 ) 9 8 8 150 1,200 C(NRV: 2 2 - 8 - 2 ) 14 12 12 300 3,600 8,800 Answer to Interactive question 6 % Sales 100 1,000 COS (75) (750) 1,000 x 75/100 GP 25 250 If the business operates at a margin of 25%, the cost of the inventory is 750. % Sales 125 1,000 COS (100) (800) 1,000 x 100/125 GP 25 200 If the business operates at a mark-up of 25%, the cost of the inventory is 800. --- Trang 230 --- AAnnsswweerrss tt oo SSeellff--tteesstt qquueessttiioonnss 11 CC OOppeenniinngg iinnvveennttoorryy ppuurrcchhaasseess -- cclloossiinngg iinnvveennttoorryy ddeelliivveerryy iinnwwaarrddss OOppeenniinngg iinnvveennttoorryy ppuurrcchhaasseess -- cclloossiinngg iinnvveennttoorryy ddeelliivveerryy iinnwwaarrddss ccoosstt ooff ssaalleess 22 CC 1122,,000000 OOppeenniinngg iinnvveennttoorryy vvaalluuee ((bbaallaanncciinngg ffiigguurree)) 11 22,,000000 AAdddd ppuurrcchhaasseess ((iinncc.. ddeelliivveerryy iinnwwaarrddss)) 11 55,,000000 2277,,000000 LLeessss cclloossiinngg iinnvveennttoorryy ((1133,,000000)) CCoosstt ooff ggooooddss ssoolldd 11 44,,000000 IIff yyoouu ppiicckkeedd AA,, tthheenn yyoouu wwrroonnggllyy iinncclluuddeedd ddeelliivveerryy oouuttwwaarrddss iinn ccoosstt ooff ggooooddss ssoolldd.. IIff yyoouu cchhoossee BB,, tthheenn yyoouu uusseedd tthhee ddeelliivveerryy oouuttwwaarrddss iinnsstteeaadd ooff tthhee ddeelliivveerryy iinnwwaarrddss ffiigguurree iinn yyoouurr ccaallccuullaattiioonnss.. WWiitthh DD,, yyoouu iiggnnoorreedd ddeelliivveerryy iinnwwaarrddss aanndd oouuttwwaarrddss aallttooggeetthheerr.. 33 GGooooddss aarree ssttoolleenn oorr lloosstt GGooooddss aarree ddaammaaggeedd GGooooddss aarree oobbssoolleettee 44 CC 11,,770000 CClloossiinngg iinnvveennttoorryy 4400 6600 -- 5500 7700 -- 4455 8800 11 5555 uunniittss CCoosstt oonn aa FFIIFFOO bbaassiiss DDaattee ooff ppuurrcchhaassee TToottaall ccoosstt UUnniittss ppeerr uunniitt 22 44 MMaayy 8800 1111 888800 1155 MMaayy 7700 1111 777700 22 MMaayy 55 1100 5500 115555 11,,770000 55 DD 119900 iinnccrreeaassee CClloossiinngg iinnvveennttoorryy 5500 110000 5500 8800--8800--4400--2200 114400 uunniittss CClloossiinngg iinnvveennttoorryy uunnddeerr FFIIFFOO --- Trang 231 --- 8800 2255 22,,000000 5500 2222 11,,110000 1100 2200 220000 33,,330000 SSoo pprrooffiitt iiss (( 33,,11 11 00 -- 33,,330000)) 119900 mmoorree uunnddeerr FFIIFFOO 66 BB 2288,,000000 CClloossiinngg iinnvveennttoorryy 660000 880000 -- 550000 -- 440000 -- 220000 330000 uunniittss CCoosstt ooff iinnvveennttoorryy oonn aann AAVVCCOO bbaassiiss DDaattee ooff ppuurrcchhaassee TToottaall ccoosstt UUnniittss ppeerr uunniitt OOppeenniinngg iinnvveennttoorryy 660000 2200..0000 1122,,000000 22 FFeebb ((550000)) 2200..0000 ((1100,,000000)) 110000 22,,000000 1133 FFeebb 880000 3311..2255 2255,,000000 990000 3300..0000 2277,,000000 OOppeenniinngg iinnvveennttoorryy 1122,,000000 PPuurrcchhaasseess ((880000 xx 3311. . 2255)) 2255,,000000 CClloossiinngg iinnvveennttoorryy ((330000 xx 3300..0000)) ((99,,000000)) CCoosstt ooff ssaalleess 2288,,000000 77 BB AAnn iinnccrreeaassee ooff 11,, 000000 IItt sshhoouulldd nnooww bbee iinncclluuddeedd iinn cclloossiinngg iinnvveennttoorryy aatt 11,, 000000 ((lloowweerr ooff ccoosstt aanndd NNRRVV)).. TThhiiss wwiillll iinnccrreeaassee pprrooffiitt bbyy 11,,000000.. 88 DD 22,,110000 LLoowweerr ooff ccoosstt aanndd NNRRVV XX aatt ccoosstt ((110000 xx 11..5500)) 115500 YY aatt NNRRVV ((220000 xx ((88..0000 -- 22..0000)))) 11,, 220000 ZZ aatt NNRRVV ((225500 xx ((33..5500 -- 00..5500)))) 775500 22,,110000 --- Trang 232 --- 99 DD 11..9955 IInnvveennttoorryy vvaalluuaattiioonn -- LLoowweerr ooff:: CCoosstt 22..5500 NNeett rreeaalliissaabbllee vvaalluuee ((sseelllliinngg pprriiccee lleessss ddiissccoouunntt lleessss rreeppaacckkaaggiinngg ccoosstt)) 11..9955 1100 DD 1166,,000000 DDrraafftt pprrooffiitt 1155,,880000 AAdddd bbaacckk:: ddrraawwiinnggss aatt ccoosstt 228800 xx 11 0000//11 4400 220000 1166,,000000 1111 AA 77,,336688 CCoosstt NN RR VV SS PP xx 99 66 %% LLoowweerr ooff ccoosstt aanndd NNRRVV SShhaakkeessppeeaarree 22,,228800 22,,778844 22,,228800 AArrmmssttrroonngg--SSiiddddeelleeyy 44,,008800 33,,884400 33,,884400 BBuunniioonn 11,,228800 11,,224488 11,,224488 77,,336688 1122 AA RRoooomm rreennttaall ccoossttss CC CClliieenntt rreeffeerrrraall ffeeee ppaaiidd ttoo rreecceeppttiioonniisstt DD MMaatteerriiaallss ccoossttss iinnccuurrrreedd TThhee rreeffeerrrraall ffeeee aanndd mmaatteerriiaall ccoossttss aarree iinnccrreemmeennttaall ccoossttss aassssoocciiaatteedd wwiitthh pprroovviiddiinngg ttaattttooooss ttoo cclliieennttss aanndd sshhoouulldd tthheerreeffoorree bbee iinncclluuddeedd iinn ccoosstt ooff ssaalleess.. TThhee ccoosstt ooff rroooomm rreennttaall aanndd tthhee rreecceeppttiioonniisstt ss ssaallaarryy aarree nnoott iinnccrreemmeennttaall ccoossttss aanndd sshhoouulldd nnoott bbee iinncclluuddeedd.. AAss JJoo iiss aa ssoollee ttrraaddeerr,, tthheeiirr ssaallaarryy iiss iinn ffaacctt ddrraawwiinnggss aanndd iiss tthheerreeffoorree nnoott iinncclluuddeedd aass aann eexxppeennssee ooff tthhee bbuussiinneessss.. --- Trang 233 --- CCoosstt ooff cclloossiinngg iinnvveennttoorryy:: 1133 FFIIFFOO bbaassiiss 555500 AAVVCCOO bbaassiiss 550044 AAtt 3311 OOccttoobbeerr 2200XX22 JJaacckk hhaass 11 0000 665500 -- 660000 11 5500 lliittrreess iinn iinnvveennttoorryy FFiirrsstt iinn ffiirrsstt oouut t mmeetthhoodd ((FFIIFFOO)) CClloossiningg iinnvveenntotoryry QQuuaannttiittyy iinn iinnvveenntotoryry AAccqquuiissiittiioonn ddaattee CCoosstt ppeerr lliittrree vvaalluuee ((lliittrreess)) 110000 2288 OOccttoobbeerr 33..5500 335500 5500 2211 OOccttoobbeerr 44..0000 220000 115500 555500 WWeeiigghhtteedd aavveerraaggee ccoosstt ((AAVVCCOO)) AAvveerraaggee ccoosstt ppeerr DDaattee QQuuaannttiittyy CCoosstt ppeerr lliittrree VVaalluuee lliittrree ((lliittrreess)) OOppeenniinngg bbaallaannccee 110000 33..0000 330000 33..0000 44 OOcctt IIssssuuee ((8800)) 33..0000 ((224400)) 2200 6600 33..0000 77 OOcctt PPuurrcchhaassee 220000 22..5500 550000 222200 556600 22..5555 11 11 OOcctt IIssssuuee ((7700)) 22..5555 ((117788)) 115500 338822 22..5555 11 44 OOcctt PPuurrcchhaassee 330000 33..0000 990000 445500 11,,228822 22..8855 11 88 OOcctt IIssssuuee ((225500)) 22..8855 ((771122)) 220000 557700 2211 OOcctt PPuurrcchhaassee 5500 44..0000 220000 225500 777700 33..0088 2255 OOcctt IIssssuuee ((220000)) 33..0088 ((661166)) 5500 115544 2288 OOcctt PPuurrcchhaassee 110000 33..5500 335500 115500 550044 33..3366 CClloossiinngg iinnvveennttoorryy ccoosstt 115500 lliittrreess 33..3366 550044 --- Trang 234 --- CChhaapptteerr 88 IICCAAEEWW II rr rr ee cc oo vv ee rr aa bb ll ee dd ee bb tt ss aa nn dd tt hh ee aa ll ll oo ww aa nn cc ee ff oo rr rr ee cc ee ii vv aa bb ll ee ss IInnttrroodduuccttiioonn LLeeaarrnniinngg oouuttccoommeess SSyyllllaabbuuss lliinnkkss EExxaammiinnaattiioonn ccoonntteexxtt CChhaapptteerr ssttuuddyy gguuiiddaannccee LLeeaarrnniinngg ttooppiiccss 1 IIrrrreeccoovveerraabbllee ddeebbttss 22 TThhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess 33 AAccccoouunnttiinngg ffoorr iirrrreeccoovveerraabbllee ddeebbttss aanndd tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess 44 AAddjjuussttiinngg tthhee iinniittiiaall ttrriiaall bbaallaannccee ffoorr iirrrreeccoovveerraabbllee ddeebbttss aanndd tthhee aalllloowwaannccee :r k ffoorr rreecceeiivvaabblleess r SSuummmmaarryy s. 4 FFuurrtthheerr qquueessttiioonn pprraaccttiiccee 5 SSeellff--tteesstt qquueessttiioonnss i AAnnsswweerrss ttoo IInntteerraaccttiivvee qquueessttiioonnss I I I 3 AAnnsswweerrss ttoo SSeellff--tteesstt qquueessttiioonnss --- Trang 235 --- II nn tt rr oo dd uu cc tt ii oo nn LLeeaarrnniinngg oouuttccoommeess (cid:127) (cid:127) RReeccoorrdd aanndd aaccccoouunntt ffoorr ttrraannssaaccttiioonnss aanndd eevveennttss rreessuullttiinngg iinn iinnccoommee,, eexxppeennsseess,, aasssseettss,, lliiaabbiilliittiieess aanndd eeqquuiittyy iinn aaccccoorrddaannccee wwiitthh tthhee aapppprroopprriiaattee bbaassiiss ooff aaccccoouunnttiinngg aanndd tthhee llaawwss,, rreegguullaattiioonnss aanndd aaccccoouunnttiinngg ssttaannddaarrddss aapppplliiccaabbllee ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) IIddeennttiiffyy tthhee mmaaiinn ccoommppoonneennttss ooff aa sseett ooff ffiinnaanncciiaall ssttaatteemmeennttss aanndd ssppeecciiffyy tthheeiirr ppuurrppoossee aanndd iinntteerrrreellaattiioonnsshhiipp (cid:127) (cid:127) PPrreeppaarree aanndd pprreesseenntt aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn,, ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, ssttaatteemmeenntt ooff cchhaannggeess iinn eeqquuiittyy aanndd ssttaatteemmeenntt ooff ccaasshh fflloowwss ((oorr eexxttrraaccttss)) ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss aanndd ttrriiaall bbaallaannccee iinn aa ffoorrmmaatt wwhhiicchh ssaattiissffiieess tthhee iinnffoorrmmaattiioonn rreeqquuiirreemmeennttss ooff tthhee eennttiittyy SSppeecciiffiicc ssyyllllaabbuuss lleeaarrnniinngg oouuttccoommeess aarree:: 11dd;; 33aa,, cc SSyyllllaabbuuss lliinnkkss TThhee mmaatteerriiaall iinn tthhiiss cchhaapptteerr wwiillll bbee ddeevveellooppeedd ffuurrtthheerr iinn tthhee AAccccoouunnttiinngg mmoodduullee,, aanndd tthheenn iinn PPrrooffeessssiioonnaall LLeevveell FFiinnaanncciiaall AAccccoouunnttiinngg aanndd RReeppoortritnign.g. EExxaammiinnaattiioonn ccoonntteexxtt QQuueessttiioonnss oonn tthhee ttooppiiccss iinn tthhiiss cchhaapptteerr wwiillll bbee sseett aass mmuullttiippllee cchhooiiccee,, mmuullttii--ppaarrtt mmuullttiippllee cchhooiiccee oorr mmuullttiippllee-- rreessppoonnssee qquueessttiioonnss,, ssoommee ooff wwhhiicchh mmaayy iinnvvoollvvee ccaallccuullaattiioonnss.. VVeerryy oofftteenn ddoouubbllee eennttrryy qquueessttiioonnss aarree pphhrraasseedd iinn tteerrmmss ooff pprreeppaarriinngg aa jjoouurrnnaall.. IInn aaddddiittiioonn,, tthhee mmaatteerriiaall ccoovveerreedd iinn tthhiiss cchhaapptteerr mmaayy aallssoo bbee eexxaammiinneedd aass ppaarrtt ooff aa lloonngg ffoorrmm qquueessttiioonn.. IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo:: (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg pprriinncciipplleess bbeehhiinndd aaccccoouunnttiinngg ffoorr iirrrreeccoovveerraabbllee ddeebbttss aanndd tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess (cid:127) (cid:127) iiddeennttiiffyy jjoouurrnnaallss ffoorr wwrriittiinngg ooffff iirrrreeccoovveerraabbllee ddeebbttss,, rreecceeiivviinngg ccaasshh iinn rreessppeecctt ooff ddeebbttss pprreevviioouussllyy wwrriitttteenn ooffff,, aanndd sseettttiinngg uupp oorr aaddjjuussttiinngg tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess (cid:127) (cid:127) ccaallccuullaattee tthhee ccaarrrryyiinngg aammoouunntt iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ffoorr rreecceeiivvaabblleess (cid:127) (cid:127) iiddeennttiiffyy tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aammoouunntt ffoorr iirrrreeccoovveerraabbllee ddeebbttss eexxppeennssee (cid:127) (cid:127) iiddeennttiiffyy tthhee eeffffeeccttss ooff iirrrreeccoovveerraabbllee ddeebbttss aanndd tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess oonn ggrroossss pprrooffiitt aanndd pprrooffiitt ffoorr tthhee ppeerriioodd iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss (cid:127) (cid:127) ssppeecciiffyy hhooww ttoo aaddjjuusstt tthhee iinniittiiaall ttrriiaall bbaallaannccee ttoo ttaakkee aaccccoouunntt ooff iirrrreeccoovveerraabbllee ddeebbttss aanndd tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess CChhaapptteerr ssttuuddyy gguuiiddaannccee UUssee tthhiiss sscchheedduullee aanndd yyoouurr ssttuuddyy ttiimmeettaabbllee ttoo ppllaann tthhee ddaatteess oonn wwhhiicchh yyoouu wwiillll ccoommpplleettee yyoouurr ssttuuddyy ooff tthhiiss chapter. Practical significance SSttuuddyy aapppprrooaacchh EExxaamm aapppprrooaacchh IInntteerraaccttiivvee qquueessttiioonnss IIrrrreeccoovveerraabbllee ddeebbttss AApppprrooaacchh IIrrrreeccoovveerraabbllee ddeebbttss ffrreeqquueennttllyy aappppeeaarr iinn OOnnee ooff tthhee rriisskkss ooff EEnnssuurree yyoouu tthhee oobbjjeeccttiivvee tteesstt sseelllliinngg ggooooddss oonn uunnddeerrssttaanndd tthhaatt aa qquueessttiioonnss aanndd aass aann ccrreeddiitt iiss tthhaatt tthhee ccrreeddiitt wwrriittee--ooffff iiss rreeqquuiirreedd aaddjjuussttmmeenntt iinn tthhee ccuussttoommeerr ffaaiillss ttoo mmaakkee ffoorr iirrrreeccoovveerraabbllee lloonngg--ffoorrmm qquueessttiioonn.. ppaayymmeenntt wwhheenn tthhee ddeebbttss oonnllyy.. CCoovveerr tthhee YYoouu aarree eexxppeecctteedd ttoo iinnvvooiiccee ffaallllss dduuee.. AA wwoorrkkeedd eexxaammppllee bbee aabbllee ttoo pprreeppaarree ddeebbtt tthhaatt wwiillll nnoott bbee ccaarreeffuullllyy.. jjoouurrnnaall eennttrriieess ttoo wwrriittee ccoolllleecctteedd sshhoouulldd bbee ooffff iirrrreeccoovveerraabbllee wwrriitttteenn ooffff.. SSoommeettiimmeess ddeebbttss aanndd ttoo aaccccoouunntt aa ddeebbtt tthhaatt hhaass ffoorr tthhee ccoolllleeccttiioonn ooff aallrreeaaddyy bbeeeenn wwrriitttteenn ddeebbttss pprreevviioouussllyy ooffff iiss ssuubbsseeqquueennttllyy wwrriitttteenn ooffff.. ccoolllleecctteedd,, iinn wwhhiicchh --- Trang 236 --- ccaassee tthhee eeffffeecct t ooff tthhee pprreevviioouuss wwrritiet-eo-ffoff mmuusstt bbee rreevveerrsseedd.. 22 TThhee aalllloowwaannccee ffoorr AApppprrooaacchh TThhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess rreecceeiivvaabblleess iiss aallssoo YYoouu nneeeedd ttoo ffrreeqquueennttllyy eexxaammiinneedd,, AAccccoouunnttiinngg ssttaannddaarrddss uunnddeerrssttaanndd wwhhyy aann oofftteenn aalloonnggssiiddee rreeqquuiirree aann eennttiittyy ttoo eennttiittyy ccrreeaatteess aann iirrrreeccoovveerraabbllee ddeebbttss.. IItt ccoonnssiiddeerr ppaasstt aalllloowwaannccee ffoorr iiss iimmppoorrttaanntt tthhaatt yyoouu iinnffoorrmmaattiioonn aanndd mmaakkee rreecceeiivvaabblleess.. TThheerree iiss ccaann pprreeppaarree tthhee ffuuttuurree pprreeddiiccttiioonnss ttoo qquuiittee aa lloott ooff ddeettaaiill oonn jjoouurrnnaall eennttrryy ttoo rreeccoorrdd aasssseessss hhooww mmuucchh ooff tthhee rreeqquuiirreemmeennttss ooff tthhee aalllloowwaannccee ffoorr tthhee rreecceeiivvaabblleess IIFFRRSS 99,, FFiinnaanncciiaall rreecceeiivvaabblleess aanndd tthhaatt bbaallaannccee iiss nnoott lliikkeellyy ttoo IInnssttrruummeennttss wwhhiicchh yyoouu yyoouu uunnddeerrssttaanndd wwhheerree bbee ccoolllleecctteedd.. AAnn nneeeedd ttoo hhaavvee aa hhiigghh-- iitt iiss pprreesseenntteedd iinn tthhee aalllloowwaannccee iiss ccrreeaatteedd lleevveell uunnddeerrssttaannddiinngg ffiinnaanncciiaall ssttaatteemmeennttss.. iinn tthhee ffiinnaanncciiaall ooff.. ssttaatteemmeennttss iinn rreessppeecctt YYoouu sshhoouulldd lleeaarrnn tthhaatt ooff tthhee aammoouunntt nnoott tthhee jjoouurrnnaall eennttrryy ttoo eexxppeecctteedd ttoo bbee rreeccoorrdd aann aalllloowwaannccee ccoolllleecctteedd iinn tthhee DDOOEESS NNOOTT ddiirreeccttllyy ffuuttuurree.. UUnnlliikkee aann rreedduuccee tthhee iirrrreeccoovveerraabbllee ddeebbtt,, aann rreecceeiivvaabblleess bbaallaannccee.. aalllloowwaannccee rreeqquuiirreess tthhee TThhee rreecceeiivvaabblleess uussee ooff jjuuddggeemmeenntt aanndd aalllloowwaannccee iiss aa eessttiimmaatteess.. sseeppaarraattee nnoommiinnaall lleeddggeerr aaccccoouunntt.. SSttoopp aanndd tthhiinnkk WWhhaatt iinnffoorrmmaattiioonn ccoouulldd aann eennttiittyy uussee wwhheenn ccoonnssiiddeerriinngg hhooww mmuucchh tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess sshhoouulldd bbee 33 AAccccoouunnttiinngg ffoorr AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy IIQQ11 IIrrrreeccoovveerraabbllee iirrrreeccoovveerraabbllee ddeebbttss bbee rreeqquuiirreedd ttoo iiddeennttiiffyy ddeebbttss wwrriitttteenn ooffff TThhiiss iiss aa cchhaannccee ttoo aanndd tthhee aalllloowwaannccee ffoorr jjoouurrnnaallss ffoorr wwrriittiinngg ooffff cchheecckk yyoouu aarree TThhiiss qquueessttiioonn cchheecckkss rreecceeiivvaabblleess iirrrreeccoovveerraabbllee ddeebbttss,, ccoommffoorrttaabbllee wwiitthh tthhee yyoouurr uunnddeerrssttaannddiinngg ooff rreecceeiivviinngg ccaasshh iinn TThhiiss ttooppiicc ssuummmmaarriisseess rreeqquuiirreedd jjoouurrnnaall rreeccoorrddiinngg ttrraannssaaccttiioonnss rreessppeecctt ooff ddeebbttss tthhee jjoouurrnnaall eennttrriieess yyoouu eennttrriieess.. WWoorrkk tthhrroouugghh iinn tthhee ttrraaddee pprreevviioouussllyy wwrriitttteenn ooffff,, hhaavvee aallrreeaaddyy mmeett iinn tthhee eexxaammpplleess aanndd rreecceeiivvaabblleess aanndd aanndd sseettttiinngg uupp oorr TTooppiiccss 11 aanndd 22 iinn ccoommpplleettee tthhee iirrrreeccoovveerraabbllee ddeebbttss aaddjjuussttiinngg tthhee rreessppeecctt ooff IInntteerraaccttiivvee qquueessttiioonnss.. aaccccoouunnttss.. aalllloowwaannccee ffoorr iirrrreeccoovveerraabbllee ddeebbttss SSttoopp aanndd tthhiinnkk IIQQ22 AAlllloowwaannccee ffoorr rreecceeiivvaabblleess.. JJoouurrnnaall aanndd tthhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess eennttrriieess aarree iimmppoorrttaanntt HHooww iiss tthhee ccrreeaattiioonn ooff rreecceeiivvaabblleess.. iinn tthhee oobbjjeeccttiivvee tteesstt aann aalllloowwaannccee ffoorr TThhiiss qquueessttiioonn ggiivveess rreecceeiivvaabblleess ccoonnssiisstteenntt qquueessttiioonnss aanndd tthhee yyoouu aa cchhaannccee ttoo lloonngg--ffoorrmm qquueessttiioonn.. wwiitthh pprroovviiddiinngg aa ttrruuee ccaallccuullaattee tthhee rreeqquuiirreedd aanndd ffaaiirr vviieeww aalllloowwaannccee ffoorr rreecceeiivvaabblleess aanndd ccoonnssiiddeerr tthhee iimmppaacctt ooff tthhee aalllloowwaannccee oonn tthhee SSPPLLaanndd SSEFPP.. --- Trang 237 --- AAddjjuusstitningg tthhee ttrriiaall AApppprrooaacchh YYoouu mmaayy bbee rreeqquuiirreedd bbaallaannccee ffoorr ttoo aaddjjuusstt tthhee iinniittiiaall WWoorrkk tthhrroouugghh tthhee iirrrreeccoovveerraabbllee ddeebbttss ttrriiaall bbaallaannccee ffoorr eexxaammppllee ccaarreeffuullllyy,, aanndd tthhee aalllloowwaannccee ffoorr iirrrreeccoovveerraabbllee ddeebbttss ppaayyiinngg aatttteennttiioonn ttoo rreecceeiivvaabblleess aanndd tthhee aalllloowwaannccee ffoorr wwhheerree tthhee rreecceeiivvaabblleess iinn tthhee YYoouu aallrreeaaddyy kknnooww hhooww iirrrreeccoovveerraabbllee ddeebbtt lloonngg--ffoorrmm qquueessttiioonn.. ttoo pprroocceessss aanndd tthhee aalllloowwaannccee ffoorr YYoouu aarree aallssoo eexxppeecctteedd aaddjjuussttmmeennttss aaggaaiinnsstt rreecceeiivvaabblleess aarree ttoo ssttaattee hhooww tthhee iinniittiiaall ttrriiaall rreeccoorrddeedd.. iirrrreeccoovveerraabbllee ddeebbttss bbaallaannccee.. HHeerree yyoouu SSttoopp aanndd tthhiinnkk aanndd tthhee aalllloowwaannccee ffoorr sshhoouulldd ccoonncceennttrraattee oonn rreecceeiivvaabblleess iimmppaacctt oonn RReemmiinndd yyoouurrsseellff ooff tthhee nneeww lliinnee iitteemm tthhaatt wwhhyy wwee nneeeedd aa tthhee ffiinnaanncciiaall iiss ccrreeaatteedd iinn rreessppeecctt ooff ssttaatteemmeennttss,, iinncclluuddiinngg sseeppaarraattee aaccccoouunntt lliinnee tthhee aalllloowwaannccee aanndd tthhee ffoorr tthhee aalllloowwaannccee ffoorr tthheeiirr eeffffeecctt oonn pprrooffiitt.. iimmppaacctt ooff tthhee wwrriittee ooffff rreecceeiivvaabblleess.. aanndd aalllloowwaannccee oonn pprrooffiitt.. OOnnccee yyoouu hhaavvee wwoorrkkeedd tthhrroouugghh tthhiiss gguuiiddaannccee yyoouu aarree rreeaaddyy ttoo aatttteemmpptt tthhee ffuurrtthheerr qquueessttiioonn pprraaccttiiccee iinncclluuddeedd aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. 11 IIrrrreeccoovveerraabbllee dd ee bb tt ss SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) WWrriittiinngg ooffff aann iirrrreeccoovveerraabbllee ddeebbtt DDEEBBIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee XX CCRREEDDIITT TTrraaddee rreecceeiivvaabblleess XX (cid:127) (cid:127) AAccccoouunnttiinngg ffoorr tthhee rreecceeiipptt ooff ccaasshh iinn rreessppeecctt ooff aa ddeebbtt pprreevviioouussllyy wwrriitttteenn ooffff:: DDEEBBIITT CCaasshh aatt bbaannkk XX CCRREEDDIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee XX (cid:127) (cid:127) TThhee ffaacctt tthhaatt aa ccuussttoommeerr ss ppaayymmeenntt hhaass nnoott bbeeeenn rreecceeiivveedd bbyy tthhee ssppeecciiffiieedd ddaattee ddooeess nnoott aauuttoommaattiiccaallllyy mmeeaann tthhee ccuussttoommeerr ss ddeebbtt sshhoouulldd bbee wwrriitttteenn ooffff.. CCuussttoommeerrss wwhhoo bbuuyy ggooooddss oonn ccrreeddiitt mmiigghhtt ffaaiill ttoo ppaayy ffoorr tthheemm,, ppeerrhhaappss oouutt ooff ddiisshhoonneessttyy,, oorr bbeeccaauussee tthheeyy hhaavvee ggoonnee bbaannkkrruupptt aanndd ccaannnnoott ppaayy,, oorr bbeeccaauussee tthheerree iiss aa ddiissppuuttee bbeettwweeeenn tthhee ppaarrttiieess aabboouutt tthhee aammoouunntt ppaayyaabbllee.. FFoorr oonnee rreeaassoonn oorr aannootthheerr,, aa bbuussiinneessss mmiigghhtt ddeecciiddee ttoo ggiivvee uupp eexxppeeccttiinngg ppaayymmeenntt ooff tthhee ddeebbtt aanndd ttoo wwrriittee iitt ooffff.. DDeeffiinniittiioonnss IIrrrreeccoovveerraabbllee ddeebbtt:: AA ddeebbtt wwhhiicchh iiss nnoott eexxppeecctteedd ttoo bbee ppaaiidd.. WWrriittiinngg ooffff:: CChhaarrggiinngg tthhee ccoosstt ooff tthhee ddeebbtt aaggaaiinnsstt tthhee pprrooffiitt ffoorr tthhee ppeerriioodd.. ..11 WWrriittiinngg ooffff iirrrreeccoovveerraabbllee ddeebbttss WWhheenn aa bbuussiinneessss ddeecciiddeess tthhaatt aa ppaarrttiiccuullaarr ddeebbtt wwiillll nnoott bbee ppaaiidd,, tthhee wwhhoollee aammoouunntt ooff tthhee rreecceeiivvaabbllee iinn qquueessttiioonn iiss wwrriitttteenn ooffff aass aann eexxppeennssee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss:: --- Trang 238 --- Irrecoverable debts expense DEBIT (statement of profit or loss) X Trade receivables (statement of CREDIT financial position) X Irrecoverable debts written off are presented as follows: (cid:127) Revenue is recorded in the statement of profit or loss at the amount expected to be received from the customer, which in most cases is the invoice amount. The sale has been made, an expense has been incurred in making that sale and the gross profit should be recognised. The subsequent failure to collect the debt is a separate administrative matter and does not require revenue to be adjusted. (cid:127) Irrecoverable debts expense is shown as an administrative expense. (cid:127) The receivable is removed from trade receivables. Suppose it is discovered that an invoice for services rendered to a customer for 300 is never going to be paid. The net effect of the way we account for this as follows: Revenue (in the statement of profit or loss) 300 Irrecoverable debts expense (administrative expense) (300) 0 Overall, however, a loss is made on the transaction since the entity has incurred costs in rendering the service, and these will not be recovered. The business has also foregone the profit it could have made on the transaction in selling the good or service to a different customer. When a debt is written off, the value of the receivable as a current asset is zero. It is no longer recognised as an asset because it no longer has the potential to produce economic benefits for the business and therefore does not meet the Conceptual Frame work definition of an asset. Professional skills focus: Assimilating and using information An accountant must use information about its credit customers to determine whether a debt is irrecoverable. This information may be formally provided by the credit customer s liquidator or administrator or may be more generally confirmed by a public notice that the credit customer has entered into administration. 1 .1. 1 Irrecoverable debts written off and subsequently paid An irrecoverable debt which has been written off might be unexpectedly paid. Whether it is paid in the same reporting period or a subsequent period, the entry is: DEBIT Cash at bank X CREDIT Irrecoverable debts expense X We do not need to credit trade receivables as this has already been done when the debt was initially written off. Worked example: Irrecoverable debts subsequently received 1 At 1 December 20X6, Guernsey s financial statements included a trade receivable totalling 500 in respect of its credit customer Alderney. On 31 December 20X6, Guernsey received an email from Alderney s lawyers to advise that it was bankrupt and was unlikely to be able to pay the debt. Requirement Prepare the journal entry to write off the debt of Alderney at 31 December 20X6. 2 On 1 2 February 20X7, Guernsey unexpectedly received a payment of 200 from Alderney in respect of its debt. The payment was accompanied by an email stating that this was the only and final payment that would be made. --- Trang 239 --- RReeqquuiirreemmeenntt PPrreeppaarree tthhee jjoouurrnnaall eennttrryy ttoo rreeccoorrdd tthhee ppaayymmeenntt rreecceeiivveedd.. SSoolluuttiioonn 11 TThhee ddeebbtt iiss wwrriitttteenn ooffff bbyy iinnccrreeaassiinngg iirrrreeccoovveerraabbllee ddeebbttss eexxppeennsseess aanndd rreedduucciinngg ttrraaddee rreecceeiivvaabblleess:: DDEEBBIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee 550000 CCRREEDDIITT TTrraaddee rreecceeiivvaabblleess 550000 22 IIrrrreessppeeccttiivvee ooff tthhee ppeerriioodd iinn wwhhiicchh ppaayymmeennttss aarree rreecceeiivveedd iinn rreessppeecctt ooff ddeebbttss pprreevviioouussllyy wwrriitttteenn ooff,, tthhee jjoouurrnnaall eennttrryy iiss ttoo rreeccoorrdd tthhee rreecceeiipptt ooff ccaasshh aanndd rreedduuccee eexxppeennsseess.. DDEEBBIITT CCaasshh aatt bbaannkk 220000 CCRREEDDIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee 220000 PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: SSttrruuccttuurriinngg pprroobblleemmss aanndd ssoolluuttiioonnss RReecceeiivviinngg aa ppaayymmeenntt iinn rreessppeecctt ooff aa ddeebbtt pprreevviioouussllyy wwrriitttteenn ooffff iiss lliikkeellyy ttoo rreessuulltt aa pprroobblleemm ffoorr tthhee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm aass iitt wwiillll bbee uunnaabbllee ttoo mmaattcchh tthhee ppaayymmeenntt ttoo aa kknnoowwnn ttrraannssaaccttiioonn.. TThhee uunnmmaattcchheedd ppaayymmeenntt wwoouulldd bbee rreeppoorrtteedd oonn aann eexxcceeppttiioonn rreeppoorrtt,, tthhee ddeettaaiillss ooff wwhhiicchh mmaayy bbee pprreesseenntteedd ttoo yyoouu iinn aann eexxaamm qquueessttiioonn.. YYoouu nneeeedd kknnooww hhooww ttoo rreessoollvvee tthhee pprroobblleemm bbyy rreeccoorrddiinngg tthhee ttrraannssaaccttiioonn mmaannuuaallllyy uussiinngg aa jjoouurrnnaall eennttrryy.. 11 ..22 DDiisshhoonnoouurreedd ppaayymmeennttss aanndd iirrrreeccoovveerraabbllee ddeebbttss IIff aa ccuussttoommeerr mmaakkeess aa ppaayymmeenntt tthhaatt iiss nnoott hhoonnoouurreedd bbyy iittss bbaannkk,, wwee mmuusstt rreeiinnssttaattee tthhee ddeebbtt aanndd rreemmoovvee tthhee rreecceeiipptt ooff ccaasshh:: ddeebbiitt ttrraaddee rreecceeiivvaabblleess ((rreeiinnssttaattiinngg tthhee ddeebbtt)) aanndd ccrreeddiitt ccaasshh aatt bbaannkk ((rreemmoovviinngg tthhee 11 rreecceeiipptt )).. TThhiiss mmaayy ooccccuurr iiff tthhee ccuussttoommeerr hhaass ppaaiidd bbuutt tthhee eelleeccttrroonniicc ttrraannssffeerr ooff ffuunnddss iiss nnoott pprroocceesssseedd aass eexxppeecctteedd.. IInn aann eexxaamm qquueessttiioonn,, uunnlleessss yyoouu aarree ssppeecciiffiiccaallllyy ttoolldd ootthheerrwwiissee,, yyoouu sshhoouulldd NNOOTT aauuttoommaattiiccaallllyy ttrreeaatt aa ddiisshhoonnoouurreedd ppaayymmeenntt aass aann iirrrreeccoovveerraabbllee ddeebbtt.. PPaayymmeennttss mmaayy nnoott bbee pprroocceesssseedd oorr,, bbee ddiisshhoonnoouurreedd ffoorr aaddmmiinniissttrraattiivvee rreeaassoonnss tthhaatt hhaavvee nnootthhiinngg ttoo ddoo wwiitthh aa ccuussttoommeerr ss aaccttuuaall iinnaabbiilliittyy ttoo ppaayy iittss ddeebbtt,, ssoo ddoo nnoott pprreessuummee tthhaatt iitt wwiillll nneevveerr bbee ppaaiidd.. 22 TThhee aalllloowwaannccee ffoorr rreecceeiivvaabblleess SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) AA rreecceeiivvaabbllee iiss aa ttyyppee ooff ffiinnaanncciiaall iinnssttrruummeenntt.. IIFFRRSS 99,, FFiinnaanncciiaall Iinnssttrruummeennttss,, rreeqquuiirreess ccoommppaanniieess ttoo ccrreeaattee aann aalllloowwaannccee iinn tthhee ccuurrrreenntt yyeeaarr iinn rreessppeecctt ooff aannyy ppootteennttiiaall ffuuttuurree aammoouunnttss tthhaatt wwiillll nnoott bbee rreeccoovveerreedd ffrroomm ccrreeddiitt ccuussttoommeerrss.. (cid:127) (cid:127) OOnn sseettttiinngg uupp aann aalllloowwaannccee ffoorr rreecceeiivvaabblleess aanndd oonn iinnccrreeaassiinngg aann eexxiissttiinngg aalllloowwaannccee:: DDEEBBIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) XX CCRREEDDIITT AAlllloowwaannccee ffoorr rreecceeiivvaabblleess ((ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX (cid:127) (cid:127) WWhheenn aa ssmmaalllleerr aalllloowwaannccee iiss nneeeeddeedd aatt tthhee eenndd ooff aa ssuubbsseeqquueenntt rreeppoorrttiinngg ppeerriioodd,, tthhee eennttrryy iiss rreevveerrsseedd:: DDEEBBIITT AAlllloowwaannccee ffoorr rreecceeiivvaabblleess XX CCRREEDDIITT IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee XX --- Trang 240 --- A trade receivable is a type of financial asset. IFRS 9, Financial Instruments, requires financial assets to be tested for impairment. For complex financial assets this can be a challenging process but in Accounting you only need to be aware of the simplified approach that applies to trade receivables. IFRS 9 requires a company to look forward and estimate expected future losses on the trade receivables balance (IFRS 9: para. 5.5.1 ). In the exam, if you are required to calculate an allowance for receivables, you will be provided with the probability of non-payment and should use this to calculate the required allowance for receivables. UK GAAP alert In FRS 1 02, trade receivables (trade debtors) should be tested for impairment at the end of each reporting period. If there is objective evidence of impairment, such as a debtor becoming bankrupt or entering into administration, any impairment loss should be recognised in profit or loss immediately. This is a backwards- looking test based on known evidence at the year-end date. There are no forward-looking criteria under FRS 102. Professional skills focus: Applying judgement In practice, determining the allowance for receivables will require significant judgement on behalf of the accountant in order to determine the probability of non-payment. This will involve detailed analysis of the aged receivables listing and determining the probability of non-payment based on industry averages, past trends, known payment issues for specific receivables as well as consideration of changes in the wider economy. Definition Allowance for receivables: An amount in relation to the probability of the non-recovery of debts that reduces the receivables asset to its prudent valuation in the statement of financial position. The allowance is a separate account which is offset against trade receivables, which are shown at the net amount. An allowance for receivables is a provision for the expected credit losses relating to trade receivables. Expected credit losses refers to the amount of trade receivables which may not be collected in future and arises due to the risk that credit customers will default on their debts. The allowance for receivables is less certain than an irrecoverable debt write off and an accountants must use judgement to determine the expected future losses relating to trade receivables. An allowance for receivables is an example of how prudence is applied in the financial statements. By making an allowance for receivables, the business will be more likely to avoid reporting profits which subsequently fail to materialise because some receivables turn out to be irrecoverable. Creating an allowance for receivables has the dual impact of reducing the carrying amount of a business s assets and increasing its expenses, thus reducing profits. Businesses generally want to report a high asset value and strong profits and therefore the creation of an allowance is contrary to this general aim. Because of the level of subjectivity and estimates involved in determining the amount of the allowance, there is increased scope for creative accounting, which would generally seek to understate the amount of the allowance required. (cid:127) When an allowance for receivables is first made, it is charged as an expense (irrecoverable debts expense) in the statement of profit or loss. The other side of the double entry is a credit to a separate account in the statement of financial position, the allowance for receivables. The double entry is: Irrecoverable debts expense (statement of profit or loss - DEBIT administrative expense) X CREDIT Allowance for receivables (statement of financial position) (cid:127) When an allowance for receivables already exists but is subsequently increased, the amount of the increase in allowance is debited to irrecoverable debts expense and credited to the allowance for receivables. (cid:127) When an allowance for receivables already exists but is subsequently reduced, the amount of the decrease in allowance is credited to irrecoverable debts expense and debited to the allowance for receivables. (cid:127) The allowance for receivables is not presented as a separate account in the statement of financial position. Instead, it is net off against trade receivables. --- Trang 241 --- Context example: Allowance for receivables 1 A business commences operations o n 1 July 20X4, and in the twelve months to 30 June 20X5 makes credit sales of 300,000 and writes off irrecoverable debts of 6,000. Cash received from credit customers during the reporting period is 244,000. Credit sales during the reporting period 300,000 Add receivables at 1 July 20X4 0 Total debts owed to the business 300,000 Less cash received from credit customers (244,000) 56,000 Less irrecoverable debts written off (6,000) Trade receivables outstanding at 30 June 20X5 50,000 Of these outstanding trade receivables, an allowance of 1 0% is required to reflect the risk of non-payment of debts. The business accounts for its irrecoverable debts and allowance for receivables as follows: DEBIT Irrecoverable debts expense ( 6,000 5,000) 11,000 CREDIT Allowance for receivables 5,000 Trade receivables 6,000 In the statement of financial position, the value of trade receivables (after the debt write-off, ie, 50,000) must be shown with the allowance for receivables netted off. Total receivables at 30 June 20X5 50,000 Less: allowance for receivables (5,000) Carrying amount in the statement of financial position 45,000 Worked example: Allowance for receivables 2 Corin Driver owns and runs the Aerobic Health Foods Shop which commenced trading o n 1 January 20X1, selling health foods to customers, most of whom make use of a credit facility that Corin offers. (Customers are allowed to purchase u p to 200 of goods o n credit but must repay a certain proportion of their outstanding debt every month.) This credit system initially gives rise to a large number of irrecoverable debts, but experience helps Corin to control them by the third year. Aerobic Health Foods results for the first three years of operations are as follows: Year to 31 December 20X1 Gross profit 27,000 Irrecoverable debts written off 8,000 Debts owed by customers as at 31 December 20X1 40,000 Allowance for receivables 1,000 Other expenses 20,000 --- Trang 242 --- Year to 31 December 20X2 Gross profit 45,000 Irrecoverable debts written off 1 0,000 Debts owed by customers as at 31 December 20X2 50,000 Allowance for receivables 1,250 Other expenses 28,750 Year to 31 December 20X3 Gross profit 60,000 Irrecoverable debts written off 7,000 Debts owed by customers as at 31 December 20X3 30,000 Allowance for receivables 800 Other expenses 32,850 Requirement For each of these three reporting periods, calculate the business s profit for the period, and state the value of trade receivables appearing in the statement of financial position as at 31 December. Solution Aerobic Health Foods Shop Statement of profit or loss for the years ended 31 December 20X1 20X2 20X3 Gross profit 27,000 45,000 60,000 Expenses: Irrecoverable debts written off 8,000 10,000 7,000 Increase/decrease in allowance for receivables 1,000 250 (450) Other expenses 20,000 28,750 32,850 (29,000) (39,000) (39,400) Profit/(loss) for the year (2,000) 6,000 20,600 (cid:127) We calculate the statement of profit or loss amount by: (cid:127) preparing a T-account for the allowance for receivables; (cid:127) carrying down the figure that we require at the end of each reporting period s statement of financial position; and (cid:127) treating the balancing figure in the reporting period as the charge or credit required in the statement of profit o r loss for that reporting period. --- Trang 243 --- ALLOWANCE FOR RECEIVABLES 31.12.X1 Balance c/d 1,000 31.12.X 1 Irrecoverable debts expense 1 ,000 1,000 1,000 1.1.X 2 Balance b/d 1,000 31.1 2.X 2 Irrecoverable debts expense 31.12.X 2 Balance c/d 1,250 (bal fig) 250 1,250 1,250 31. 1 2.X 3 Irrecoverable debts expense (bal fig) 450 1.1.X 3 Balance b/d 1,250 31.12.X3 Balance c/d 800 1,250 1,250 1.1.X 4 Balance b/d 800 Carrying amount of trade receivables in the statement of financial position As at As at As at 31.12.20X1 31.12.20X2 31.12.20X3 Total value of receivables 40,000 50,000 30,000 Less allowance for receivables (1,000) (1,250) (800) Carrying amount in the statement of financial position 39,000 48,750 29,200 3 Accounting for irrecoverable debts and the allowance for receivables M Section overview (cid:127) The irrecoverable debts expense account will be debited with debts written off and with increases in the allowance for receivables. It will be credited with amounts received in respect of debts previously written off, and with reductions in the allowance for receivables. (cid:127) The trade receivables account is only affected when an irrecoverable debt is written off. It is unaffected by accounting entries related to the allowance for receivables. 3.1 Irrecoverable debts written off: ledger accounting entries To recap: (cid:127) When it is decided that a particular debt will not b e paid, the debt is n o longer called a receivable, and becomes an irrecoverable debt. DEBIT Irrecoverable debts expense X CREDIT Trade receivables X --- Trang 244 --- In the receivables ledger, the personal account of the customer whose debt is irrecoverable will also be adjusted to remove the balance that is not expected to be recovered. In a computerised accounting system, when a debt is written off, the trade receivables balance and the customer s personal account in the receivables ledger will be updated simultaneously. (cid:127) At the end of the reporting period, the balance on the irrecoverable debts expense account is transferred to the statement of profit or loss (like all other expense accounts). (cid:127) Where an irrecoverable debt is subsequently recovered, the accounting entries will be as follows: DEBIT Cash at bank X CREDIT Irrecoverable debts expense X Interactive question 1 : Irrecoverable debts written off At 1 October 20X5 a business had total outstanding debts of 8,600. During the 1 2-month reporting period to 30 September 20X6 the following transactions took place: (1) Credit sales 44,000. (2) Payments from credit customers 49,000. (3) Two debts, for 180 and 420, were declared irrecoverable and the customers are no longer purchasing goods from the company. These are to be written off. Requirement Prepare the trade receivables account and the irrecoverable debts expense account for the reporting period. 3.2 Allowance for receivables: ledger accounting entries To recap, the following journal entries are required to record an allowance for receivables: DEBIT Irrecoverable debts expense X CREDIT Allowance for receivables X When preparing the statement of financial position, the credit balance on the allowance for receivables account is deducted from the balance on the trade receivables account (an asset account, therefore a debit balance). In subsequent reporting periods, the allowance for receivables will be adjusted as follows: (cid:127) Carry down the new allowance required in the allowance for receivables account. (cid:127) Calculate the charge or credit to the statement of profit or loss. If the allowance has increased: DEBIT Irrecoverable debts expense X CREDIT Allowance for receivables X With the amount of the increase. If the allowance has decreased: DEBIT Allowance for receivables X CREDIT Irrecoverable debts expense X With the amount of the decrease. Note: An allowance CANNOT be a debit balance, so the maximum amount of any decrease will be to reduce the allowance to nil. --- Trang 245 --- Worked example: Accounting entries for the allowance for receivables 1 Alex has total trade receivables outstanding at 31 December 20X2 of 28,000. They expect that 1 % of these balances may not be collected and wish to make an appropriate allowance. Before now, Alex has not made any allowance for receivables at all. On 31 December 20X3, Alex s trade receivables are 40,000. Alex believes an allowance of 5% needs to be made against trade receivables. Requirements What accounting entries should Alex make on 31 December 20X2 and what is the carrying amount of trade receivables for inclusion in the statement of financial position as at that date 2 What accounting entries should Alex make on 31 December 20X3 and what is the carrying amount of trade receivables for inclusion in the statements of financial position as at that date Solution At 31 December 20X2 1 Alex will make the following entries: DEBIT Irrecoverable debts expense ( 28,000 x 1 %) 280 CREDIT Allowance for receivables 280 In the statement of financial position, trade receivables will be shown net of the allowance for receivables to give a carrying amount as follows: Trade receivables (28,000 - 280) 27,720 At 31 December 20X3 2 Following the procedure described above: ALLOWANCE FOR RECEIVABLES Balance c/d ( 40,000 x 5%) 2,000 Balance b/d 280 Irrecoverable debts expense 1,720 2,000 2,000 So, on calculating the irrecoverable debts expense, Alex will make the following entries: DEBIT Irrecoverable debts expense 1,720 CREDIT Allowance for receivables 1,720 In the statement of financial position, trade receivables will be shown as follows: Trade receivables (40,000 - 2,000) 38,000 Interactive question 2: Allowance for receivables Shown below are the outstanding trade receivables and the probability of non-payment of those trade receivables at the end of each reporting period. --- Trang 246 --- Balance on trade Probability of non- receivables account payment Y/e 28.2.20X6 15,200 2% Y/e 28.2.20X7 17,100 2% Y/e 28.2.20X8 21,400 1% Requirements Requirement For each of the three reporting periods: (1) Calculate the amount of the allowance for receivables. (2) Calculate the charge or credit required to the statement of profit or loss. (3) Calculate the carrying amount of trade receivables that should be presented in the statement of financial position. 4 Adjusting the initial trial balance for irrecoverable debts and the allowance for receivables B Section overview (cid:127) The journal entry to write off an irrecoverable debt is: debit irrecoverable debts expense, credit trade receivables. The debit increases the statement of profit or loss expense; the credit reduces trade receivables at the end of each reporting period. (cid:127) The journal entry to set up or increase an allowance for receivables is: debit irrecoverable debts expense, credit allowance for receivables. The debit increases the statement of profit or loss expense; the credit sets up the allowance to be set against trade receivables in the statement of financial position. So far, we have looked at how irrecoverable debts and the allowance for receivables are calculated and accounted for in the ledger accounts. Because decisions about irrecoverable debts and allowances for receivables are usually made and accounted for after the initial trial balance has been extracted, one way of recording the effect of the decisions is to adjust the initial trial balance using the columnar approach we met in Chapter 5. (cid:127) Calculate the amount of irrecoverable debts expense and the required allowance for receivables. (cid:127) Prepare the journal entries to record the expense and the allowance. (cid:127) Enter these journal entries in the adjustments columns of the trial balance, opening new lines for irrecoverable debts expense and the allowance for receivables if necessary. (cid:127) Add across to prepare the final trial balance. Worked example: Irrecoverable debts, the allowance for receivables a n d the trial balance Harjinder runs a bookshop. Harjinder has extracted the following initial trial balance as at 31 December 20X9: --- Trang 247 --- DR CR Cash at bank 4,391 Opening capital 20,000 Loan 2,000 Non-current assets 30,000 Trade payables 9,642 Irrecoverable debt expense 50 Expenses 3,896 Cost of sales 42,875 Sales 96,475 Trade receivables 8,622 Allowance for receivables 350 Drawings 38,833 Suspense 200 128,667 128,667 Harjinder needs to take account of the following matters: (cid:127) As at the end of the reporting period there is a debt of 695 to be written off. (cid:127) Of the remaining receivables, an allowance totalling 250 is required to reflect the probability of non- payment of debts. (cid:127) During the reporting period, 200 was banked in respect of a debt which had been written off in the reporting period ended 31 December 20X8. Harjinder was unsure of how to record the transaction and therefore posted the cash received to the cash at bank account and credited the suspense account. Requirement Adjust Harjinder s initial trial balance to take account of the above matters and calculate the profit for the reporting period. Solution A debt of 695 is to be written off as irrecoverable. The required allowance for receivables is 250, which is a decrease of 1 00 ( 350 - 250) on the previous year. The 200 cash received relating to the debt previously written off should have been debited to the cash at bank account and credited to the irrecoverable debts expense account (instead of being credited to the suspense account). The adjusting journals are therefore as follows: 1 DEBIT Irrecoverable debts expense 695 CREDIT Trade receivables 695 2 DEBIT Allowance for receivables 100 CREDIT Irrecoverable debts expense 100 3 DEBIT Suspense a/c 200 CREDIT Irrecoverable debts expense 200 --- Trang 248 --- Ledger balance Initial trial balance Adjustments Final trial balance DR CR DR CR DR CR Cash at bank 4,391 4,391 Opening capital 20,000 20,000 Loan 2,000 2,000 Non-current assets 30,000 30,000 Trade payables 9,642 9,642 100 Irrecoverable debt expense 50 695 200 445 Expenses 3,896 3,896 Cost of sales 42,875 42,875 Sales 96,475 96,475 Trade receivables 8,622 695 7,927 Allowance for receivables 350 100 250 Drawings 38,833 38,833 Suspense ______ 200 200 128,667 128,667 995 995 128,367 128,367 The profit for the year can be calculated as: Revenue 96,475 Less: Cost of sales (42,875) Gross profit 53,600 Irrecoverable debts expense (445) Expenses (3,896) Net profit 49,259 --- Trang 249 --- Summary Irrecoverable debts Write off: DR Irrecoverable debts expense (statement of profit or loss) CR Trade receivables (statement of financial position) Cash received re. debt written off: DR Cash at bank (statement of financial position) CR Irrecoverable debts expense (statement of profit or loss) Allowance for receivables Set up an allowance: DR Irrecoverable debts expense (statement of profit or loss) CR Allowance for receivables (statement of financial position - net off trade receivables) ALLOWANCE FOR RECEIVABLES Decrease X Balance b/d X Balance c/d X Increase X Increase an allowance DR Irrecoverable debts expense (statement of profit or loss) CR Allowance for receivables (statement of financial position) Decrease an allowance DR Allowance for receivables (statement of financial position) CR Irrecoverable debts expense (statement of profit or loss) Further question practice Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studies this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 250 --- Confirm your learning 1 Can you state the journal entry that is used to write off an irrecoverable debt (Topic 1 ) 2 How is an unexpected receipt in respect of a debt written off in the previous year accounted for (Topic 1 ) 3 Does the allowance for receivables directly reduce the trade receivables balance What about indirectly (Topic 2) 4 What is the journal entry to reduce an allowance for receivables (Topic 3) 5 What additional line item(s) are required in the trial balance to adjust for irrecoverable debts and the creation of an allowance for receivables (Topic 4) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Irrecoverable debts and allowance for receivables chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you d i d not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move o n to the next chapter. Self-test questions Answer the following questions. 1 An irrecoverable debt arises in which of the following situations A A customer pays part of the account B An invoice is in dispute C The customer goes bankrupt D A receipt in settlement of a trade receivable is dishonoured by the customer s bank 2 An allowance for receivables of 4,000 is required at the end of a reporting period. The allowance for receivables brought forward from the previous period is 2,000. Requirement What is the impact of the allowance for receivables o n profit for the year A Increase by 4,000 B Decrease by 4,000 C Increase by 2,000 D Decrease by 2,000 3 O n 1 January 20X5 Plodd had an allowance for receivables of 1 ,000. During 20X5 Plodd wrote off debts of 600 and was paid 80 by the liquidator of a company whose debts had been written off completely in 20X4. At the end of 20X5 it was decided to adjust the allowance for receivables to 900. --- Trang 251 --- Requirement What is the irrecoverable debts expense in the statement of profit or loss for 20X5 A 420 B 580 C 620 D 780 4 Smith has receivables totalling 1 6,000 after writing off irrecoverable debts of 500 and has an allowance for receivables brought forward of 2,000. Smith wishes to carry forward an allowance for receivables of 800. Requirement What will be the effect o n profit of adjusting the allowance for receivables A 700 decrease B 700 increase C 1 ,200 decrease D 1 ,200 increase 5 At 31 December 20X9 Folland s receivables totalled 1 20,000. Folland wishes to have an allowance for receivables of 3,600, which is 25% higher than it was before. During the year irrecoverable debts of 3,200 were written off and irrecoverable debts (written off three years previously) of 1 50 were recovered. Requirement What is the net charge for irrecoverable debts for the 1 2-month reporting period ended 31 December 20X9 A 720 B 900 C 3,770 D 3,950 6 During the 1 2-month reporting period ended 31 December 20X8, Keele decreased its allowance for receivables by 600. An irrecoverable debt written off in the previous reporting period amounting to 300 was recovered in 20X8. Requirement If the profit for the reporting period after accounting for the above items is 5,000, what was it before accounting forthem A 4,100 B 4,700 C 5,300 D 5,900 --- Trang 252 --- 7 Bodkin had the following balances in its trial balance at 30 June 20X1. Trade receivables 70,000 Irrecoverable debts expense 500 Allowance for receivables at 1 July 20X0 5,000 Bodkin wishes to carry forward at 30 June 20X1 an allowance equal to 1 0% of trade receivables. Requirement What is the irrecoverable debts expense in the statement of profit or loss for the 1 2-month reporting period ended 3 0 June 20X1 A Charge of 2,450 B Credit of 2,450 C Charge of 2,500 D Credit of 2,500 8 Wacko had an allowance for receivables at 1 January 20X0 of 1, 000. It calculates that at 31 December 20X0 an allowance for receivables of 1,500 is required. In addition, 2,000 of debts were written off during the reporting period. Requirement How much should be included in Wacko s statement of profit or loss in relation to irrecoverable debts expense for the 1 2-month reporting period ended 31 December 20X0 A 1,500 B 2,450 2,500 D 2,550 Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this Answers t o Interactive questions Answer to Interactive question 1 TRADE RECEIVABLES Opening balance b/fd 8,600 Cash at bank 49,000 Irrecoverable debts expense (180 Sales 44,000 420) 600 Closing balance c/d 3,000 52,600 52,600 Opening balance b/d 3,000 --- Trang 253 --- IRRECOVERABLE DEBTS EXPENSE Trade receivables 600 Statement of profit or loss 600 600 600 Answer to Interactive question 2 The entries for the three reporting periods are shown below. TRADE RECEIVABLES (EXTRACT) 28.2.20X6 Balance 15,200 28.2.20X7 Balance 17,100 28.2.20X8 Balance 21,400 ALLOWANCE FOR RECEIVABLES Statement of profit or 28.2.20X6 Balance c/d 304 28.2.20X6 loss 304 304 304 28.2.20X7 Balance c/d 342 1.3.20X6 Balance b/d 304 Statement of profit or 28.2.20X7 loss (bal fig) 38 342 342 Statement of profit or 28.2.20X8 loss (bal fig) 128 1.3.20X7 Balance b/d 342 28.2.20X8 Balance c/d 214 342 342 1.3.20X8 Balance b/d 214 Statement of financial position: extract as at 28 February 20X6 20X7 20X8 Current assets Trade receivables (net of allowance for receivables) 14,896 16,758 21,186 --- Trang 254 --- Answers t o Self-test questions 1 C The customer goes bankrupt When a customer becomes bankrupt there is n o money with which to settle the debt, so it must be regarded as being irrecoverable. A customer settling only part of an account, an invoice being in dispute and a receipt being dishonoured by the customer s bank (ie, it being returned unpaid) may all be caused by administrative problems; further analysis of the situation will need to be done before concluding that the debt is irrecoverable. 2 D Decrease by 2,000 The allowance in the statement of financial position needs to be increased by 2,000 to 4,000; this will be a charge in the statement of profit or loss which in turn reduces profit by the same a m o u n t 3 A 420 ALLOWANCE FOR RECEIVABLES Irrecoverable debts expense 100 b/d 1,000 c/d 900 1,000 1,000 IRRECOVERABLE DEBTS EXPENSE Receivables 600 Cash at bank 80 Allowance for receivables 100 Statement of profit o r loss 420 600 600 Alternative working: Impact on profit or loss (expense) / income Debt written off (600) Cash received from debt previously written off 80 Reduction in allowance for receivables (1,000 - 900) 1 00 Total expense in profit or loss (420) --- Trang 255 --- 4 D 1 ,200 increase ALLOWANCE FOR RECEIVABLES IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee 11,,220000 bb//dd 22,,000000 cc//dd 880000 22,,000000 22,,000000 55 CC 33,,777700 IIRRRREECCOOVVEERRAABBLLEE DDEEBBTTSS EEXXPPEENNSSEE RReecceeiivvaabblleess 33,,220000 CCaasshh aatt bbaannkk 115500 AAlllloowwaannccee ffoorr rreecceeiivvaabblleess 772200 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 33,,777700 33,,992200 33,,992200 AALLLLOOWWAANNCCEE FFOORR RREECCEEIIVVAABBLLEESS cc//dd 33,,660000 bb//dd ((33,,660000 xx 110000//112255)) 22,,888800 IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee 772200 33,,660000 33,,660000 AAlltteerrnnaattiivvee wwoorrkkiinngg:: IImmppaacctt oonn pprroofifti t oorr lloossss ((eexxppeennssee)) // iinnccoommee IInnccrreeaassee iinn aalllloowwaannccee ffoorr rreecceeiivvaabblleess ((33,,660000 // 55 )) ((772200)) DDeebbtt wwrriitttteenn ooffff ((33,,220000)) CCaasshh rreecceeiivveedd ffrroomm ddeebbtt pprreevviioouussllyy wwrriitttteenn ooffff 115500 TToottaall eexxppeennssee iinn pprrooffiitt oorr lloossss (3,770) 66 AA 44,,110000 PPrrooffiitt bbeeffoorree iirrrreeccoovveerraabbllee ddeebbttss ((bbaallaanncciinngg ffiigguurree)) 44,,11 0000 AAdddd DDeeccrreeaassee iinn aalllloowwaannccee 660000 AAdddd IIrrrreeccoovveerraabbllee rreeccoovveerreedd 330000 PPrrooffiitt aafftteerr iirrrreeccoovveerraabbllee ddeebbttss 55,,000000 --- Trang 256 --- 77 CC CChhaarrggee ooff 22,,550000 AALLLLOOWWAANNCCEE FFOORR RREECCEEIIVVAABBLLEESS bb//dd 55,,000000 cc//dd ((1100%% xx 7700,,000000)) 77,,000000 IIrrrreeccoovveerraabbllee ddeebbttss eexxppeennssee 22,,000000 77,,000000 77,,000000 IIRRRREECCOOVVEERRAABBLLEE DDEEBBTTSS EEXXPPEENNSSEE bb//dd 550000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 22,,550000 AAlllloowwaannccee ffoorr rreecceeiivvaabblleess 22,,000000 22,,550000 22,,550000 AAlltteerrnnaattiivvee wwoorrkkiinngg:: IImmppaacctt oonn pprroofifti t oorr lloossss ((eexxppeennssee)) // iinnccoommee IIrrrreeccoovveerraabbllee ddeebbtt eexxppeennssee ppeerrTTBB ((550000)) IInnccrreeaassee iinn aalllloowwaannccee ffoorr rreecceeiivvaabblleess ((((1100%% x 7700,,000000)) -- 55,,000000)) ((22,,000000)) TToottaal l eexxppeennssee iinn pprrooffiitt oorr lloossss ((iiee,, aa cchhaarrggee)) ((22,,550000)) 88 CC 22,,550000 IIRRRREECCOOVVEERRAABBLLEE DDEEBBTTSS EEXXPPEENNSSEE AAlllloowwaannccee ffoorr rreecceeiivvaabblleess 550000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 22,,550000 RReecceeiivvaabblleess 22,,000000 22,,550000 22,,550000 --- Trang 257 --- CChhaapptteerr 99 IICCAAEEWW Accccrruuaallss aa nn dd pp rr ee pp aa yy mm ee nn tt ss IInnttrroodduuccttiioonn LLeeaarrnniinngg oouuttccoommeess SSyyllllaabbuuss lliinnkkss EExxaammiinnaattiioonn ccoonntteexxtt CChhaapptteerr ssttuuddyy gguuiiddaannccee LLeeaarrnniinngg ttooppiiccss 11 TThhee pprriinncciippllee bbeehhiinndd aaccccrruuaallss aanndd pprreeppaayymmeennttss 22 AAccccrruuaallss - 33 PPrreeppaayymmeennttss ((pprreeppaaiidd eexxppeennsseess)) 44 AAccccoouunnttiinngg ffoorr aaccccrruuaallss aanndd pprreeppaayymmeennttss . i ft. 55 TThhee aaccccrruuaall pprriinncciippllee aanndd iinnccoommee - KJrm I i I l I I H II 66 AAccccrruuaallss,, pprreeppaayymmeennttss,, aaddvvaanncceess aanndd aarrrreeaarrss aanndd tthhee ttrriiaall bbaallaannccee t l t i SSuummmmaarryy n I I (cid:127) E dr 4 fe n r amwkf FFuurrtthheerr qquueessttiioonn pprraaccttiiccee J : I 1 JBj i IP SSeellff--tteesstt qquueessttiioonnss r t r AAnnsswweerrss ttoo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerrss ttoo SSeellff--tteesstt qquueessttiioonnss --- Trang 258 --- II nn tt rr oo dd uu cc tt ii oo nn LLeeaarrnniinngg oouuttccoommeess (cid:127) (cid:127) RReeccoorrdd aanndd aaccccoouunntt ffoorr ttrraannssaaccttiioonnss aanndd eevveennttss rreessuullttiinngg iinn iinnccoommee,, eexxppeennsseess,, aasssseettss,, lliiaabbiilliittiieess aanndd eeqquuiittyy iinn aaccccoorrddaannccee wwiitthh tthhee aapppprroopprriiaattee bbaassiiss ooff aaccccoouunnttiinngg aanndd tthhee llaawwss,, rreegguullaattiioonnss aanndd aaccccoouunnttiinngg ssttaannddaarrddss aapppplliiccaabbllee ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) IIddeennttiiffyy tthhee mmaaiinn ccoommppoonneennttss ooff aa sseett ooff ffiinnaanncciiaall ssttaatteemmeennttss aanndd ssppeecciiffyy tthheeiirr ppuurrppoossee aanndd iinntteerrrreellaattiioonnsshhiipp (cid:127) (cid:127) PPrreeppaarree aanndd pprreesseenntt aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn,, ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, ssttaatteemmeenntt ooff cchhaannggeess iinn eeqquuiittyy aanndd ssttaatteemmeenntt ooff ccaasshh fflloowwss ((oorr eexxttrraaccttss)) ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss aanndd ttrriiaall bbaallaannccee iinn aa ffoorrmmaatt wwhhiicchh ssaattiissffiieess tthhee iinnffoorrmmaattiioonn rreeqquuiirreemmeennttss ooff tthhee eennttiittyy SSppeecciiffiicc ssyyllllaabbuuss lleeaarrnniinngg oouuttccoommeess aarree:: 11 dd;; 33aa,, cc SSyyllllaabbuuss lliinnkkss TThhee mmaatteerriiaall iinn tthhiiss cchhaapptteerr wwiillll bbee ddeevveellooppeedd ffuurrtthheerr iinn tthhee AAccccoouunnttiinngg mmoodduullee,, aanndd tthheenn iinn PPrrooffeessssiioonnaall LLeevveell FFiinnaanncciiaall AAccccoouunnttiinngg aanndd RReeppoortritnign.g. EExxaammiinnaattiioonn ccoonntteexxtt QQuueessttiioonnss oonn tthhee ttooppiiccss iinn tthhiiss cchhaapptteerr wwiillll bbee sseett aass mmuullttiippllee cchhooiiccee,, mmuullttii--ppaarrtt mmuullttiippllee cchhooiiccee oorr mmuullttiippllee-- rreessppoonnssee qquueessttiioonnss,, ssoommee ooff wwhhiicchh mmaayy iinnvvoollvvee ccaallccuullaattiioonnss.. VVeerryy oofftteenn ddoouubbllee eennttrryy qquueessttiioonnss aarree pphhrraasseedd iinn tteerrmmss ooff pprreeppaarriinngg aa jjoouurrnnaall.. IInn aaddddiittiioonn,, tthhee mmaatteerriiaall ccoovveerreedd iinn tthhiiss cchhaapptteerr mmaayy aallssoo bbee eexxaammiinneedd aass ppaarrtt ooff aa lloonngg ffoorrmm qquueessttiioonn.. IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo:: (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg pprriinncciipplleess bbeehhiinndd aaccccrruuaallss aanndd pprreeppaayymmeennttss (cid:127) (cid:127) ccaallccuullaattee ffiigguurreess iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ffoorr aaccccrruuaallss aanndd pprreeppaayymmeennttss ooff eexxppeennddiittuurree (cid:127) (cid:127) ccaallccuullaattee ffiigguurreess iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ffoorr aaccccrruueedd aanndd ddeeffeerrrreedd iinnccoommee ((aarrrreeaarrss aanndd aaddvvaanncceess)) (cid:127) (cid:127) iiddeennttiiffyy tthhee ccoorrrreecctt aammoouunnttss iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr iinnccoommee aanndd eexxppeennsseess (cid:127) (cid:127) iiddeennttiiffyy tthhee eeffffeecctst s ooff aaccccrruuaallss aanndd pprreeppaayymmeennttss ooff iinnccoommee aanndd eexxppeennsseess oonn pprrooffiitt ffoorr tthhee ppeerriioodd iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss (cid:127) (cid:127) ssppeecciiffyy hhooww tthhee iinniittiiaall ttrriiaall bbaallaannccee sshhoouulldd bbee aaddjjuusstteedd ttoo rreefflleecctt yyeeaarr--eenndd aaccccrruuaallss aanndd pprreeppaayymmeennttss CChhaapptteerr ssttuuddyy gguuiiddaannccee UUssee tthhiiss sscchheedduullee aanndd yyoouurr ssttuuddyy ttiimmeettaabbllee ttoo ppllaann tthhee ddaatteess oonn wwhhiicchh yyoouu wwiillll ccoommpplleettee yyoouurr ssttuuddyy ooff tthhiiss cchhaapptteerr.. Practical significance SSttuuddyy aapppprrooaacchh EExxaamm aapppprrooaacchh IInntteerraaccttiivvee qquueessttiioonnss TThhee pprriinncciippllee bbeehhiinndd AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy aaccccrruuaallss aanndd bbee rreeqquuiirreedd ttoo iiddeennttiiffyy RReeaadd tthhrroouugghh TTooppiicc 11,, pprreeppaayymmeennttss tthhee aaccccoouunnttiinngg ppaayyiinngg aatttteennttiioonn ttoo pprriinncciipplleess bbeehhiinndd AAccccoouunnttiinngg ffoorr tthhee ccoonntteexxtt aaccccrruuaallss aanndd aaccccrruuaallss aanndd eexxaammppllee.. TThhiiss ttooppiicc pprreeppaayymmeennttss.. pprreeppaayymmeennttss iiss sshhoouulldd bbee aa rreemmiinnddeerr ccoonncceerrnneedd wwiitthh ooff wwhhaatt yyoouu aallrreeaaddyy mmaattcchhiinngg eexxppeennsseess kknnooww aabboouutt tthhee iinnccuurrrreedd wwiitthh tthhee aaccccrruuaallss pprriinncciippllee.. rreevveennuuee tthheeyy ggeenneerraattee SSttoopp aanndd tthhiinnkk aanndd iiss tthheerreeffoorree aa WWhhyy iiss tthhee aaccccrruuaallss ddiirreecctt aapppplliiccaattiioonn ooff pprriinncciippllee aallssoo kknnoowwnn aaccccrruuaall aaccccoouunnttiinngg aass tthhee mmaattcchhiinngg ((tthhee aaccccrruuaallss pprriinncciippllee pprriinncciippllee)).. YYoouu sshhoouulldd bbee ffaammiilliiaarr wwiitthh tthhee --- Trang 259 --- aaccccrruuaallss pprriinncciippllee aass wwee hhaavvee mmeett iitt aa ffeeww ttiimmeess iinn AAccccoouunnttiinngg aallrreeaaddyy.. 2 AAccccrruuaallss AApppprrooaacchh IInn tthhee eexxaamm,, yyoouu aarree IIQQ11 AAccccrruuaallss 11 lliikkeellyy ttoo bbee rreeqquuiirreedd ttoo AAccccrruuaallss ((aaccccrruueedd CCoovveerr tthhee wwoorrkkeedd TThhiiss qquueessttiioonn wwiillll tteesstt ccaallccuullaattee tthhee bbaallaannccee eexxppeennsseess)) aarriissee wwhheenn eexxaammppllee ccaarreeffuullllyy.. PPaayy yyoouurr uunnddeerrssttaannddiinngg ooff ffoorr aaccccrruuaallss ffoorr aa bbuussiinneessss hhaass aatttteennttiioonn ttoo hhooww ttoo ccaallccuullaattee aanndd iinncclluussiioonn iinn tthhee iinnccuurrrreedd aann eexxppeennssee ttrraannssaaccttiioonn aanndd rreeccoorrdd aann aaccccrruuaall.. ssttaatteemmeenntt ooff ffiinnaanncciiaall tthhaatt iitt hhaass nnoott yyeett ppaaiidd ppaayymmeenntt ddaatteess aass tthheeyy ppoossiittiioonn aanndd aaddjjuusstt ffoorr.. UUttiilliittiieess,, ssuucchh aass aarree iimmppoorrttaanntt iinn eexxppeennsseess ttoo ttaakkee eelleeccttrriicciittyy,, aarree oofftteenn aaccccrruuaallss.. aaccccoouunntt ooff aaccccrruuaallss.. ppaaiidd ffoorr iinn tthhee mmoonntthh SSttoopp aanndd tthhiinnkk oorr qquuaarrtteerr aafftteerr tthheeyy CCaann yyoouu tthhiinnkk ooff aannyy hhaavvee bbeeeenn pprroovviiddeedd.. ppeerrssoonnaall eexxppeennsseess IInn tthhiiss ttooppiicc yyoouu wwiillll yyoouu iinnccuurr bbuutt ddoonn tt lleeaarrnn hhooww ttoo mmaakkee tthhee ppaayy ffoorr uunnttiill aa llaatteerr aaddjjuussttmmeenntt ttoo rreeccoorrdd ddaattee eexxppeennsseess iinn tthhee ppeerriioodd iinn wwhhiicchh tthheeyy aarree iinnccuurrrreedd.. PPrreeppaayymmeennttss AApppprrooaacchh IInn tthhee eexxaamm,, yyoouu aarree lliikkeellyy ttoo bbee rreeqquuiirreedd ttoo PPrreeppaayymmeennttss aarriissee WWoorrkk tthhrroouugghh tthhee ccaallccuullaattee tthhee bbaallaannccee wwhheenn aa bbuussiinneessss ppaayyss eexxaammppllee sslloowwllyy,, ffoorr pprreeppaayymmeennttss ffoorr ffoorr ggooooddss oorr sseerrvviicceess ppaayyiinngg aatttteennttiioonn ttoo iinncclluussiioonn iinn tthhee bbeeffoorree iitt rreecceeiivveess ddaatteess.. EEnnssuurree yyoouu ssttaatteemmeenntt ooff ffiinnaanncciiaall tthheemm.. IInnssuurraannccee iiss uunnddeerrssttaanndd wwhhaatt tthhee ppoossiittiioonn aanndd aaddjjuusstt ccoommmmoonnllyy ppaaiidd ffoorr iinn eeffffeecctt ooff ccrreeddiittiinngg tthhee eexxppeennsseess ttoo ttaakkee aaddvvaannccee.. rreelleevvaanntt eexxppeennssee iiss.. aaccccoouunntt ooff IInn tthhiiss ttooppiicc yyoouu wwiillll SSttoopp aanndd tthhiinnkk pprreeppaayymmeennttss.. lleeaarrnn hhoowwttoo mmaakkee aann CCaann yyoouu tthhiinnkk ooff aannyy aaddjjuussttmmeenntt ffoorr ppeerrssoonnaall eexxppeennsseess eexxppeennddiittuurree ppaaiidd iinn yyoouu ppaayy ffoorr iinn aaddvvaannccee.. aaddvvaannccee AAccccoouunnttiinngg ffoorr AApppprrooaacchh AAccccoouunnttiinngg ffoorr IIQQ22 AAccccrruuaallss 22 aaccccrruuaallss aanndd aaccccrruuaallss aanndd IItt iiss iimmppoorrttaanntt tthhaatt yyoouu TThhiiss qquueessttiioonn wwiillll tteesstt pprreeppaayymmeennttss pprreeppaayymmeennttss iiss lliikkeellyy uunnddeerrssttaanndd wwhhyy tthhee yyoouurr uunnddeerrssttaannddiinngg ooff ttoo ffeeaattuurree aass aann AAccccrruuaallss aanndd ooppeenniinngg ppoossiittiioonnss aarree hhooww ttoo ccaallccuullaattee aaddjjuussttmmeenntt iinn tthhee pprreeppaayymmeennttsswwiillll bbee rreevveerrsseedd rraatthheerr tthhaann aaccccrruuaallss aanndd hhooww ttoo lloonngg--ffoorrmm qquueessttiioonn.. pprreesseenntteedd sseeppaarraatteellyy ssiimmppllyy lleeaarrnniinngg tthhee aaddjjuusstt eexxppeennsseess ffoorr oonn tthhee ssttaatteemmeenntt ooff jjoouurrnnaallss,, ssoo ssppeenndd YYoouu aarree aallssoo lliikkeellyy ttoo aaccccrruuaallss.. ffiinnaanncciiaall ppoossiittiioonn aanndd ssoommee ttiimmee sseeee oobbjjeeccttiivvee tteesstt IIQQ33 AAccccrruuaallss aanndd tthhee bbaallaannccee oonn eeaacchh iiss uunnddeerrssttaannddiinngg tthhee qquueessttiioonnss tthhaatt aasskk yyoouu pprreeppaayymmeennttss ccaarrrriieedd ffoorrwwaarrdd aatt tthhee tthheeoorryy.. OOnnccee yyoouu ttoo ccaallccuullaattee aann AA ggoooodd qquueessttiioonn ttoo eenndd ooff eeaacchh uunnddeerrssttaanndd tthhee aaccccrruuaallss oorr ggeett yyoouu tthhiinnkkiinngg aaccccoouunnttiinngg ppeerriioodd.. IInn aapppprrooaacchh,, tthheerree aarree pprreeppaayymmeennttss bbaallaannccee,, aabboouutt ddaatteess aanndd oorrddeerr nnoott ttoo ddoouubbllee sseevveerraall wwoorrkkeedd aasskk yyoouu ttoo ccaallccuullaattee wwhheetthheerr aann eexxppeennssee iiss ccoouunntt tthhee aaccccrruueedd eexxaammpplleess aanndd eexxppeennsseess aafftteerr aaccccrruueedd oorr pprreeppaaiidd.. eexxppeennssee oorr ffaaiill ttoo iinntteerraaccttiivvee qquueessttiioonnss aaddjjuussttiinngg ffoorr aaccccrruuaallss rreeccoorrdd tthhee pprreeppaaiidd wwhhiicchh yyoouu sshhoouulldd oorr pprreeppaayymmeennttss oorr IIQQ44 SSttaatteemmeenntt ooff eexxppeennssee,, iitt iiss wwoorrkk tthhrroouugghh iinn ddeettaaiill.. ssttaattee wwhhaatt tthhee iimmppaacctt pprrooffiitt oorr lloossss aanndd iimmppoorrttaanntt ttoo rreevveerrssee ooff aaddjjuussttiinngg ffoorr SSttaatteemmeenntt ooff ffiinnaanncciiaall SSttoopp aanndd tthhiinnkk tthhee ooppeenniinngg aaccccrruuaallss aaccccrruuaallss aanndd ppoossiittiioonn WWhhaatt wwoouulldd bbee tthhee aanndd pprreeppaayymmeennttss.. pprreeppaayymmeennttss iiss oonn TThhiiss qquueessttiioonn rreeqquuiirreess eeffffeecctt oonn eexxppeennsseess iiff pprrooffiitt oorr lloossss.. yyoouu ttoo mmaakkee wwee ddiiddnn tt rreevveerrssee aann aaddjjuussttmmeennttss ffoorr ooppeenniinngg aaccccrruuaall aaccccrruuaallss aanndd --- Trang 260 --- pprreeppaayymmeennttss aanndd pprreeppaarree bbaassiicc ffiinnaanncciiaall ssttaatteemmeennttss.. IIQQ55 AAddmmiinniissttrraattiivvee eexxppeennsseess aaccccoouunntt This question tests yyoouurr uunnddeerrssttaannddiinngg ooff tthhee iimmppaacctt ooff aaccccrruuaallss oonn aann eexxppeennssee.. 5 The accrual principle AApppprrooaacchh YYoouu aarree eexxppeecctteedd ttoo IIQQ66 AAccccrruueedd iinnccoommee aanndd iinnccoommee uunnddeerrssttaanndd hhoowwttoo YYoouu nneeeedd ttoo TThhiiss iiss qquuiittee ttrriicckkyy.. PPaayy aaddjjuusstt ffoorr aaccccrruueedd aanndd The principle of uunnddeerrssttaanndd tthhee tteerrmmss aatttteennttiioonn ttoo tthhee ddaatteess ddeeffeerrrreedd iinnccoommee iinn aaccccrruueedd aanndd pprreeppaaiidd aaccccrruueedd aanndd ddeeffeerrrreedd aanndd mmaakkee ssuurree yyoouu mmuucchh tthhee ssaammee wwaayy aass eexxppeennsseess iiss ggeenneerraallllyy iinnccoommee aanndd bbee aabbllee ttoo aaddjjuusstt tthhee pprreeppaaiidd ffoorr aaccccrruuaallss aanndd wweellll uunnddeerrssttoooodd,, bbuutt iitt aappppllyy tthheemm ccoorrrreeccttllyy.. aanndd aaccccrruueedd iinnccoommee pprreeppaayymmeennttss rreellaattiinngg iiss oofftteenn mmoorree IIff yyoouu ccaann ddoo tthhiiss,, tthhee correctly. ttoo eexxppeennsseess -- yyoouu cchhaalllleennggiinngg ttoo aappppllyy aaccccoouunnttiinngg sshhoouulldd nneeeedd ttoo bbee aabbllee ttoo tthhee ssaammee pprriinncciippllee ttoo come easily as it ccaallccuullaattee tthhee aammoouunntt iinnccoommee.. ffoolllloowwss tthhee ssaammee ooff tthhee aaccccrruueedd oorr aapppprrooaacchh ffoorr IInnccoommee tthhaatt iiss ddeeffeerrrreedd iinnccoommee aanndd eexxppeennsseess.. rreecceeiivveedd bbeeffoorree iitt iiss uunnddeerrssttaanndd hhooww iitt eeaarrnneedd ((uussuuaallllyy aa SSttoopp aanndd tthhiinnkk iimmppaaccttss oonn tthhee ddeeppoossiitt)) iiss ddeeffeerrrreedd WWhhyy iiss iitt iinnccoorrrreecctt ttoo ssttaatteemmeenntt ooff pprrooffiitt oorr iinnccoommee.. IInnccoommeetthhaatt lloossss.. rreeccoorrdd aa ccaasshh ddeeppoossiitt hhaass bbeeeenn eeaarrnneedd bbuutt rreecceeiivveedd nnooww ffoorr wwoorrkk not yet received is ttoo bbee ccaarrrriieedd oouutt iinn aa aaccccrruueedd iinnccoommee.. ffuuttuurree aaccccoouunnttiinngg ppeerriioodd aass iinnccoommee iinn tthhee ccuurrrreenntt ppeerriioodd 6 AAccccrruuaallss,, AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy pprreeppaayymmeennttss,, bbee rreeqquuiirreedd ttoo ssppeecciiffyy YYoouu nneeeedd ttoo aaddvvaanncceess aanndd aarrrreeaarrss hhooww tthhee iinniittiiaall ttrriiaall uunnddeerrssttaanndd tthhaatt aanndd tthhee ttrriiaall bbaallaannccee bbaallaannccee sshhoouulldd bbee aaccccrruuaallss aanndd aaddjjuusstteedd ttoo rreefflleecctt YYoouu sshhoouulldd nnooww bbee pprreeppaayymmeennttss aarree aa yyeeaarr--eenndd aaccccrruuaallss aanndd ggeettttiinngg uusseedd ttoo hhooww ppeerriioodd--eenndd pprreeppaayymmeennttss.. to reflect the required aaddjjuussttmmeenntt tthhaatt nneeeedd aaddjjuussttmmeennttss uussiinngg tthhee ttoo bbee pprroocceesssseedd ttrriiaall bbaallaannccee.. TThhiiss against the initial trial ttooppiicc iiss ffuurrtthheerr bbaallaannccee.. CCoovveerr tthhee practice of this wwoorrkkeedd eexxaammpplleess iimmppoorrttaanntt sstteepp.. ccaarreeffuullllyy,, eennssuurriinngg yyoouu uunnddeerrssttaanndd eeaacchh ooff tthhee aaddjjuussttmmeennttss iinn ttuurrnn.. SSttoopp aanndd tthhiinnkk WWhheerree wwiillll aaccccrruueedd eexxppeennsseess bbee pprreesseenntteedd iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn WWhheerree wwiillll aaccccrruueedd iinnccoommee bbee pprreesseenntteedd OOnnccee yyoouu hhaavvee wwoorrkkeedd tthhrroouugghh tthhiiss gguuiiddaannccee yyoouu aarree rreeaaddyy ttoo aatttteemmpptt tthhee ffuurrtthheerr qquueessttiioonn pprraaccttiiccee iinncclluuddeedd aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. --- Trang 261 --- 11 TThhee pprriinncciippllee bbeehhiinndd aaccccrruuaallss aanndd pprreeppaayymmeennttss BS SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TThhee aaccccrruuaall pprriinncciippllee rreeqquuiirreess tthhaatt wwee rreeccoorrdd eexxppeennsseess iinn tthhee ppeerriioodd iinn wwhhiicchh tthheeyy aarree iinnccuurrrreedd aanndd mmaattcchh eexxppeennsseess wwiitthh tthhee iinnccoommee ggeenneerraatteedd bbyy tthheemm.. (cid:127) (cid:127) WWee ssoommeettiimmeess tthheerreeffoorree nneeeedd ttoo ccaarrrryy ffoorrwwaarrdd eexxppeennddiittuurree ppaaiidd ttoo aa ssuubbsseeqquueenntt ppeerriioodd ((aa pprreeppaayymmeenntt)),, oorr aaccccoouunntt ffoorr eexxppeennddiittuurree iinnccuurrrreedd bbeeffoorree iitt iiss aaccttuuaallllyy ppaaiidd ffoorr ((aann aaccccrruuaall)).. GGrroossss pprrooffiitt sshhoouulldd bbee ccaallccuullaatteedd bbyy mmaattcchhiinngg rreevveennuuee aanndd ccoosstt ooff ssaalleess.. NNeett pprrooffiitt sshhoouulldd bbee ccaallccuullaatteedd bbyy cchhaarrggiinngg tthhee eexxppeennsseess wwhhiicchh rreellaattee ttoo tthhaatt ppeerriioodd.. FFoorr eexxaammppllee,, iinn pprreeppaarriinngg tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr aa ssiixx--mmoonntthh ppeerriioodd,, iitt wwoouulldd bbee aapppprroopprriiaattee ttoo cchhaarrggee ssiixx mmoonntthhss eexxppeennsseess iinnccuurrrreedd ffoorr rreenntt,, llooccaall pprrooppeerrttyy ttaaxxeess,, iinnssuurraannccee aanndd tteelleepphhoonnee ccoossttss,, eettcc.. HHoowweevveerr,, eexxppeennsseess mmaayy nnoott aaccttuuaallllyy bbee ppaaiidd ffoorr dduurriinngg tthhee ppeerriioodd ttoo wwhhiicchh tthheeyy rreellaattee.. TThhee aaccccrruuaallss pprriinncciippllee rreeqquuiirreess tthhaatt eexxppeennsseess aarree rreeccooggnniisseedd iinn tthhee ppeerriioodd iinn wwhhiicchh tthheeyy aarree iinnccuurrrreedd aanndd aarree mmaattcchheedd aaggaaiinnsstt rreevveennuuee,, rreeggaarrddlleessss ooff wwhheetthheerr tthheeyy hhaavvee yyeett bbeeeenn ppaaiidd ffoorr.. CCoonntteexxtt eexxaammppllee:: AAccccrruuaall pprriinncciippllee AA bbuussiinneessss ppaayyss iinnssuurraannccee rreellaattiinngg ttoo iittss sshhoopp ooff 2200,,000000 ppeerr aannnnuumm aanndd ppaayyss tthhee ffuullll aannnnuuaall iinnssuurraannccee pprreemmiiuumm oonn 11 AApprriill eeaacchh yyeeaarr.. IIff wwee ccaallccuullaattee tthhee pprrooffiitt ooff tthhee bbuussiinneessss ffoorr ssiixx mmoonntthhss ttoo 3300 JJuunnee 2200XX77,, tthhee ccoorrrreecctt cchhaarrggee ffoorr iinnssuurraannccee eexxppeennsseess iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss iiss 11 00,,000000,, eevveenn tthhoouugghh tthhee iinnssuurraannccee pprreemmiiuumm ppaaiidd iiss 2200,,000000 iinn tthhaatt ppeerriioodd.. SSiimmiillaarrllyy,, tthhee iinnssuurraannccee cchhaarrggee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee sseeccoonndd ssiixx mmoonntthhss ooff 2200XX77 iiss 11 00 ,,000000,, eevveenn tthhoouugghh nnoo iinnssuurraannccee pprreemmiiuumm iiss aaccttuuaallllyy ppaaiidd iinn tthhaatt ppeerriioodd.. WWee uussee tthhee aaccccrruuaall pprriinnccipilpe le ttoo mmaattcchh eexxppeennsseess ttoo tthhee rreelleevvaanntt ttiimmee ppeerriioodd.. DDeeffiinniittiioonnss AAccccrruuaallss ((aaccccrruueedd eexxppeennsseess)):: EExxppeennsseess wwhhiicchh aarree cchhaarrggeedd aaggaaiinnsstt tthhee pprrooffiitt ffoorr aa ppaarrttiiccuullaarr ppeerriioodd,, eevveenn tthhoouugghh tthheeyy hhaavvee nnoott yyeett bbeeeenn ppaaiidd ffoorr.. PPrreeppaayymmeennttss ((pprreeppaaiidd eexxppeennsseess)):: EExxppeennsseess wwhhiicchh hhaavvee bbeeeenn ppaaiidd iinn oonnee rreeppoorrttiinngg ppeerriioodd bbuutt aarree nnoott cchhaarrggeedd aaggaaiinnsstt pprrooffiitt uunnttiill aa llaatteerr ppeerriioodd,, bbeeccaauussee tthheeyy rreellaattee ttoo tthhaatt llaatteerr ppeerriioodd.. TThhee ffoolllloowwiinngg eexxaammpplleess ccllaarriiffyy tthhee pprriinncciippllee iinnvvoollvveedd,, tthhaatt eexxppeennsseess sshhoouulldd bbee mmaattcchheedd aaggaaiinnsstt iinnccoommee iinn tthhee ppeerriioodd ttoo wwhhiicchh tthheeyy rreellaattee.. AAccccrruuaallss aanndd pprreeppaayymmeennttss aarree tthhee mmeeaannss bbyy wwhhiicchh wwee mmoovvee eexxppeennsseess iinnttoo tthhee ccoorrrreecctt rreeppoorrttiinngg ppeerriioodd.. (cid:127) (cid:127) IIff wwee ppaayy iinn tthhiiss ppeerriioodd ffoorr ggooooddss//sseerrvviicceess tthhaatt rreellaattee ttoo tthhee nneexxtt rreeppoorrttiinngg ppeerriioodd,, wwee uussee aa pprreeppaayymmeenntt ttoo ttrraannssffeerr tthhaatt eexxppeennssee ffoorrwwaarrdd ttoo tthhee nneexxtt ppeerriioodd.. (cid:127) (cid:127) IIff wwee hhaavvee iinnccuurrrreedd aann eexxppeennssee iinn tthhiiss ppeerriioodd wwhhiicchh wwiillll nnoott bbee ppaaiidd ffoorr uunnttiill tthhee nneexxtt ppeerriioodd,, wwee uussee aann aaccccrruuaall ttoo bbrriinngg tthhee eexxppeennssee bbaacckk iinnttoo tthhiiss ppeerriioodd.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAppppllyyiinngg jjuuddggeemmeenntt SSoommeettiimmeess aann iinnvvooiiccee ffoorr ggooooddss oorr sseerrvviicceess uusseedd iinn tthhee yyeeaarr wwiillll nnoott yyeett hhaavvee bbeeeenn rreecceeiivveedd aatt tthhee yyeeaarr eenndd ddaattee,, bbuutt tthhaatt ddooeess nnoott mmeeaann wwee sshhoouulldd nnoott aaccccrruuee ffoorr tthhee eexxppeennssee.. TThhee aaccccoouunnttaanntt mmaayy hhaavvee ttoo uussee tthheeiirr pprrooffeessssiioonnaall jjuuddggeemmeenntt ttoo eessttiimmaattee tthhee aaccccrruuaall bbaasseedd oonn ssiimmiillaarr eexxppeennsseess iinnccuurrrreedd iinn tthhee ppaasstt.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: SSttrruuccttuurriinngg pprroobblleemmss aanndd ssoolluuttiioonnss AApppplliiccaattiioonn ooff tthhee aaccccrruuaallss pprriinncciippllee iiss eesssseennttiiaall iiff tthhee ffiinnaanncciiaall ssttaatteemmeennttss aarree ttoo pprreesseenntt aa ttrruuee aanndd ffaaiirr vviieeww ooff tthhee ppeerrffoorrmmaannccee aanndd ppoossiittiioonn ooff aann eennttiittyy.. AAddjjuussttiinngg ffoorr aaccccrruuaallss aanndd pprreeppaayymmeennttss iiss tthheerreeffoorree aann eesssseennttiiaall sstteepp iinn pprreeppaarriinngg tthhee ffiinnaanncciiaall ssttaatteemmeennttss ffoorr ccoommmmuunniiccaattiioonn ttoo eexxtteerrnnaall ssttaakkeehhoollddeerrss.. --- Trang 262 --- 22 AAccccrruuaallss SS SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TToo sseett uu pp aann aaccccrruuaall DDEEBBIITT EExxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) XX AAccccrruuaall ((ccuurrrreenntt lliiaabbiilliittyy oo nn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall CCRREEDDIITT ppoossiittiioonn)) XX WWoorrkkeedd eexxaammppllee:: AAccccrruuaallss 11 HHaassaabb MMoottoorr SSppaarreess pprreeppaarreess iittss aaccccoouunnttss ttoo 2288 FFeebbrruuaarryy eeaacchh yyeeaarr.. HHaassaabb MMoottoorr SSppaarree ss tteelleepphhoonnee ccoonnttrraacctt ccoommmmeenncceedd 11 AApprriill 2200XX66 aanndd tthhee qquuaarrtteerrllyy tteelleepphhoonnee bbiillll iiss rreecceeiivveedd aatt tthhee eenndd ooff eeaacchh qquuaarrtteerr.. RReeqquuiirreemmeenntt CCaallccuullaattee HHaassaabb MMoottoorr SSppaarree ss tteelleepphhoonnee eexxppeennssee ttoo bbee cchhaarrggeedd ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee yyeeaarr eennddeedd 2288 FFeebbrruuaarryy 2200XX77.. TTeelleepphhoonnee eexxppeennssee ffoorr tthhee tthhrreeee mmoonntthhss eennddeedd:: 3300..66..2200XX66 2233..5500 3300..99..2200XX66 2277..2200 3311..1122..2200XX66 3333..4400 3311..33..2200XX77 3366..0000 AAllll tthhee bbiillllss wweerree ppaaiidd oo nn tthhee ffiinnaall ddaayy ooff eeaacchh tthhrreeee--mmoonntthh ppeerriioodd.. SSoolluuttiioonn AAss aatt 22 88 FFeebbrruuaarryy 2200XX77,, nn oo tteelleepphhoonnee bbiillll hhaadd bbeeeenn rreecceeiivveedd iinn rreessppeecctt ooff tthhee ffiirrsstt qquuaarrtteerr ooff 2200XX77 bbeeccaauussee iitt wwaass nnoott dduuee ffoorr aannootthheerr mmoonntthh.. HHoowweevveerr,, tthhee aaccccrruuaall pprriinncciippllee mmeeaannss wwee ccaannnnoott iiggnnoorree tthhee tteelleepphhoonnee eexxppeennsseess ffoorr JJaannuuaarryy aanndd FFeebbrruuaarryy,, aanndd ssoo aann aaccccrruuaall ooff 2244 iiss mmaaddee,, bbeeiinngg ttwwoo tthhiirrddss ooff tthhee ffiinnaall bbiillll ooff 3366.. TThhee tteelleepphhoonnee eexxppeennsseess ffoorr tthhee yyeeaarr eennddeedd 2288 FFeebbrruuaarryy 2200XX77 aarree aass ffoolllloowwss:: 11 MMaarrcchh -- 33 11 MMaarrcchh 2200XX66 ((nnoo tteelleepphhoonnee)) 00..0000 11 AApprriill -- 33 00 JJuunnee 2200XX66 2233..5500 11 JJuullyy -- 3300 SSeepptteemmbbeerr 2200XX66 2277..2200 11 OOccttoobbeerr -- 33 11 DDeecceemmbbeerr 2200XX66 3333..4400 11 JJaannuuaarryy -- 22 88 FFeebbrruuaarryy 2200XX77 ((ttwwoo mmoonntthhss:: 3366 xx 22//33)) 2244..0000 110088..1100 TThhee aaccccrruuaall wwiillll bbee sshhoowwnn iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ooff tthhee bbuussiinneessss aass aatt 2288 FFeebbrruuaarryy 2200XX77,, aass aa ccuurrrreenntt lliiaabbiilliittyy.. IItt iiss aa lliiaabbiilliittyy bbeeccaauussee tthhee bbuussiinneessss hhaass aann oobblliiggaattiioonn ttoo ppaayy ffoorr tthhee eexxppeennssee iinn tthhee ffuuttuurree.. TThhee jjoouurrnnaall eennttrryy ttoo rreeccoorrdd tthhee aaccccrruuaall iiss:: DDEEBBIITT EElleeccttrriicciittyy eexxppeennssee 2244 CCRREEDDIITT AAccccrruuaall ((ccuurrrreenntt lliiaabbiilliittyy)) --- Trang 263 --- IInntteerraaccttiivvee qquueessttiioonn 11 :: AAccccrruuaallss 11 CClleevveerrlleeyy ssttaarrtteedd iinn bbuussiinneessss aass aa ppaappeerr ppllaattee aanndd ccuupp mmaannuuffaaccttuurreerr oonn 11 JJaannuuaarryy 2200XX22,, pprreeppaarriinngg ffiinnaanncciiaall ssttaatteemmeennttss ttoo 3311 DDeecceemmbbeerr 2200XX22.. CClleevveerrlleeyy iiss nnoott rreeggiisstteerreedd ffoorr VVAATT.. EElleeccttrriicciittyy bbiillllss rreecceeiivveedd iinn rreessppeecctt ooff cchhaarrggeess ffoorr tthhee pprreevviioouuss qquuaarrtteerr wweerree aass ffoolllloowwss:: 2200XX22 2200XX33 3311 JJaannuuaarryy 449911..5522 3300 AApprriill 227799..4477 440000..9933 3311 JJuullyy 666633..8800 770000..9944 3311 OOccttoobbeerr 111177..2288 662200..0000 RReeqquuiirreemmeenntt WWhhaatt iiss tthhee eelleeccttrriicciittyy eexxppeennssee ffoorr tthhee yyeeaarr eennddeedd 3311 DDeecceemmbbeerr 2200XX22 PPrreeppaarree aa jjoouurrnnaall eennttrryy ttoo rreeccoorrdd tthhee aaccccrruuaall aass aatt 3311 DDeecceemmbbeerr 2200XX22.. 33 PPrreeppaayymmeennttss (( pp rr ee pp aa ii dd eexxppeennsseess)) SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) TToo sseett uupp aa pprreeppaayymmeenntt DDEEBBIITT PPrreeppaayymmeenntt ((ccuurrrreenntt aasssseett iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX CCRREEDDIITT EExxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) XX WWoorrkkeedd eexxaammppllee:: PPrreeppaayymmeennttss 11 7 AA bbuussiinneessss ooppeennss oonn 11 JJaannuuaarryy 2200XX44.. IItt ppaayyss aa ffeeee ffoorr iittss aaddvveerrttss ttoo bbee aa pprroommootteedd ppoosstt oonn sseeaarrcchh eennggiinneess aatt aa ccoosstt ooff 2200,,000000 ppeerr yyeeaarr,, ppaayyaabbllee qquuaarrtteerrllyy iinn aaddvvaannccee aatt tthhee bbeeggiinnnniinngg ooff eeaacchh tthhrreeee--mmoonntthh ppeerriioodd.. PPaayymmeennttss wweerree mmaaddee aass ffoolllloowwss:: 11 JJaannuuaarryy 2200XX44 55,,000000 3311 MMaarrcchh 2200XX44 55,,000000 3300 JJuunnee 2200XX44 55,,000000 3300 SSeepptteemmbbeerr 2200XX44 55,,000000 3311 DDeecceemmbbeerr 2200XX44 55,,000000 RReeqquuiirreemmeenntt WWhhaatt iiss tthhee aaddvveerrttiissiinngg eexxppeennssee ffoorr tthhee yyeeaarr eennddeedd 3311 DDeecceemmbbeerr 2200XX44 --- Trang 264 --- SSoolluuttiioonn TThhee ttoottaall aammoouunntt ppaaiidd iinn tthhee yyeeaarr iiss 2255,,000000.. TThhee yyeeaarrllyy rreennttaall,, hhoowweevveerr,, iiss oonnllyy 2200,,000000.. TThhee llaasstt ppaayymmeenntt iiss aa pprreeppaayymmeenntt aass iitt iiss aa ppaayymmeenntt iinn aaddvvaannccee ffoorr tthhee ffiirrsstt tthhrreeee mmoonntthhss ooff 2200XX55.. TThhee cchhaarrggee ffoorr 2200XX44 iiss tthheerreeffoorree:: PPaaiidd iinn yyeeaarr 2255,,000000 PPrreeppaayymmeenntt ((55,,000000)) 2200,,000000 TThhee ddoouubbllee eennttrryy ffoorr tthhiiss pprreeppaayymmeenntt iiss:: DDEEBBIITT PPrreeppaayymmeennttss ((ccuurrrreenntt aasssseett)) 55,,000000 CCRREEDDIITT AAddvveertirstinisgi ng 55,,000000 44 AA cc cc oo uu nn tt ii nn gg ff oo rr aaccccrruuaallss aa nn dd pp rr ee pp aa yy mm ee nn tt ss B SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) AAccccrruuaallss aarree iinncclluuddeedd aass ccuurrrreenntt lliiaabbiilliittiieess aanndd pprreeppaayymmeennttss aass ccuurrrreenntt aasssseettss aass tthheeyy nneeaarrllyy aallwwaayyss cclleeaarr vveerryy ssoooonn aafftteerr tthhee eenndd ooff tthhee rreeppoortirntgi ng ppeerriioodd.. (cid:127) (cid:127) IInn oorrddeerr nnoott ttoo ddoouubbllee ccoouunntt aaccccrruueedd eexxppeennddiittuurree,, oorr ffaaiill ttoo aaccccoouunntt ffoorr pprreeppaaiidd eexxppeennddiittuurree aatt aallll,, cclloossiinngg aaccccrruuaallss aanndd pprreeppaayymmeennttss mmuusstt bbee rreevveerrsseedd aatt tthhee ssttaarrtt ooff tthhee nneexxtt rreeppoorrttiinngg ppeerriioodd:: DDEEBBIITT AAccccrruuaallss XX CCRREEDDIITT EExxppeennssee XX DDEEBBIITT EExxppeennssee XX CCRREEDDIITT PPrreeppaayymmeenntt XX SSoommee ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemmss mmaayy rreeccoorrdd aann aaccccrruuaall oorr pprreeppaayymmeenntt aauuttoommaattiiccaallllyy aatt tthhee eenndd ooff tthhee aaccccoouunnttiinngg ppeerriioodd ffoorr rreeccuurrrriinngg eexxppeennsseess ssuucchh aass rreenntt aanndd iinnssuurraannccee.. FFoorr tthhee ppuurrppoosseess ooff tthhee WWoorrkkbbooookk,, wwee wwiillll aassssuummee tthhaatt aaccccrruuaallss aanndd pprreeppaayymmeennttss aarree rreeccoorrddeedd uussiinngg aa jjoouurrnnaall eennttrryy.. YYoouu ccaann sseeee ffrroomm tthhee ddoouubbllee eennttrryy ttoo rreeccoorrdd aann aaccccrruuaall:: DDEEBBIITT EExxppeennssee XX CCRREEDDIITT AAccccrruuaallss XX aanndd ttoo rreeccoorrdd aa pprreeppaayymmeenntt:: DDEEBBIITT PPrreeppaayymmeennttss XX CCRREEDDIITT EExxppeennssee XX tthhaatt wwhhiillsstt oonnee ssiiddee ooff tthhee jjoouurrnnaall eennttrryy aaddjjuussttss tthhee eexxppeennssee aaccccoouunntt,, tthhee ootthheerr ssiiddee ooff tthhee eennttrryy iiss ttaakkeenn ttoo tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn:: aass aann aasssseett oorr aa lliiaabbiilliittyy aaccccoouunntt tthhaatt iiss nneeeeddeedd oonnllyy aatt tthhee eenndd ooff eeaacchh rreeppoortirntgi ng ppeerriioodd.. (cid:127) (cid:127) PPrreeppaayymmeennttss aarree iinncclluuddeedd iinn ccuurrrreenntt aasssseettss iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass tthheeyy rreepprreesseenntt ggooooddss oorr sseerrvviicceess tthhaatt tthhee bbuussiinneessss iiss oowweedd iinn rreessppeecctt ooff eexxppeennsseess tthhaatt hhaavvee bbeeeenn ppaaiidd iinn tthhee yyeeaarr bbuutt rreellaattee ttoo ffuuttuurree aaccccoouunnttiinngg ppeerriiooddss.. TThheeyy uussuuaallllyy cclleeaarr wwiitthhiinn 11 22 mmoonntthhss ooff tthhee ddaattee ooff tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. TThhee bbaallaannccee oonn tthhee pprreeppaayymmeenntt lleeddggeerr aaccccoouunntt iiss bbrroouugghhtt ddoowwnn aass aa ddeebbiitt bbaallaannccee aatt tthhee bbeeggiinnnniinngg ooff tthhee nneexxtt ppeerriioodd.. --- Trang 265 --- (cid:127) (cid:127) AAccccrruuaallss aarree iinncclluuddeedd iinn ccuurrrreenntt lliiaabbiliitlieitsi es aass tthheeyy rreepprreesseenntt eexxppeennsseess wwhhiicchh hhaavvee bbeeeenn iinnccuurrrreedd bbuutt ffoorr wwhhiicchh nnoo iinnvvooiiccee hhaass yyeett bbeeeenn rreecceeiivveedd.. TThheeyy nneeaarrllyy aallwwaayyss cclleeaarr ssoooonn aafftteerr tthhee eenndd ooff tthhee rreeppoorrttiinngg ppeerriioodd.. TThhee bbaallaannccee oonn tthhee aaccccrruuaallss aaccccoouunntt iiss bbrroouugghhtt ddoowwnn aass aa ccrreeddiitt bbaallaannccee aatt tthhee bbeeggiinnnniinngg ooff tthhee nneexxtt ppeerriioodd.. TTrraannssaaccttiioonn DDRR CCRR DDeessccrriippttiioonn AAccccrruuaall EExxppeennssee LLiiaabbiilliittyy ((aaccccrruuaall)) EExxppeennssee iinnccuurrrreedd iinn ppeerriioodd,, nnoott ppaaiidd//rreeccoorrddeedd PPrreeppayamyemnet nt AAsssseett ((pprreeppaayymmeenntt)) ((RReedduuccttiioonn iinn)) eexxppeennssee EExxppeennssee ppaaiidd//rreeccoorrddeedd iinn ppeerriioodd,, nnoott iinnccuurrrreedd uunnttiill nneexxtt ppeerriioodd 44..11 RReevveerrssiinngg aaccccrruuaallss aanndd pprreeppaayymmeennttss iinn nneeww ppeerriioodd PPrreeppaayymmeennttss aanndd aaccccrruuaallss mmuusstt bbee rreevveersresde d bbyy aann ooppeenniinngg jjoouurrnnaall iinn tthhee nneeww ppeerriioodd,, ootthheerrwwiissee tthhee eennttiittyy wwiillll cchhaarrggee iittsseellff ttwwiiccee ffoorr tthhee ssaammee eexxppeennssee ((aaccccrruuaallss)) oorr wwiillll nneevveerr cchhaarrggee iittsseellff ((pprreeppaayymmeennttss)).. TTrraannssaaccttiioonn DDRR CCRR DDeessccrriippttiioonn RReevveerrssee aaccccrruuaall AAccccrruuaall ((ooppeenniinngg ccrreeddiitt EExxppeennssee ((nneeww ppeerriioodd)) RReevveerrssiinngg aaccccrruuaall ooff bbaallaannccee oonn lliiaabbiilliittyy eexxppeennssee sseett uupp iinn aaccccoouunntt)) pprreevviioouuss ppeerriioodd RReevveerrssee pprreeppaayymmeenntt EExxppeennssee ((nneeww ppeerriioodd)) PPrreeppaayymmeenntt ((ooppeenniinngg RReevveerrssiinngg pprreeppaayymmeenntt ddeebbiitt bbaallaannccee oonn aasssseett ooff eexxppeennssee sseett uupp iinn aaccccoouunntt)) pprreevviioouuss ppeerriioodd OOnnccee tthheessee ooppeenniinngg jjoouurrnnaallss aarree pprroocceesssseedd,, tthhee bbaallaannccee oonn tthhee aaccccrruuaallss aanndd pprreeppaayymmeennttss aaccccoouunnttss wwiillll bbee zzeerroo.. TThheeyy wwiillll nnoott bbee uusseedd aaggaaiinn uunnttiill tthhee eenndd ooff tthhee nneeww ppeerriioodd.. MMoosstt ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemmss aallllooww yyoouu ttoo sseett uupp ssppeecciiaall jjoouurrnnaallss ccaalllleedd rreevveerrssiinngg jjoouurrnnaallss wwhhiicchh aarree ffllaaggggeedd ttoo aauuttoommaattiiccaallllyy bbee rreevveerrsseedd bbyy tthhee ssyysstteemm aafftteerr aa ssppeecciiffiicc ddaattee.. 44..11 ..11 RReevveerrssiinngg aaccccrruuaallss WWee sshhaallll uussee tthhee eelleeccttrriicciittyy aaccccoouunntt ffrroomm IInntteerraaccttiivvee qquueessttiioonn 11 aabboovvee,, pplluuss aa nneeww aaccccrruuaall lleeddggeerr aaccccoouunntt,, aanndd sseeee hhooww tthhee aaccccrruuaall iiss rreevveerrsseedd aatt tthhee bbeeggiinnnniinngg ooff tthhee nneeww ppeerriioodd,, tthheenn hhooww aa nneeww aaccccrruuaall iiss sseett uupp aatt tthhee eenndd ooff tthhee nneeww ppeerriioodd.. AACCCCRRUUAALL Fl 2200XX22 3311 DDeecc BBaallaannccee cc//dd 332277..6688 332277..6688 332277..6688 332277..6688 2200XX33 11 JJaann EElleeccttrriicciittyy ((aaccccrruuaall rreevveerrsseedd)) 332277..6688 332277..6688 --- Trang 266 --- EELLEECCTTRRIICCIITTYY 2200XX22 2200XX22 SSttaatteemmeenntt ooff pprrooffiitt oorr 33 00 AApprr CCaasshh aatt bbaannkk 227799..4477 3311 DDeecc lloossss 11,,338888..2233 3311 JJuull CCaasshh aatt bbaannkk 666633..8800 3311 OOcctt CCaasshh aatt bbaannkk 111177..2288 3311 DDeecc AAccccrruuaall aaccccoouunntt 332277..6688 11,,338888..2233 11,,338888..2233 2200XX33 2200XX33 3311 JJaann CCaasshh aatt bbaannkk 449911..5522 11 JJaann AAccccrruuaall rreevveerrsseedd 332277..6688 SSttaatteemmeenntt ooff pprrooffiitt oorr 33 00 AApprr CCaasshh aatt bbaannkk 440000..9933 3311 DDeecc lloossss 22,,338877..8877 3311 JJuull CCaasshh aatt bbaannkk 770000..9944 3311 OOcctt CCaasshh aatt bbaannkk 662200..0000 3311 DDeecc AAccccrruuaall aaccccoouunntt 550022..11 66 22,,771155..5555 22,,771155..5555 TThhee 2200XX33 ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss cchhaarrggee ooff 22,,338877..8877 aanndd aaccccrruuaall ffoorr 550022..11 66 ccaann bbee cchheecckkeedd aass ffoolllloowwss:: PPrrooppoorrttioionn cchhaarrggeedd iinn IInnvvooiiccee ppaaiidd 2200XX33 3311 JJaann XX33 449911..5522 11//33 116633..8844 33 00 AA pp rr XX 33 440000..9933 aallll 440000..9933 3311 JJuull XX33 770000..9944 aallll 770000..9944 3311 OO cc tt XX 33 662200..0000 aallll 662200..0000 3311 JJaann XX44 775533..2244 22//33 550022..1166 CChhaarrggee ttoo ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss iinn 2200XX33 22,,338877..8877 44..11..22 RReevveerrssiinngg pprreeppaayymmeennttss UUssiinngg tthhee aaddvveerrttiissiinngg aaccccoouunntt ffrroomm tthhee pprreeppaayymmeenntt wwoorrkkeedd eexxaammppllee,, tthhee 55,,000000 rreenntt pprreeppaaiidd iinn 2200XX44 wwiillll bbee rreevveerrsseedd bbyy aann ooppeenniinngg jjoouurrnnaall iinn tthhee nneeww ppeerriioodd.. TThhee aaddvveerrttiissiinngg eexxppeennssee iinn 2200XX55 wwiillll bbee ccaallccuullaatteedd aass:: AAmmoouunntt pprreeppaaiidd iinn 2200XX44 X AA dd dd :: AAddvveerrttiissiinngg eexxppeennsseess ppaaiidd iinn 2200XX55 XX LLeessss:: AAmmoouunntt pprreeppaaiidd iinn 2200XX55 ((XX)) XX --- Trang 267 --- PREPAYMENT ACCOUNT 20X4 20X4 31 Dec Advertising a/c 5,000 31 Dec Balance c/d 5,000 5,000 5,000 20X5 20X5 1 Jan Prepayment a/c 1 Jan Balance b/d 5,000 (reversal) 5,000 31 Dec Advertising a/c 5,000 31 Dec Balance c/d 5,000 10,000 10,000 ADVERTISING 20X4 20X4 In year Cash (5 payments) 25,000 31 Dec Prepayment a/c 5,000 31 Dec Statement of profit or loss 20,000 25,000 25,000 20X5 20X5 1 Jan Advertising a/c (prepayment reversed) 5,000 31 Dec Prepayment a/c 5,000 In year Cash (5 payments) 20,000 31 Dec Statement of profit or loss 20,000 25,000 25,000 Interactive question 2: Accruals 2 Sawyer owns a business dealing in pest control. Sawyer employs a team of eight people who were paid 1 2,000 per annum each in the year to 31 December 20X5. At the start of 20X6 Sawyer raised salaries by 10% to 13,200 per annum each. O n 1 July 20X6, Sawyer hired a trainee at a salary of 8,400 per annum. Sawyer pays the workforce o n the first working day of every month, one month in arrears, so that the employees receive their salary for January o n the first working day in February, etc. Requirements 2.1 Calculate the cost of salaries charged in Sawyer s statement of profit or loss for the year ended 31 December 20X6. 2.2 Calculate the amount actually paid in salaries during the year (ie, the amount of cash received by the work force). 2.3 State the amount of the accrual for salaries which will appear in Sawyer s statement of financial position as at 31 December 20X6. Worked example: Prepayments 2 The Square Wheels Garage pays fire insurance annually in advance o n 1 June each year. The firm s reporting period is the year ended 28 February 20X8. The following records insurance payments made in 20X6 and 20X7. --- Trang 268 --- Insurance paid 1 June 20X6 600 1 June 20X7 700 Requirement Calculate the insurance charge to the statement of profit or loss for the 1 2-month reporting period ended 28 February 20X8. Solution 3 months, 1 March - 31 May 20X7 (3/12 x 600) (opening prepayment) 1 50 9 months, 1 June 20X7 - 28 February 20X8 (9/12 700) 525 Insurance cost for the year to 28 February 20X8, charged to the statement of profit or loss 675 At 28 February 20X8 there is a prepayment for insurance, covering the period 1 March - 31 May 20X8. The insurance premium was paid on 1 June 20X7, but only nine months worth of the annual cost is chargeable to the reporting period ended 28 February 20X8. The prepayment of (3/12 x 700) 175 as at 28 February 20X8 will appear as a current asset in the statement of financial position of the Square Wheels Garage. In the same way, there was a prepayment of (3/12 x 600) 1 50 in the statement of financial position one year earlier as at 28 February 20X7. Interactive question 3: Accruals and prepayments The Batley Print Shop, which is not registered for VAT, rents a photocopying machine. The rental agreement does not meet the definition of a lease and therefore rental expenses are accounted for in profit or loss. It makes a quarterly payment as follows: (1) three months rental in advance (2) a charge of 2 pence per copy made during the quarter just ended The rental agreement began on 1 August 20X4. The first six quarterly bills were as follows: Cost of copies Bills dated Rental taken Total 1 August 20X4 2,100 0 2,100 1 November 20X4 2,100 1,500 3,600 1 February 20X5 2,100 1,400 3,500 1 May 20X5 2,100 1,800 3,900 1 August 20X5 2,700 1,650 4,350 1 November 20X5 2,700 1,950 4,650 The bills are paid promptly, as soon as they are received. Requirements 3.1 Calculate the charge for photocopying expenses for the year to 31 August 20X4 and the amount of prepayments and/or accrued charges as at that date. 3.2 Calculate the charge for photocopying expenses for the following year to 31 August 20X5, and the amount of prepayments and/or accrued charges as at that date. --- Trang 269 --- CCoonntetextx t eexxaammppllee:: AAccccrruuaallss 33 MMoorrggaann ooppeennss aann oonnlliinnee sshhoopp oo nn 11 MMaayy 2200XX66 ttoo sseellll ccaammppiinngg eeqquuiippmmeenntt.. MMoorrggaann eenntteerrss iinnttoo aann aaggrreeeemmeenntt wwiitthh aa llooggiissttiiccss ccoommppaannyy wwhhiicchh wwiillll ddeelliivveerr ggooooddss ttoo ccuussttoommeerrss aatt aa ffiixxeedd ccoosstt ooff 11 22,,000000 ppeerr aannnnuumm,, ppaayyaabbllee qquuaarrtteerrllyy iinn aarrrreeaarrss ((wwiitthh tthhee ffiirrsstt ppaayymmeenntt oo nn 3311 JJuullyy 2200XX66)).. MMoorrggaann ss rreeppoorrttiinngg ppeerriioodd eennddss oo nn 3311 DDeecceemmbbeerr eeaacchh yyeeaarr.. TThhee ddiissttrriibbuuttiioonn ccoossttss lleeddggeerr aaccccoouunntt aass aatt 3311 DDeecceemmbbeerr 2200XX66 wwiillll rreeccoorrdd oonnllyy ttwwoo ffiixxeedd ppaayymmeennttss ((oonn 3311 11 JJuullyy aanndd 3311 OOccttoobbeerr)) aanndd tthheerree wwiillll bbee ttwwoo mmoonntthhss aaccccrruueedd ddiissttrriibbuuttiioonn ccoossttss ffoorr NNoovveemmbbeerr aanndd DDeecceemmbbeerr 2200XX66 (( 22,,000000)),, ssiinnccee tthhee nneexxtt ffiixxeedd ppaayymmeenntt iiss nnoott dduuee uunnttiill 3311 JJaannuuaarryy 2200XX77.. 1 TThhee cchhaarrggee ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee ppeerriioodd ttoo 3311 DDeecceemmbbeerr 2200XX66 wwiillll bbee ffoorr eeiigghhtt mmoonntthhss rreenntt ((MMaayy -- DDeecceemmbbeerr iinncclluussiivvee)),, 88,,000000.. SSoo ffaarr,, tthhee rreenntt aaccccoouunntt aappppeeaarrss aass ffoolllloowwss:: DDIISSTTRRIIBBUUTTIIOONN CCOOSSTTSS AACCCCOOUUNNTT 2200XX66 2200XX66 3311 JJuullyy CCaasshh aatt bbaannkk 33,,000000 3311 OOcctt CCaasshh aatt bbaannkk 33,,000000 3311 DDeecc SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 88,,000000 TToo ccoommpplleettee tthhee ppiiccttuurree,, tthhee aaccccrruuaall ooff 22,,000000 hhaass ttoo bbee ppuutt iinn,, ttoo bbrriinngg tthhee bbaallaannccee oo nn tthhee aaccccoouunntt uupp ttoo tthhee ffuullll cchhaarrggee ffoorr tthhee yyeeaarr.. AAtt tthhee bbeeggiinnnniinngg ooff tthhee nneexxtt yyeeaarr tthhee aaccccrruuaall iiss rreevveerrsseedd.. DDIISSTTRRIIBBUUTTIIOONN CCOOSSTTSS AACCCCOOUUNNTT 2200XX66 2200XX66 3311 JJuullyy CCaasshh aatt bbaannkk 33,,000000 3311 OOcctt CCaasshh aatt bbaannkk 33,,000000 3311 DDeecc AAccccrruuaallss 22,,000000 3311 DDeecc SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 88,,000000 88,,000000 88,,000000 2200XX77 11 JJaann AAccccrruuaall rreevveerrsseedd 22,,000000 TThhee ccoorrrreessppoonnddiinngg ccrreeddiitt eennttrryy wwoouulldd bbee ttoo ccaasshh aatt bbaannkk iiff tthhee aammoouunnttss aarree ppaaiidd wwiitthhoouutt tthhee nneeeedd ffoorr aann iinnvvooiiccee -- eegg,, wwiitthh ppaayymmeenntt bbyy bbaannkk ttrraannssffeerr oorr ddiirreecctt ddeebbiitt aatt tthhee bbaannkk.. IIff tthheerree iiss aallwwaayyss aann iinnvvooiiccee wwhheenn tthhee ddiissttrriibbuuttiioonn ccoossttss bbeeccoommee ppaayyaabbllee,, tthhee ddoouubbllee eennttrryy wwoouulldd bbee:: DDEEBBIITT DDiissttrriibbuuttiioonn ccoossttss aaccccoouunntt 22,,000000 CCRREEDDIITT PPaayyaabblleess 22,,000000 TThheenn wwhheenn tthhee ddiissttrriibbuuttiioonn ccoossttss aarree ppaaiidd,, tthhee lleeddggeerr eennttrriieess wwoouulldd bbee:: DDEEBBIITT PPaayyaabblleess 22,,000000 CCRREEDDIITT CCaasshh aatt bbaannkk 22,,000000 TThhee rreenntt aaccccoouunntt ffoorr tthhee nneexxtt yyeeaarr ttoo 3311 DDeecceemmbbeerr 2200XX77,, aassssuummiinngg nn oo iinnccrreeaassee iinn rreenntt iinn tthhaatt yyeeaarr,, wwoouulldd bbee aass ffoolllloowwss:: --- Trang 270 --- DDIISSTTRRIIBBUUTTIIOONN CCOOSSTTSS AACCCCOOUUNNTT 2200XX77 2200XX77 3311 JJaann CCaasshh aatt bbaannkk 33,,000000 I 11 JJaann AAccccrruuaall rreevveerrsseedd 22,,000000 33 00 AApprr CCaasshh aatt bbaannkk 33,,000000 3311 JJuull CCaasshh aatt bbaannkk 33,,000000 3311 OOcctt CCaasshh aatt bbaannkk 33,,000000 3311 DDeecc AAccccrruuaallss 22,,000000 3311 DDeecc SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 11 22,,000000 1144,,000000 1144,,000000 2200XX88 11 JJaann AAccccrruuaall rreevveerrsseedd 22,,000000 11 AA ffuullll 11 22 mmoonntthhss ddiissttrriibbuuttiioonn ccoossttss aarree ttaakkeenn aass aann eexxppeennssee ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. CCoonntteexxtt eexxaammppllee:: PPrreeppaayymmeennttss 33 TTeerrrryy ccoommmmeenncceess bbuussiinneessss aass aa llaannddssccaappee ggaarrddeenneerr oonn 11 SSeepptteemmbbeerr 2200XX55.. TTeerrrryy iimmmmeeddiiaatteellyy ddeecciiddeess ttoo jjooiinn tthhee llooccaall ttrraaddee aassssoocciiaattiioonn,, tthhee CCoonnffeeddeerraattiioonn ooff LLuuttoonn GGaarrddeenneerrss,, ffoorr wwhhiicchh tthhee aannnnuuaall mmeemmbbeerrsshhiipp ssuubbssccrriippttiioonn iiss 11 8800, , ppaayyaabbllee aannnnuuaallllyy iinn aaddvvaannccee.. TTeerrrryy ppaaiidd tthhiiss aammoouunntt oo nn 11 SSeepptteemmbbeerr 2200XX55.. IInn tthhee ffoolllloowwiinngg yyeeaarr,, TTeerrrryy eexxppeeccttss tthhee ssuubbssccrriippttiioonn ttoo rriissee bbyy 11 22.. TTeerrrryy ddeecciiddeess tthhaatt tthhee rreeppoorrttiinngg ppeerriioodd sshhoouulldd eenndd oo nn 3300 JJuunnee eeaacchh yyeeaarr.. IInn tthhee ffiirrsstt rreeppoortrintgin g ppeerriioodd ttoo 3300 JJuunnee 2200XX66 ((11 00 mmoonntthhss)),, aa ffuullll yyeeaarr ss mmeemmbbeerrsshhiipp wwiillll hhaavvee bbeeeenn ppaaiidd,, bbuutt oonnllyy tteenn ttwweellfftthhss ooff tthhee ssuubbssccrriippttiioonn sshhoouulldd bbee cchhaarrggeedd ttoo tthhee ppeerriioodd ((11 00//11 22 11 8800 11 5500)).. TThheerree iiss aa pprreeppaayymmeenntt ooff ttwwoo mmoonntthhss ooff mmeemmbbeerrsshhiipp ssuubbssccrriippttiioonn ((iiee,, 22//1122 xx 11 8800 3300)).. TThhee jjoouurrnnaall ttoo sseett uu pp tthhee pprreeppaayymmeenntt iiss aass ffoolllloowwss:: DDEEBBIITT PPrreeppaayymmeenntt aaccccoouunntt 3300 CCRREEDDIITT SSuubbssccrriippttiioonnss aaccccoouunntt 3300 TThhee bbaallaannccee oo nn tthhee ssuubbssccrriippttiioonnss aaccccoouunntt (( 115500)) sshhoouulldd tthheenn bbee ttaakkeenn ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. TThhee bbaallaannccee oo nn tthhee pprreeppaayymmeenntt aaccccoouunntt wwiillll aappppeeaarr aass aa ccuurrrreenntt aasssseett iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt 3300 JJuunnee 2200XX66,, aanndd wwiillll bbee rreevveerrsseedd oo nn 11 JJuullyy 2200XX66.. SSUUBBSSCCRRIIPPTTIIOONNSS AACCCCOOUUNNTT 2200XX55 2200XX66 11 SSeepptt CCaasshh aatt bbaannkk 118800 3300 JJuunn SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 115500 3300 JJuunn PPrreeppaayymmeenntt 3300 118800 118800 2200XX66 11 JJuull PPrreeppaayymmeenntt rreevveerrsseedd 3300 TThhee ssuubbssccrriippttiioonn aaccccoouunntt ffoorr tthhee nneexxtt rreeppoortirntgin g ppeerriioodd wwiillll bbee:: --- Trang 271 --- SUBSCRIPTIONS ACCOUNT 20X6 20X7 3 0 Jun Statement of profit or loss (bal 1 Jul Prepayment reversed 30 190 fig) 1 Sept Cash at bank 192 3 0 Jun Prepayment (1 92 x 2/12) 32 222 222 20X7 1 Jul Prepayment reversed 32 Interactive question 4: Statement of profit or loss and statement of financial position The Umbrella Shop has the following trial balance as at 30 September 20X8: Sales 156,000 Purchases 65,000 Non-current assets 200,000 Inventory at 1 October 20X7 10,000 Cash at bank 12,000 Trade receivables 54,000 Trade payables 40,000 Distribution costs 10,000 Petty cash 2,000 Administrative expenses 15,000 Finance costs 5,000 Delivery inwards 1,000 Delivery outwards 2,000 Capital account at 1 October 20X7 180,000 376,000 376,000 The following information is available: (1) Closing inventory at 30 September 20X8 is 1 3,000, after writing off damaged goods of 2,000. (2) Included in administrative expenses is the short-term rental of specialist machinery for 6,000 covering the year to 31 December 20X8. (3) A late invoice for 1 2,000 in respect of cloud-based enterprise management software for the year ended 30 June 20X9 has not been included in the trial balance. Requirement Prepare a statement of profit or loss and statement of financial position for the year ended 30 September 20X8. --- Trang 272 --- Interactive question 5: Administrative expenses account Xbat has recorded expenses incurred on credit totalling 1 0,500 to its administrative expenses ledger account during 20X2, and expenses paid in cash of 250. At 31 December 20X2 the business estimates that the year-end accrual should be 10 0 less than the accrual brought forward, and the prepayment should be 1 50 less. Requirement What is the total cost of administrative expenses in the year ended 31 December 20X2 Professional skills focus: Assimilating and using information As you have seen in the examples and interactive questions covered so far, there is a lot of information to handle in calculating accruals and prepayments. You need to consider invoice dates, payment dates and the year end date carefully in order to correctly calculate accruals and prepayments. Professional skills focus: Structuring problems and solutions Many questions will involve an adjustment to an existing accrual or prepayment. This requires you to think differently about how to calculate the adjustment and what the required journal entry is. You need to be able to find the correct solution to questions that are worded in different ways. 5 The accrual principle and income Section overview (cid:127) The accrual principle also applies to income. (cid:127) Accrued income arises when receipt of income (such as rent or subscription) is in arrears at the end of the reporting period. (cid:127) Deferred income arises when income has been received in advance at the end of the reporting period, so it needs to be carried forward and treated as income of the following reporting period. (cid:127) Accounting for accrued income: DEBIT Accrued income (asset in the statement of financial position) X CREDIT Revenue or other income (statement of profit or loss) X (cid:127) Accounting for deferred income: DEBIT Revenue or other income (statement of profit or loss) X CREDIT Deferred income (liability in the statement of financial position) X So far we have concentrated on accrued and prepaid expenses arising from the need to match expenses with the income to which they relate. It is also necessary sometimes to treat income in line with the accruals principle. --- Trang 273 --- (a) Cash may be received in one period although the actual sale to which it relates occurs in the subsequent period. An example is a deposit (or advance payment, or payment on account) received from a customer on an item which will be delivered in the future. The deposit is banked but until the actual sale is recognised the cash should be treated as still being owing to the customer, not as income. This is known as deferred income, a current liability in the statement of financial position. (b) Cash may be received in one period in relation to an event which arose in a previous period. An example is where a supplier makes a refund in relation to a purchase in a previous period. This is known as accrued income, a current asset on the statement of financial position. The treatment is similar to accruals and prepayments of expenses: (cid:127) Calculate the amount of the deferred or accrued income. (cid:127) At the end of the reporting period, prepare a journal entry which updates the relevant statement of profit or loss accounts, and which sets up the relevant asset and liability accounts. (cid:127) At the beginning of the next reporting period, reverse the journal entry. Worked example: Deferred a n d accrued income Sunrise Carpets sells floor coverings to the public. At the end of its 1 2-month reporting period, 31 December 20X4, it has recorded as sales 1, 200 received from customers as deposits on carpets which are not due to be invoiced until February 20X5. In January 20X5 it records a 500 refund from one of its main suppliers as a result of exceeding the agreed level of custom during 20X4. Requirement Prepare journals: (1) Recording these transactions in the ledger accounts for the reporting period ended 31 December 20X4. (2) Recording these transactions in the ledger accounts for the reporting period ended 31 December 20X5. Solution (cid:127) The reversal of deferred income in 20X5 is not to the statement of profit or loss but to trade receivables. This is because we are dealing with credit transactions: the full amount of the sale will be invoiced in February 20X5 (Debit Receivables, Credit Sales), so the deposit should be credited to trade receivables in the new reporting period in anticipation. (cid:127) The full amount of purchases was originally invoiced by the supplier in 20X4, so the refund is treated as a deduction from what is owed to the supplier by being debited to trade payables in 20X5. (D 31 DecX4 DEBIT Sales 1,200 CREDIT Deferred income (liability) 1,200 Deposits from customers 31 DecX4 DEBIT Accrued income (asset) 500 CREDIT Purchases 500 Refund from supplier (2) 1 Jan X5 DEBIT Deferred income (liability) 1,200 CREDIT Trade receivables 1,200 Reversal of deferred income 1 Jan X5 DEBIT Trade payables 500 CREDIT Accrued income (asset) 500 Reversal of accrued income --- Trang 274 --- Most frequently this situation is seen in relation to subscriptions to clubs o r associations, which d o not generally maintain a receivables ledger and so just use cash accounting. Clubs and associations are likely to use a manual system of accounting. Some members pay an annual subscription earlier than they need to (in advance), and others pay late (in arrears). At the end of the year there are bound to be amounts in arrears and amounts paid in advance, but the club will nevertheless need to make sure that the income figure it shows relates only to the actual reporting period. The treatment is as follows: (cid:127) O p e n a subscriptions receivable ledger account. (cid:127) Enter all the amounts you know eg, annual income or cash received. (cid:127) Calculate the balancing figure - in an exam the balancing figure will be the amount you are looking for. SUBSCRIPTIONS RECEIVABLE Opening arrears X Opening advances X Annual income X Cash received in year X Irrecoverable amounts X Closing advances X Closing arrears X X X Interactive question 6: Accrued income The Drones Club has a reporting period of 1 2 months to 3 0 June. Its annual subscription for the year ended 30 June 20X7 was 100, and this rose to 120 per annum for the year to 30 June 20X8. As at 1 July 20X6 the Club s members had paid 2,380 in advance, and were 4,840 in arrears. The Club only has 200 members, and there are n o irrecoverable amounts. It received 23,620 in respect of subscriptions in the year to 30 June 20X7, and four members are known to b e in arrears at 30 June 20X7. Note: The Drones Club decided that from 1 July 20X6 they will n o longer accept any part payment of subscriptions. This d i d not affect the collection of arrears. Requirement How many members have paid their subscriptions for the reporting period ended 30 June 20X8 in advance Note: Use the subscriptions receivable T-account. You may also encounter deferred income/advances and accrued income/arrears in relation to rent receivable in the exam. Again, a single rent receivable ledger account is the best way to make the required calculations. 6 Accruals, prepayments, advances and arrears and the trial balance B Section overview (cid:127) Accrued expenses will be recorded in the adjustments column and processed against the initial trial balance as a debit to the expenses line and a credit to a new accruals line. The debit is added to the st atement of profit or loss expense. The credit is a liability in the statement of financial position. (cid:127) A similar approach is taken for prepaid expenses: debit a new prepayments line and credit the relevant expenses line. The debit is an asset in the statement of financial position. The credit is deducted from the statement of profit or loss expense. --- Trang 275 --- SSoo ffaarr wwee hhaavvee llooookkeedd aatt hhooww aaccccrruuaallss,, pprreeppaayymmeennttss,, aaddvvaanncceess aanndd aarrrreeaarrss aarree aaccccoouunntteedd ffoorr iinn tthhee lleeddggeerr aaccccoouunnttss,, uussiinngg cclloossiinngg aanndd ooppeenniinngg jjoouurrnnaallss.. HHoowweevveerr,, aaccccrruuaallss,, pprreeppaayymmeennttss,, aaddvvaanncceess aanndd aarrrreeaarrss aatt tthhee after ppeerriioodd eenndd aarree uussuuaallllyy ccaallccuullaatteedd aanndd aaccccoouunntteedd ffoorr aass aaddjjuussttmmeennttss after tthhee iinniittiiaall ttrriiaall bbaallaannccee hhaass bbeeeenn eexxttrraacctteedd.. IInn aa ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm,, iitt iiss lliikkeellyy tthhaatt aa nneeww ttrriiaall bbaallaannccee wwoouulldd bbee eexxttrraacctteedd oonnccee tthhee aaccccrruuaallss aanndd pprreeppaayymmeennttss hhaadd bbeeeenn rreeccoorrddeedd.. HHoowweevveerr,, ffoorr tthhee ppuurrppoosseess ooff uunnddeerrssttaannddiinngg tthhee aapppprrooaacchh,, wwee wwiillll aassssuummee tthhaatt aaccccrruuaallss aanndd pprreeppaayymmeennttss aarree pprroocceesssseedd aass aaddjjuussttmmeennttss aaggaaiinnsstt tthhee iinniittiiaall ttrriiaall bbaallaannccee bbyy uussiinngg aaddjjuussttmmeennttss ccoolluummnnss.. (cid:127) (cid:127) CCaallccuullaattee tthhee aammoouunnttss ooff tthhee aaccccrruueedd aanndd pprreeppaaiidd eexxppeennsseess,, aanndd tthhee ddeeffeerrrreedd oorr aaccccrruueedd iinnccoommee,, aass uussuuaall.. (cid:127) (cid:127) PPrreeppaarree tthhee ppeerriioodd--eenndd jjoouurrnnaallss aass uussuuaall.. (cid:127) (cid:127) EEnntteerr tthheessee jjoouurrnnaallss iinn tthhee aaddjjuussttmmeennttss ccoolluummnnss aaggaaiinnsstt tthhee iinniittiiaall ttrriiaall bbaallaannccee.. (cid:127) (cid:127) AAdddd aaccrroossss ((ccrroossss ccaasstt)) ttoo pprreeppaarree tthhee ffiinnaall ttrriiaall bbaallaannccee.. (cid:127) (cid:127) EEnntteerr tthhee cclloossiinngg jjoouurrnnaallss iinn tthhee lleeddggeerr aaccccoouunnttss aass uussuuaall.. (cid:127) (cid:127) PPrreeppaarree aanndd eenntteerr tthhee ooppeenniinngg jjoouurrnnaallss ttoo rreevveerrssee tthhee aaccccrruuaallss aanndd pprreeppaayymmeennttss.. CCoonntteexxtt eexxaammppllee:: AAccccrruuaallss aanndd pprreeppaayymmeennttss aanndd tthhee ttrriiaall bbaallaannccee JJaaxx mmaakkeess aanndd sseellllss ccllootthhiinngg ttoo oorrddeerr.. TThhee rreeppoorrttiinngg ppeerriioodd iiss tthhee 11 22 mmoonntthhss eennddeedd 3311 DDeecceemmbbeerr.. JJaaxx hhaass eexxttrraacctteedd tthhee ffoolllloowwiinngg ttrriiaall bbaallaannccee aass aatt 3311 DDeecceemmbbeerr 2200XX11 :: DDeebbiti t CCrreedditit CCaasshh aatt bbaannkk 66,,554411 OOppeenniinngg ccaappiittaall 1155,,000000 LLooaann 88,,000000 NNoonn--ccuurrrreenntt aasssseettss 4455,,000000 TTrraaddee ppaayyaabblleess 1166,,775588 EExxppeennsseess 1100,,887777 PPuurrcchhaasseess 6622,,997755 SSaalleess 115577,,663322 OOtthheerr iinnccoommee 00 TTrraaddee rreecceeiivvaabblleess 2222,,885544 DD rraa ww ii nn gg ss 4499,,114 433 119977,,339900 119977,,339900 JJaaxx nneeeeddss ttoo ttaakkee aaccccoouunntt ooff tthhee ffoolllloowwiinngg mmaatttteerrss:: ((aa)) TThhee qquuaarrtteerrllyy ppoowweerr bbiillllss aarree 882222.. TThhee llaasstt bbiillll ppaaiidd wwaass iinn rreessppeecctt ooff tthhee qquuaarrtteerr eennddiinngg 3311 OOccttoobbeerr 2200XX11.. ((bb)) TThhee aannnnuuaall iinnssuurraannccee bbiillll ooff 22,,997700 wwaass ppaaiidd oonn 11 MMaayy 2200XX11 iinn rreessppeecctt ooff tthhee yyeeaarr ttoo 3300 AApprriill 2200XX22.. ((cc)) SSaalleess iinncclluuddee 335500 rreecceeiivveedd ffrroomm ccaasshh ccuussttoommeerrss iinn DDeecceemmbbeerr iinn rreessppeecctt ooff iitteemmss ooff ccllootthhiinngg tthhaatt JJaaxx wwiillll ccoommpplleettee iinn JJaannuuaarryy 2200XX22.. ((dd)) AA rrooyyaallttyy ooff 5588 iiss dduuee ffrroomm aa ffaasshhiioonn mmaaggaazziinnee wwhhiicchh uusseedd JJaaxx ss pprroodduuccttss iinn aa ffaasshhiioonn sshhoooott.. JJaaxx wwiisshheess ttoo aaccccoouunntt ffoorr tthhiiss aass ootthheerr//aaccccrruueedd iinnccoommee rraatthheerr tthhaann ttrraaddee rreecceeiivvaabblleess.. WWee nneeeedd ttoo pprroocceessss tthhee nneecceessssaarryy aaddjjuussttmmeennttss aaggaaiinnsstt tthhee iinniittiiaall ttrriiaall bbaallaannccee.. --- Trang 276 --- LLeeddggeerr bbaallaannccee IInniittiiaall ttrriiaall bbaallaannccee AAddjjuussttmmeennttss FFiinnaall ttrriiaall bbaallaannccee DDeebbiitt CCrreeddiitt DDeebbiitt CCrreeddiitt DDeebbiitt CCrreeddiitt CCaasshh aatt bbaannkk 66,,554411 66,,554411 OOppeenniinngg ccaappiittaall 1155,,000000 1155,,000000 LLooaann 88,,000000 88,,000000 NNoonn--ccuurrrreenntt aasssseettss 4455,,000000 4455,,000000 TTrraaddee ppaayyaabblleess 1166,,775588 1166,,775588 EExxppeennsseess ((aa)),,((bb)) 1100,,887777 554488 990 990 1100,,443355 PPuurrcchhaasseess 6622,,997755 6622,,997755 SSaalleess ((cc)) 115577,,663322 335500 115577,,228822 OOtthheerr iinnccoommee ((dd)) 5588 5588 TTrraaddee rreecceeiivvaabblleess 2222,,885544 2222,,885544 DDrraawwiinnggss 4499,,114433 4499,,114433 AAccccrruuaallss ((882222 xx 22//33)) ((aa)) 554488 554488 PPrreeppaayymmeennttss ((22,,997700 xx 44//11 22)) ((bb)) 999900 999900 AAccccrruueedd iinnccoommee ((dd)) 5588 5588 DDeeffeerrrreedd iinnccoommee ((cc)) 335500 335500 119977,,339900 119977,,339900 11,,994466 11,,994466 119977,,999966 119977,,999966 SS uu mm mm aa rr yy AAccccrruuaallss pprriinncciippllee MMaattcchh eexxppeennsseess wwiitthh iinnccoommee AAccccrruueedd eexxppeennssee aatt eenndd ooff pprreevviioouuss ppeerriioodd PPrreeppaaiidd eexxppeennssee aatt eenndd ooff pprreevviioouuss ppeerriioodd DDRR EEExxxpppeeennnssseee (((ssstttaaattteeemmmeeennnttt oooff pprrooffiitt oorr lloossss)) DDRR PPrreeppaayymmeenntt ((aasssseett iinn ssttaatteemmeenntt ooff CCRR AAccccrruuaall ((lliiaabbiilliittyy iinn ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) ffiinnaanncciiaall ppoossiittiioonn)) CCRR EExxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) RReevveerrssee eennttrriieess iinn nneeww ppeerriioodd DDeeffeerrrreedd iinnccoommee aatt eenndd ooff yyeeaarr AAccccrruueedd iinnccoommee aatt eenndd ooff yyeeaarr DDRR RReevveennuuee oorr ootthheerr iinnccoommee ((ssttaatteemmeenntt ooff pprrooffiitt DDRR AAccccrruueedd iinnccoommee ((aasssseett iinn ssttaatteemmeenntt ooff oorr lloossss)) ffiinnaanncciiaall ppoossiittiioonn)) CCRR DDeeffeerrrreedd iinnccoommee ((lliiaabbiilliittyy iinn ssttaatteemmeenntt ooff CCRR OOtthheerr iinnccoommee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) ffiinnaanncciiaall ppoossiittiioonn)) --- Trang 277 --- FFuurrtthheerr qquueessttiioonn pprraaccttiiccee 11 KKnnoowwlleeddggee ddiiaaggnnoossttiicc BBeeffoorree yyoouu mmoovvee oonn ttoo qquueessttiioonn pprraaccttiiccee,, ccoonnffiirrmm yyoouu aarree aabbllee ttoo aannsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss hhaavviinngg ssttuuddiieedd tthhiiss cchhaapptteerr.. IIff nnoott,, yyoouu aarree aaddvviisseedd ttoo rreevviissiitt tthhee rreelleevvaanntt lleeaarrnniinngg ffrroomm tthhee ttooppiicc iinnddiiccaatteedd.. CCoonnffiirrmm yyoouurr lleeaarrnniinngg 11 CCaann yyoouu eexxppllaaiinn wwhhaatt iiss mmeeaanntt bbyy tthhee aaccccrruuaallss pprriinncciippllee ((TTooppiicc 11 )) 22 WWhheerree iiss aann aaccccrruuaall pprreesseenntteedd iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss ((TTooppiicc 22)) 33 CCaann yyoouu pprreeppaarree tthhee jjoouurrnnaall eennttrryy ttoo rreeccoorrdd aa pprreeppaaiidd eexxppeennssee ((TTooppiicc 33)) 44 HHooww wwoouulldd aa ddeeccrreeaassee iinn aa tteelleepphhoonnee aaccccrruuaall bbee aaccccoouunntteedd ffoorr ((TTooppiicc 44)) 55 CCaann yyoouu eexxppllaaiinn tthhee ddiiffffeerreennccee bbeettwweeeenn aaccccrruueedd aanndd ddeeffeerrrreedd iinnccoommee ((TTooppiicc 55)) AAiimm ttoo ccoommpplleettee aallll tthhee sseellff--tteesstt qquueessttiioonnss aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. OOnnccee ccoommpplleetteedd,, aatttteemmpptt aallll tthhee qquueessttiioonnss iinn tthhee AAccccrruuaallss aanndd pprreeppaayymmeennttss cchhaapptteerr ooff tthhee AAccccoouunnttiinngg QQuueessttiioonn BBaanrikk-. RReeffeerr bbaacckk ttoo tthhee lleeaarrnniinngg iinn tthhiiss cchhaapptteerr ffoorr aannyy qquueessttiioonnss wwhhiicchh yyoouu ddiidd nnoott aannsswweerr ccoorrrreeccttllyy oorr wwhheerree tthhee ssuuggggeesstteedd ssoolluuttiioonn hhaass nnoott pprroovviiddeedd ssuuffffiicciieenntt eexxppllaannaattiioonn ttoo aannsswweerr aallll yyoouurr qquueerriieess.. OOnnccee yyoouu hhaavvee aatttteemmpptteedd tthheessee qquueessttiioonnss,, yyoouu ccaann mmoovvee oonn ttoo tthhee nneexxtt cchhaapptteerr.. SSeellff--tteesstt qquueessttiioonnss AAnnsswweerr tthhee ffoolllloowwiinngg qquueessttiioonnss.. 11 IIff aa bbuussiinneessss hhaass ppaaiidd pprrooppeerrttyy ttaaxx ooff 11,, 000000 ffoorr tthhee yyeeaarr ttoo 3311 MMaarrcchh 2200XX99,, wwhhaatt iiss tthhee pprreeppaayymmeenntt iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss ffoorr tthhee 1122--mmoonntthh rreeppoorrttiinngg ppeerriioodd eennddiinngg oonn 3311 DDeecceemmbbeerr 2200XX88 AA 00 BB 225500 CC 775500 DD 11,,000000 22 OOnn 55 MMaayy 2200XX88 PPoorrttaallss ppaayyss aann iinnssuurraannccee bbiillll ooff 11,, 880000 ffoorr tthhee 11 88 mmoonntthhss eennddeedd 3300 JJuunnee 2200XX99.. RReeqquuiirreemmeenntt WWhhaatt iiss tthhee cchhaarrggee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd tthhee eennttrryy ffoorr rreenntt iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn iinn rreessppeecctt ooff tthhee 1122--mmoonntthh rreeppoorrttiinngg ppeerriioodd eennddeedd 3311 MMaarrcchh 2200XX99 AA 11,, 220000 wwiitthh pprreeppaayymmeenntt ooff 330000 BB 11,, 220000 wwiitthh aaccccrruuaall ooff 660000 CC 11,, 550000 wwiitthh aaccccrruuaall ooff 330000 DD 11,, 550000 wwiitthh pprreeppaayymmeenntt ooff 330000 --- Trang 278 --- 33 AA ffiirrmm mmaaddee tthhee ffoolllloowwiinngg rreenntt ppaayymmeennttss.. 99,,000000 ffoorr tthhee ssiixx mmoonntthhss eennddeedd 3311 MMaarrcchh 2200XX66 11 22,,000000 ffoorr tthhee ssiixx mmoonntthhss eennddeedd 3300 SSeepptteemmbbeerr 2200XX66 11 11,, 1199 66 ffoorr tthhee 11 22 mmoonntthhss eennddeedd 3300 SSeepptteemmbbeerr 2200XX77 RReeqquuiirreemmeenntt TThhee cchhaarrggee ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee 11 22--mmoonntthh rreeppoorrttiinngg ppeerriioodd eennddeedd 3311 DDeecceemmbbeerr 2200XX66 wwaass:: AA 1133,,229999 BB 1199,,229999 CC 2244,,889977 DD 2222,,009988 EEhhssaann ppaaiidd 22,,550000 ffoorr ggaass dduurriinngg tthhee rreeppoorrttiinngg ppeerriioodd.. AAtt tthhee bbeeggiinnnniinngg ooff tthhee ppeerriioodd EEhhssaann oowweedd 550000;; aatt tthhee eenndd EEhhssaann oowweedd 11,,000000.. RReeqquuiirreemmeenntt WWhhaatt cchhaarrggee sshhoouulldd hhaavvee aappppeeaarreedd iinn EEhhssaann ss ssttaatteemmeenntt ooff pprrooffiitt oo rr lloossss ffoorr tthhaatt rreeppoorrttiinngg ppeerriioodd AA 22,,000000 BB 22,,550000 CC 33,,000000 DD 33,,550000 55 AAtt tthhee bbeeggiinnnniinngg ooff SSeepptteemmbbeerr BBaarrnneeyy CCoo wweerree oowweedd 220000 iinn rreenntt.. AAtt tthhee eenndd ooff SSeepptteemmbbeerr tthheeyy wweerree oowweedd 440000.. 880000 ccaasshh ffoorr rreenntt wwaass rreecceeiivveedd dduurriinngg SSeepptteemmbbeerr.. RReeqquuiirreemmeenntt WWhhaatt eennttrryy wwiillll bbee mmaaddee iinn BBaarrnneeyy 8c CCoo ss ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr SSeepptteemmbbeerr ffoorr rreenntt rreecceeiivvaabbllee AA DDeebbiitt 660000 BB DDeebbiitt 11,,000000 CC CCrreeddiitt 660000 DD CCrreeddiitt 11,,000000 NNooww gg oo bbaacckk ttoo tthhee IInnttrroodduuccttiioonn aanndd eennssuurree tthhaatt yyoouu hhaavvee aacchhiieevveedd tthhee LLeeaarrnniinngg oouuttccoommeess lliisstteedd ffoorr tthhiiss cchhaapptteerr.. --- Trang 279 --- AAnnsswweerrss tt oo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 11 TThhee tthhrreeee iinnvvooiicceess rreecceeiivveedd dduurriinngg 2200XX22 ttoottaalllleedd 11,, 006600..5555,, bbuutt tthhiiss iiss nnoott tthhee ffuullll cchhaarrggee ffoorr tthhee rreeppoorrttiinngg ppeerriioodd:: tthhee NNoovveemmbbeerr aanndd DDeecceemmbbeerr eelleeccttrriicciittyy cchhaarrggee wwaass nnoott iinnvvooiicceedd uunnttiill tthhee eenndd ooff JJaannuuaarryy 2200XX33.. TToo sshhooww tthhee ccoorrrreecctt cchhaarrggee ffoorr tthhee rreeppoorrttiinngg ppeerriioodd,, wwee aaccccrruuee tthhee cchhaarrggee ffoorr NNoovveemmbbeerr aanndd DDeecceemmbbeerr bbaasseedd oo nn JJaannuuaarryy ss bbiillll.. TThhee cchhaarrggee ffoorr 2200XX22 iiss:: PPaaiidd iinn yyeeaarr 11,,006600..5555 AAccccrruuaall ((22//33 xx 449911.. 5522)) 332277..6688 11,,338888..2233 TThhee ddoouubbllee eennttrryy ffoorr tthhee aaccccrruuaall wwiillll bbee:: DDEEBBIITT EElleeccttrriicciittyy aaccccoouunntt 332277..6688 CCRREEDDIITT AAccccrruuaallss 332277..6688 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 22 22..11 SSaallaarriieess eexxppeennssee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss yyeeaarr eennddeedd 3311 DDeecceemmbbeerr 2200XX66 CCoosstt ooff 88 eemmppllooyyeeeess ffoorr aa ffuullll yyeeaarr aatt 11 33,,220000 eeaacchh 11 0055,,660000 CCoosstt ooff ttrraaiinneeee ffoorr aa hhaallff yyeeaarr (( 88,,440000//22)) 44,,220000 110099,,880000 22..22 SSaallaarriieess aaccttuuaallllyy ppaaiidd iinn 2200XX66 DDeecceemmbbeerr 2200XX55 ssaallaarriieess ppaaiidd iinn JJaannuuaarryy ((88 eemmppllooyyeeeess xx 11 ,, 000000 ppeerr mmoonntthh)) 88,,000000 SSaallaarriieess ooff 88 eemmppllooyyeeeess ffoorr JJaannuuaarryy -- NNoovveemmbbeerr 2200XX66 ppaaiidd iinn FFeebbrruuaarryy -- DDeecceemmbbeerr ((88 eemmppllooyyeeeess xx 11, ,11 0000 ppeerr mmoonntthh xx 11 11 mmoonntthhss)) 9966,,880000 SSaallaarryy ooff ttrraaiinneeee ((ffoorr JJuullyy -- NNoovveemmbbeerr ppaaiidd iinn AAuugguusstt -- DDeecceemmbbeerr:: 55 mmoonntthhss xx 770000 ppeerr mmoonntthh)) 33,,550000 SSaallaarriieess aaccttuuaallllyy ppaaiidd 11 0088,,330000 22..33 AAccccrruueedd ssaallaarryy aass aatt 3311 DDeecceemmbbeerr 2200XX66 ((iiee,, ccoossttss cchhaarrggeedd iinn tthhee SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, bbuutt nnoott yyeett ppaaiidd)) 88 eemmppllooyyeeeess xx 11 mmoonntthh xx 11 ,,11 0000 ppeerr mmoonntthh 88,,880000 11 ttrraaiinneeee xx 11 mmoonntthh xx 770000 ppeerr mmoonntthh 770000 99,,550000 --- Trang 280 --- SSuummmmaarryy AAccccrruueedd ssaallaarriieess aass aatt 11 JJaannuuaarryy 2200XX66 ((DDeecceemmbbeerr 2200XX55 ssaallaarriieess)) 88,,000000 AAdddd ssaallaarriieess ccoosstt ffoorr 2200XX66 ((SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss ((aa)))) 11 0099,,880000 111177,,880000 LLeessss ssaallaarriieess ppaaiidd ((bb)) ((11 0088,,330000)) EEqquuaallss aaccccrruueedd ssaallaarriieess aass aatt 3311 DDeecceemmbbeerr 2200XX66 ((lliiaabbiilliittyy iinn ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ((cc)))) 99,,550000 SSAALLAARRIIEESS AACCCCOOUUNNTT 2200XX66 2200XX66 CCaasshh ppaaiidd 110088,,330000 11 JJaann AAccccrruuaall rreevveerrsseedd 88,,000000 3311 DDeecc AAccccrruuaall 99,,550000 3311 DDeecc SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 110099,,880000 111177,,880000 111177,,880000 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 33 33..11 YYeeaarr ttoo 3311 AAuugguusstt 2200XX44 OOnnee mmoonntthh ss rreennttaall ((11//33 xx 22,,11 0000)) 770000 AAccccrruueedd ccooppyyiinngg cchhaarrggeess ((11//33 xx 11,,550000)) 550000 PPhhoottooccooppyyiinngg eexxppeennssee ((SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) 11,, 220000 FFrroomm tthhee qquuaarrtteerrllyy bbiillll ddaatteedd 11 AAuugguusstt 2200XX44 FFrroomm tthhee qquuaarrteterlryl y bbiillll ddaatteedd 11 NNoovveemmbbeerr 2200XX44 TThheerree iiss aa pprreeppaayymmeenntt ffoorr 22 mmoonntthhss rreennttaall ((22//33 xx 22,,11 0000 11 , ,440000)) aass aatt 3311 AAuugguusstt 2200XX44,, aanndd aann aaccccrruuaall ffoorr ccooppyyiinngg cchhaarrggeess ooff 11,,550000//33 550000 33..22 YYeeaarr ttoo 3311 AAuugguusstt 2200XX55 RReennttaall ffrroomm 11 SSeepptteemmbbeerr 2200XX44 -- 3311 JJuullyy 2200XX55 ((11 11 mmoonntthhss aatt 22,,11 0000 ppeerr qquuaarrteter r oorr 770000 ppeerr mmoonntthh)) 77,,770000 RReennttaall ffrroomm 11 AAuugguusstt -- 3311 AAuugguusstt 2200XX55 ((11//33 xx 22,,770000)) 990000 RReennttaall cchhaarrggee ffoorr tthhee yyeeaarr 88,,660000 CCooppyyiinngg cchhaarrggeess:: 11 SSeepptteemmbbeerr -- 33 11 OOccttoobbeerr 2200XX44 ((22//33 xx 11,,550000)) 11,,000000 11 NNoovveemmbbeerr 2200XX44 -- 3311 JJaannuuaarryy 2200XX55 11, , 440000 11 FFeebbrruuaarryy -- 3300 AApprriill 2200XX55 11, , 880000 11 MMaayy --3311 JJuullyy 2200XX55 11,,665500 AAccccrruueedd cchhaarrggeess ffoorr AAuugguusstt 2200XX55 ((11//33 xx 11 ,,995500)) 665500 --- Trang 281 --- 66,,550000 PPhhoottooccooppyyiinngg eexxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) 11 55,,11 0000 TThheerree iiss aa pprreeppaayymmeenntt ffoorr 22 mmoonntthhss rreennttaall ((22//33 xx 22,,770000 11, , 880000)) aass aatt 3311 AAuugguusstt 2200XX55,, aanndd aann aaccccrruuaall ffoorr ccooppyyiinngg cchhaarrggeess ooff 11,,995500//33 665500.. SSuummmmaarryy ooff rreeppoorrttiinngg ppeerriioodd 11 SSeepptteemmbbeerr 2200XX44 -- 3311 AAuugguusstt 2200XX55 RReennttaall CCooppyyinigng cchhaarrggeess ccoosststs PPrreeppaayymmeenntt aass aatt 3311 AAuugguusstt 2200XX44 ((22//33 xx 22,,11 0000)) 11,,440000 AAccccrruueedd cchhaarrggee aass aatt 3311 AAuugguusstt 2200XX44 ((550000)) BBiillllss ppaaiidd dduurriinngg tthhee rreeppoorrttiningg ppeerriioodd 11 NNoovveemmbbeerr 2200XX44 22,,110000 11,,550000 11 FFeebbrruuaarryy 2200XX55 22,,110000 11,,440000 11 MMaayy 2200XX55 22,,110000 11,,880000 11 AAuugguusstt 2200XX55 22,,770000 11,,665500 PPrreeppaayymmeenntt aass aatt 3311 AAuugguusstt 2200XX55 ((22//33 xx 22,,770000)) ((11,,880000)) AAccccrruueedd cchhaarrggee aass aatt 3311 AAuugguusstt 2200XX55 665500 CChhaarrggee ttoo tthhee SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee rreeppoorrttiningg ppeerriioodd 88,,660000 66,,550000 IItteemmss iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt 3311 AAuugguusstt 2200XX55 PPrreeppaaiidd rreennttaall ((ccuurrrreenntt aasssseett)) 11,,880000 AAccccrruueedd ccooppyyiinngg cchhaarrggee ((ccuurrrreenntt lliiaabbiilliittyy)) 665500 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 44 TThhee UUmmbbrreellllaa SShhoopp SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss ffoorr tthhee yyeeaarr eennddeedd 33 00 SSeepptteemmbbeerr 2200XX88 SSaalleess 115566,,000000 OOppeenniinngg iinnvveennttoorryy 1100,,000000 PPuurrcchhaasseess 6655,,000000 DDeelliivveerryy iinnwwaarrddss 11,,000000 CClloossiinngg iinnvveennttoorryy ((WW11 )) ((1133,,000000)) CCoosstt ooff ssaalleess ((6633,,000000)) GGrroossss pprrooffiitt 9933,,000000 DDiissttrriibbuuttiioonn ccoossttss ((11 00,,000000 22,,000000)) 1122,,000000 AAddmmiinniissttrraattiivvee eexxppeennsseess ((WW22)) 1166,,550000 FFiinnaannccee ccoossttss 55,,000000 ((3333,,550000)) PPrrooffiitt ffoorr tthhee yyeeaarr 5599,,550000 --- Trang 282 --- TThhee UUmmbbrreellllaa SShhoopp SSttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aass aatt 3300 SSeepptteemmbbeerr 2200XX88 AASSSSEETTSS NNoonn--ccuurrrreenntt aasssseettss 220000,,000000 CCuurrrreenntt aasssseettss IInnvveennttoorryy ((WW11 )) 1133,,000000 TTrraaddee rreecceeiivvaabblleess 5544,,000000 PPrreeppaayymmeennttss ((WW44)) 11,,550000 CCaasshh aatt bbaannkk aanndd iinn hhaanndd ((1122,,000000 22,,000000)) 1144,,000000 8822,,550000 TToottaall aasssseettss 228822,,550000 CCAAPPIITTAALL AANNDD LLIIAABBIILLIITTIIEESS OOwwnneerr ss ccaappiittaall BBaallaannccee bbrroouugghhtt ffoorrwwaarrdd 118800,,000000 PPrrooffiitt ffoorr tthhee yyeeaarr 5599,,550000 223399,,550000 CCuurrrreenntt lliiaabbiilliittiieess TTrraaddee ppaayyaabblleess 4400,,000000 AAccccrruuaallss ((WW33)) 33,,000000 4433,,000000 TToottaall ccaappiittaall aanndd lliiaabbiilliittiieess 228822,,550000 WWOORRKKIINNGGSS ((11 )) CClloossiinngg iinnvveennttoorryy AAss tthhee ffiigguurree ooff 1133 ,,000000 iiss aafftteerr wwrriittiinngg ooffff ddaammaaggeedd ggooooddss,, nnoo ffuurrtthheerr aaddjjuussttmmeennttss aarree nneecceessssaarryy.. RReemmeemmbbeerr tthhaatt yyoouu aarree ccrreeddiittiinngg cclloossiinngg iinnvveennttoorryy ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd tthhee ccoorrrreessppoonnddiinngg ddeebbiitt iiss ttoo tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. ((22)) AAddmmiinniissttrraattiivvee eexxppeennsseess PPeerr ttrriiaall bbaallaannccee 1155,,000000 AAdddd aaccccrruuaall ((WW33)) 33,,000000 LLeessss pprreeppaayymmeenntt ((WW44)) ((11,,550000)) 1166,,550000 ((33)) AAccccrruuaall SSooffttwwaarree ccoossttss ffoorr yyeeaarr ttoo 3300 JJuunnee 2200XX99 1122,,000000 AAccccrruuaall ffoorr ppeerriioodd ttoo 3300 SSeepptteemmbbeerr 2200XX88 ((33//11 22 xx 11 22,,000000)) 33,,000000 --- Trang 283 --- ((44)) PPrreeppaayymmeenntt MMaacchhiinneerryy rreennttaall ffoorr tthhee yyeeaarr ttoo 3311 DDeecceemmbbeerr 2200XX88 66,,000000 PPrreeppaayymmeenntt ffoorr ppeerriioodd 11 OOccttoobbeerr ttoo 3311 DDeecceemmbbeerr 2200XX88 ((33//11 22 xx 66,,000000)) 11,,550000 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 55 AADDMMIINNIISSTTRRAATTIIVVEE EEXXPPEENNSSEESS TTrraaddee ppaayyaabblleess 1100,,550000 CCaasshh aatt bbaannkk aaccccoouunntt 225500 DDeeccrreeaassee iinn aaccccrruuaallss 110000 DDeeccrreeaassee iinn pprreeppaayymmeenntt 115500 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 1100,,880000 1100,,990000 1100,,990000 AAnnsswweerr ttoo IInntteerraaccttiivvee qquueessttiioonn 66 SSUUBBSSCCRRIIPPTTIIOONNSS RREECCEEIIVVAABBLLEE AArrrreeaarrss ((aaccccrruueedd iinnccoommee AAddvvaanncceess ((ddeeffeerrrreedd 11 JJuullyyXX66 rreevveerrsseedd)) 44,,884400 11 JJuullyyXX66 iinnccoommee rreevveerrsseedd)) 22,,338800 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 33 00 JJuunnee XX77 ((220000 xx 110000)) 2200,,000000 CCaasshh aatt bbaannkk aaccccoouunntt 2233,,662200 AAddvvaanncceess ((ddeeffeerrrreedd AArrrreeaarrss ((44 xx 11 0000)) 33 00 JJuunnee XX77 iinnccoommee)) bbaall ffiigg 11,,556600 3300 JJuunnee XX77 ((aaccccrruueedd iinnccoommee)) 440000 2266,,440000 2266,,440000 AAddvvaanncceess ttoottaall 11 ,,556600,, wwhhiicchh rreepprreesseennttss 11 33 mmeemmbbeerrss ppaayymmeennttss ((11 33 xx 11 2200 11, ,556600)).. AAnnsswweerrss tt oo SSeellff--tteesstt qquueessttiioonnss 11 BB 225500 33//1122 xx 11,,000000 225500 --- Trang 284 --- 22 AA 11, , 220000 wwiitthh pprreeppaayymmeenntt ooff 330000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss 11 22//11 88 xx11 ,,880000 11,,220000 CClloossiinngg pprreeppaayymmeenntt:: 33//1188 xx 11,,880000 330000 33 BB 1199,,229999 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss:: ((33//66 xx 99,,000000)) 11 22,,000000 ((33//11 2 2 xx 11 11 ,, 11 99 66)) 19,299 44 CC 33,,000000 OOppeenniinngg aaccccrruuaall ((550000)) CCaasshh ppaaiidd 22,,550000 CClloossiinngg aaccccrruuaall 11,,000000 33,,000000 55 DD CCrreeddiitt 11,,000000 RREENNTT RREECCEEIIVVAABBLLEE OOtthheerr rreecceeiivvaabblleess ((rreevveerrssaall ooff ooppeenniinngg aaccccrruueedd iinnccoommee)) 220000 CCaasshh aatt bbaannkk 880000 SSttaatteemmeenntt ooff pprrooffiitt oorr lloossss ((bbaall ffiigg)) 11,,000000 AAccccrruueedd iinnccoommee 440000 11,,220000 11,,220000 --- Trang 285 --- CChhaapptteerr 11 00 IICCAAEEWW NN oo nn -- cc uu rr rr ee nn tt aasssseettss,, dd ee pp rr ee cc ii aa tt ii oo nn aa nn dd ii mm pp aa ii rr mm ee nn tt IInnttrroodduuccttiioonn LLeeaarrnniinngg oouuttccoommeess SSyyllllaabbuuss lliinnkkss EExxaammiinnaattiioonn ccoonntteexxtt CChhaapptteerr ssttuuddyy gguuiiddaannccee LLeeaarrnniinngg ttooppiiccss 11 TTaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss aanndd ddeepprreecciiaattiioonn ((IIAASS 11 66)) ((FFRRSS 11 0022 ss11 77)) 22 TThhee oobbjjeeccttiivvee ooff ddeepprreecciiaattiioonn 33 CCaallccuullaattiinngg ddeepprreecciiaattiioonn 44 AAccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn 55 IImmppaaiirrmmeenntt ooff aasssseettss ((IIAASS 3366)) B, D i .1 LI J i JI 66 NNoonn--ccuurrrreenntt aasssseett ddiissppoossaallss s If 77 TThhee aasssseett rreeggiisstteerr 88 IInnttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss I a - u I Ml 1WH 1 J 99 TThhee nnoonn--ccuurrrreenntt aasssseettss nnootteess ttoo tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn l-JL. . SSuummmmaarryy .Utt FFuurrtthheerr qquueessttiioonn pprraaccttiiccee : IF SSeellff--tteesstt qquueessttiioonnss AAnnsswweerrss ttoo IInntteerraaccttiivvee qquueessttiioonnss AAnnsswweerrss ttoo SSeellff--tteesstt qquueessttiioonnss --- Trang 286 --- II nn tt rr oo dd uu cc tt ii oo nn LLeeaarrnniinngg oouuttccoommeess (cid:127) (cid:127) RReeccoorrdd aanndd aaccccoouunntt ffoorr ttrraannssaaccttiioonnss aanndd eevveennttss rreessuullttiinngg iinn iinnccoommee,, eexxppeennsseess,, aasssseettss,, lliiaabbiilliittiieess aanndd eeqquuiittyy iinn aaccccoorrddaannccee wwiitthh tthhee aapppprroopprriiaattee bbaassiiss ooff aaccccoouunnttiinngg aanndd tthhee llaawwss,, rreegguullaattiioonnss aanndd aaccccoouunnttiinngg ssttaannddaarrddss aapppplliiccaabbllee ttoo tthhee ffiinnaanncciiaall ssttaatteemmeennttss (cid:127) (cid:127) IIddeennttiiffyy tthhee mmaaiinn ccoommppoonneennttss ooff aa sseett ooff ffiinnaanncciiaall ssttaatteemmeennttss aanndd ssppeecciiffyy tthheeiirr ppuurrppoossee aanndd iinntteerrrreellaattiioonnsshhiipp (cid:127) (cid:127) PPrreeppaarree aanndd pprreesseenntt aa ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn,, ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss,, ssttaatteemmeenntt ooff cchhaannggeess iinn eeqquuiittyy aanndd ssttaatteemmeenntt ooff ccaasshh fflloowwss ((oorr eexxttrraaccttss)) ffrroomm tthhee aaccccoouunnttiinngg rreeccoorrddss aanndd ttrriiaall bbaallaannccee iinn aa ffoorrmmaatt wwhhiicchh ssaattiissffiieess tthhee iinnffoorrmmaattiioonn rreeqquuiirreemmeennttss ooff tthhee eennttiittyy SSppeecciiffiicc ssyyllllaabbuuss lleeaarrnniinngg oouuttccoommeess aarree:: 11 dd;; 33aa,, cc SSyyllllaabbuuss lliinnkkss TThhee mmaatteerriiaall iinn tthhiiss cchhaapptteerr wwiillll bbee ddeevveellooppeedd ffuurrtthheerr iinn tthhee AAccccoouunnttiinngg mmoodduullee,, aanndd tthheenn iinn PPrrooffeessssiioonnaall LLeevveell FFiinnaanncciiaall AAccccoouunnttiinngg aanndd RReeppoorrttiinngg.. EExxaammiinnaattiioonn ccoonntteexxtt QQuueessttiioonnss oonn tthhee ttooppiiccss iinn tthhiiss cchhaapptteerr wwiillll bbee sseett aass mmuullttiippllee cchhooiiccee,, mmuullttii--ppaarrtt mmuullttiippllee cchhooiiccee oorr mmuullttiippllee-- rreessppoonnssee qquueessttiioonnss,, ssoommee ooff wwhhiicchh mmaayy iinnvvoollvvee ccaallccuullaattiioonnss ssoo tthhaatt tthhee ccoorrrreecctt aannsswweerr ccaann bbee sseelleecctteedd.. FFrreeqquueennttllyy ddoouubbllee eennttrryy qquueessttiioonnss aarree eexxpprreesssseedd iinn tteerrmmss ooff pprreeppaarriinngg aa jjoouurrnnaall.. IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo:: (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg pprriinncciipplleess bbeehhiinndd aaccccoouunnttiinngg ffoorr ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss ((pprrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt)),, ddeepprreecciiaattiioonn aanndd iimmppaaiirrmmeenntt (cid:127) (cid:127) ssppeecciiffyy wwhhaatt iiss iinncclluuddeedd iinn tthhee ccoosstt ooff aa nnoonn--ccuurrrreenntt aasssseett (cid:127) (cid:127) uussee tthhee ssttrraaiigghhtt lliinnee aanndd rreedduucciinngg bbaallaannccee mmeetthhooddss ttoo ccaallccuullaattee ddeepprreecciiaattiioonn (cid:127) (cid:127) ccaallccuullaattee pprrooffiittss aanndd lloosssseess oonn ddiissppoossaall ooff nnoonn--ccuurrrreenntt aasssseettss,, iinncclluuddiinngg ppaarrtt--eexxcchhaannggee ddiissppoossaallss (cid:127) (cid:127) ssppeecciiffyy tthhee eeffffeeccttss ooff cchhaannggiinngg rreessiidduuaall vvaalluueess,, uusseeffuull lliivveess aanndd ddeepprreecciiaattiioonn mmeetthhooddss oonn aammoouunnttss iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn (cid:127) (cid:127) iiddeennttiiffyy tthhee ssiittuuaattiioonnss tthhaatt mmaayy rreessuulltt iinn tthhee iimmppaaiirrmmeenntt ooff aasssseettss,, uunnddeerrssttaanndd wwhhaatt iiss mmeeaanntt bbyy tthhee tteerrmm rreeccoovveerraabbllee aammoouunntt aanndd ccaallccuullaattee aann iimmppaaiirrmmeenntt lloossss (cid:127) (cid:127) iiddeennttiiffyy hhooww ttoo aaccccoouunntt ffoorr nnoonn--ccuurrrreenntt aasssseettss,, ddeepprreecciiaattiioonn aanndd ddiissppoossaallss iinn tthhee lleeddggeerr aaccccoouunnttss (cid:127) (cid:127) ccaallccuullaattee tthhee ccaarrrryyiinngg aammoouunntt iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn ffoorr ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss,, aanndd tthhee aammoouunnttss tthhaatt aappppeeaarr iinn tthhee ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseett ddiisscclloossuurree nnoottee (cid:127) (cid:127) ccaallccuullaattee tthhee ddeepprreecciiaattiioonn cchhaarrggee,, tthhee ffiigguurree ffoorr pprrooffiittss oorr lloosssseess oonn ddiissppoossaallss aanndd iimmppaaiirrmmeenntt lloosssseess ffoorr iinncclluussiioonn iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss (cid:127) (cid:127) iiddeennttiiffyy tthhee eeffffeeccttss ooff ddeepprreecciiaattiioonn aanndd ddiissppoossaallss oonn ggrroossss aanndd nneett pprrooffiitt iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss (cid:127) (cid:127) ssppeecciiffyy tthhee uusseess ooff tthhee aasssseett rreeggiisstteerr (cid:127) (cid:127) iiddeennttiiffyy tthhee aaccccoouunnttiinngg ttrreeaattmmeenntt ffoorr iinnttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss,, ccaappiittaalliisseedd ddeevveellooppmmeenntt eexxppeennddiittuurree,, lliicceenncceess aanndd bbrraannddss.. CChhaapptteerr ssttuuddyy gguuiiddaannccee UUssee tthhiiss sscchheedduullee aanndd yyoouurr ssttuuddyy ttiimmeettaabbllee ttoo ppllaann tthhee ddaatteess oonn wwhhiicchh yyoouu wwiillll ccoommpplleettee yyoouurr ssttuuddyy ooff tthhiiss cchhaapptteerr.. --- Trang 287 --- Topic Practical significance SSttuuddyy aapppprrooaacchh EExxaamm aapppprrooaacchh IInntteerraacctitviev e qquueessttioionnss 1 TTaannggiibbllee nnoonn--ccuurrrreenntt AApppprrooaacchh YYoouu aarree eexxppeecctteedd ttoo IIQQ11 DDeepprreecciiaabbllee aasssseettss aanndd bbee aabbllee ttoo iiddeennttiiffyy tthhee aammoouunntt IIAASS 1166 pprreessccrriibbeess tthhee ddeepprreecciiaattiioonn ((IIAASS 1166)) aaccccoouunnttiinngg pprriinncciipplleess aaccccoouunnttiinngg TThhiiss iiss aa sshhoortrt bbeehhiinndd aaccccoouunnttiinngg ffoorr AAllmmoosstt aallll bbuussiinneesssseess rreeqquuiirreemmeennttss ffoorr qquueessttiioonn ttoo cchheecckk tthhaatt ttaannggiibbllee nnoonn--ccuurrrreenntt oowwnn aasssseettss bboouugghhtt iinn pprroopperetyr,t y, ppllaanntt aanndd yyoouu uunnddeerrssttaanndd hhooww aasssseettss aanndd one period for use in eeqquuiippmmeenntt.. YYoouu nneeeedd ttoo ccaallccuullaattee ddeepprreecciiaattiioonn.. TThhiiss mmaayy ggeenneerraattiinngg bbeenneeffiittss ttoo rreeaadd tthhrroouugghh tthhee ddeepprreecciiaabbllee aammoouunntt bbee aasskkeedd ddiirreeccttllyy oorr oovveerr tthhee lloonngg tteerrmm.. AA Topic carefully, bbeeffoorree wwee mmoovvee oonn ttoo bbee iimmpplliicciitt wwiitthhiinn aa mmaannuuffaaccttuurreerr mmaayy eennssuurriinngg yyoouu llooookk aatt ddeepprreecciiaattiioonn iinn ttaannggiibbllee nnoonn--ccuurrrreenntt hhaavvee mmaacchhiinneerryy,, aa uunnddeerrssttaanndd wwhhaatt tthhee mmoorree ddeettaaiill.. aasssseettss qquueessttiioonn.. ffaaccttoorryy aanndd vveehhiicclleess;; aa ccoommppoonneennttss ooff ccoosstt rreettaaiilleerr mmaayy hhaavvee aarree aanndd hhooww ttoo YYoouu wwiillll aallssoo bbee pprrooppeerrttyy ((sshhooppss)),, ddeetteerrmmiinnee tthhee eexxppeecctteedd ttoo iiddeennttiiffyy ffiixxttuurree,, ffiittttiinnggss aanndd ddeepprreecciiaabbllee aammoouunntt. wwhhaatt iiss iinncclluuddeedd iinn tthhee vveehhiicclleess;; aanndd ccoosstt ooff aa nnoonn--ccuurrrreenntt SSttoopp aanndd tthhiinnkk tteecchhnnoollooggyy aasssseett wwhheenn iitt iiss ffiirrsstt WWhhaatt bbaallaanncceess iinn tthhee bbuussiinneesssseess wwiillll hhaavvee aaccccoouunntteedd ffoorr.. ffiinnaanncciiaall ssttaatteemmeennttss ddaattaa cceennttrreess aanndd YYoouu wwiillll nnoott bbee aarree iimmppaacctteedd wwhheenn aa nneettwwoorrkkss ooff ccaabblleess,, eexxppeecctteedd ttoo ccaallccuullaattee bbuussiinneessss ppuurrcchhaasseess sseerrvveerrss aanndd ootthheerr tthhee iinniittiiaall aanndd ddeepprreecciiaatteess hhaarrddwwaarree.. WWee rreeffeerr ttoo mmeeaassuurreemmeenntt ooff aa ttaannggiibbllee nnoonn--ccuurrrreenntt ssuucchh iitteemmss aass ttaannggiibbllee rriigghhtt--ooff--uussee aasssseett.. assets nnoonn--ccuurrrreenntt aasssseettss,, oorr pprrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt ((PPPPEE)) ttoo uussee tthhee tteerrmmiinnoollooggyy uusseedd iinn IIFFRRSS AAccccoouunnttiinngg SSttaannddaarrddss.. YYoouu nneeeedd ttoo uunnddeerrssttaanndd hhoowwttoo aappppllyy tthhee rreeqquuiirreemmeennttss ooff tthhee rreelleevvaanntt IIAASS 11 66,, PPrrooppeerrttyy,, PPllaanntt aanndd EEqquuipipmmeennt t 22 TThhee oobbjjeeccttiivvee ooff AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy ddeepprreecciiaattiioonn bbee rreeqquuiirreedd ttoo iiddeennttiiffyy TThhiiss iiss aa sshhoortr t ttooppiicc tthhee aaccccoouunnttiinngg YYoouu sshhoouulldd bbee tthhaatt jjuusstt nneeeeddss aa qquuiicckk pprriinncciipplleess bbeehhiinndd ccoommfofrotarbtlae ble wwiitthh tthhee rreeaadd tthhrroouugghh.. aaccccoouunnttiinngg ffoorr nnoottiioonn ooff ddeepprreecciiaattiioonn SSttoopp aanndd tthhiinnkk ddeepprreecciiaattiioonn.. ffoorr ppuurrcchhaasseedd aanndd 11 WWhhyy ddoo wwee sspprreeaadd lleeaasseedd aasssseettss aass wwee tthhee ccoosstt oovveerr aallll tthhee hhaavvee mmeennttiioonneedd iitt aa rreeppoortirntgi ng ppeerriiooddss ffeeww ttiimmeess iinn eeaarrlliieerr wwhhiicchh bbeenneeffiitt ffrroomm cchhaapptteerrss.. TThhiiss sshhoortrt hhaavviinngg tthhee aasssseettss ttooppiicc rreemmiinnddss yyoouu ooff tthhee rreeaassoonn wwhhyy wwee ccaallccuullaattee ddeepprreecciiaattiioonn.. 3 CCaallccuullaattiningg AApppprrooaacchh DDeepprreecciiaattiioonn IIQQ22 DDeepprreecciiaattiioonn ddeepprreecciiaattiioonn ccaallccuullaattiioonnss ffeeaattuurree TThheerree iiss aa lloott ooff ddeettaaiill This question tests ffrreeqquueennttllyy iinn tthhee TThheerree aarree ttwwoo iinn tthhiiss ttooppiicc aanndd iitt yyoouurr uunnddeerrssttaannddiinngg ooff oobbjjeeccttiivvee tteesstt aanndd ccoommmmoonn mmeetthhooddss ooff ccoovveerrss sseevveerraall tthhee iimmppaacctt ooff bbootthh lloonngg--ffoorrmm qquueessttiioonnss.. ccaallccuullaattiinngg iimmpporotarntat nt ccaallccuullaattiioonnss.. mmeetthhooddss ooff YYoouu nneeeedd ttoo kknnooww ddeepprreecciiaattiioonn aanndd yyoouu YYoouu mmaayy ffiinndd tthhee ddeepprreecciiaattiioonn oonn tthhee hhooww ttoo ccaallccuullaattee nneeeedd ttoo bbee eeqquuaallllyy sseeccttiioonnss rreellaattiinngg ttoo ccaarrrryyiinngg aammoouunntt ooff ddeepprreecciiaattiioonn uussiinngg tthhee ccoommfofrotarbtlae ble wwiitthh cchhaannggiinngg aasssseettss.. ssttrraaiigghhtt lliinnee aanndd --- Trang 288 --- bbootthh.. YYoouu aallssoo nneeeedd ttoo ddeepprreecciiaattiioonn mmeetthhooddss IIQQ33 CChhaannggee iinn rreedduucciinngg bbaallaannccee kknnooww hhooww ttoo ddeeaall wwiitthh aanndd rreevviissiinngg tthhee ddeepprreecciiaattioionn mmeetthhoodd mmeetthhooddss aanndd bbee aabbllee cchhaannggeess ttoo tthhee uusseeffuull rreessiidduuaall vvaalluuee oorr ttoo aaccccoouunntt ffoorr tthhee TThhiiss qquueessttiioonn cchheecckkss lliiffee aanndd rreessiidduuaall uusseeffuull lliiffee cchhaalllleennggiinngg.. eeffffeeccttss ooff cchhaannggiinngg tthhaatt yyoouu uunnddeerrssttaanndd vvaalluueess ooff aasssseettss,, wwhhiicchh WWoorrkk tthhrroouugghh tthhee rreessiidduuaall vvaalluueess,, uusseeffuull hhooww ttoo aappppllyy aa iiss aallssoo ccoovveerreedd iinn tthhiiss mmaatteerriiaall sslloowwllyy,, lliivveess aanndd ddeepprreecciiaattiioonn cchhaannggee iinn ttooppiicc.. ccoovveerriinngg aallll eexxaammpplleess mmeetthhooddss.. ddeepprreecciiaattiioonn mmeetthhoodd.. ccaarreeffuullllyy.. YYoouu wwiillll nneeeedd ttoo bbee IIQQ44 CChhaannggee iinn SSttoopp aanndd tthhiinnkk aabbllee ttoo ccaallccuullaattee rreessiidduuaall vvaalluuee WWhheenn mmiigghhtt iitt bbee ddeepprreecciiaattiioonn oonn aa AA ttrriicckkyy qquueessttiioonn tthhaatt aapppprroopprriiaattee ttoo cchhaannggee rriigghhtt --ooff --uussee aasssseett,, ccoonnssiiddeerrss tthhaatt tthhee uusseeffuull lliiffee ooff aa bbuutt wwiillll nnoott bbee aapppprrooaacchh wwhheenn tthheerree ttaannggiibbllee nnoonn--ccuurrrreenntt eexxaammiinneedd oonn cchhaannggeess iiss aa cchhaannggee iinn rreessiidduuaall aasssseett WWhhyy mmiigghhtt ttoo uusseeffuull lliiffee oorr vvaalluuee.. AA ssiimmiillaarr tthheerree bbee eetthhiiccaall rreessiidduuaall vvaalluueess ooff aapppprrooaacchh ccaann bbee ccoonncceerrnnss aassssoocciiaatteedd lleeaasseedd aasssseettss.. aapppplliieedd wwhheenn tthheerree iiss wwiitthh aa cchhaannggee iinn aa cchhaannggee iinn uusseeffuull uusseeffuull lliiffee lliiffee.. 4 Accounting for AApppprrooaacchh IInn tthhee eexxaamm yyoouu wwiillll ddeepprreecciiaattiioonn bbee eexxppeecctteedd ttoo OOnnccee yyoouu hhaavvee sseeeenn uunnddeerrssttaanndd wwhheerree NNooww wwee kknnooww hhooww ttoo tthhee bbaassiicc jjoouurrnnaall eennttrryy,, ddeepprreecciiaattiioonn iiss ccaallccuullaattee tthhiiss iiss bbeesstt lleeaarrnneedd bbyy rreeccoorrddeedd iinn tthhee ddeepprreecciiaattiioonn,, wwee ccaann eexxaammppllee.. EEnnssuurree yyoouu pprriimmaarryy ffiinnaanncciiaall ttuurrnn oouurr aatttteennttiioonn ttoo ccoovveerr tthhee eexxaammpplleess ssttaatteemmeennttss iinn oorrddeerr ttoo hhooww ttoo aaccccoouunntt ffoorr iitt.. ccaarreeffuullllyy.. ccoorrrreeccttllyy ccaallccuullaattee YYoouu sshhoouulldd aallrreeaaddyy SSttoopp aanndd tthhiinnkk pprrooffiitt aanndd tthhee ccaarrrryyiinngg kknnooww tthhaatt WWhhyy ddoo wwee ccrreeaattee aa aammoouunntt ooff aasssseettss.. ddeepprreecciiaattiioonn iiss aann separate credit eexxppeennssee iinn pprrooffiitt oorr aaccccoouunntt ffoorr lloossss aanndd wwee wwiillll nnooww aaccccuummuullaatteedd ddiissccuussss tthhee ddeepprreecciiaattiioonn iinnsstteeaadd aaccccuummuullaatteedd ooff jjuusstt rreedduucciinngg tthhee ddeepprreecciiaattiioonn aaccccoouunntt ccoosstt ooff tthhee aasssseettss tthhaatt aappppeeaarrss iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. 5 IImmppaaiirrmmeenntt ooff aasssseettss AApppprrooaacchh YYoouu mmaayy bbee aasskkeedd ttoo IIQQ55 IImmppaaiirrmmeenntt ((IIAASS 3366)) iiddeennttiiffyy aa ssiittuuaattiioonn iinn TThhiiss iiss qquuiittee aa This question tests wwhhiicchh aann iimmppaaiirrmmeenntt IImmppaaiirrmmeenntt iiss aann cchhaalllleennggiinngg ttooppiicc yyoouurr uunnddeerrssttaannddiinngg ooff rreevviieeww iiss rreeqquuiirreedd oorr,, iimmppoortarntat nt wwhhiicchh wwiillll tteesstt yyoouurr iimmppaaiirrmmeenntt aanndd bbee aasskkeedd ttoo ccaallccuullaattee nnoottiioonn.. AAsssseettss sshhoouulldd uunnddeerrssttaannddiinngg ooff hhooww cchhaannggee iinn uusseeffuull lliiffee.. aanndd aaccccoouunntt ffoorr nnoott bbee ccaarrrriieedd aatt mmoorree ttoo aaccccoouunntt ffoorr aasssseettss YYoouu mmaayy ffiinndd iitt qquuiittee iimmppaaiirrmmeenntt iinn tthhee tthhaann tthheeiirr rreeccoovveerraabbllee tthhaatt yyoouu hhaavvee ccoovveerreedd cchhaalllleennggiinngg.. pprriimmaarryy ffiinnaanncciiaall aammoouunntt,, wwhheerree tthhee ssoo ffaarr.. WWoorrkk tthhrroouugghh ssttaatteemmeennttss iinn oorrddeerr ttoo rreeccoovveerraabbllee aammoouunntt tthhee TTooppiicc sslloowwllyy,, ccoorrrreeccttllyy ccaallccuullaattee ooff aann aasssseett wwiillll aallwwaayyss ppaayyiinngg ppaarrtitciuclaurlar pprrooffiitt aanndd tthhee ccaarrrryyiinngg bbee aassssuummeedd aass tthhee aatttteennttiioonn ttoo tthhee aammoouunntt ooff aasssseettss.. ggrreeaatteerr ooff hhooww mmuucchh eexxaammppllee ccoovveerriinngg iitt ccoouulldd bbee ssoolldd ffoorr iimmppaaiirrmmeenntt aanndd aanndd hhooww mmuucchh vvaalluuee iitt ddeepprreecciiaattiioonn.. iiss eexxppeecctteedd ttoo SSttoopp aanndd tthhiinnkk ggeenneerraattee ffrroomm iittss uussee CCaann yyoouu tthhiinnkk wwhhyy iitt iiss iinn tthhee ffuuttuurree.. aapppprroopprriiaattee ttoo rreevviieeww CCaarrrryyiinngg oouutt aann aann aasssseett ss uusseeffuull lliiffee iimmppaaiirrmmeenntt rreevviieeww iiss aanndd rreessiidduuaall vvaalluuee iimmppoortarntat nt ttoo eennssuurree aafftteerr aann iimmppaaiirrmmeenntt tthhaatt aasssseettss aarree nnoott hhaass ooccccuurrrreedd oovveerrvvaalluueedd.. --- Trang 289 --- 6 NNoonn--ccuurrrreenntt aasssseett AApppprrooaacchh TThhee ddiissppoossaall ooff nnoonn-- IIQQ66 NNoonn--ccuurrrreenntt aasssseett ddiissppoossaallss ccuurrrreenntt aasssseettss ffeeaattuurreess lleeddggeerr aaccccoouunnttss TTaakkee yyoouurr ttiimmee wwiitthh ffrreeqquueennttllyy iinn oobbjjeeccttiivvee TThhiiss iiss aann iimmppoorrttaanntt tthhiiss TTooppiicc.. CCoovveerr tthhee TThhiiss iiss aa ttrriicckkyy tteesstt aanndd lloonngg--ffoorrmm TTooppiicc tthhaatt iiss bbootthh eexxaammpplleess ccaarreeffuullllyy ttoo qquueessttiioonn tthhaatt tteessttss qquueessttiioonnss.. YYoouu nneeeedd cchhaalllleennggiinngg aanndd eennssuurree yyoouu yyoouurr uunnddeerrssttaannddiinngg ooff ttoo bbee aabbllee ttoo ccaallccuullaattee ffrreeqquueennttllyy eexxaammiinneedd.. uunnddeerrssttaanndd hhoowwttoo ddiissppoossaallss.. pprrooffiittss aanndd lloosssseess oonn NNoonn--ccuurrrreenntt aasssseettss aarree ccaallccuullaattee aanndd aaccccoouunntt ddiissppoossaall ooff nnoonn-- ddiissppoosseedd ooff aanndd ffoorr tthhee ggaaiinn oorr lloossss oonn ccuurrrreenntt aasssseettss,, rreeppllaacceedd rreegguullaarrllyy,, ddiissppoossaall oonn aa ccaasshh iinncclluuddiinngg ppaarrtt-- eeiitthheerr bbyy aa ccaasshh ssaallee aanndd ppaarrtt--eexxcchhaannggee eexxcchhaannggee ddiissppoossaallss,, oorr tthhee mmoorree bbaassiiss.. aanndd aaccccoouunntt ffoorr ccoommpplliiccaatteedd ppaarrtt-- SSttoopp aanndd tthhiinnkk ddiissppoossaallss iinn tthhee eexxcchhaannggee.. YYoouu nneeeedd lleeddggeerr aaccccoouunnttss.. AA ddiissppoossaallss aaccccoouunntt iiss ttoo uunnddeerrssttaanndd hhooww ttoo aa tteemmppoorraarryy ccaallccuullaattee tthhee ggaaiinn oorr YYoouu wwiillll nnoott bbee aaccccoouunntt.. WWhhaatt ootthheerr lloossss tthhaatt aarriisseess aanndd eexxaammiinneedd oonn tthhee tteemmppoorraarryy aaccccoouunntt hhooww ttoo cclloossee ooffff tthhee ddiissppoossaall ooff lleeaasseedd hhaavvee yyoouu mmeett iinn rreelleevvaanntt lleeddggeerr aasssseettss.. AAccccoouunnttiinngg aanndd wwhhaatt aaccccoouunnttss.. mmuusstt wwee mmaakkee ssuurree hhaappppeennss ttoo tteemmppoorraarryy aaccccoouunnttss 7 TThhee aasssseett rreeggiisstteerr AApppprrooaacchh IInn tthhee eexxaamm yyoouu mmaayy bbee rreeqquuiirreedd ttoo ssppeecciiffyy TThhiiss iiss aa sshhoorrtt YYoouu ccaann rreeaadd tthhrroouugghh tthhee uusseess ooff tthhee aasssseett tthheeoorreettiiccaall ttooppiicc tthhiiss sshhoorrtt ttooppiicc rreeggiisstteerr.. ccoovveerriinngg tthhee aasssseett qquuiicckkllyy.. rreeggiisstteerr,, wwhhiicchh iiss SSttoopp aanndd tthhiinnkk eeffffeeccttiivveellyy aa lliisstt ooff aallll WWhhyy iiss iitt iimmppoorrttaanntt ttoo tthhee nnoonn--ccuurrrreenntt aasssseettss mmaaiinnttaaiinn aa ccoonnttrrooll hheelldd bbyy aa bbuussiinneessss rreeccoorrdd ffoorr ttaannggiibbllee wwhhiicchh iiss mmaaiinnttaaiinneedd nnoonn--ccuurrrreenntt aasssseettss ffoorr iinntteerrnnaall ccoonnttrrooll ppuurrppoosseess.. 8 IInnttaannggiibbllee nnoonn-- AApppprrooaacchh IInnttaannggiibbllee aasssseettss mmaayy IIQQ77 TTaannggiibbllee aanndd ccuurrrreenntt aasssseettss ((IIAASS 3388)) ffeeaattuurree iinn tthhee iinnttaannggiibbllee aasssseettss YYoouu nneeeedd ttoo oobbjjeeccttiivvee tteesstt oorr lloonngg-- IInnttaannggiibbllee aasssseettss aarree uunnddeerrssttaanndd wwhhaatt iiss TThhiiss qquueessttiioonn tteessttss ffoorrmm qquueessttiioonnss.. YYoouu tthhoossee tthhaatt ccrreeaattee vvaalluuee mmeeaanntt bbyy iinnttaannggiibbllee yyoouurr uunnddeerrssttaannddiinngg ooff nneeeedd ttoo bbee aabbllee ttoo ffoorr aa bbuussiinneessss bbuutt aasssseettss aanndd hhooww tthheeyy ffiitt tthhee aaccccoouunnttiinngg iiddeennttiiffyy tthhee ccaannnnoott bbee sseeeenn oorr wwiitthh tthhee CCoonncceeptputaulal ttrreeaattmmeenntt ooff aa rraannggee aaccccoouunnttiinngg ttrreeaattmmeennttss ttoouucchheedd.. MMaannyy FFrraammeewwoorrkk dde effi in niittiioonn ooff iitteemmss.. ooff iinnttaannggiibbllee aasssseettss.. mmooddeerrnn bbuussiinneesssseess,, ooff aann aasssseett.. ssuucchh aass tthhoossee tthhaatt AAccccoouunnttiinngg ffoorr ootthheerr ooppeerraattee iinn tthhee iinnttaannggiibbllee aasssseettss ssuucchh tteecchhnnoollooggyy sseeccttoorr,, aass ccaappiittaalliisseedd hhaavvee aa ssiiggnniiffiiccaannttllyy ddeevveellooppmmeenntt ccoossttss,, ggrreeaatteerr ccaarrrryyiinngg lliicceenncceess aanndd bbrraannddss iiss aammoouunntt ooff iinnttaannggiibbllee iimmppoorrttaanntt.. YYoouu nneeeedd aasssseettss tthhaann ttaannggiibbllee ttoo uunnddeerrssttaanndd tthhaatt tthhee aasssseettss.. TThhiiss TTooppiicc aaccccoouunnttiinngg ffoorr ccoonnssiiddeerrss hhooww ssoommee ccaappiittaalliisseedd ooff tthhee mmoosstt ccoommmmoonn ddeevveellooppmmeenntt ccoossttss iiss ttyyppeess ooff iinnttaannggiibbllee nnoott aann aaccccoouunnttiinngg aasssseettss sshhoouulldd bbee ppoolliiccyy cchhooiiccee -- iiff tthhee aaccccoouunntteedd ffoorr.. ccrriitteerriiaa aarree ssaattiissffiieedd,, ddeevveellooppmmeenntt ccoossttss mmuusstt bbee ccaappiittaalliisseedd.. EEnnssuurree yyoouu uunnddeerrssttaanndd tthhee ddiiffffeerreennccee bbeettwweeeenn --- Trang 290 --- iinntteerrnnaallllyy ggeenneerraatteedd bbrraannddss aanndd aaccqquuiirreedd bbrraannddss.. SSttoopp aanndd tthhiinnkk WWhhyy wwoouulldd aa ppaatteenntt bbee ccllaasssseedd aass aann iinnttaannggiibbllee aasssseett TThhee ttaannggiibbllee nnoonn-- AApppprrooaacchh IInn tthhee eexxaamm yyoouu aarree ccuurrrreenntt aasssseettss nnoottee ttoo eexxppeecctteedd ttoo EEnnssuurree yyoouu tthhee ssttaatteemmeenntt ooff uunnddeerrssttaanndd wwhhaatt uunnddeerrssttaanndd tthhee ffoorrmmaatt ffiinnaanncciiaall ppoossiittiioonn iinnffoorrmmaattiioonn iiss ooff tthhee nnoottee aass sshhoowwnn iinncclluuddeedd iinn tthhee TThheerree iiss aa ffiixxeedd ffoorrmmaatt iinn tthhee eexxaammppllee.. ttaannggiibbllee nnoonn--ccuurrrreenntt ffoorr tthhee nnoonn--ccuurrrreenntt SSttoopp aanndd tthhiinnkk aasssseettss nnoottee aanndd bbee aasssseettss nnoottee tthhaatt iiss aabbllee ttoo ccaallccuullaattee tthhee WWhhyy iiss ssoommee pprreesseenntteedd iinn tthhee nnootteess ffiigguurreess tthhaatt aappppeeaarr iirr iinnffoorrmmaattiioonn pprreesseenntteedd ttoo tthhee ssttaatteemmeenntt ooff tthhee nnoottee.. iinn tthhee nnootteess ttoo tthhee ffiinnaanncciiaall ppoossiittiioonn.. TThhee ffiinnaanncciiaall ssttaatteemmeennttss nnoottee ttaakkeess tthhee aasssseett ccoosstt aanndd ddeepprreecciiaattiioonn bbaallaanncceess aanndd pprreesseennttss tthheemm ttoo tthhee uusseerrss ooff ffiinnaanncciiaall ssttaatteemmeennttss iinn aa cclleeaarr mmaannnneerr.. OOnnccee yyoouu hhaavvee wwoorrkkeedd tthhrroouugghh tthhiiss gguuiiddaannccee yyoouu aarree rreeaaddyy ttoo aatttteemmpptt tthhee ffuurrtthheerr qquueessttiioonn pprraaccttiiccee iinncclluuddeedd aatt tthhee eenndd ooff tthhiiss cchhaapptteerr.. 11 TTaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss aanndd ddeepprreecciiaattiioonn ((IIAASS 11 66)) ((FFRRSS 110022 ss117 7)) BB SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) NNoonn--ccuurrrreenntt aasssseettss aarree aasssseettss tthhaatt hhaavvee aa uusseeffuull lliiffee tthhaatt eexxtteennddss bbeeyyoonndd oonnee rreepporotirntgi ng ppeerriioodd.. (cid:127) (cid:127) NNoonn--ccuurrrreenntt aasssseettss mmaayy bbee ttaannggiibbllee oorr iinnttaannggiibbllee.. TTaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss aarree kknnoowwnn aass pprrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt ((PPRREE)).. (cid:127) (cid:127) NNoonn--ccuurrrreenntt aasssseettss mmaayy bbee ppuurrcchhaasseedd ffoorr ccaasshh,, oonn ccrreeddiitt,, vviiaa aa llooaann oorr lleeaasseedd.. LLeeaasseedd aasssseettss aarree rreeccooggnniisseedd oonn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn aanndd aarree kknnoowwnn aass rriigghhtt--ooff--uussee aasssseettss.. (cid:127) (cid:127) TThhee ccoosstt ooff aann iitteemm ooff PPPPEE iinncclluuddeess:: ppuurrcchhaassee pprriiccee;; ddeelliivveerryy ccoossttss;; ttaaxxeess aanndd dduuttiieess;; iirrrreeccoovveerraabbllee VVAATT;; iinnssttaallllaattiioonn aanndd aasssseemmbbllyy ccoossttss;; pprrooffeessssiioonnaall ffeeeess;; tteessttiinngg ccoossttss.. (cid:127) (cid:127) SSuubbsseeqquueenntt ccaappiittaall eexxppeennddiittuurree mmaayy bbee aaddddeedd ttoo tthhee ccoosstt ooff aann iitteemm ooff PPPPEE pprroovviiddeedd tthhee eexxppeennddiittuurree eennhhaanncceess oorr rreessttoorreess aannyy bbeenneeffiittss ccoonnssuummeedd.. (cid:127) (cid:127) PPaarrtt ooff tthhee ppuurrcchhaassee pprriiccee ooff aann iitteemm ooff PPPPEE mmaayy bbee sseettttlleedd bbyy ttrraaddiinngg iinn aann oolldd aasssseett iinn ppaarrtt--eexxcchhaannggee.. (cid:127) (cid:127) AAllll ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss eexxcceepptt ffrreeeehhoolldd llaanndd,, hhaavvee aa ffiinniittee uusseeffuull lliiffee.. (cid:127) (cid:127) MMaannyy iitteemmss ooff PPPPEE wwiillll hhaavvee aa rreessiidduuaall vvaalluuee aatt tthhee eenndd ooff tthheeiirr uusseeffuull lliivveess.. (cid:127) (cid:127) DDeepprreecciiaattiioonn aallllooccaatteess tthhee ccoosstt ooff aann iitteemm ooff PPPPEE,, lleessss iittss rreessiidduuaall vvaalluuee,, oovveerr iittss uusseeffuull lliiffee.. AAsssseettss aarree nnoonn--ccuurrrreenntt aasssseettss wwhheenn tthheeyy aarree eexxppeecctteedd ttoo bbee uusseedd oovveerr mmoorree tthhaann oonnee rreeppoorrttiinngg ppeerriioodd.. NNoonn--ccuurrrreenntt aasssseettss mmaayy bbee ttaannggiibbllee,, wwhhiicchh mmeeaannss tthheeyy hhaavvee pphhyyssiiccaall ssuubbssttaannccee ssuucchh aass pprrooppeerrttyy,, mmaacchhiinneerryy,, ddeelliivveerryy vveehhiicclleess,, sseerrvveerrss ((rreeffeerrrreedd ttoo aass pprrooppeerrtyty, , ppllaanntt aanndd eeqquuiippmmeenntt)) oorr iinnttaannggiibbllee wwhhiicchh mmeeaannss tthheeyy ddoo nnoott hhaavvee pphhyyssiiccaall ssuubbssttaannccee,, ssuucchh aass aa bbrraanndd oorr aa ppaatteenntt.. TTaannggiibbllee aanndd iinnttaannggiibbllee aasssseettss aarree pprreesseenntteedd sseeppaarraatteellyy oonn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. RRiigghhtt--ooff--uussee aasssseettss sshhoouulldd bbee pprreesseenntteedd wwiitthhiinn nnoonn--ccuurrrreenntt aasssseettss iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn.. --- Trang 291 --- 11 ..11 PPaayyiinngg ffoorr ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss AA bbuussiinneessss mmiigghhtt ppuurrcchhaassee aa nneeww iitteemm ooff PPPPEE ffoorr ccaasshh oorr oonn ccrreeddiitt,, vviiaa aa llooaann oorr lleeaassee tthhee aasssseett. FFoorr eexxaammppllee,, yyoouu ccaann bbuuyy aa ccaarr oouuttrriigghhtt,, lleeaassee iitt ffoorr aann aaggrreeeedd nnuummbbeerr ooff yyeeaarrss oorr hhiirree iitt ffoorr aa sshhoorrtt ppeerriioodd ooff ttiimmee.. IInn eeaacchh ccaassee,, yyoouu aarree aabbllee ttoo ddrriivvee tthhee ccaarr ((yyoouu hhaavvee tthhee rriigghhtt ttoo uussee tthhee aasssseett)),, bbuutt yyoouurr rriigghhttss oovveerr tthhee ccaarr ddiiffffeerr iinn eeaacchh ccaassee.. BBuuyy tthhee aasssseett AAnn eennttiittyy ccaann bbuuyy aann aasssseett oouuttrriigghhtt.. IInn tthhiiss ccaassee,, tthhee eennttiittyy:: ((aa)) iiss lleeggaallllyy tthhee oowwnneerr ooff tthhee aasssseett ((iiee,, iitt hhaass lleeggaall ttiittllee ttoo tthhee aasssseett));; ((bb)) hhaass ffuullll ccoonnttrrooll oovveerr hhooww tthhee aasssseett iiss uusseedd uunnttiill iitt iiss ddiissppoosseedd ooff oorr rreettiirreedd;; aanndd ((cc)) iiss eexxppoosseedd ttoo aallll tthhee rriisskkss aanndd rreewwaarrddss ooff oowwnniinngg tthhee aasssseett.. IInn tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, tthhee aasssseett wwiillll bbee ttrreeaatteedd aass aa nnoonn--ccuurrrreenntt aasssseett,, eeiitthheerr aass pprroopperetyr,t y, ppllaanntt aanndd eeqquuiippmmeenntt oorr aann iinnttaannggiibbllee aasssseett.. OOff ccoouurrssee,, tthhee eennttiittyy mmiigghhtt ppaayy ffoorr tthhee aasssseett aa ccoouuppllee ooff mmoonntthhss llaatteerr,, oonn ssttaannddaarrdd ccrreeddiitt tteerrmmss.. TThhiiss iiss tthheenn aa ssiimmppllee ccrreeddiitt ppuurrcchhaassee.. LLeeaassee tthhee aasssseett IIff aann eennttiittyy lleeaasseess aann aasssseett,, iitt iiss ppaayyiinngg aannootthheerr eennttiittyy ffoorr tthhee rriigghhtt ttoo uussee tthhaatt aasssseett ffoorr aann aaggrreeeedd ppeerriioodd ooff ttiimmee.. IItt iiss tthhee oowwnneerr ss ((lleessssoorr ss)) pprroopperetyr,t y, bbuutt tthhee eennttiittyy ((lleesssseeee)) iiss ggeettttiinngg tthhee rriigghhtt ttoo uussee iitt aanndd aacccceessss ttoo tthhee bbeenneeffiittss ffrroomm uussiinngg iitt ffoorr tthhee aaggrreeeedd ppeerriioodd ooff ttiimmee.. TThheerree aarree cclleeaarr lleeggaall ddiiffffeerreenncceess bbeettwweeeenn oowwnniinngg aanndd lleeaassiinngg aann aasssseett.. HHoowweevveerr,, mmaannyy lleeaassiinngg aarrrraannggeemmeennttss ttrraannssffeerr aallll tthhee bbeenneeffiittss aanndd rriisskkss ooff oowwnniinngg aann aasssseett ttoo tthhee lleesssseeee ffoorr aann aaggrreeeedd ppeerriioodd.. IInn ssuucchh ccaasseess,, ssiimmppllyy aaccccoouunnttiinngg ffoorr tthhee lleeaassee ppaayymmeennttss aass aann eexxppeennssee eeaacchh mmoonntthh ddooeess nnoott aapppprroopprriiaatteellyy rreefflleecctt tthhee ssuubbssttaannccee ooff tthhee aarrrraannggeemmeenntt.. IInn oorrddeerr ttoo mmoorree aaccccuurraatteellyy rreefflleecctt tthhee ssuubbssttaannccee ooff ssuucchh aarrrraannggeemmeennttss,, IIFFRRSS 11 66,, LLeeaasseess rreeqquuiirreess aa lleesssseeee ttoo rreeccooggnniissee aa nnoonn--ccuurrrreenntt rriigghhtt--ooff--uussee aasssseett rreepprreesseennttiinngg iittss rriigghhtt ttoo uussee tthhee lleeaasseedd aasssseett ffoorr aa ssppeecciiffiieedd ppeerriioodd aanndd aa lleeaassee lliiaabbiilliittyy,, rreepprreesseennttiinngg iittss oobblliiggaattiioonn ttoo mmaakkee ppaayymmeennttss uunnddeerrtthhee lleeaassee.. TThhiiss iiss aallssoo ccoonnssiisstteenntt wwiitthh tthhee ddeeffiinniittiioonn ooff aann aasssseett iinn tthhee CCoonncceeppttuuaall FFrraammeewwoorrkk wwhhiicchh ssttaatteess tthhaatt aann aasssseett iiss aa rreessoouurrccee tthhaatt iiss ccoonnttrroolllleedd bbyy tthhee eennttiittyy ((nnoott oowwnneedd)).. 11 ..22 IIAASS 11 66,, PPrrooppeerrttyy,, PPllaanntt aanndd EEqquuiippmmeenntt TThhee oobbjjeeccttiivvee ooff IIAASS 11 66 iiss ttoo pprreessccrriibbee iinn rreellaattiioonn ttoo pprroopperetyr,t y, ppllaanntt aanndd eeqquuiippmmeenntt tthhee aaccccoouunnttiinngg ttrreeaattmmeenntt ffoorr:: (cid:127) (cid:127) tthhee rreeccooggnniittiioonn ooff aasssseettss (cid:127) (cid:127) tthhee ddeetteerrmmiinnaattiioonn ooff tthheeiirr ccaarrrryyiinngg aammoouunnttss (cid:127) (cid:127) tthhee ddeepprreecciiaattiioonn cchhaarrggeess rreellaattiinngg ttoo tthheemm TThhiiss pprroovviiddeess tthhee uusseerrss ooff ffiinnaanncciiaall ssttaatteemmeennttss wwiitthh iinnffoorrmmaattiioonn aabboouutt aann eennttiittyy ss iinnvveessttmmeenntt iinn,, aanndd uussee ooff,, iittss pprroopperetyr,t y, ppllaanntt aanndd eeqquuiippmmeenntt ((PPPPEE)) aanndd cchhaannggeess iinn ssuucchh iinnvveessttmmeennttss.. IIAASS 11 66 sshhoouulldd bbee ffoolllloowweedd wwhheenn aaccccoouunnttiinngg ffoorr PPPPEE uunnlleessss aannootthheerr IIFFRRSS AAccccoouunnttiinngg SSttaannddaarrdd rreeqquuiirreess aa ddiiffffeerreenntt ttrreeaattmmeenntt,, eegg,, IIFFRRSS 55,, NNoonn--ccuurrrreenntt AAsssseettss HHeelldd ffoorr SSaallee aanndd DDiissccoonnttiinnuueedd OOppeerraattiioonnss oorr IIFFRRSS 1166,, LLeeaasseess.. UU KK GGAAAAPP aalleerrtt TThheerree aarree nnoo mmaatteerriiaall ddiiffffeerreenncceess bbeettwweeeenn IIAASS 1166 aanndd FFRRSS 110022.. 11..33 CCoosstt ooff PPPPEE TThhee ccoosstt ooff PPPPEE iinncclluuddeess aallll aammoouunnttss iinnccuurrrreedd ttoo aaccqquuiirree tthhee aasssseett aanndd aannyy aammoouunnttss tthhaatt ccaann bbee ddiirreeccttllyy aattttrriibbuuttaabbllee ttoo bbrriinnggiinngg tthhee aasssseett ttoo tthhee llooccaattiioonn aanndd ccoonnddiittiioonn nneecceessssaarryy ffoorr iitt ttoo bbee ccaappaabbllee ooff ooppeerraattiinngg iinn tthhee wwaayy iinntteennddeedd bbyy mmaannaaggeemmeenntt.. WWiitthh tthhee eexxcceeppttiioonn ooff ccaarrss,, wwhheerree tthhee VVAATT iiss nnoott uussuuaallllyy rreeccoovveerraabbllee,, tthhee aammoouunntt ccaappiittaalliisseedd wwiillll eexxcclluuddee VVAATT.. DDiirreeccttllyy aattttrriibbuuttaabbllee ccoossttss iinncclluuddee:: (cid:127) (cid:127) ppuurrcchhaassee pprriiccee (cid:127) (cid:127) ddeelliivveerryy ccoossttss (cid:127) (cid:127) ssttaammpp dduuttyy aanndd iimmpporot rt dduuttiieess ((aanndd iirrrreeccoovveerraabbllee VVAATT oonn ccaarrss)) --- Trang 292 --- (cid:127) (cid:127) ccoossttss ooff pprreeppaarriinngg tthhee ssiittee ffoorr iinnssttaallllaattiioonn aanndd aasssseemmbbllyy ooff tthhee aasssseett 11 (cid:127) (cid:127) pprrooffeessssiioonnaall ffeeeess,, ssuucchh aass lleeggaall aanndd aarrcchhiitteeccttss ffeeeess (cid:127) (cid:127) ccoossttss ooff tteessttiinngg wwhheetthheerr tthhee aasssseett iiss ffuunnccttiioonniinngg EExxppeennsseess ssuucchh aass ggeenneerraall oovveerrhheeaadd ccoossttss,, aaddmmiinniissttrraattiioonn ccoossttss,, ttrraaiinniinngg ccoossttss ffoorr ssttaaffff,, ffuueell iinn aa vveehhiiccllee oonn ddeelliivveerryy aanndd lliicceennccee ffeeeess ffoorr ooppeerraattiinngg tthhee aasssseett aarree nnoott iinncclluuddeedd aass ppaarrtt ooff tthhee ttoottaall ccoossttss ooff tthhee nnoonn--ccuurrrreenntt aasssseett.. TThhee ccoosstt ooff ssuubbsseeqquueennt t ccaappiittaall eexxppeennddiittuurree oonn aa nnoonn--ccuurrrreenntt aasssseett wwiillll bbee aaddddeedd ttoo tthhee ccoosstt ooff tthhee aasssseett,, pprroovviiddeedd tthhiiss eexxppeennddiittuurree eennhhaanncceess tthhee bbeenneeffiittss ooff tthhee nnoonn--ccuurrrreenntt aasssseett oorr rreessttoorreess aannyy bbeenneeffiittss ccoonnssuummeedd.. TThhiiss mmeeaannss tthhaatt ccoossttss ooff mmaajjoorr iimmpprroovveemmeennttss oorr aa mmaajjoorr oovveerrhhaauull mmaayy bbee ccaappiittaalliisseedd.. HHoowweevveerr,, tthhee ccoossttss ooff rreeppaaiirrss tthhaatt aarree ccaarrrriieedd oouutt ssiimmppllyy ttoo mmaaiinnttaaiinn eexxiissttiinngg ppeerrffoorrmmaannccee mmaayy nnoott bbee ccaappiittaalliisseedd:: tthheeyy wwiillll bbee ttrreeaatteedd aass eexxppeennsseess ooff tthhee rreeppoorrttiinngg ppeerriioodd iinn wwhhiicchh tthhee wwoorrkk iiss ddoonnee aanndd cchhaarrggeedd iinn ffuullll aass aann eexxppeennssee iinn tthhaatt ppeerriioodd.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAssssiimmiillaattiinngg aanndd uussiinngg iinnffoorrmmaattiioonn AA qquueessttiioonn mmaayy lliisstt sseevveerraall eexxppeennsseess tthhaatt hhaavvee bbeeeenn iinnccuurrrreedd iinn aaccqquuiirriinngg aann iitteemm ooff PPPPEE.. IItt iiss iimmpporotarntat nt tthhaatt yyoouu ccaann ddeetteerrmmiinnee wwhhaatt iinnffoorrmmaattiioonn iiss rreelleevvaanntt wwhheenn ccaallccuullaattiinngg tthhee iinniittiiaall ccoosstt ooff tthhee aasssseett aass tthhiiss ddeetteerrmmiinneess wwhhiicchh eexxppeennsseess sshhoouulldd tthheerreeffoorree bbee ccaappiittaalliisseedd aanndd wwhhiicchh eexxppeennsseess sshhoouulldd bbee wwrriitttteenn ooffff ttoo pprrooffiitt oorr lloossss.. IInn tthhee AAccccoouunnttiinngg eexxaamm tthhee ccoosstt ooff aannyy rriigghhtt--ooff--uussee aasssseett wwiillll bbee ggiivveenn iinn tthhee qquueessttiioonn.. 11 ..44 PPaayyiinngg ffoorr PPPPEE AA bbuussiinneessss mmiigghhtt ppuurrcchhaassee aa nneeww iitteemm ooff PPPPEE ffoorr ccaasshh oorr oonn ccrreeddiitt,, oorr iitt mmaayy hhaanndd oovveerr aann oolldd aasssseett iinn ppaarrtt-- eexxcchhaannggee.. TThhiiss iiss ccoommmmoonn,, ffoorr eexxaammppllee,, wwiitthh mmoottoorr vveehhiicclleess.. TThhee ssuupppplliieerr ooff tthhee nneeww aasssseett aaggrreeeess ttoo ttaakkee tthhee oolldd aasssseett aanndd ggiivveess tthhee bbuuyyeerr aa rreedduuccttiioonn iinn tthhee ppuurrcchhaassee pprriiccee ooff tthhee nneeww aasssseett.. TThhiiss rreedduuccttiioonn iiss tthhee ppaarrtt--eexxcchhaannggee vvaalluuee ooff tthhee oolldd aasssseett.. Stt CCoonntteexxtt eexxaammppllee:: PPaarrtt--eexxcchhaannggee AA bbuussiinneessss ppuurrcchhaasseess aa nneeww eelleeccttrriicc ddeelliivveerryy vvaann,, ttrraaddiinngg iinn aann oolldd ddiieesseell vvaann iinn ppaarrt-te-xecxhcanhgaen. ge. TThhee ccoosstt ooff tthhee nneeww vvaann iiss 2255,,000000 aanndd tthhee ppaarrtt--eexxcchhaannggee vvaalluuee ooff tthhee oolldd vvaann iiss 11 00,,000000,, ssoo tthhee bbuussiinneessss wwiillll ppaayy tthhee vvaann ddeeaalleerr 11 55,,000000.. AAss wwee wwiillll sseeee bbeellooww,, pprrooffiitt oorr lloossss oonn tthhee ddiissppoossaall ooff tthhee oolldd vvaann mmuusstt aallssoo bbee ccaallccuullaatteedd aanndd rreeccoorrddeedd.. 11..55 UUsseeffuull lliiffee AAnn aasssseett hhaass aann eeccoonnoommiicc lliiffee aanndd aa uusseeffuull lliiffee.. DDeeffiinniittiioonnss EEccoonnoommiicc lliiffee:: TThhee ttoottaall ppeerriioodd oovveerr wwhhiicchh aann aasssseett iiss eexxppeecctteedd ttoo bbee eeccoonnoommiiccaallllyy uussaabbllee bbyy oonnee oorr mmoorree uusseerrss.. UUsseeffuull lliiffee:: TThhee eessttiimmaatteedd ppeerriioodd ffoorr wwhhiicchh aann iitteemm ooff PPPPEE iiss eexxppeecctteedd ttoo bbee aavvaaiillaabbllee ffoorr uussee ttoo aa bbuussiinneessss.. TThhee eeccoonnoommiicc lliiffee ooff aann aasssseett mmaayy bbee lloonnggeerr tthhaann iittss uusseeffuull lliiffee.. CCoonnssiiddeerr tthhee eexxaammppllee ooff aann eennttiittyy wwhhiicchh hhaass ccoommppaannyy ccaarrss.. AA wweellll--mmaaiinnttaaiinneedd ccaarr mmaayy hhaavvee aann eeccoonnoommiicc lliiffee ooff tteenn yyeeaarrss oorr mmoorree,, bbuutt iiff aann eennttiittyy hhaass aa ppoolliiccyy ooff rreeppllaacciinngg iittss ccaarrss eevveerryy tthhrreeee yyeeaarrss,, tthhee uusseeffuull lliiffee ooff tthhee ccaarr ttoo tthhee eennttiittyy wwiillll bbee tthhrreeee yyeeaarrss.. TThhee oonnllyy ttaannggiibbllee aasssseett tthhaatt iiss ddeeeemmeedd ttoo hhaavvee aann uunnlliimmiitteedd uusseeffuull lliiffee iiss ffrreeeehhoolldd llaanndd.. AAllll ootthheerr ttaannggiibbllee aasssseettss hhaavvee aa ffiinniittee uusseeffuull lliiffee aanndd wwiillll ddeepprreecciiaattee oovveerr tthhaatt uusseeffuull lliiffee.. DDeetteerrmmiinniinngg tthhee uusseeffuull lliiffee ooff PPPPEE iiss aa mmaatttteerr ooff jjuuddggeemmeenntt.. AAnn aaccccoouunnttaanntt wwiillll ccoonnssiiddeerr tthhee uusseeffuull lliiffee ooff ssiimmiillaarr aasssseettss hheelldd iinn tthhee ppaasstt,, tthhee uusseeffuull lliiffee ooff ootthheerr ssiimmiillaarr aasssseettss,, wwhhaatt iiss nnoorrmmaall ffoorr tthhee iinndduussttrryy aanndd tthhee eennttiittyy ss ffuuttuurree ppllaannss ffoorr tthhee aasssseett.. TThhee uusseeffuull lliiffee ddeetteerrmmiinneess tthhee ddeepprreecciiaattiioonn tthhaatt iiss cchhaarrggeedd oonn aann aasssseett eeaacchh yyeeaarr aanndd tthheerreeffoorree aaffffeeccttss bbootthh tthhee pprrooffiitt ffoorr tthhee ppeerriioodd aanndd tthhee ccaarrrryyiinngg aammoouunntt ooff aasssseettss.. IInn tthhee AAccccoouunnttiinngg eexxaamm aa lleeaasseedd aasssseett wwiillll bbee ddeepprreecciiaatteedd oovveerr tthhee lleeaassee tteerrmm wwhhiicchh wwiillll bbee tthhee ssaammee aass tthhee uusseeffuull lliiffee.. --- Trang 293 --- 11 ..66 WWhhaatt iiss ddeepprreecciiaattiioonn DDeeffiinniittiioonn DDeepprreecciiaattiioonn:: TThhee ssyysstteemmaattiicc aallllooccaattiioonn ooff tthhee ccoosstt ooff aann aasssseett,, lleessss iittss rreessiidduuaall vvaalluuee,, oovveerr iittss uusseeffuull lliiffee.. IInn ddeetteerrmmiinniinngg tthhee eexxppeennsseess ffoorr aa ppeerriioodd,, iitt iiss iimmppoorrttaanntt ttoo mmaattcchh tthhee ccoosstt ooff tthhee ccoonnssuummppttiioonn ooff nnoonn-- ccuurrrreenntt aasssseettss dduurriinngg tthhaatt ppeerriioodd ((tthhaatt iiss,, ddeepprreecciiaattiioonn)).. TToo ccaallccuullaattee tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr aa rreeppoortirntgi ng ppeerriioodd,, tthhee ffoolllloowwiinngg ffaaccttoorrss aarree rreelleevvaanntt:: (cid:127) (cid:127) aasssseett ccoosstt (cid:127) (cid:127) uusseeffuull lliiffee (cid:127) (cid:127) rreessiidduuaall vvaalluuee 11..77 RReessiidduuaall vvaalluuee AAtt tthhee eenndd ooff tthhee uusseeffuull lliiffee ooff aann iitteemm ooff PPPPEE,, tthhee bbuussiinneessss wwiillll ddiissppoossee ooff iitt aanndd aannyy eexxppeecctteedd ddiissppoossaall pprroocceeeeddss rreepprreesseenntt iittss rreessiidduuaall vvaalluuee.. FFoorr iinnssttaannccee,, aann aasssseett tthhaatt iiss eexxppeecctteedd ttoo bbee ssoolldd ffoorr 550000 aatt tthhee eenndd ooff iittss uusseeffuull lliiffee hhaass aa rreessiidduuaall vvaalluuee ooff 550000.. IIff iitt iiss uunnlliikkeellyy ttoo bbee aa ssiiggnniiffiiccaanntt aammoouunntt,, aa rreessiidduuaall vvaalluuee ooff zzeerroo wwiillll bbee aassssuummeedd.. TThhee ccoosstt ooff aann iitteemm ooff PPPPEE lleessss iittss rreessiidduuaall vvaalluuee rreepprreesseennttss tthhee ttoottaall aammoouunntt ttoo bbee ddeepprreecciiaatteedd ((iittss ddeepprreecciiaabbllee aammoouunntt)) oovveerr iittss uusseeffuull lliiffee.. DDeetteerrmmiinniinngg rreessiidduuaall vvaalluuee iiss aannootthheerr aarreeaa iinn wwhhiicchh aann aaccccoouunnttaanntt nneeeeddss ttoo aappppllyy jjuuddggeemmeenntt aass ttoo wwhhaatt mmaayy bbee aapppprroopprriiaattee ffoorr eeaacchh aasssseett.. TThhee rreessiidduuaall vvaalluuee aassssiiggnneedd ttoo aann aasssseett iiss oonnee ooff tthhee ffaaccttoorrss wwhhiicchh ddeetteerrmmiinneess tthhee ddeepprreecciiaattiioonn tthhaatt iiss cchhaarrggeedd eeaacchh yyeeaarr.. NNoottee:: FFoorr eexxaamm ppuurrppoosseess,, aallwwaayyss aassssuummee tthhee rreessiidduuaall vvaalluuee iiss zzeerroo uunnlleessss ttoolldd ootthheerrwwiissee.. DDeeffiinniittiioonn RReessiidduuaall vvaalluuee:: TThhee eessttiimmaatteedd aammoouunntt tthhaatt tthhee eennttiittyy wwoouulldd oobbttaaiinn ffrroomm ddiissppoossiinngg ooff tthhee aasssseett aatt tthhee eenndd ooff iittss uusseeffuull lliiffee,, aafftteerr ddeedduuccttiinngg eessttiimmaatteedd ddiissppoossaall ccoossttss.. IInntteerraaccttiivvee qquueessttiioonn 11 :: DDeepprreecciiaabbllee aammoouunntt AArruunnddeell EEnntteerrpprriisseess ppuurrcchhaasseedd aa nneeww ccaarr ffoorr aa ssaalleess rreepprreesseennttaattiivvee.. TThhee iinnvvooiiccee rreecceeiivveedd ccoonnttaaiinneedd tthhee ffoolllloowwiinngg iinnffoorrmmaattiioonn:: LLiisstt pprriiccee ooff tthhee ccaarr 11 88,,772200 DDeeppoossiitt ppaaiidd ((66,,220000)) AAmmoouunntt dduuee 11 22,,552200 IItt iiss eessttiimmaatteedd tthhaatt tthhee nneeww ccaarr wwiillll hhaavvee aa uusseeffuull lliiffee ooff tthhrreeee yyeeaarrss aanndd wwiillll hhaavvee aa rreessiidduuaall vvaalluuee ooff 66,,336600.. RReeqquuiirreemmeenntt CCaallccuullaattee tthhee ttoottaall aammoouunntt ttoo bbee ddeepprreecciiaatteedd iinn rreessppeecctt ooff tthhee nneeww ccaarr.. 22 TThhee oo bb jj ee cc ttiivvee ooff dd ee pp rr ee cc ii aa tt ii oo nn 9 SSeecctitoion n oovveerrvviieeww (cid:127) DDeepprreecciiaattiioonn aarriisseess ffrroomm tthhee aapppplliiccaattiioonn ooff tthhee aaccccrruuaall pprriinncciippllee.. --- Trang 294 --- TThhee ddeepprreecciiaabbllee aammoouunntt iiss ccoosstt lleessss rreessiidduuaall vvaalluuee,, aanndd tthhee uusseeffuull lliiffee pprroovviiddeess tthhee ttiimmee ppeerriioodd oovveerr wwhhiicchh tthhee aasssseett sshhoouulldd bbee ddeepprreecciiaatteedd.. SSoo hhooww mmuucchh ooff tthhiiss ddeepprreecciiaabbllee aammoouunntt iiss cchhaarrggeedd aaggaaiinnsstt pprrooffiittss iinn eeaacchh rreeppoorrttiinngg ppeerriioodd 22..11 AAccccoouunnttiinngg ccoonncceeppttss aanndd ddeepprreecciiaattiioonn TThhee nneeeedd ttoo ddeepprreecciiaattee ttaannggiibbllee nnoonn--ccuurrrreenntt aasssseettss aarriisseess ffrroomm tthhee aaccccrruuaall pprriinncciippllee.. IIff mmoonneeyy iiss ssppeenntt oonn ppuurrcchhaassiinngg aann aasssseett,, tthheenn tthhiiss aammoouunntt mmuusstt aatt ssoommee ttiimmee bbee cchhaarrggeedd aaggaaiinnsstt pprrooffiittss.. IIff tthhee aasssseett ccoonnttrriibbuutteess ttoo tthhee ggeenneerraattiioonn ooff iinnccoommee oovveerr aa nnuummbbeerr ooff rreeppoorrttiinngg ppeerriiooddss iitt wwoouulldd bbee iinnaapppprroopprriiaattee ttoo cchhaarrggee aannyy ssiinnggllee ppeerriioodd ((eegg,, tthhee ppeerriioodd iinn wwhhiicchh tthhee aasssseett wwaass aaccqquuiirreedd)) wwiitthh tthhee wwhhoollee ooff tthhee eexxppeennddiittuurree.. IInnsstteeaadd,, ssoommee mmeetthhoodd mmuusstt bbee ffoouunndd ooff sspprreeaaddiinngg tthhee ccoosstt ooff tthhee aasssseett oovveerr iittss uusseeffuull lliiffee.. 22..22 CCoommmmoonn ddeepprreecciiaattiioonn mmiissccoonncceeppttiioonnss (cid:127) (cid:127) IItt ddooeess nnoott rreefflleecctt tthhee ffaallll iinn vvaalluuee ooff aann aasssseett oovveerr iittss lliiffee.. (cid:127) (cid:127) IItt iiss nnoott sseettttiinngg aassiiddee mmoonneeyy ttoo rreeppllaaccee tthhee aasssseett aatt tthhee eenndd ooff iittss uusseeffuull lliiffee.. EEvveenn iiff tthhee aasssseett wwaass nnoott ggooiinngg ttoo bbee rreeppllaacceedd,, iittss ccoosstt sshhoouulldd ssttiillll bbee aallllooccaatteedd oovveerr iittss uusseeffuull lliiffee.. 33 CCaallccuullaattiinngg dd ee pp rr ee cc ii aa tt ii oo nn BB SSeecctitoino n oovveerrvviieeww (cid:127) (cid:127) DDeepprreecciiaattiioonn iiss cchhaarrggeedd ttoo tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss aanndd aaccccuummuullaatteedd iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn iinn aann aaccccuummuullaatteedd ddeepprreecciiaattiioonn aaccccoouunntt.. TThhee ccaarrrryyiinngg aammoouunntt ooff aann iitteemm ooff PPPPEE iiss iittss ccoosstt lleessss aaccccuummuullaatteedd ddeepprreecciiaattiioonn.. (cid:127) (cid:127) DDeepprreecciiaattiioonn mmaayy bbee ccaallccuullaatteedd oonn tthhee ssttrraaiigghhtt--lliinnee bbaassiiss:: CCoosstt ooff aasssseett -- rreessiidduuaall vvaalluuee . , . . -- -- ,, -------------------- -------------------- AAnnnnuuaall ddeepprreecciiaattiioonn cchhaarrggee UUsseeffuull lliiffee ooff tthhee aasssseett iinn yyeeaarrss (cid:127) (cid:127) AAlltteerrnnaattiivveellyy,, ddeepprreecciiaattiioonn mmaayy bbee ccaallccuullaatteedd oonn tthhee rreedduucciinngg bbaallaannccee bbaassiiss:: CCaarrrryyiinngg aammoouunntt x %% ttoo bbee aapppplliieedd AAnnnnuuaall ddeepprreecciiaattiioonn cchhaarrggee (cid:127) (cid:127) TThhee ddeepprreecciiaattiioonn mmeetthhoodd uusseedd sshhoouulldd bbee aapppplliieedd ccoonnssiisstteennttllyy.. AA cchhaannggee iinn mmeetthhoodd mmaayy ccaauussee aann iinnccrreeaasseedd cchhaarrggee.. (cid:127) (cid:127) IIff tthheerree iiss aa cchhaannggee iinn tthhee eessttiimmaattee ooff tthhee aasssseett ss uusseeffuull lliiffee oorr rreessiidduuaall vvaalluuee,, tthhiiss ttoooo wwiillll ccaauussee aa cchhaannggee iinn tthhee ddeepprreecciiaattiioonn cchhaarrggee.. WWhheenn aann iitteemm ooff PPPPEE iiss ddeepprreecciiaatteedd,, ttwwoo tthhiinnggss mmuusstt bbee aaccccoouunntteedd ffoorr.. (cid:127) (cid:127) TThhee cchhaarrggee ffoorr ddeepprreecciiaattiioonn iiss aann eexxppeennssee ooff tthhee rreeppoorrttiinngg ppeerriioodd iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss.. (cid:127) (cid:127) AAtt tthhee ssaammee ttiimmee,, tthhee aasssseett iiss wweeaarriinngg oouutt aanndd bbeeiinngg ccoonnssuummeedd,, aanndd ssoo iittss ccoosstt iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn mmuusstt bbee rreedduucceedd bbyy tthhee aammoouunntt ooff ddeepprreecciiaattiioonn cchhaarrggeedd.. IInn aa ccoommppuutteerriisseedd aaccccoouunnttiinngg ssyysstteemm,, ddeepprreecciiaattiioonn ccaann bbee ccaallccuullaatteedd aauuttoommaattiiccaallllyy pprroovviiddeedd ssttaannddiinngg ddaattaa rreeggaarrddiinngg tthhee uusseeffuull lliiffee aanndd rreessiidduuaall vvaalluuee ooff tthhee aasssseett iiss eenntteerreedd iinn tthhee ssyysstteemm.. TThhee aaccccoouunnttaanntt nneeeeddss ttoo uunnddeerrssttaanndd hhooww ddeepprreecciiaattiioonn iiss ccaallccuullaatteedd aanndd aaccccoouunntteedd ffoorr bbyy tthhee ssyysstteemm.. DDeeffiinniittiioonnss CCaarrrryyiinngg aammoouunntt:: CCoosstt lleessss aaccccuummuullaatteedd ddeepprreecciiaattiioonn lleessss aaccccuummuullaatteedd iimmppaaiirrmmeenntt lloosssseess.. AAccccuummuullaatteedd ddeepprreecciiaattiioonn:: TThhee ttoottaall aammoouunntt ooff tthhee aasssseett ss ddeepprreecciiaattiioonn aammoouunntt tthhaatt hhaass bbeeeenn aallllooccaatteedd ttoo rreeppoorrttiinngg ppeerriiooddss ttoo ddaattee.. TThhee aammoouunntt ooff ddeepprreecciiaattiioonn ddeedduucctteedd ffrroomm tthhee ccoosstt ooff aa nnoonn--ccuurrrreenntt aasssseett ttoo aarrrriivvee aatt iittss ccaarrrryyiinngg aammoouunntt wwiillll bbuuiilldd uupp ((oorr aaccccuummuullaattee )) oovveerr ttiimmee,, aass mmoorree ddeepprreecciiaattiioonn iiss cchhaarrggeedd iinn eeaacchh ssuucccceessssiivvee rreeppoorrttiinngg ppeerriioodd.. TThhiiss iiss ccaalllleedd aaccccuummuullaatteedd ddeepprreecciiaattiioonn.. --- Trang 295 --- CCoonntteexxtt eexxaammppllee:: AAccccuummuullaattiinngg ddeepprreecciiaattiioonn oonn aa nnoonn--ccuurrrreenntt aasssseett AA nnoonn--ccuurrrreenntt aasssseett wwaass aaccqquuiirreedd vviiaa aa lleeaassee aanndd rreeccooggnniisseedd aatt ccoosstt ooff 4400,,000000.. IIff iitt hhaass aa uusseeffuull lliiffee aanndd lleeaassee tteerrmm ooff ffoouurr yyeeaarrss aanndd aann eessttiimmaatteedd rreessiidduuaall vvaalluuee ooff nniill,, iitt mmiigghhtt bbee ddeepprreecciiaatteedd bbyy 11 00,,000000 ppeerr aannnnuumm.. DDeepprreecciiaatitoionn cchhaarrggee ffoorr tthhee AAccccuummuullaatteedd yyeeaarr ((ssttaatteemmeenntt ddeepprreecciiaattiioonn aatt CCaarrrryyiinngg aammoouunntt ooff pprrooffiitt oorr lloossss)) eenndd ooff yyeeaarr CCoosstt ooff tthhee aasssseett aatt eenndd ooff yyeeaarr ((AA)) ((BB)) ((CC)) ((CC--BB)) 4400,,000000 4400,,000000 AAtt bbeeggiinnnniinngg ooff iittss lliiffee 1100,,000000 1100,,000000 4400,,000000 3300,,000000 YYeeaarr 11 1100,,000000 2200,,000000 4400,,000000 2200,,000000 YYeeaarr 22 1100,,000000 3300,,000000 4400,,000000 1100,,000000 YYeeaarr 33 1100,,000000 4400,,000000 4400,,000000 00 YYeeaarr 44 4400,,000000 AAtt tthhee eenndd ooff YYeeaarr 44,, tthhee ffuullll 4400,,000000 ooff ddeepprreecciiaattiioonn cchhaarrggeess hhaavvee bbeeeenn mmaaddee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss ooff tthhee ffoouurr yyeeaarrss.. TThhee ccaarrrryyiinngg aammoouunntt ooff tthhee nnoonn--ccuurrrreenntt aasssseett iiss nnooww nniill.. 33..11 MMeetthhooddss ooff ddeepprreecciiaattiioonn TThheerree aarree sseevveerraall ddiiffffeerreenntt mmeetthhooddss ooff ddeepprreecciiaattiioonn.. OOff tthheessee,, tthhee oonneess wwhhiicchh aarree rreelleevvaanntt ffoorr AAccccoouunnttiinngg aarree tthhee:: (cid:127) (cid:127) ssttrraaiigghhtt lliinnee mmeetthhoodd (cid:127) (cid:127) rreedduucciinngg bbaallaannccee mmeetthhoodd aaccccoouunnttiinngg eessttiimmaattee.. AA cchhaannggee ffrroomm oonnee mmeetthhoodd ttoo aannootthheerr iiss ccoonnssiiddeerreedd aa cchhaannggee iinn TThheerree iiss nnoo cchhaannggee ddeepprreecciiaattee ttaannggibiblele nnoonn--ccuurrrreenntt aasssseettss.. iinn aaccccoouunnttiinngg ppoolliiccyy,, wwhhiicchh rreemmaaiinnss:: ttoo O3 PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: AAppppllyyiinngg jjuuddggeemmeenntt DDeecciiddiinngg wwhhiicchh mmeetthhoodd ooff ddeepprreecciiaattiioonn ttoo uussee iiss aann aarreeaa iinn wwhhiicchh tthhee aaccccoouunnttaanntt mmuusstt aappppllyy jjuuddggeemmeenntt.. TThhee mmeetthhoodd uusseedd wwiillll ddeetteerrmmiinnee tthhee ppaatttteerrnn ooff ddeepprreecciiaattiioonn cchhaarrggeedd oovveerr tthhee aasssseett ss uusseeffuull lliiffee aanndd tthheerreeffoorree aaffffeeccttss pprrooffiittss aanndd tthhee ccaarrrryyiinngg aammoouunntt ooff tthhee aasssseett eeaacchh yyeeaarr.. 33..22 TThhee ssttrraaiigghhtt lliinnee mmeetthhoodd ooff ddeepprreecciiaattiioonn DDeeffiinniittiioonn SSttrraaiigghhtt lliinnee ddeepprreecciiaattiioonn:: eeqquuaall iinnssttaallmmeennttss TThhee ddeepprreecciiaabbllee aammoouunntt ((ccoosstt lleessss rreessiidduuaall vvaalluuee)) iiss cchhaarrggeedd iinn ttoo eeaacchh rreeppoorrttiinngg ppeerriioodd oovveerr tthhee uusseeffuull lliiffee ooff tthhee aasssseett.. ((IInn tthhiiss wwaayy,, tthhee ccaarrrryyiinngg aammoouunntt ooff tthhee nnoonn--ccuurrrreenntt aasssseett ddeecclliinneess aatt aa sstteeaaddyy rraattee,, oorr iinn aa ssttrraaiigghhtt lliinnee oovveerrttiimmee..)) aannnnuuaall TThhee ddeepprreecciiaattiioonn cchhaarrggee iiss:: CCoosstt ooff aasssseett -- rreessiidduuaall vvaalluuee UUsseeffuull lliiffee ooff tthhee aasssseett iinn yyeeaarrss mmoonntthhllyy TThhee ddeepprreecciiaattiioonn cchhaarrggee iiss:: CCoosstt ooff aasssseett -- rreessiidduuaall vvaalluuee UUsseeffuull lliiffee iinn yyeeaarrss xx 1122 NNoottee:: SSiinnccee ssttrraaiigghhtt lliinnee ddeepprreecciiaattiioonn iiss cchhaarrggeedd mmoonntthhllyy yyoouu sshhoouulldd mmaakkee tthhee sseeccoonndd,, mmoonntthhllyy,, ccaallccuullaattiioonn iinn aann eexxaamm.. --- Trang 296 --- CCoonntteexxtt eexxaammppllee:: SSttrraaiigghhtt lliinnee mmeetthhoodd ((aa)) AA nnoonn--ccuurrrreenntt aasssseett ccoossttiinngg 2244,,000000 wwiitthh aa uusseeffuull lliiffee ooff 11 00 yyeeaarrss aanndd nnoo rreessiidduuaall vvaalluuee wwoouulldd bbee ddeepprreecciiaatteedd aatt tthhee rraattee ooff:: 2244,,000000 220000 ppeerr mmoonntthh,, oorr 22,,440000 ppeerr aannnnuumm.. 1100 xx 1122 ((bb)) AA nnoonn--ccuurrrreenntt aasssseett ccoossttiinngg 6600,,000000 hhaass aa uusseeffuull lliiffee ooff ffiivvee yyeeaarrss aanndd aa rreessiidduuaall vvaalluuee ooff 66,,000000.. TThhee mmoonntthhllyy ddeepprreecciiaattiioonn cchhaarrggee uussiinngg tthhee ssttrraaiigghhtt lliinnee mmeetthhoodd iiss:: ((6600,,000000 -- 66,,000000)) 55 xx 1122 990000 ppeerr mmoonntthh,, oorr 1100,,880000 ppeerr aannnnuumm TThhee ccaarrrryyiinngg aammoouunntt ooff tthhee nnoonn--ccuurrrreenntt aasssseett wwoouulldd bbee aass ffoolllloowwss:: AAfftteerr 11 yyeeaarr AAfftteerr 22 yyeeaarrss AAfftteerr 33 yyeeaarrss AAfftteerr 44 yyeeaarrss AAfftteerr 55 yyeeaarrss CCoosstt ooff tthhee aasssseett 6600,,000000 6600,,000000 6600,,000000 6600,,000000 6600,,000000 AAccccuummuullaatteedd ddeepprreecciiaattiioonn ((1100,,880000)) ((2211,,660000)) ((3322,,440000)) ((4433,,220000)) ((5544,,000000)) CCaarrrryyiinngg aammoouunntt 4499,,220000 3388,,440000 2277,,660000 1166,,880000 66,,000000 iiee,, iittss eessttiimmaatteedd rreessiidduuaall vvaalluuee.. SSiinnccee tthhee ssttrraaiigghhtt lliinnee ddeepprreecciiaattiioonn cchhaarrggee ppeerr aannnnuumm iiss tthhee ssaammee aammoouunntt eevveerryy 11 22 mmoonntthh rreeppoorrttiinngg ppeerriioodd,, iitt iiss oofftteenn ccoonnvveenniieenntt ttoo ssttaattee tthhaatt ddeepprreecciiaattiioonn iiss cchhaarrggeedd aatt aa ppeerrcceennttaaggee ppeerr aannnnuumm oonn tthhee aasssseett ss ddeepprreecciiaabbllee aammoouunntt.. IInn tthhee eexxaammppllee iinn ((11 )) aabboovvee,, tthhee ddeepprreecciiaattiioonn cchhaarrggee ppeerr aannnnuumm iiss 11 00%% ooff ccoosstt ((iiee,, 11 00%% ooff 2244,,000000 22,,440000)).. IInn ((22)),, iitt iiss 2200%% ooff tthhee ddeepprreecciiaabbllee aammoouunntt ((2200%% xx ((6600,,000000 -- 66,,000000)) 11 00,,880000)).. TThhee ssttrraaiigghhtt lliinnee mmeetthhoodd aallllooccaatteess tthhee ttoottaall ddeepprreecciiaabbllee aammoouunntt iinn eeqquuaall aammoouunnttss bbeettwweeeenn ddiiffffeerreenntt rreeppoorrttiinngg ppeerriiooddss.. WWoorrkkeedd eexxaammppllee:: MMoonntthhllyy ddeepprreecciiaattiioonn oonn tthhee ssttrraaiigghhtt lliinnee bbaassiiss AA bbuussiinneessss hhaass aa rreeppoorrttiinngg ppeerriioodd ffrroomm 11 JJaannuuaarryy ttoo 3311 DDeecceemmbbeerr aanndd ppuurrcchhaasseess aa nnoonn--ccuurrrreenntt aasssseett oonn 11 AApprriill 2200XX11,, aatt aa ccoosstt ooff 2244,,000000.. TThhee uusseeffuull lliiffee ooff tthhee aasssseett iiss ffoouurr yyeeaarrss,, aanndd iittss rreessiidduuaall vvaalluuee iiss nniill.. RReeqquuiirreemmeenntt WWhhaatt iiss tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr tthhee rreeppoorrttiinngg ppeerriioodd ttoo 3311 DDeecceemmbbeerr 2200XX11 SSoolluuttiioonn TThhee mmoonntthhllyy ddeepprreecciiaattiioonn cchhaarrggee wwiillll bbee:: 2244,,000000 550000 ppeerr mmoonntthh 44 xx 1122 SSiinnccee tthhee aasssseett wwaass aaccqquuiirreedd oonn 11 AApprriill 2200XX11,, tthhee bbuussiinneessss hhaass oonnllyy bbeenneeffiitteedd ffrroomm tthhee uussee ooff tthhee aasssseett ffoorr 99 mmoonntthhss iinnsstteeaadd ooff aa ffuullll 11 22 mmoonntthhss.. WWee tthheerreeffoorree cchhaarrggee ddeepprreecciiaattiioonn iinn 2200XX11 ooff:: 99 xx 550000 44,,550000 33..33 TThhee rreedduucciinngg bbaallaannccee mmeetthhoodd ooff ddeepprreecciiaattiioonn DDeeffiinniittiioonn RReedduucciinngg bbaallaannccee ddeepprreecciiaattiioonn:: TThhee aannnnuuaall ddeepprreecciiaattiioonn cchhaarrggee iiss aa ffiixxeedd ppeerrcceennttaaggee ooff tthhee bbrroouugghhtt ffoorrwwaarrdd ccaarrrryyiinngg aammoouunntt ooff tthhee aasssseett.. TThhee rreedduucciinngg bbaallaannccee mmeetthhoodd mmiigghhtt bbee uusseedd ttoo aallllooccaattee aa ggrreeaatteerr pprroopoprotiornti on ooff tthhee ttoottaall ddeepprreecciiaabbllee aammoouunntt ttoo tthhee aasssseett ss eeaarrlliieerr yyeeaarrss aanndd aa lloowweerr pprroopoprotiornti on ttoo iittss llaatteerr yyeeaarrss,, aass tthhee bbeenneeffiittss oobbttaaiinneedd bbyy tthhee bbuussiinneessss ffrroomm uussiinngg tthhee aasssseett ddeecclliinnee oovveerr ttiimmee.. --- Trang 297 --- NNoottee:: WWhheenn ccaallccuullaattiinngg rreedduucciinngg bbaallaannccee ddeepprreecciiaattiioonn iinn aann eexxaamm yyoouu wwiillll NNOOTT bbee ccoonncceerrnneedd wwiitthh tthhee aasssseett ss rreessiidduuaall vvaalluuee nnoorr hhooww ttoo ccaallccuullaattee tthhee ppeerrcceennttaaggee:: jjuusstt tthhee ccaarrrryyiinngg aammoouunntt aanndd tthhee rreedduucciinngg bbaallaannccee ppeerrcceennttaaggee ggiivveenn ttoo yyoouu.. CCoonntetextx t eexxaammppllee:: RReedduucciinngg bbaallaannccee mmeetthhoodd AA bbuussiinneessss ppuurrcchhaasseess eenneergryg-yef-feicfiefinct ient mmaacchhiinneerryy aatt aa ccoosstt ooff 11 00,,000000 oonn 11 JJaannuuaarryy 2200XX11,, wwhhiicchh iitt ppllaannss ttoo kkeeeepp ffoorr tthhrreeee yyeeaarrss ttoo 3311 DDeecceemmbbeerr 2200XX33.. TThhee bbuussiinneessss wwiisshheess ttoo uussee tthhee rreedduucciinngg bbaallaannccee mmeetthhoodd ttoo ddeepprreecciiaattee tthhee mmaacchhiinneerryy aanndd ccaallccuullaatteess tthhaatt tthhee rraattee ooff ddeepprreecciiaattiioonn sshhoouulldd bbee 4400%% ooff tthhee rreedduucciinngg bbaallaannccee ((ccaarrrryyiinngg aammoouunntt)) ooff tthhee mmaacchhiinneerryy.. TThhee ddeepprreecciiaattiioonn cchhaarrggee ppeerr aannnnuumm aanndd tthhee ccaarrrryyiinngg aammoouunntt ooff tthhee aasssseett aass aatt tthhee eenndd ooff eeaacchh rreeppoorrttiinngg ppeerriioodd wwiillll bbee aass ffoolllloowwss:: AAccccuummuullaatteedd ddeepprreecciiaattiioonn MMaacchhiinneerryy aatt ccoosstt 1100,,000000 DDeepprreecciiaattiioonn iinn 2200XX11 ((4400%%)) ((44,,000000)) 44,,000000 CCaarrrryyiinngg aammoouunntt aatt eenndd ooff 2200XX11 66,,000000 DDeepprreecciiaattiioonn iinn 2200XX22 ((4400%% ooff ccaarrrryyiinngg aammoouunntt 66,,000000)) ((22,,440000)) 66,,440000 ((44,,000000 22,,440000)) CCaarrrryyiinngg aammoouunntt aatt eenndd ooff 2200XX22 33,,660000 DDeepprreecciiaattiioonn iinn 2200XX33 ((4400%% 33,,660000)) ((11,,444400)) 77,,884400 ((66,,440000 11,,444400)) CCaarrrryyiinngg aammoouunntt aatt eenndd ooff 2200XX33 22,,116600 TThhee aannnnuuaall cchhaarrggee ffoorr rreedduucciinngg bbaallaannccee ddeepprreecciiaattiioonn iiss hhiigghheerr iinn tthhee eeaarrlliieerr rreeppoorrttiinngg ppeerriiooddss ooff tthhee aasssseett ss lliiffee,, aanndd lloowweerr iinn tthhee llaatteerr rreeppoorrttiinngg ppeerriiooddss (( 44,,000000,, 22,,440000 aanndd 11,,444400 rreessppeeccttiivveellyy)).. TThhee bbaallaannccee rreemmaaiinniinngg aatt tthhee eenndd ooff tthhee tthhrreeee--yyeeaarr uusseeffuull lliiffee ooff 22,,11 6 600 iiss tthhee eessttiimmaatteedd rreessiidduuaall vvaalluuee wwhhiicchh wwaass ttaakkeenn iinnttoo aaccccoouunntt wwhheenn ccaallccuullaattiinngg tthhaatt 4400%% rreedduucciinngg bbaallaannccee wwaass aapppprroopprriiaattee.. NNoottee:: IInn aann eexxaamm qquueessttiioonn,, yyoouu wwiillll nnoott hhaavvee ttoo ccaallccuullaattee wwhhaatt aammoouunntt ooff rreedduucciinngg bbaallaannccee ddeepprreecciiaattiioonn sshhoouulldd bbee cchhaarrggeedd mmoonntthhllyy.. YYoouu mmaayy mmaakkee aa ssiimmpplliiffyyiinngg aassssuummppttiioonn tthhaatt tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr aa ppaarrtt yyeeaarr iiss tthhee aapppprroopprriiaattee pprrooppoorrttiioonn ooff tthhee aannnnuuaall cchhaarrggee.. IInn aann eexxaamm qquueessttiioonn iinn wwhhiicchh tthhee rreedduucciinngg bbaallaannccee mmeetthhoodd hhaass bbeeeenn aapppplliieedd ttoo aann aasssseett bbeeiinngg ddiissppoosseedd ooff,, tthhee ddiissppoossaall wwiillll eeiitthheerr bbee:: (cid:127) OOnn tthhee ffiirrsstt ddaayy ooff tthhee yyeeaarr,, iinn wwhhiicchh ccaassee ddeepprreecciiaattiioonn ffoorr tthhee yyeeaarr ddooeess nnoott nneeeedd ttoo bbee ccaallccuullaatteedd (cid:127) (cid:127) OOnn tthhee llaasstt ddaayy ooff tthhee yyeeaarr,, iinn wwhhiicchh ccaassee yyoouu sshhoouulldd ccaallccuullaattee aa wwhhoollee yyeeaarr ss ddeepprreecciiaattiioonn 33..44 AAppppllyyiinngg aa ddeepprreecciiaattiioonn mmeetthhoodd ccoonnssiisstteennttllyy AA bbuussiinneessss ccaann cchhoooossee wwhhiicchh mmeetthhoodd ooff ddeepprreecciiaattiioonn ttoo aappppllyy ttoo iittss pprrooppeerrttyy,, ppllaanntt aanndd eeqquuiippmmeenntt.. OOnnccee tthhiiss ddeecciissiioonn hhaass bbeeeenn mmaaddee iitt sshhoouulldd bbee aapppplliieedd ccoonnssiisstteennttllyy ffrroomm rreeppoorrttiinngg ppeerriioodd ttoo rreeppoorrttiinngg ppeerriioodd.. AA cchhaannggee iinn tthhee mmeetthhoodd ooff ddeepprreecciiaattiioonnss iiss ppeerrmmiitttteedd iiff tthheerree iiss aa cchhaannggee iinn tthhee wwaayy iinn wwhhiicchh tthhee aasssseett iiss uusseedd ((sseeee sseeccttiioonn 33..66)).. AA bbuussiinneessss ccaann ddeepprreecciiaattee ddiifffefreernet nt ccaatteeggoorriieess ooff nnoonn--ccuurrrreenntt aasssseettss iinn ddiiffffeerreenntt wwaayyss.. FFoorr eexxaammppllee,, iiff aa bbuussiinneessss oowwnnss tthhrreeee ccaarrss,, tthheenn eeaacchh ccaarr wwoouulldd nnoorrmmaallllyy bbee ddeepprreecciiaatteedd iinn tthhee ssaammee wwaayy ((eegg,, bbyy tthhee ssttrraaiigghhtt lliinnee mmeetthhoodd));; bbuutt aannootthheerr ccaatteeggoorryy ooff nnoonn--ccuurrrreenntt aasssseett,, ssaayy pphhoottooccooppiieerrss,, mmiigghhtt bbee ddeepprreecciiaatteedd uussiinngg aa ddiiffffeerreenntt mmeetthhoodd ((eegg,, bbyy tthhee rreedduucciinngg bbaallaannccee mmeetthhoodd)).. IInntteerraaccttiivvee qquueessttiioonn 22:: DDeepprreecciiaattiioonn AA lloorrrryy bboouugghhtt ffoorr aa bbuussiinneessss ccoosstt 11 77,,000000 pplluuss VVAATT aatt 2200%%.. IItt iiss eexxppeecctteedd ttoo llaasstt ffoorr ffiivvee yyeeaarrss aanndd tthheenn ttoo bbee ssoolldd ffoorr 22,,000000 pplluuss VVAATT.. WWoorrkk oouutt tthhee ddeepprreecciiaattiioonn ttoo bbee cchhaarrggeedd ttoo eeaacchh 1122--mmoonntthh rreeppoortirntgi ng ppeerriioodd uunnddeerr:: RReeqquuiirreemmeennttss 22..11 tthhee ssttrraaiigghhtt lliinnee mmeetthhoodd 22..22 tthhee rreedduucciinngg bbaallaannccee mmeetthhoodd,, uussiinngg aa rraattee ooff 3355%% --- Trang 298 --- 33..55 RReevviieewwiinngg aanndd cchhaannggiinngg tthhee ddeepprreecciiaattiioonn mmeetthhoodd AAss wwee hhaavvee nnootteedd aabboovvee,, ddeepprreecciiaattiioonn iiss aann aarreeaa ooff ssiiggnniiffiiccaanntt jjuuddggeemmeenntt.. AAss ssuucchh iitt mmaayy bbee aapppprroopprriiaattee ttoo cchhaannggee tthhee ddeepprreecciiaattiioonn mmeetthhoodd,, tthhee uusseeffuull lliiffee oorr tthhee rreessiidduuaall vvaalluuee iiff nneeww iinnffoorrmmaattiioonn bbeeccoommeess aavvaaiillaabbllee.. TThhee ddeepprreecciiaattiioonn mmeetthhoodd uusseedd sshhoouulldd bbee rreevviieewweedd aannnnuuaallllyy ffoorr aapppprroopprriiaatteenneessss.. IIff tthheerree aarree aannyy cchhaannggeess iinn tthhee eexxppeecctteedd ppaatttteerrnn ooff uussee ooff tthhee aasssseett ((aanndd hheennccee eeccoonnoommiicc bbeenneeffiitt)),, tthheenn tthhee mmeetthhoodd uusseedd sshhoouulldd bbee cchhaannggeedd.. TThhee rreemmaaiinniinngg ccaarrrryyiinngg aammoouunntt iiss ddeepprreecciiaatteedd uunnddeerr tthhee nneeww mmeetthhoodd,, iiee,, oonnllyy ccuurrrreenntt aanndd ffuuttuurree ppeerriiooddss aarree aaffffeecctteedd.. WWhheenn tthhee bbaassiiss ooff ddeepprreecciiaattiioonn iiss cchhaannggeedd,, tthhee eeffffeecctt oonn ccuurrrreenntt aanndd ffuuttuurree ppeerriiooddss sshhoouulldd bbee qquuaannttiiffiieedd aanndd ddiisscclloosseedd iinn tthhee ffiinnaanncciiaall ssttaatteemmeennttss,, aanndd tthhee rreeaassoonn ffoorr tthhee cchhaannggee sshhoouulldd bbee ssttaatteedd.. WWoorrkkeedd eexxaammppllee:: CChhaannggee iinn mmeetthhoodd ooff ddeepprreecciiaattiioonn JJaakkoobb CCoo ppuurrcchhaasseedd aann aasssseett ffoorr 11 0000,,000000 oonn 11 ..11.. XX11 .. IItt hhaadd aann eessttiimmaatteedd uusseeffuull lliiffee ooff ffiivvee yyeeaarrss,, aanndd iitt wwaass ddeepprreecciiaatteedd uussiinngg tthhee rreedduucciinngg bbaallaannccee mmeetthhoodd aatt aa rraattee ooff 4400%%.. OOnn 11 ..11 .. XX33 iitt wwaass ddeecciiddeedd ttoo cchhaannggee tthhee ddeepprreecciiaattiioonn mmeetthhoodd ttoo ssttrraaiigghhtt lliinnee.. TThheerree wwaass nnoo cchhaannggee ttoo tthhee uusseeffuull lliiffee,, aanndd nnoo rreessiidduuaall vvaalluuee iiss aannttiicciippaatteedd.. RReeqquuiirreemmeenntt SShhooww tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr eeaacchh yyeeaarr ((ttoo 3311 DDeecceemmbbeerr)) ooff tthhee aasssseett ss lliiffee.. SSoolluuttiioonn DDeepprreecciiaattioionn AAccccuummuullaatteedd YYeeaarr cchhaarrggee ddeepprreecciiaattioionn 2200XX11 110000,,000000 xx 4400%% 4400,,000000 4400,,000000 2200XX22 6600,,000000 xx 4400%% 2244,,000000 6644,,000000 110000,,000000 -- 6644,,000000 33 rreemmaaiinniinngg yyeeaarrss 2200XX33 1122,,000000 7766,,000000 2200XX44 1122,,000000 8888,,000000 2200XX55 1122,,000000 110000,,000000 IInntteerraaccttiivvee qquueessttiioonn 33 :: CChhaannggee iinn ddeepprreecciiaattiioonn mmeetthhoodd FFoorrddee ppiicc pprreeppaarreess iittss ffiinnaanncciiaall ssttaatteemmeennttss ffoorr tthhee 11 22--mmoonntthh rreeppoorrttiinngg ppeerriioodd ttoo 3311 DDeecceemmbbeerr eeaacchh yyeeaarr.. OOnn 11 JJaannuuaarryy 2200XX00 iitt bboouugghhtt aa mmaacchhiinnee ffoorr 11 00 00,,000000 aanndd ddeepprreecciiaatteedd iitt aatt 11 00%% ppeerr aannnnuumm oonn tthhee rreedduucciinngg bbaallaannccee bbaassiiss.. OOnn 3311 DDeecceemmbbeerr 2200XX33,, tthhee mmaacchhiinnee wwiillll bbee iinncclluuddeedd iinn FFoorrddee ppiicc ss ffiinnaanncciiaall ssttaatteemmeennttss aatt:: CCoosstt 110000,,000000 AAccccuummuullaatteedd ddeepprreecciiaattiioonn ((11 00,,000000 99,,000000 88,,11 0000 77,,229900)) ((3344,,339900)) CCaarrrryyiinngg aammoouunntt 6655,,66110 0 OOnn 11 JJaannuuaarryy 2200XX44,, tthhee ccoommppaannyy ddeecciiddeedd ttoo cchhaannggee tthhee bbaassiiss ooff ddeepprreecciiaattiioonn ttoo ssttrraaiigghhtt lliinnee oovveerr aa ttoottaall lliiffee ooff nniinnee yyeeaarrss,, iiee,, ffiivvee yyeeaarrss rreemmaaiinniinngg ffrroomm 11 JJaannuuaarryy 2200XX44.. TThheerree iiss nnoo rreessiidduuaall vvaalluuee.. RReeqquuiirreemmeenntt CCaallccuullaattee tthhee rreevviisseedd aannnnuuaall ddeepprreecciiaattiioonn cchhaarrggee.. --- Trang 299 --- 33..66 RReevviieewwiinngg aanndd cchhaannggiinngg uusseeffuull lliiffee oorr rreessiidduuaall vvaalluuee TThhee rreessiidduuaall vvaalluuee aanndd eessttiimmaatteedd uusseeffuull lliiffee ooff aa nnoonn--ccuurrrreenntt aasssseett sshhoouulldd bbee rreevviieewweedd aanndd cchhaannggeedd iiff tthheeyy aarree nnoo lloonnggeerr aapppprroopprriiaattee.. Sb CCoonntteexxtt eexxaammppllee:: CChhaannggee iinn uusseeffuull lliiffee AA bbuussiinneessss ppuurrcchhaasseedd aa nnoonn--ccuurrrreenntt aasssseett ccoossttiinngg 11 22 ,,000000 wwiitthh aann eessttiimmaatteedd uusseeffuull lliiffee ooff ffoouurr yyeeaarrss aanndd nnoo rreessiidduuaall vvaalluuee.. IIff iitt uusseedd tthhee ssttrraaiigghhtt lliinnee mmeetthhoodd ooff ddeepprreecciiaattiioonn,, iitt wwoouulldd mmaakkee aann aannnnuuaall ddeepprreecciiaattiioonn cchhaarrggee ooff 11 22 ,,000000//44 yyeeaarrss 33,,000000.. TThhee bbuussiinneessss ddeecciiddeess aafftteerr ttwwoo yyeeaarrss tthhaatt tthhee uusseeffuull lliiffee ooff tthhee aasssseett hhaass bbeeeenn uunnddeerreessttiimmaatteedd,, aanndd iitt ssttiillll hhaass ffiivvee mmoorree yyeeaarrss iinn uussee ttoo ccoommee,, mmaakkiinngg iittss ttoottaall uusseeffuull lliiffee sseevveenn yyeeaarrss.. FFoorr tthhee ffiirrsstt ttwwoo yyeeaarrss,, tthhee aasssseett iiss ddeepprreecciiaatteedd bbyy 33,,000000 ppeerr aannnnuumm,, ssoo tthhaatt iittss ccaarrrryyiinngg aammoouunntt aafftteerr ttwwoo yyeeaarrss iiss ((1122,,000000 -- 66,,000000)) 66,,000000.. IIff tthhee rreemmaaiinniinngg uusseeffuull lliiffee ooff tthhee aasssseett iiss nnooww rreevviisseedd ttoo ffiivvee mmoorree yyeeaarrss,, tthhee rreemmaaiinniinngg aammoouunntt ttoo bbee ddeepprreecciiaatteedd (( 66,,000000)) iiss sspprreeaadd oovveerr tthhee rreemmaaiinniinngg uusseeffuull lliiffee,, ggiivviinngg aann aannnnuuaall ddeepprreecciiaattiioonn cchhaarrggee ffoorr tthhee ffiinnaall ffiivvee yyeeaarrss ooff:: CCaarrrryyiinngg aammoouunntt aatt ttiimmee ooff cchhaannggee 66,,000000 11,,220000 ppeerr yyeeaarr RReevviisseedd uusseeffuull lliiffee 55 yyeeaarrss IInntteerraaccttiivvee qquueessttiioonn 44:: CChhaannggee iinn rreessiidduuaall vvaalluuee AAnn aasssseett hhaadd aa ccoosstt ooff 11,, 000000,, aann eessttiimmaatteedd uusseeffuull lliiffee ooff 11 00 yyeeaarrss aanndd aa rreessiidduuaall vvaalluuee ooff 220000.. AAtt tthhee ssttaarrtt ooff YYeeaarr 33,, aa rreevviieeww sshhoowwss iittss rreemmaaiinniinngg uusseeffuull lliiffee wwaass uunncchhaannggeedd bbuutt tthhee rreessiidduuaall vvaalluuee wwaass rreedduucceedd ttoo nniill.. RReeqquuiirreemmeenntt CCaallccuullaattee tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr eeaacchh ooff YYeeaarrss 11 ttoo 33 oonn tthhee ssttrraaiigghhtt lliinnee bbaassiiss.. PPrrooffeessssiioonnaall sskkiillllss ffooccuuss:: SSttrruuccttuurriinngg pprroobblleemmss aanndd ssoolluuttiioonnss YYoouu mmaayy sseeee aa qquueessttiioonn iinn wwhhiicchh aa cchhaannggee iinn mmeetthhoodd ooff ddeepprreecciiaattiioonn,, uusseeffuull lliiffee oorr rreessiidduuaall vvaalluuee hhaass nnoott bbeeeenn aapppplliieedd,, oorr hhaass bbeeeenn aapppplliieedd iinnccoorrrreeccttllyy.. IItt iiss iimmppoorrttaanntt tthhaatt yyoouu ccaann iiddeennttiiffyy hhooww tthheessee cchhaannggeess sshhoouulldd bbee aaccccoouunntteedd ffoorr aanndd hhooww ttoo rreessoollvvee aannyy iinnccoorrrreecctt aaccccoouunnttiinngg tthhaatt hhaass bbeeeenn aapppplliieedd.. IInn tthhee AAccccoouunnttiinngg eexxaamm yyoouu wwiillll nnoott hhaavvee ttoo ddeeaall wwiitthh aa cchhaannggee iinn tthhee mmeetthhoodd ooff ddeepprreecciiaattiioonn,, uusseeffuull lliiffee oorr rreessiidduuaall vvaalluuee ooff aa lleeaasseedd aasssseett.. 44 AAccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn SSeeccttiioonn oovveerrvviieeww (cid:127) (cid:127) AAccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn:: DDEEBBIITT DDeepprreecciiaattiioonn eexxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) XX CCRREEDDIITT AAccccuummuullaatteedd ddeepprreecciiaattiioonn ((ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX 44..11 AAccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn TThheerree aarree ttwwoo bbaassiicc aassppeeccttss ooff aaccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn ttoo rreemmeemmbbeerr:: --- Trang 300 --- (cid:127) (cid:127) AA ddeepprreecciiaattiioonn cchhaarrggee iiss mmaaddee iinn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss iinn eeaacchh rreeppoortrintgin g ppeerriioodd ffoorr eevveerryy ddeepprreecciiaabbllee nnoonn--ccuurrrreenntt aasssseett.. NNeeaarrllyy aallll nnoonn--ccuurrrreenntt aasssseettss aarree ddeepprreecciiaabbllee,, tthhee mmoosstt iimmppoortartnat nt eexxcceeppttiioonn bbeeiinngg ffrreeeehhoolldd llaanndd.. (cid:127) (cid:127) TThhee ttoottaall aaccccuummuullaatteedd ddeepprreecciiaattiioonn oo nn aa nnoonn--ccuurrrreenntt aasssseett bbuuiillddss uupp aass tthhee aasssseett ggeettss oollddeerr.. TThhee ttoottaall aaccccuummuullaatteedd ddeepprreecciiaattiioonn iiss aallwwaayyss ggeettttiinngg llaarrggeerr,, uunnttiill tthhee nnoonn--ccuurrrreenntt aasssseett iiss ffuullllyy ddeepprreecciiaatteedd.. AAccccoouunnttiinngg ffoorr ddeepprreecciiaattiioonn iiss aass ffoolllloowwss:: (cid:127) (cid:127) SSeett uu pp aann aaccccuummuullaatteedd ddeepprreecciiaattiioonn aaccccoouunntt ffoorr eeaacchh sseeppaarraattee ccaatteeggoorryy ooff nnoonn--ccuurrrreenntt aasssseett,, ffoorr eexxaammppllee ppllaanntt aanndd mmaacchhiinneerryy,, llaanndd aanndd bbuuiillddiinnggss,, ffiixxttuurreess aanndd ffiittttiinnggss,, mmoottoorr vveehhiicclleess.. IInn aa ccoommppuutteerriisseedd ssyysstteemm,, tthhee lleeddggeerr ccooddee aallllooccaatteedd ttoo tthhee aaccccuummuullaatteedd ddeepprreecciiaattiioonn wwiillll iimmmmeeddiiaatteellyy ffoollllooww tthhee ccoosstt ooff tthhee aasssseett iinn oorrddeerr tthhaatt tthhee ccoosstt aanndd aaccccuummuullaatteedd ddeepprreecciiaattiioonn ffoorr tthhee ssaammee aasssseett iiss pprreesseenntteedd ccoonnsseeccuuttiivveellyy wwhheenn tthhee iinniittiiaall ttrriiaall bbaallaannccee iiss eexxttrraacctteedd.. (cid:127) (cid:127) WWiitthh tthhee ddeepprreecciiaattiioonn cchhaarrggee ffoorr tthhee ppeerriioodd:: DDEEBBIITT DDeepprreecciiaattiioonn eexxppeennssee ((ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss)) XX CCRREEDDIITT AAccccuummuullaatteedd ddeepprreecciiaattiioonn aaccccoouunntt ((ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn)) XX (cid:127) (cid:127) TThhee bbaallaannccee oo nn tthhee aaccccuummuullaatteedd ddeepprreecciiaattiioonn aaccccoouunntt iiss tthhee ttoottaall aaccccuummuullaatteedd ddeepprreecciiaattiioonn.. TThhiiss iiss aallwwaayyss aa ccrreeddiitt bbaallaannccee bbrroouugghhtt ffoorrwwaarrdd iinn tthhee lleeddggeerr aaccccoouunntt.. (cid:127) (cid:127) TThhee nnoonn--ccuurrrreenntt aasssseett ccoosstt aaccccoouunnttss aarree uunnaaffffeecctteedd bbyy ddeepprreecciiaattiioonn.. (cid:127) (cid:127) IInn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn,, tthhee bbaallaannccee oo nn tthhee aaccccuummuullaatteedd ddeepprreecciiaattiioonn aaccccoouunntt iiss sseett aaggaaiinnsstt tthhee nnoonn--ccuurrrreenntt aasssseett ccoosst t aaccccoouunnttss ttoo ddeerriivvee tthhee ccaarrrryyiinngg aammoouunntt ooff tthhee nnoonn--ccuurrrreenntt aasssseettss.. TThhiiss iiss hhooww tthhee nnoonn--ccuurrrreenntt aasssseett ccoosstt,, aaccccuummuullaatteedd ddeepprreecciiaattiioonn aanndd ddeepprreecciiaattiioonn cchhaarrggee aaccccoouunnttss mmiigghhtt aappppeeaarr iinn aa ttrriiaall bbaallaannccee:: DDRR CCRR FFrreeeehhoolldd bbuuiillddiinngg -- ccoosstt 22,,000000,,000000 FFrreeeehhoolldd bbuuiillddiinngg -- aaccccuummuullaatteedd ddeepprreecciiaattiioonn (( 2200,,000000 ccuurrrreenntt rreeppoortrintging ppeerriioodd)) 550000,,000000 MMoottoorr vveehhiicclleess -- ccoosstt 7700,,000000 MMoottoorr vveehhiicclleess -- aaccccuummuullaatteedd ddeepprreecciiaattiioonn (( 11 55,,000000 ccuurrrreenntt rreeppoortrintgin g ppeerriioodd)) 4400,,000000 RRiigghhtt--ooff--uussee aasssseett -- ccoosstt 2255,,000000 RRiigghhtt--ooff--uussee aasssseett -- aaccccuummuullaatteedd ddeepprreecciiaattiioonn (( 33,,000000 ccuurrrreenntt rreeppoortrintging ppeerriioodd)) 1155,,000000 DDeepprreecciiaattiioonn eexxppeennssee ((2200,,000000 1155,,000000 33,,000000)) 3388,,000000 TThheeyy wwoouulldd bb ee sshhoowwnn aatt tthhee ffoolllloowwiinngg ccaarrrryyiinngg aammoouunnttss iinn tthhee ssttaatteemmeenntt ooff ffiinnaanncciiaall ppoossiittiioonn:: NNoonn--ccuurrrreenntt aasssseettss FFrreeeehhoolldd bbuuiillddiinngg 11,,550000,,000000 MMoottoorr vveehhiicclleess 3300,,000000 RRiigghhtt--ooff--uussee aasssseett 1100,,000000 IInn tthhee ssttaatteemmeenntt ooff pprrooffiitt oorr lloossss tthhee ddeepprreecciiaattiioonn cchhaarrggee wwoouulldd bbee iinncclluuddeedd ppaarrtltyl y iinn aaddmmiinniissttrraattiivvee eexxppeennsseess aanndd ppaarrtltyl y iinn ddiissttrriibbuuttiioonn ccoossttss,, aassssuummiinngg tthhaatt tthhee rriigghhtt--ooff--uussee aasssseett iiss uusseedd ffoorr aaddmmiinniissttrraattiivvee ppuurrppoosseess:: AAddmmiinniissttrraattiivvee eexxppeennsseess ((2200,,000000 33,,000000)) 2233,,000000 DDiissttrriibbuuttiioonn ccoossttss 1155,,000000 3388,,000000 --- Trang 301 --- Context example: Accounting for depreciation I Billie set u p their own computer software business on 1 March 20X6. Billie purchased network equipment on credit from a manufacturer for 1 6,000. The equipment has a useful life of three years and a residual value of 2,500. Using the straight line method of depreciation, the non-current asset account, accumulated depreciation account and statement of profit or loss (extract) and statement of financial position (extract) would be as follows, for each of the next three reporting periods ending 28 February 20X7, 20X8 and 20X9. NON-CURRENT ASSET: NETWORK EQUIPMENT COST Date Date 1.3.X6 Trade payables 16,000 28.2.X7 Balance c/d 16,000 1.3.X7 Balance b/d 16,000 28.2.X8 Balance c/d 16,000 1.3.X8 Balance b/d 16,000 28.2.X9 Balance c/d 16,000 1.3.X9 Balance b/d 16,000 The annual depreciation charge is: (16,000 - 2,500) 4,500 pa 3 years ACCUMULATED DEPREC AT O N Date Date Statement of profit or 28.2.X 7 Balance c/d 4,500 28.2.X 7 loss 4,500 28.2.X 8 Balance c/d 9,000 1.3.X 7 Balance b/d 4,500 Statement of profit or 28.2.X 8 loss 4,500 9,000 9,000 28.2.X 9 Balance c/d 13,500 1.3.X 8 Balance b/d 9,000 Statement of profit or 28.2.X 9 loss 4,500 13,500 13,500 1.3.X 9 Balance b/d 13,500 At the end of three reporting periods, the network is fully depreciated down to its residual value ( 1 6,000 - 1 3,500 2,500). If it continues to be used by Billie, it will not be depreciated any further (unless its estimated residual value is reduced). Statement of profit or loss (extract) Year ending: 28 Feb 20X7 Depreciation expense 4,500 28 Feb 20X8 Depreciation expense 4,500 28 Feb 20X9 Depreciation expense 4,500 --- Trang 302 --- Statement of financial position (extract) as at 2 8 February 20X7 20X8 20X9 Computer equipment at cost 16,000 16,000 16,000 Less accumulated depreciation (4,500) (9,000) (13,500) Carrying amount 11,500 7,000 2,500 In theory, the non-current asset is now at the end of its useful life. However, until it is sold off or scrapped, the asset will still appear in the statement of financial position at cost (less accumulated depreciation) and it should remain in the ledger accounts for computer equipment until disposal. Worked example: Accounting for depreciation II Jamie develops and sells medical software for use in the diagnosis and management of pain. Jamie and their assistant, Jordan, require cars to allow them to visit potential clients. Relevant information relating to the purchases is as follows: Estimated Date of purchase Cost Estimated life residual value Jamie car 1 June 20X6 20,000 3 years 2,000 Jordan car 1 June 20X7 15,500 3 years 2,000 The straight line method of depreciation is to be used. Requirements 1 Prepare the motor vehicles account and vehicles accumulated depreciation account for the reporting periods to 28 February 20X7 and 20X8. 2 Calculate the carrying amount of the vehicles as at 28 February 20X8. Solution Jamie car 500 pm __ .I V (20,000-2,000) Monthly depreciation 3 x 12 Depreciation 1 June 20X6 - 28 February 20X7 (9 x 500) 4,500 I- ---------------------- 1 March 20X7 - 28 February 20X8 (1 2 x 500) 6,000 Jordan car 375 pm Depreciation 1 June 20X7 - 28 February 20X8 (9 x 375) 3,375 --- Trang 303 --- MOTOR VEHICLES Date Date Payables (or cash) (car 1 Jun 20X6 purchase) 20,000 28 Feb 20X7 Balance c/d 20,000 1 Mar 20X7 Balance b/d 20,000 Payables (or cash) (car 1 Jun 20X7 purchase) 15,500 28 Feb 20X8 Balance c/d 35,500 35,500 35,500 1 Mar 20X8 Balance b/d 35,500 MOTOR VEHICLES -ACCUMULATED DEPRECIATION Date Date Statement of profit 28 Feb 20X7 Balance c/d 4,500 28 Feb 20X7 or loss 4,500 1 Mar 20X7 Balance b/d 4,500 Statement of profit or loss (6,000 28 Feb 20X8 Balance c/d 13,875 28 Feb 20X8 3,375) 9,375 13,875 13,875 1 Mar 20X8 Balance b/d 13,875 2 STATEMENT O F FINANCIAL POSITION (WORKINGS) AS AT 28 FEBRUARY 20X8 Jamie s car Jordan s car Total Asset at cost 20,000 15,500 35,500 Accumulated depreciation Year to 28 Feb 20X7 4,500 Year to 28 Feb 20X8 6,000 3,375 (10,500) (3,375) (13,875) Carrying amount 9,500 12,125 21,625 4.2 Adjusting the initial trial balance for depreciation Because the final depreciation calculation is often accounted for after the initial trial balance has been extracted, the only figure for accumulated depreciation o n the initial trial balance is the one for the balance brought forward. We need to calculate depreciation for the current period and adjust the initial trial balance to take account of the depreciation charge to calculate the final trial balance. (cid:127) Calculate the amount of depreciation to b e charged. (cid:127) Prepare the year-end journal to record depreciation expense (and impairment loss if relevant). (cid:127) Enter the journal in the adjustments columns. (cid:127) Adjust the initial trial balance to take account of the adjustments and prepare the financial statements. --- Trang 304 --- 5 Impairment o f assets (IAS 3 6 ) Section overview (cid:127) Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. (cid:127) The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. (cid:127) Impairment loss carrying amount - recoverable amount (cid:127) An impairment loss should be deducted from the carrying amount of the asset and charged immediately to profit or loss. There may be occasions when the carrying amount of an asset exceeds the value that the asset is expected to generate for the business. The value that an asset is expected to generate for a business is known as its recoverable amount. The recoverable amount of an asset is the higher of: (cid:127) its fair value less costs of disposal; and (cid:127) its value in use - defined as the present value of the future cash flows expected to flow from the use of the asset. (IAS 36: para. 6) When the carrying amount of an asset exceeds its recoverable amount, an impairment loss is said to have occurred. You will not have to calculate recoverable amount in Accounting as it will be given. 5.1 Calculating and accounting for an impairment loss An impairment loss is calculated as: Carrying amount of the asset X Less recoverable amount of the asset (X) Impairment loss X When an asset has suffered an impairment loss, the carrying amount of the asset should b e reduced by the amount of the impairment loss and the impairment loss is charged immediately to profit or loss: DEBIT Impairment expense (statement of profit or loss) X CREDIT Carrying amount of asset (statement of financial position) X For assets that have been revalued, accounting for an impairment loss is more complicated, but this is not included in the Accounting syllabus. Accounting for impairment is an example of prudence being applied in financial accounting as it ensures that assets are not overstated. Determining whether an asset has been impaired and calculating the recoverable amount of the asset are areas in which the accountant must apply judgement. S Context example: Impairment and depreciation A business purchased a building o n 1 January 20X1 at a cost of 1 00,000. The building had a 20-year useful life, which resulted in an annual depreciation charge of: 100,000 5,000 per annum 20 years --- Trang 305 --- At the reporting date of 31 December 20X5 the carrying amount of the building is calculated as: Cost of the building in 1 January 20X5 1 00,000 Accumulated depreciation at 31 December 20X5 (5 years x 5,000) (25,000) Carrying amount at 31 December 20X5 75,000 During 20X5, property prices fell sharply indicating that the building may be impaired. On 31 December 20X5, the business undertook an impairment review and determined that the building had a recoverable amount of 60,000. The business calculated an impairment loss at 31 December 20X5: Carrying amount of the building at 31 December 20X5 75,000 Recoverable amount at 31 December 20X5 (60,000) Impairment loss charged to profit or loss in 20X5 1 5,000 The business should therefore reduce the carrying amount of the building to 60,000 and charge the impairment loss of 1 5,000 to profit or loss. In 20X6, depreciation should be calculated based on the building s new carrying amount of 60,000 and the remaining useful life of 1 5 years: 60,000 4,000 per annum 15 years At 31 December 20X6, the carrying amount of the building would be: Cost of the building in 1 January 20X6 60,000 Accumulated depreciation at 31 December 20X6 (4,000) Carrying amount at 31 December 20X6 56,000 At the end of each reporting period, a business is required to assess if there is any indication that an asset may be impaired (IAS 36: para. 9) Indications of impairment could come from internal or external sources of information. (cid:127) External indicators of impairment: - Afall in the asset s market value that is more than is expected as a result of passage of time or normal use. - A significant change in the technological, market, legal or economic environment of the business in which the assets are employed. - The carrying amount of the entity s net assets being more than its market capitalisation. (cid:127) Internal indicators of impairment: - Evidence of obsolescence or physical damage. - Adverse changes in the use to which the asset is put. - Evidence from internal reports that the economic performance of an asset is, or will be, worse than expected. (IAS 36: para. 12) --- Trang 306 --- Professional skills focus: Applying judgement Assessing whether an asset is impaired is a matter of significant judgement by an accountant. Accounting for an impairment loss has the dual effect of decreasing the carrying amount of assets and increasing expenses, which in turn reduces profit. Generally, a business will want to avoid making impairment adjustments or will try to minimise the amount of any impairment as it has a detrimental impact on the financial statements. A professional accountant must ensure that they are aware of the indicators of impairment and can accurately calculate and account for impairment losses. You will not be required to judge whether an impairment has occurred in the Accounting exam but do need to be aware of the key indicators and be able to account for an impairment loss. 5.3 Reviewing and changing useful life or residual value after impairment When an impairment loss is recognised, the asset s remaining useful life and residual value should also be reviewed and revised if appropriate. Interactive question 5 : Impairment On 1 January 20X1 Tiger buys a non-current asset for 1 20,000, with an estimated useful life of 20 years and no residual value. Tiger depreciates its non-current assets on a straight line basis. Its reporting period is the 12 months ended 31 December. On 31 December 20X3 the asset has a carrying amount calculated as follows: Non-current asset at cost 120,000 Accumulated depreciation (3 x ( 120,000/20)) (18 ,000) Carrying amount 1 02,000 Consider each of these alternatives separately. Requirement 5.1 On 31 December 20X3 the remaining useful life is revised to 1 5 years from that date. Requirement Calculate the revised annual depreciation charge commencing in 20X4. 5.2 On 31 December 20X3 the remaining useful life is revised to 1 0 years from that date. An impairment review has been carried out which shows that the recoverable amount is 95,000. Requirement Show how the impairment loss would be recorded in the financial statements for the year ended 31 December 20X3 and calculate the revised annual depreciation charge commencing in 20X4. 6 Non-current asset disposals B Section overview (cid:127) When a non-current asset is disposed of, the cost and accumulated depreciation must be removed from the accounting records. The proceeds received are recorded, and a profit or loss is recognised in the statement of profit or loss. --- Trang 307 --- (cid:127) The profit or loss is calculated as the difference between the proceeds received and the carrying amount of the asset at the date of disposal. (cid:127) A disposals T account can be used to record the entries. (cid:127) When an old asset has been attributed a net realisable value (NRV) when given in part-exchange for a new one, the part-exchange value is accounted for as the old asset s disposal proceeds. Non-current assets might be sold off at some stage during their life, either when their useful life is over or before then. When an asset is sold, it no longer has the potential to produce economic benefits and therefore does not meet the Conceptual Framework definition of an asset It must therefore be derecognised (removed) from the financial statements. On derecognition, both the cost and accumulated depreciation associated with the non-current asset must be removed from the financial statements. Whenever a business sells something, it will make a profit or a loss. When non-current assets are disposed of, there will be a profit or loss on disposal. As it is a capital item being sold, the profit or loss will be capital income or a capital expense. Profits may be presented as other income or, netted off against the relevant expense category. Losses are reported as administrative expenses or distribution costs in the statement of profit or loss of the business, not as part of gross profit. They are commonly referred to as profit (or loss) on disposal of non-current assets . Exam readiness In the long form question in the Accounting exam, you will be told how to present any profit or loss on disposal of non-current assets. Read the information in the question carefully to ensure you apply the correct presentation. 6.1 The principles behind calculating the profit or loss on disposal The profit or loss on the disposal of a non-current asset is the difference between: (cid:127) the carrying amount of the asset at the time of its sale; and (cid:127) its net disposal proceeds: the amount received less any costs of making the sale. A profit is made when the net disposal proceeds exceed the carrying amount. A loss is made when the net disposal proceeds are less than the carrying amount. S Worked example: Disposal of a non-current asset I A business purchased a non-current asset on 1 January 20X1 for 25,000. It had an estimated life of six years and an estimated residual value of 7,000 and is depreciated on the straight line basis. The asset was sold after three years on 1 January 20X4 to another trader who paid 1 7,500 for it. Requirement What was the profit or loss on disposal Solution , (25,000 - 7,000) A Annual depreciation 3,000 per annum 6 years Cost of asset 25,000 Less accumulated depreciation (3 x 3,000) (9,000) Carrying amount at date of disposal 1 6,000 Disposal proceeds 17,500 Profit on disposal 1,500 This profit will be shown in the statement of profit or loss as an item of other income, added to the gross profit to arrive at net profit. --- Trang 308 --- Worked example: Disposal of a non-current asset II A business purchased a machine on 1 July 20X1 for 39,000. The machine had an estimated residual value of 3,000 and a useful life of eight years. The machine was sold for 1 8,600 on 31 December 20X4. To make the sale, the business had to incur dismantling costs and costs of transporting the machine to the buyer s premises of 1, 200. Requirement The business uses the straight line method of depreciation. What was the profit or loss on disposal of the machine Solution Depreciation expense 375 per month, and 4,500 per annum In 20X1 only six months depreciation was charged, because the asset was purchased six months into the reporting period. 39,000 Depreciation in 20X1 (6 x 375) 2,250 20X2, 20X3 and 20X4 (3 x 4,500) Accumulated depreciation (15,750) Carrying amount at date of disposal 23,250 Disposal proceeds 18,600 Costs incurred in making the sale (1,200) Net disposal proceeds (17,400) Loss on disposal (5,850) This loss will be shown as part of administrative expenses in the statement of profit or loss of the business. It is a capital expense, not a trading loss, and it should not therefore be part of the calculation of gross profit. 6.2 Accounting for non-current asset disposals We can record the disposal of non-current assets in a disposals ledger account using journal entries. (cid:127) The following items appear in the disposals account: - the cost of the asset - the accumulated depreciation up to the date of sale - the disposal proceeds, if any (cid:127) The profit or loss on disposal is the difference between: - the disposal proceeds; and - the carrying amount of the asset at the time of disposal. The journal entries are as follows: DEBIT Disposal account X CREDIT Non-current asset cost account X with the cost of the asset disposed of (the cost of the asset is removed from the statement of financial position). DEBIT Accumulated depreciation account X CREDIT Disposal account X --- Trang 309 --- with the accumulated depreciation o n the asset as at the date of sale (the accumulated depreciation o n the asset is removed from the statement of financial position). DEBIT Cash at bank account (or receivables) X CREDIT Disposal account X with the disposal proceeds of the asset The balance o n the disposal account is the profit or loss o n disposal is recorded in the statement of profit o r loss. Exam readiness It is important that you understand how to use a disposals T account as you may be presented with one in the exam in a multiple-choice, multi-part multiple-choice o r multiple-response question. However, if you need to calculate a profit or loss o n disposal you d o not need to use the disposals T account. In the example below the solution shows how a disposal T account can be used and an alternative working. Worked example: Accounting for the disposal of non-current assets A business has 1 1 0,000 worth of machinery at cost. Its policy is to depreciate at 20% per annum straight line. The total accumulated depreciation now stands at 70,000. The business sells for 1 9,000 a machine which it purchased exactly two years ago for 30,000. Requirement Show the relevant ledger entries. Solution MACHINERY- COST Balance b/d 110,000 Disposals 30,000 Balance c/d 80,000 110,000 110,000 Balance b/d 80,000 MACHINERY - ACCUMULATED DEPRECIATION Disposals (20% of 30,000 for 2 years) 12,000 Balance b/d 70,000 Balance c/d 58,000 70,000 70,000 Balance b/d 58,000 DISPOSAL ACCOUNT Machinery - accumulated Machinery - cost 30,000 depreciation 12,000 Statement of profit o r loss (profit o n disposal) 1,000 Cash at bank a/c 19,000 31,000 31,000 --- Trang 310 --- Alternative working: Asset at cost 30,000 Accumulated depreciation at time of sale (12,000) Carrying amount at time of sale 18,000 Disposal proceeds 19,000 Profit on disposal 1 ,000 6.3 Accounting for disposals of non-current assets given in part-exchange 1 Quite often a business does not receive cash for the asset, but instead get a part-exchange or trade-in 1 value for it against the cost of a new asset. Instead of disposal proceeds being received in the form of cash or promised in the form of a receivable, use the part-exchange value given to the asset by the other party as its disposal value. Context example: Accounting for part-exchange disposals I Asset A, costing 20,000 is acquired by a business for 12 ,000 cash, plus its old Asset B. The part-exchange value attributed to Asset B is 20,000 - 12 ,000 8,000. This amount must be compared with Asset B s carrying amount in order to establish the profit or loss on Asset B s disposal. Asset B cost 1 5,000 and has had 4,000 depreciation charged in respect of it, so its carrying amount at the date of the part-exchange disposal is 11 ,000. The business has made a loss of 1 1 ,000 - 8,000 3,000 on Asset B s disposal. First, he 8,000 part-exchange value must be included in the cost of Asset A, along with the 1 2,000 cash handed over. DEBIT Asset A cost 20,000 CREDIT Cash 12,000 CREDIT Disposal account (Asset B s part-exchange value) 8,000 Being the acquisition of Asset A for cash and part-exchange of Asset B Next, Asset B should be removed from the ledger accounts DEBIT Asset B accumulated depreciation 4,000 CREDIT Disposal account (Asset B) 4,000 DEBIT Disposal account (Asset B) 15,000 CREDIT Asset B cost account 15,000 Being the removal of Asset B from the ledger accounts Finally, the loss on disposal of Asset B should be recorded. DEBIT Statement of profit or loss 3,000 CREDIT Disposal account 3,000 Being the loss on disposal of Asset B (8,000 - (1 5,000 - 4,000)) --- Trang 311 --- DISPOSALS ACCOUNT Disposal proceeds (part exchange Asset B cost (b) 15,000 value) (a) 8,000 Asset B accumulated depreciation (b) 4,000 Statement of profit or loss (c) (loss on disposal) 3,000 15,000 15,000 Alternative working: Asset B at cost 15,000 Accumulated depreciation at time of sale (4,000) Carrying amount at time of sale 11,000 Part-exchange value 8,000 Loss on disposal 3,000 Worked example: Accounting for part-exchange disposals II A business trades in an asset that cost 30,000 two years ago for a new asset that costs 60,000. A cheque for 41, 000 was also handed over in full settlement. Assets are depreciated on the straight line basis over five years. Requirement What are the relevant ledger account entries Solution MACHINERY ACCOUNT Balance b/d 30,000 Disposals 30,000 Cash at bank a/c 41,000 Balance c/d 60,000 Disposals (part exchange value (60,000-41,000)) 19,000 90,000 90,000 Balance b/d 60,000 The new asset is recorded in the non-current asset account at cost (41, 000 1 9,000) 60,000. MACHINERY ACCUMULATED DEPRECIATION Disposals (20% of 30,000 for 2 years) 12,000 Balance c/d 12,000 --- Trang 312 --- DISPOSALS Cost 30,000 Accumulated depreciation 12,000 Statement of profit or loss (profit on disposal) 1,000 Cost - part-exchange value 19,000 31,000 31,000 Alternative working: Old asset at cost 30,000 Accumulated depreciation at time of sale (30,000 / 5 x 2) (1 2,000) Carrying amount at time of sale 18,000 Part-exchange value (60,000 - 41, 000) 1 9,000 Profit on disposal 1,000 Interactive question 6: Non-current asset ledger accounts A business purchased two machines - machine one and machine two, on 1 January 20X5 at a cost of 1 5,000 each. Each had an estimated life of five years and a nil residual value. The straight line method of depreciation is used. Owing to an unforeseen slump in market demand for its end product, the business decided to reduce its output, and switch to making other products instead. On 31 March 20X7, machine one was sold (on credit) to a buyer for 8,000. Later in the reporting period, however, it was decided to abandon production altogether, and machine two was sold on 1 December 20X7 for 2,500 cash. Requirement Prepare the machinery account, accumulated depreciation of machinery account and disposal account for the 1 2-month reporting period to 31 December 20X7 to determine the profit or loss on disposal of each machine. 6.4 The initial trial balance and non-current assets Earlier we saw how the initial trial balance is adjusted to take account of depreciation. We will now look at a comprehensive example of adjusting the initial trial balance to take account of non-current asset transactions. Worked example: Non-current assets and the initial trial balance Rodrigo s initial trial balance as at 31 December 20X0 is as follows: --- Trang 313 --- Ledger balance Initial trial balance Debit Credit Current assets 87,420 Capital at 1 .1 .X0 100,000 Freehold land and buildings - cost at 1 .1, X0 100,000 Freehold land and buildings - accumulated depreciation at 1 .1 .X0 15,000 Plant and equipment - cost at 1 .1. X0 45,000 Plant and equipment - accumulated depreciation at 1 .1 .X0 18,750 Motor vehicles - cost at 1 .1. X0 25,000 Motor vehicles - accumulated depreciation at 1 .1 .X0 14,650 Current liabilities 15,420 Expenses 5,830 Purchases 58,740 Sales 205,640 Drawings 47,670 Suspense 200 369,660 369,660 The following matters have now been discovered: (cid:127) O n 1 January 20X0 Rodrigo disposed of an item of plant that had cost 1 0,000 and o n which 1 ,250 depreciation had been charged. They received payment by bank transfer for 7,950. The accounting entry made was to debit the cash at bank account and credit the suspense account. (cid:127) O n 1 January 20X0 Rodrigo also traded in a car that had cost 8,000 and o n which 4,500 depreciation had been charged for a new car costing 1 3,300. Rodrigo also paid 7,750 by bank transfer. The only entry with regard to this transaction was to credit the cash at bank account and debit the suspense account. (cid:127) With regard to the assets held at 31 December 20X0, depreciation o n the freehold building of 5,000, o n plant and equipment of 5,290, and o n motor vehicles of 6,900, is to be charged. Requirements (a) Prepare Rodrigo s year-end journals as at 31 December 20X0 in respect of these matters. (b) Prepare the final trial balance after taking account of the adjustments. Solution (a) DEBIT Suspense CREDIT Disposal - plant 7,950 DEBIT Plant and equipment - accumulated depreciation 1,250 Disposal - plant (carrying amount) 8,750 CREDIT Plant and equipment - cost 10,000 Being the correct recording of cash received o n disposal of plant, and the removal of the asset s cost and accumulated depreciation --- Trang 314 --- DEBIT Motor vehicles - cost 13,300 CREDIT Suspense 7,750 Disposal - car given in part exchange (1 3,300 - 7,750) 5,550 Being the correct recording of purchase of a new car for 1 3,300 DEBIT Motor vehicles - accumulated depreciation 4,500 Disposal - car given in part exchange (carrying amount) 3,500 CREDIT Motor vehicles - cost 8,000 Being the removal of the cost and accumulated depreciation in relation to a cap given in part exchange for a new one DEBIT Expenses (depreciation) 17,190 CREDIT Freehold land and buildings - accumulated depreciation 5,000 Plant and equipment - accumulated depreciation 5,290 Motor vehicles - accumulated depreciation 6,900 Being the depreciation charge for the reporting period (b) Ledger account Initial trial balance Adjustments Final trial balance Debit Credit Debit Credit Debit Credit Current assets 87,420 87,420 Capital at 1 .1, X0 100,000 100,000 Freehold land and buildings - cost 100,000 100,000 Freehold land and buildings -accumulated depreciation 15,000 5,000 20,000 Plant and equipment - cost 45,000 10,000 35,000 Plant and equipment - accumulated depreciation 18,750 1,250 5,290 22,790 Motor vehicles - cost 25,000 13,300 8,000 30,300 Motor vehicles - accumulated depreciation 14,650 4,500 6,900 17,050 Current liabilities 15,420 15,420 Expenses 5,830 17,190 23,020 --- Trang 315 --- Purchases 58,740 58,740 Sales 205,640 205,640 Drawings 47,670 47,670 Suspense 200 7,950 7,750 Disposal - plant 8,750 7,950 800 Disposal - car 3,500 5,550 2,050 369,660 369,660 56,440 56,440 382,950 382,950 7 The asset register Section overview (cid:127) The asset register lists out all the details of each non-current asset. Definition Asset register: A listing of all non-current assets owned and leased by the organisation, broken down by department, location or asset type, and containing non-financial information (such as chassis numbers and security codes) as well as financial information. An asset register is maintained primarily for internal control purposes. It shows an organisation s investment in capital equipment in financial terms and allows the business to trace from its ledger accounts for non- current assets to individual assets. In a computerised accounting system, the asset register and the non- current asset ledger accounts will be updated simultaneously when transactions relating to non-current assets are recorded. 7.1 Data kept in an asset register Details about each non-current asset include the following: (cid:127) internal reference number (for physical identification purposes) (cid:127) manufacturer s serial number (for maintenance purposes) (cid:127) description of asset (cid:127) location of asset (cid:127) department which uses the asset (cid:127) Purchase / lease commencement date (for calculation of depreciation) (cid:127) cost, and any enhancement expenditure (cid:127) depreciation method and estimated useful life (for calculation of depreciation) (cid:127) carrying amount --- Trang 316 --- 8 Intangible non-current assets Section overview (cid:127) Purchased intangible assets such as brands and licences should be capitalised and amortised over their useful life. (cid:127) Internally generated intangible assets such as the costs associated with the development of new ideas or products should be capitalised if they meet specific criteria. (cid:127) Intangible non-current assets should be subject to reviews for impairment of their carrying amount. Not all assets held for the long term are physical items that can be touched; some are intangible. 8.1 Purchased intangible assets A business may purchase intangible assets from third parties. The initial recognition and measurement of purchased intangible assets is consistent with that of tangible assets. (cid:127) Licences are purchased by companies to allow them to operate in a particular area, for example, a bus company may be granted a licence to allow it to operate in certain areas of the country. The cost of licences can be capitalised as intangible assets as the grant of the licence meets the definition of an intangible asset-that is, the licence is controlled by the entity as a result of past events and economic benefits are expected to flow from the licence. Licences have a finite life as they are granted for a set period. They should therefore be amortised over that finite life. (cid:127) Patents on ideas are designs that the business has developed or bought. Patents are legally controlled by the entity and are expected to generate income over many reporting periods. They are initially capitalised at cost and are subject to amortisation over the period that they are expected to generate benefits. (cid:127) Brands are important for many businesses as they help to distinguish that business s products or services from those of other businesses. The cost of developing internally generated brands cannot be capitalised as the cost cannot be separated from the other general costs of developing the business. The cost of purchased brands (those purchased from other businesses) can, however, be capitalised. Brands are likely to have an indefinite useful life and therefore should not be amortised and should instead be tested annually for impairment. 8.1. 1 Initial recognition and amortisation When an intangible asset is purchased, the accounting entry is: DEBIT Intangible non-current assets X CREDIT Cash/payables X The cost of this intangible non-current asset will need to be allocated to the statement of profit or loss as it is matched against the income it helps to generate. This process is essentially the same as for depreciation of tangible non-current assets, but it is called amortisation. The accounting entry to recognise amortisation is: DEBIT Amortisation expense (P/L) X CREDIT Accumulated amortisation X Some intangible assets, such as a purchased brand name, do not have a finite useful life as they are expected to generate economic benefits for a period that cannot be readily determined. Intangible assets with an indefinite useful life are required to be tested for impairment on an annual basis. Where indicators of impairment exist, the approach to calculating and accounting for any impairment loss is the same as that covered earlier in the chapter for property, plant and equipment. --- Trang 317 --- Interactive question 7 : Tangible a n d intangible assets Coral operates an app which allows customers to purchase baby products such as medicines, nappies and formula and have them delivered directly to their homes within a two-hour period. Coral s app has proved very popular, and the business has grown rapidly. Coral wishes to understand how the following costs incurred in growing the business would be accounted for. Requirement Explain how the following costs should be accounted for in the financial statements of Coral. Cost Accounting treatment Coral purchased a small fleet of electric cars to allow deliveries to be made to a wider geographical area. Coral paid a graphic designerto design a new logo which is used on Coral s app. The new logo represents the Coral brand. Coral paid to have the software used by the app upgraded to allow it to process a greater number of orders each day. 8.2 Internally generated intangible assets (development costs) Large companies spend significant amounts of money on development activities from which they hope to generate revenues in future periods. These amounts are credited to cash or payables and debited to an account for development expenditure. The accounting problem is how to treat the debit balance on the development cost account at the date of the statement of financial position. There are two possibilities: (cid:127) The debit balance may be classified as an expense and transferred to the statement of profit or loss. This 1 is referred to as writing off the expenditure. The argument here is that it is an expense just like rent or wages and its accounting treatment should be the same. (cid:127) The debit balance may be classified as an asset and included in the statement of financial position. This is 1 referred to as capitalising or carrying forward or deferring the expenditure. This argument is based on the accrual principle. If development activity eventually leads to new or improved products which generate income, the costs should be carried forward to be matched against that income in future reporting periods. IAS 38, Intangible Assets sets out the criteria that must be satisfied in order to recognise development expenditure as an asset. Knowledge of the criteria falls outside the scope of the Accounting syllabus, but you should be aware that a company does not have a choice as to whether to expense or capitalise the expenditure - if the criteria are satisfied, the development expenditure must be capitalised. When development expenditure is to be recognised as an asset, the accounting entries are as shown for purchased intangible assets above: DEBIT Intangible non-current assets X CREDIT Cash/payables X Internally generated intangible assets should be amortised and tested for impairment. --- Trang 318 --- Worked example: Development costs Monty pic is a pharmaceuticals company which has been involved in the development of a new vaccine to treat a respiratory virus. The financial accountant of Monty pic has determined that of the 6.2 million spent on the development this year, 1. 2 million should be written off as an expense in the period to 31 December 20X6 and the remainder can be capitalised. The capitalised development costs should be amortised over the expected production period for the vaccine of 5 years and should commence from 1 July 20X6. Requirement Prepare the journal entries required to record the development expenditure and amortisation for the year ended 31 December 20X6. Solution 1. 2 million of the development costs incurred should be written off to profit or loss as expenditure in the period and the remaining 5 million should be capitalised. DEBIT Development expenditure (P/L) 1.2m Intangible non-current assets (Development costs) (SFP) CREDIT Cash/payables The capitalised development costs should then be amortised, pro-rata ( 5m/5 years x 6/12 months) 0.5m. DEBIT Amortisation expense (P/L) CREDIT Accumulated amortisation 8.2.1 Internally generated brands There are some internally generated intangibles that cannot be recognised as assets as they do not meet the definition of an asset. Whilst you are not expected to be aware of the criteria in Accounting, you should be aware that internally generated brands cannot be capitalised as an intangible asset whereas purchased brands (as discussed above) can be capitalised. 8.3 Goodwill If a business has goodwill it means that the market value of the business as a going concern is greater than the carrying amount of its assets less its liabilities in its accounting records. Goodwill is created by good relationships between a business and its customers, for example: (cid:127) by building up a reputation (by word of mouth perhaps) for high quality products or high standards of service (cid:127) by responding promptly and helpfully to queries and complaints from customers (cid:127) through the personality of the staff, their attitudes to customers and their skills Although the value of goodwill to a business might be extremely significant it is not usually included in the financial statements. For example, the welcoming smiles of shop staff and its reputation for good customer service may contribute more to a supermarket s profits than the fact that a new electronic cash register has recently been acquired; even so, whereas the cash register will be recorded in the ledger accounts as a non-current asset, the value of the staff and the supermarket s reputation would be ignored for accounting purposes. (cid:127) Goodwill is inherent in the business but it has not been directly paid for, so valuation is subjective. (cid:127) Goodwill changes from day to day. One act of bad customer relations might damage goodwill and one act of good relations might improve it. Staff with a favourable personality might retire or leave, to be replaced by staff who need time to become established. Internally generated goodwill is not identifiable as it is not separable from the business, doesn t arise from legal rights and is not controlled by the entity. Internally generated goodwill cannot be recognised as an asset. Goodwill may be recognised when one business purchases another, however this is not considered further in Accounting. --- Trang 319 --- 8.4 Other non-current assets (cid:127) Investments held for the long term. Investments made in the shares of other companies or in debt issued by companies or governments are included in non-current assets as investments. Such investments are known as financial instruments. The accounting and valuation of these can be complex and falls outside the scope of the Accounting syllabus. 9 The non-current assets n o t e s t o t h e s t a t e m e n t o f financial p o s i t i o n Section overview (cid:127) The details behind the single figure for tangible non-current assets in the statement of financial position are provided in a non-current asset note to the statement of financial position. (cid:127) There will be an equivalent note for any right-of-use assets and intangible assets. There is usually a detailed note to the financial statements in respect of property, plant and equipment, with just the summarised figure in the statement of financial position. For each class of property, plant and equipment the note shows: (cid:127) costand accumulated depreciation brought forward (cid:127) additions during the reporting period (cid:127) disposals during the reporting period, and the related accumulated depreciation (cid:127) depreciation charge f o r t h e reporting period (cid:127) closing balance carried forward Note: Disposal proceeds, and gains/losses o n disposal, d o not appear in the non-current assets note. Context example: The non-current assets note We prepared Rodrigo s final trial balance earlier in this chapter. We can now prepare his non-current assets (property, plant and equipment) note from the closing trial balance as follows: Freehold land Plant and a n d buildings equipment Motor vehicles Total Cost At 1.1.X 0 100,000 45,000 25,000 170,000 Additions 13,300 13,300 Disposals (10,000) (8,000) (18,000) At31.12.X0 100,000 35,000 30,300 165,300 Accumulated depreciation At 1.1.X 0 15,000 18,750 14,650 48,400 Charge for the reporting period 5,000 5,290 6,900 17,190 Disposals (1,250) (4,500) (5,750) At31.12.X0 20,000 22,790 17,050 59,840 Carrying amount At 1.1.X 0 85,000 26,250 10,350 121,600 At31.12.X0 80,000 12,210 13,250 105,460 O n Rodrigo s statement of financial position as at 31 December 20X0 there will just be a single figure, for Property, plant and equipment , of 1 05,460. --- Trang 320 --- Professional skills focus: Assimilating and using information The property, plant and equipment disclosure note contains detailed information that is not presented on the face of the financial statements. The information will be sourced from the underlying accounting records of the business, mainly the nominal ledger accounts relevant to property, plant and equipment. Summary Estimated net amount to be received on disposal Non-current assets Where an asset has a useful life extending over more than one period, its cost less its residual value is and depreciation apportioned over its useful life using depreciation Delivery costs of costs - residual value Including irrecoverable Taxes over useful life VAT on cars Site preparation Professional fees Depreciation charge May be reduced DR CR (impairment loss) Statement of Statement of during useful life profit or loss - financial position - Depreciation Accumulated expense depreciation May be purchased for cash, on credit, leased or via part exchange NCA-COST Cost - Accumulated depreciation Cash at bank X Carrying amount Payables X Disposal - Px valuation X 1 Reducing balance Carrying amount x depreciation % 2 Straight line (monthly charge) Cost - Residual value Useful life x 12 Change in accounting estimate: (cid:127) Residual value (cid:127) Useful life (cid:127) Basis INTANGIBLE NON-CURRENT ASSETS (cid:127) Cost of purchased intangible assets such as licences, patents and purchased brands are capitalised, amortised and tested for impairment (cid:127) Development expenditure may be: - capitalised as an assets - if criteria are satisfied - expensed to profit or loss - if criteria are not satisfied - capitalised development expenditure is amortised - internally generated brands are not capitalised --- Trang 321 --- Accounting for non-current assets DR Cost X CR Cash/payables/disposal X 2 Depreciate asset DR Depreciation charge X CR Accumulated depreciation X 3 Test for impairment DR P/L impairment loss X CR PPE Carrying amount X 4 Dispose of asset Disposal Cost X Accumulated depreciation X Cash/payables/ Px valuation X P/L (profit) X P/L (loss) _x_ X X Non-current assets (PPE) note to statement of financial position Land and Plant and Motor buildings equipment vehicles Total Cost B/d X X X X Additions X X X X Disposals 00 00 00 00 C/d X X X X Accumulated depreciation B/d X X X X Additions X X X X Disposals 00 00 00 00 C/d X 2 22 X Carrying amount B/d X x X 22 C/d X X X X Further question practice Knowledge diagnostic Before you move o n to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 322 --- Confirm your learning What is the depreciable amount of a tangible non-current asset (Topic 1 ) Which accounting principle underpins depreciation (Topic 2) Can you explain how a change in useful life is accounted for (Topic 3) How do you calculate an impairment loss (Topic 5) How do you calculate the profit or loss on disposal of a non-current asset (Topic 6) Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the 1 questions in the Non-current assets and depreciation chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. Self-test questions Answer the following questions. 1 Materials purchased and used by Pola Co for repairs to office buildings have been included in the draft financial statements as purchases. Requirement The necessary amendment will: A Increase gross profit with no effect on profit for the year B The decrease and increase to profit for the year cancel out C Increase gross profit and reduce profit for the year D Have no effect on either gross profit or profit for the year E Reduce gross profit and increase profit for the year 2 Marcellus acquired new premises at a cost of 250,000 on 1 January 20X1. Marcellus paid the following further costs during the year ended 31 December 20X1. Costs of initial adaptation 13,900 Legal costs relating to purchase 1,200 Monthly cleaning contract Office furniture Requirement What amount should appear as the cost of premises in the company s statement of financial position as at 31 December 20X1 A 250,000 B 263,900 C 265,100 D 271,600 --- Trang 323 --- 3 Why is depreciation charged on non-current assets A To ensure that sufficient funds are available to replace the assets B To show the assets at replacement cost on the statement of financial position C To spread the cost of the assets over their useful lives D To show the fall in market value of the assets in the statement of profit or loss 4 ABC, whose reporting period is the 1 2 months ended 31 December, has charged depreciation monthly at the rate of 1 0% per annum on cost on an item of plant bought on 1 September 20X0 costing 1 5,000. The depreciation method was changed from straight line to 1 0% reducing balance at the end of 20X3. Requirement The depreciation charge on this asset for 20X5 was: A 1,500 B 945 C 900 D 889 5 A business with a year ended 30 June buys a non-current asset on 1 July 20X3 for 200,000. Depreciation is charged at 1 5% per annum on the reducing balance basis. On 30 June 20X5 the asset was sold for 54,800. Requirement What was the loss on sale of the asset A 89,700 B 85,200 C 68,025 D 55,200 6 In the year ended 31 December 20X7 Bobby traded in for 6,860 a vehicle costing 12 ,000 on 1 November 20X5 against the cost ( 9,600) of a replacement vehicle. The balance due for the new vehicle has been paid in cash and debited to the cost of vehicles account and credited to cash at bank. Requirement What net adjustment is required to the company s cost of vehicles account as a result of this transaction A 9,600 DR B 1 2,000 CR C 6,800 DR D 5,140CR 7 A business acquired machinery on 1 October 20X5 for 1 1 7,000 and has depreciated it on a reducing balance basis at 20% per annum. On 30 September 20X7, an impairment review was carried out which showed the machinery had a recoverable amount of 72,500. --- Trang 324 --- Requirement At what amount should the machinery be presented in the statement of financial position as at 30 September 20X7 A 74,880 B 72,500 C 117,000 D 70,200 8 A business buys a machine on 1 January 20X1 for 1 0,000 and depreciates it at 1 0% per annum straight line. At the end of 20X2 the machine s remaining useful life is reassessed at six years remaining and it is now believed that the machine has a residual value of 500. Requirement What is the depreciation charge for the third year of the machine s use A 950 B 1,250 C 1,267 D 1,350 9 The following information relates to the disposal of two machines by Paddock. Machine 1 Machine 2 Cost 120,000 140,000 Disposal proceeds 90,000 80,000 Profit/(loss) on disposal 30,000 (40,000) Requirement What was the total carrying amount of both machines sold at the date of disposal A 100,000 B 160,000 C 180,000 D 240,000 1 0 On 1 June 20X1 Quandry bought a non-current asset for 50,000 which had an estimated useful life of 1 0 years and a residual value of 2,000. Quandry depreciates its non-current assets on a straight line basis. Quandry s reporting period is the 12 months ended 31 December. On 1 January 20X4 the accountant determined that the asset s remaining useful life should be revised to eight years from that date with no residual value. An impairment review at that date shows that the recoverable amount of the asset is considered to be only 25,000. --- Trang 325 --- Requirement What is the total depreciation and impairment loss charge for this asset in 20X4 A 3,125 B 12,400 C 15,725 D 18,000 1 1 Kentish purchased a licence o n 1 September 20X5 at a cost of 230,000 which allows it to operate an island ferry service for a period of four years. Kentish incurred legal fees of 1 0,000 in securing the licence. Kentish has paid for the legal fees in cash but has not yet made payment for the licence, which is due to be settled by 1 5 January 20X6. Requirement What is the carrying amount of the licence as at 31 December 20X5 A Nil B 220,000 C 180,000 D 210,833 Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 Cost 18,720 Less estimated residual value (6,360) Total amount to be depreciated 12,360 The deposit represents part of the payment for the new vehicle and is not relevant in calculating the depreciable amount of the new car. Answer to Interactive question 2 2.1 Under the straight line method, depreciation for each of the five years is: (17,000 - 2,000) Annual depreciation ------------- -------------- 3,000 Remember that VAT o n lorries is recoverable; it is only in respect of cars that it is irrecoverable. --- Trang 326 --- 2.2 Under the reducing balance method, depreciation for each of the five years is as follows: Year Depreciation 1 35% x 17,000 5,950 2 35% x ( 1 7,000 - 5,950) 35% x 1 1 ,050 3,868 3 35% x ( 11,050- 3,868) 35% x 7,182 2,514 4 35% x ( 7,182 - 2,514) 35% x 4,668 1,634 5 35% x ( 4,668 - 1 ,634) 35% x 3,034 1,062 Answer to Interactive question 3 65,610 New annual charge from 20X4 13,122 per annum 5 years Answer to Interactive question 4 Year 1 Year 2 Year 3 Cost 1,000 1,000 1,000 Accumulated depreciation (80) (160) (265) Carrying amount 920 840 735 Charge for the year (W) 80 80 105 WORKING Charge for the year Year 1 (1 ,000 - 200)/1 0 years Year 2 ( 1, 000 - 200)/1 0 years Year 3 840/8 years Answer to Interactive question 5 5.1 Revised annual depreciation charge from 20X4 _ Carrying amount at revision - residual value Revised remaining life 102,000 15 6,800 per annum --- Trang 327 --- 5.2 Impairment loss and revised annual depreciation charge Recoverable amount is the higher of fair value less costs of disposal of 80,000 and the value in use of 95,000. Carrying amount at 31 December 20X3 102,000 Recoverable amount 95,000 Impairment loss 7,000 The carrying amount of the asset at 31 December 20X3 is reduced to 95,000 and the impairment loss of 7,000 is charged to profit or loss in the year ended 31 December 20X3. DR P/L impairment loss 7,000 CR PPE carrying amount 7,000 Impairment loss on non-current asset The revised annual depreciation charge from 20X4 is then calculated as: 95,000 9,500 10 Answer to Interactive question 6 MACHINERY ACCOUNT 20X7 20X7 Disposal of Balance b/d (2 x machinery 1 Jan 15,000) 30,000 31 Mar account 15,000 Disposal of machinery 1 Dec account 15,000 30,000 30,000 MACHINERY -ACCUMULATED DEPRECIATION 20X7 20X7 Balance b/d 31 Mar Disposal account (W1 ) 6, 750 1 Jan 12,000 Charge to disposal 15,000 X3 60 1 Dec Disposal account (W2) 8,750 31 Mar 750 Charge to disposal 15,000 XU 60 1 Dec 2,750 15,500 15,500 --- Trang 328 --- DISPOSAL ACCOUNT 20X7 20X7 Receivables 31 Mar Machinery 15,500 31 Mar (proceeds) 8,000 Accumulated 31 Mar depreciation (W1 ) 6,750 SPL - loss on 31 Mar disposal 250 1 Dec Machinery 15,000 1 Dec Cash (proceeds) 2,500 Accumulated 1 Dec depreciation (W2) 8,750 31 Dec loss on disposal 3,750 30,000 30,000 WORKINGS (1 ) Machine one depreciation Depreciation at date of disposal (1 5,000/60) x 27 6,750 (2) Machine two depreciation Depreciation at date of disposal (1 5,000/60) 35 8,750 Check profit or loss: Machine 1 Machine 1 cost 15,000 Accumulated depreciation at time of sale (1 5,000/5 x 2) (1 5,000/5 x 3/12 ) (6,750) Carrying amount at time of sale 8,250 Proceeds 8,000 Loss on disposal 250 Machine 2 Machine 2 cost 15,000 Accumulated depreciation at time of sale (1 5,000/5 x 2) (1 5,000/5 x 11/12) (8,750) Carrying amount at time of sale 6,250 Proceeds 2,500 Loss on disposal 3,750 Answer to Interactive question 7 Cost Accounting treatment Coral purchased a small fleet of electric cars to The electric cars are tangible non-current assets, allow deliveries to be made to a wider geographical and their cost should be capitalised accordingly. area. The cars should be depreciated over their useful lives. --- Trang 329 --- Coral paid a graphic designerto design a new logo The amount paid to the graphic designer should be which is used o n Coral s app.The new logo expensed to profit o r loss in the period it is represents the Coral brand. incurred. Internally developed brands cannot b e capitalised as the costs cannot b e separated from the general costs of growing the business. Coral paid to have the software used by the a p p The software is an intangible asset, and the upgrade upgraded to allow it to process a greater number of will generate economic benefits (in the form of orders each day. increased orders) and should therefore be capitalised. The software should be amortised over its useful life. Answers t o Self-test questions 1 A Increase gross profit with n o effect o n profit for the year To correct, reduce purchases (increase to gross profit (GP) and profit for the year (PFY), increase repairs (decrease PFY, n o effect o n GP). The decrease and increase to PFY cancel out. Overall effect o n GP is an increase. 2 C 265,100 Purchase price 250,000 Adaptation 13,900 Legal costs 1,200 265,100 3 C To spread the cost of the assets over their useful lives Depreciation spreads the depreciable cost (cost - residual value) of an asset over its useful life. --- Trang 330 --- 4 C 900 Cost 15,000 Accumulated depreciation to 31 December 20X3 /15,000 - x 40 H Ton I 1 2 0 (5,000) Carrying amount at date of change 1 0,000 Depreciation for 20X4 (1 0,000 x 1 0%) (1,000) 9,000 Depreciation for 20X5 1 0% 900 5 A 89,700 Cost 1 July 20X3 200,000 Depreciation to 30 June 20X4 (30,000) 170,000 Depreciation to 30 June 20X5 (25,500) 144,500 Less Proceeds (54,800) Loss on sale 89,700 6 D 5,140CR Debit with trade-in allowance (to get to total cost of new vehicle of 9,600) 6,860 DR Credit with cost of old vehicle (to remove cost of old vehicle) (1 2,000) CR Net adjustment (5,1 40) CR 7 B 72,500 Cost 1 October 20X5 117,000 Depreciation to 30 September 20X6 (23,400) 93,600 --- Trang 331 --- Depreciation to 30 September 20X7 (18,720) Carrying amount at 30 September 20X7 74,880 Recoverable amount at 30 September 20X7 72,500 Revised carrying amount (lower of original carrying amount and recoverable amount) at 30 September 20X7 72,500 8 B 1,250 Cost 10,000 Depreciation20X1 (10% x 1 0,000) (1,000) 9,000 20X2(10% x 10,000) (1,000) Carrying amount at end 20X2 8,000 Depreciation charge for 20X3 1,250 9 C 180,000 Machine 1 Machine 2 Total Disposal proceeds 90,000 80,000 Carrying amount (60,000) (120,000) (180,000) Profit/(loss) on disposal 30,000 (40,000) 10 C: 15,725 Cost 50,000 Accumulated depreciation to 31 December 20X3 50,000 - 2,000 X 120 (12,400) Carrying amount at 31 December 20X3 37,600 Impairment loss (37,600 - 25,000) 1 2,600 Annual depreciation charge (25,000/8) 3,1 25 15,725 --- Trang 332 --- 1 1 The cost of the licence of 240,000 ( 230,000 cost plus 10,000 legal fees) should be capitalised on 1 September 20X5. The fact that the purchase cost has not yet been paid for is not relevant in determining the cost as the accrual principle should be applied. The amount outstanding will be presented as a current liability as it will be paid within 1 2 months of the year end. The licence should then be amortised over its useful life of four years. As the licence has only been in use for four months of the current year, the amortisation expense should be pro-rated. The amortisation expense is therefore 20,000 ( 240,000/4 yrs x 4/12 months). The carrying amount of the licence is therefore 220,000 ( 240,000 - 20,000). --- Trang 333 --- Chapter 1 1 Company financial statements Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 The nature of a limited company 2 Equity: share capital 3 Equity: share premium, retained earnings and other reserves 4 Dividends 5 Rights issues and bonus issues of shares 6 Non-current liabilities I 7 Provisions (IAS 37) (FRS 102 s2 1 ) 8 Tax r in : r 9 Revenue(IFRS 1 5) (FRS 102 s23) 1 0 The regulatory framework for company financial statements SSuummmmaarryy Further question practice Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 334 --- I n t r o d u c t i o n Learning outcomes (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Record and account for changes in the ownership structure and ownership interests in an entity (cid:127) Identify the main components of a set of financial statements and specify their purpose and interre lationship (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcomes are: 1d, e; 3a, c Syllabus links The material in this chapter will be developed further in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple-choice, multi-part multiple choice or multiple- response questions, some of which may involve calculations so that the correct answer can be selected. Very often double entry questions are phrased in terms of preparing a journal. In addition, the material covered in this chapter may also be examined as part of a long form question. In the exam you may be required to: (cid:127) specify the unique features of company financial statements: equity (share capital and reserves), provisions and tax (cid:127) specify the distinctions between equity shares, and redeemable and irredeemable preference shares (cid:127) identify how to account for issues of shares and payment of dividends (cid:127) identify how loans should be split into their current and non-current liability categories for the statement of financial position (cid:127) identify how to account for changes in provisions (cid:127) identify how to account for tax, including under-provisions and over-provisions Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Practical significance Study approach Exam approach Interactive questions The nature of a Approach The ability to prepare limited company financial statements The first topic is for an individual entity Everything that you theoretical. Ensure is a fundamental part have studied so far you understand the of the Accounting leads to this chapter, terminology in respect syllabus and has a in which you see how of shares and the syllabus weighting of a set of company difference between 45%. The long-form financial statements is private and public question will require put together. Limited companies. you to prepare the companies have some Stop and think primary financial unique features for Why is the market statements of an accounting purposes. individual company. It value of a share not The first topic covers recorded in the is essential that you --- Trang 335 --- understand the company s financial companies before we statements content of this chapter look at the accounting in order to account for requirements in more the balances and detail. transactions that are specific to a company. Limited company questions might also be asked as part of the objective test questions. 2 Equity: share capital Approach As part of your IQ1 Issue of share knowledge of limited capital The format of a You need to companies, you may company statement of understand the This is a short be required to specify financial position is difference between question that tests the distinctions consistent with what equity shares and your understanding of between equity we have learned so preference shares, how to calculate share shares, and far, with the exception and between premium and howto redeemable and of the equity section. redeemable and prepare the journal irredeemable The equity section irredeemable entry to record the preference shares. replaces capital in the preference shares. Pay cash issue of shares. financial statements attention to the we have looked at so journal entry that far. The first balance shows how a share we will look at in the premium is accounted equity section is share for. Attempting the capital. Interactive question will help you to ensure you understand how to calculate and account for the share premium. Stop and think Why are redeemable preference shares accounted for as a liability 3 Equity: share Approach Understanding the premium, retained components of the Share premium was earnings and other equity section is mentioned briefly in reserves important in the share capital identifying and This topic looks at the section but you accounting for the other balances within should coverthe unique features of the equity section. worked example in company financial detail. Retained statements. earnings should be familiar to you as it is similar to the profit or loss reserve we have covered in earlier chapters, so you can cover this quickly. Stop and think How would a loss for the period impact on retained earnings --- Trang 336 --- Dividends Approach Both the long-form IQ2 Dividends and question and the retained earnings The payment of You need to objective test dividends by a understand the This question checks questions may require company is a common difference between your understanding of you to demonstrate transaction. Students equity dividends and how dividends paid your understanding of often get the preference can be derived from how to account for the accounting for dividends. The best the opening and payment of dividends. dividends wrong by approach to this topic closing retained treating them as an is to cover the worked earnings balances. expense of the examples in detail. company. Dividends It is important that you are a distribution of can work backwards funds to the owners of to calculate the a company and dividend paid from should be accounted the movement in for in equity as a retained earnings. Use deduction from the retained earnings retained earnings. equation to help you to work through the interactive question. Stop and think Why are dividends not treated as an expense of the company Apply the accruals concept when thinking of your answer. Rights issues and Approach Understanding how to IQ3 Rights issue bonus issues of shares account for issues of You need to cover This question tests shares is important in Rights issues involve some theory to your understanding of being able to prepare issuing shares to understand the rights issues. It is not the equity section of a existing shareholders difference between easy, so work slowly. company statement of at less than market rights issues and IQ4 Bonus issue financial position. value. Bonus issues bonus issues, but the Rights issues and This covers both rights involve issuing free approach to bonus issues could be issues and bonus shares to existing accounting for each is asked as part of the issues. You should find shareholders. Both are best learned by long-form question or bonus issues easier quite common example. Cover the in objective test than rights issues. occurrences and you worked examples in format. need to understand this topic carefully. the difference Stop and think between them and Why might a company how to account for issue its shares for both. free Non-current liabilities Approach Non-current liabilities can feature in the Limited companies Although complex in objective test have various options real life, in Accounting questions either in the for raising you just need to know form of journal finance. They may the journal entries for entries, identifying issue shares as we the issue and debits and credits or have already covered, repayment of debt, identifying the current they can take loans and how to allocate and non-current from banks or they the outstanding debt elements. You may can issue debt in the balance into its also be required to form of, for example, current and non- prepare journal corporate bonds. current components. --- Trang 337 --- entries to account for Ensure you are happy non-current liabilities with the required in the long form journal entries. question. Stop and think Why might a company prefer to have debt finance rather than issuing more shares Provisions (IAS 37) Approach You need to be (FRS102 s21) familiar with how to This topic covers account for provisions A provision is a type provisions for legal in order to prepare of liability but is fees. The approach is limited company unusual as there is to create the financial statements in uncertainty as to the provision, utilise the the long form amount ortiming of provision and release question. Provisions the eventual payment. any excess provision. also feature frequently Provisions are Use the worked in objective test common and involve examples to ensure questions. judgement by the you are happy with accountant to the journal entries determine the required at each appropriate stage. amount. An expense Stop and think is recognised at the In what way is a point at which the provision different provision is created, from an accrual not when the actual expenditure is incurred. Tax Approach Accounting for tax is an important part of As companies are You should limited company separate legal entities, understand the basic accounting. You need they are subject to tax journal entries to understand how tax on their profits. You required to create a is accounted for, are not required to tax liability and when including under- and understand the tax tax is paid. over-provisions, and rules for companies, It is important to know where it is just how to account understand that the presented in the for the tax incurred. amount of tax is financial statements. estimated at the date the accounts are prepared and there may be adjustments, known as under- and over-provisions in the following accounting period. You need to know how to account for these adjustments. Stop and think What does an under- provision represent Revenue (IFRS 15) Approach You are only expected (FRS102 s23) to deal with simple This is a short section revenue transactions In real life, revenue that you can read in Accounting. It is recognition is a through quickly. --- Trang 338 --- important that you complex issue for Stop and think know that revenue can many companies and Why do you think only be recognised there is a very detailed when a company has revenue is an accounting standard satisfied its important figure that covers revenue. In performance within the financial Accounting, you just statements obligations, which in need a very high level Accounting, is on understanding of the delivery of goods or requirements of the performance of a accounting standard, service. which includes a five step process to recognising revenue. The regulatory Approach You need to framework for understand the This is a theoretical company financial requirements of IAS 1 topic, some of which statements in order to prepare may already be the financial Companies have to familiarto you as we statements in the apply the accounting have met IAS 1 long-form question. standards when before. You should be You also need to preparing their able to read through it understand how financial statements. fairly quickly. expenses should be This topic briefly Stop and think categorised into cost covers IAS 1 Why is it important to of sales, administrative Presentation of the users of financial expenses, distribution Financial Statements, statements that costs and finance which you have met costs. expenses are previously, and IAS 8 separately A cco u n tin g Po li cies, categorised Changes in Accounting Estimates and Errors. Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 The nature of a limited company B Section overview (cid:127) Companies are legally separate from their owners, so the presentation of owners capital is particularly important. (cid:127) A company s initial capital is divided into shares which have a par or nominal value, and an issue value that can exceed that amount. (cid:127) A private company may not issue securities (shares and loan stock) to the public at large. A public company may do so, either through a public listing or otherwise. (cid:127) Particular features of company accounting relate to: owners capital (equity); debt capital; provisions; tax. Limited companies are the most common form of private sector business organisation. Businesses that are not limited companies tend to be small in size, or provide specialised professional services, such as firms of accountants or solicitors. A company has a separate legal existence, independent of its owner(s). It can enter contracts in its own name, it can sue or be sued, and it is liable to the tax authorities for tax on the profits that it earns. The profits available to the owners of a company are profits after deducting taxation. Because a company has this legal identity, separate from its owners, the way it raises capital from its owners, and is accountable to its owners for the capital that it holds, is more formalised than for sole traders. --- Trang 339 --- 1 .1 Share capital and shareholders A company s initial capital is divided into units of equal size, known as shares, issued to individuals or companies, called shareholders. The total capital raised is referred to as equity share capital. Ownership of a share entitles the shareholder to receive payment of a share of profit, or dividend. By law, shares must have a par value (the Companies Act 2006 calls this the nominal value ), which can be any amount, for example 1 p, 5p, 1 0p, 25p, 50p, 1 and so on. However, all shares of the same type ( class ) have the same par value. For example, 1 00,000 par value of share capital might be represented by 1 00,000 shares of 1 each, or 200,000 shares of 50p each, or 1 ,000,000 shares of 1 Op each, and so on. It is possible to have differing classes of share which carry different rights for their owners. The par value of shares will rarely bear any relationship to either: (cid:127) the issue price at which the share was originally issued by the company, to raise capital; or (cid:127) the current market value of the share if the shares of the company are traded on a stock market. The original issue price of a share matters to a company because it is the amount of cash raised for each share issued. A company will often issue shares at above ( at a premium to ) par value. For example, a company with shares of 1 might issue shares at 1. 50 per share when the company is first incorporated, then make a further issue of shares some years later at, say, 2 each, and then a further issue some time after that at, say, 3.50 each. The current market value of a share has no bearing on company financial statements at all, because this is the price at which an existing shareholding is sold by one person (not the company) to another person (not the company). Such transactions do not give rise to anything that has to be recorded in the company s accounting records. 1 .2 Public and private companies Companies are either public or private companies. (cid:127) A public company has pic in its name. A public company may offer its securities (shares and loan stock such as bonds) for sale to persons who are unrelated to the company ( the public ), but is subject to stricter regulation than private companies. In particular, a public company must have issued capital of at least 50,000. Before it can trade, at least 1 2,500 plus the whole of any premium on issue must have been received as cash. Effectively this means that a public limited company must have net assets (assets less liabilities) of at least 1 2,500. Note that all companies whose shares are traded on a stock market must be pies , but not all pics have their shares traded on a stock market. (cid:127) A private company ends its name with Limited or Ltd . A private company is any company that is not a public company. Private companies cannot offer their securities for sale to the public at large. There is no minimum level of net assets. 1.3 Accounting for companies Companies have distinctive characteristics to be accounted for. The following are examinable in Accounting: (cid:127) equity (owners capital comprising share capital, retained earnings and other reserves), rights issues and bonus issues (cid:127) forms of debt capital (non-current liabilities) (cid:127) provisions (cid:127) tax on profits (cid:127) dividends 2 E q u i t y : share c a p i t a l B Section overview (cid:127) Share capital can be split into: - equity shares (no entitlement to a set amount of dividend) --- Trang 340 --- - irredeemable preference shares (which have a fixed entitlement to dividends) (cid:127) Redeemable preference shares are entitled to a set amount of dividend but are treated as non-current liabilities (debt capital). (cid:127) The figure for called-up share capital at par value appears on the statement of financial position. This may be less than the figure for issued share capital. If an amount of called-up capital is unpaid, this is treated 1 as an other receivable . (cid:127) Of the issue price, any excess or premium received over par value is credited to share premium (a reserve or other component of equity ). 2.1 Equity shares and preference shares Companies often have just one class of share, ordinary shares, which are referred to in the Companies Act 1 2006 as equity share capital because each share represents an equal interest in the ownership of the company. A company might also issue preference shares, which entitle their holders to a dividend out of profits (preference dividend) before equity shareholders are entitled to any equity dividend. Once the preference dividend has been paid, the remaining profit belongs to the equity shareholders. However, the directors will usually decide to retain some profits (retained earnings) within the company, and the equity dividend will be an amount declared by the directors as being appropriate and affordable. 2.2 Issued and called-up share capital The issued share capital of a company (also known as its allotted share capital) is the par value of the shares that have actually been issued to shareholders. If a company issues shares but calls up the issue amounts in instalments, instead of raising cash immediately, it then has called-up share capital that is less than its issued share capital. Context example: Called-up share capital A company issues 1 00,000 shares of 1 at par value, but only calls up 75p per share as a first instalment. The issued share capital is 10 0,000, but the called-up share capital is only 75,000. The figure in the statement of financial position will be 75,000. In a company s statement of financial position, the figure for share capital is the called-up share capital. On the face of the company s statement of financial position, or in a note, called-up equity share capital and irredeemable preference share capital at par value are shown separately. Statement of financial position (extract) Equity 000 Share capital: equity shares of 50p each (81. 5m shares) 40,750 Share capital: 6% irredeemable preference shares of 1 (9m shares) 9,000 49,750 If a company has called-up share capital, but is waiting for payment from some shareholders, it has paid up capital of less than its called-up capital. Context example: Paid u p capital A company issues 1 million shares of 1 at par, and asks for payment in full on issue, but it is still owed 5,000 by shareholders who have yet to pay what they owe. The called-up share capital is 1 ,000,000, but the paid up share capital is only 995,000. In the statement of financial position, the share capital (a credit balance) is the called-up share capital of 1, 000,000, and the unpaid capital of 5,000 is shown as an other 1 receivable (a debit balance). --- Trang 341 --- 2.3 Irredeemable and redeemable preference shares (cid:127) Usually only preference shares which the company is not entitled to buy back or redeem at some stage in the future, known as irredeemable preference shares, are treated as share capital. In an exam question, you can assume that irredeemable preference shares are part of share capital unless you are told otherwise. (cid:127) Preference shares which the company is entitled to buy back from its shareholders or redeem at some future time are called redeemable preference shares, treated as non-current liabilities (debt capital). Note: In an exam question it will be specified whether preference shares are redeemable or irredeemable. j Professional skills focus: Assimilating and using information The difference between the accounting treatment of redeemable and irredeemable preference shares is in keeping with the need to present a True and fair view of an entity s position and performance. Accountants have to use information about the substance of transactions and balances to ensure they are accounted for correctly. It would be inappropriate to account for all types of shares in the same way simply because they are called shares. Instead, the underlying nature of each type of share needs to be understood if they are to be accounted for correctly. 2.4 Accounting for share capital (cid:127) When shares are issued at their par value and they are fully paid: DEBIT Cash X CREDIT Share capital (par value) X (cid:127) When shares are issued at their par value but an amount remains uncalled by the company DEBIT Cash X CREDIT Share capital (called-up amount of issued shares) X (cid:127) When shares are issued and called-up at their par value but an amount remains unpaid: DEBIT Cash X Other receivables (unpaid capital) X CREDIT Share capital (par value) X Interactive question 1 : Issue of share capital Rosewait pic issued 2,000,000 equity shares for their par value 50p each all received in cash. Requirement Prepare the journal entry to record the share issue. --- Trang 342 --- 3 E q u i t y : share p r e m i u m , r e t a i n e d earnings a n d o t h e r reserves B Section overview (cid:127) Share premium: set up with amount received over par value of issued share capital (equity and irredeemable preference shares). The account may be reduced by a bonus issue. (cid:127) Retained earnings: built up with each reporting period s profits, depleted by dividends and losses. Amounts may also be transferred to or from other reserves or reclassified as share capital in a bonus issue. (cid:127) Other reserves: created as a requirement of IFRS Accounting Standards for certain transactions. Share capital is shown in the statement of financial position at its nominal value. Any other amounts attributable to owners (equity shareholders) are shown separately as reserves. A company might have a number of different reserves, each set up for a different purpose, including the following which are examinable in Accounting: (cid:127) share premium (cid:127) retained earnings (cid:127) other reserves 3.1 Share premium The Companies Act 2006 prohibits shares from being issued at a price below ( at a discount to ) their par value. Commonly they are issued at a price above par value. When this happens, the excess of the issue price above the par value is recorded in a separate share premium account. St Context example: Share premium A company issues 1 million 50p equity shares at a price of 4.20 per share for cash. The shares are issued at a premium of 3.70 ( 4.20 - 0.50) above their par value, and the share issue should be recorded in the ledger accounts as follows: DEBIT Cash 4,200,000 CREDIT Share capital: equity shares of 50p 500,000 Share premium 3,700,000 There are tight legal restrictions on the use of the share premium reserve. Dividends cannot be paid out from it, but it may be reclassified as share capital via a bonus issue, as we shall see shortly. 3.2 Retained earnings Definition Retained earnings: A reserve used to accumulate the company s retained earnings. Retained earnings comprise the income (profits and gains less losses) that the company retains within the business, ie, income that has not been paid out as dividends or transferred to any other reserve. The retained earnings ledger account would look like this (note that if there was a loss this would be debited to the ledger account): --- Trang 343 --- RETAINED EARNINGS Balance b/d (opening statement of Dividends of the period financial position) Profit for the reporting period (from Transfers to other reserves statement of profit or loss) Balance c/d (closing statement of financial position) We shall look at the transfer to general reserve shortly. The balance carried down on the retained earnings ledger account represents the company s accumulated profits and losses over time out of which it may, if it wishes, pay dividends to its shareholders in the future. 3.3 Other reserves A company might have other reserves in its financial statements, often as a result of following the requirements of IFRS Accounting Standards, such as a revaluation surplus that arises when non-current assets are revalued upwards. It is sufficient for you to know at this stage that such reserves might exist, without needing to know why and how they are used. 4 Dividends Section overview (cid:127) An equity (or ordinary) share entitles its holderto dividends which vary in amount depending on the performance and policy of the company. (cid:127) Dividends paid on equity shares are paid out of retained earnings. (cid:127) A preference share entitles the holder to a fixed dividend, whose payment takes priority over that of ordinary share dividends. (cid:127) Dividends paid on irredeemable preference shares are paid out of retained earnings. Dividends paid on redeemable preference shares are treated as a finance cost (interest expense) of the company and are included in the statement of profit or loss. 4.1 Equity dividends The dividend to be paid to the shareholders is decided by the board of directors. The dividend rate can be expressed in a number of different ways. 5 Context example: Equity dividends I Equity dividends can be quoted in terms of the pence amount each share receives, for example, the equity share information may appear in the trial balance as follows: DR CR Ordinary share capital ( 1 per share) 400,000 The company paid an equity dividend of 5p per share. This means that the dividend paid amounts to 20,000. This is calculated by multiplying 400,000 shares by 5p. --- Trang 344 --- Number of shares in issue When you calculate dividends it is very important that you establish the number of shares in issue. (cid:127) If the nominal value of shares is 1, and the value of the ordinary share capital account is 500,000, that means there are 500,000 ordinary shares in issue ( 500,000/ 1) . (cid:127) If the nominal value of the shares was 2, and the value of the ordinary share capital account was 500,000, that means there are 250,000 ordinary shares in issue ( 500,000/ 2). (cid:127) If the nominal value of shares is 50p, and the value of the ordinary share capital account is 500,000, that means there are 1 ,000,000 ordinary shares in issue ( 500,000/ 0.50). Context example: Equity dividends 2 If the nominal value of the share is 50p, and the value of the equity share capital is 400,000, the trial balance would appear as follows: DR CR Ordinary share capital (50p per share) 400,000 The payment of an equity dividend of 5p per share would now result in a total dividend of 40,000. This is because there are actually 800,000 50p shares in issue. The journal entry to record an equity dividend paid is: DEBIT Retained earnings X CREDIT Bank/cash X 4.2 Preference dividends A company may also issue preference shares, which entitle the holders to a dividend out of profits (preference dividend) before the equity (ordinary) shareholders are entitled to any equity dividend. This is the case regardless of whether the preference shares are redeemable or irredeemable. Preference shares are often expressed as follows: DR CR 7% 1 irredeemable preference shares 100,000 This means that the preference dividend to be paid will be 7,000 ( 10 0,000 x 7%). 4.2.1 Dividends on irredeemable preference shares Dividends paid on irredeemable preference shares are taken from retained earnings in the same way as equity dividends and are therefore deducted from retained earnings. This is the case because irredeemable preference share capital is a component of equity. 4.2.2 Dividends on redeemable preference shares Dividends paid on redeemable preference shares are treated as a finance cost (interest) in the period and are therefore included in the statement of profit or loss. This is the case because redeemable preference shares are presented as liabilities on the statement of financial position. Worked example: Dividends on preference shares Lewis Ltd prepares its financial statements to 31 March 20X5. It has the following preference shares in issue: --- Trang 345 --- Preference share 5% irredeemable preference share capital 1 00,000 8% redeemable preference share capital 50,000 The dividend on the irredeemable preference share capital was paid on 31 March 20X5. The dividend on the redeemable preference share capital which relates to the year ended 31 March 20X5 was paid on 1 4 April 20X5. Requirement Prepare the journal entries to record the preference dividends paid. Solution 5% irredeemable preference share capital The dividend paid is 1 00,000 x 5% 5,000. The journal entry is: DEBIT Retained earnings 5,000 CREDIT Bank/cash 5,000 8% redeemable preference share capital The dividend paid is 50,000 x 8% 4,000. The journal entry is: DEBIT Finance costs P/L 4,000 CREDIT Accrued interest 4,000 Note: As the dividend is not paid until after the year end, it should be an accrued expense at the year end date. 4.3 Calculating the dividends from retained earnings Retained earnings comprise the profits that the company retains within the business, ie, profits that have not been paid out as dividends or transferred to any other reserve. In some cases, you may be expected to calculate the dividends paid during the period without any information regarding the dividend rate to be paid. Instead, you need to understand the composition of retained earnings. Retained earnings is calculated as: Opening retained earnings profit for the year (or - loss for the year) - dividends paid in the year. This equation can be used to calculate dividends paid. Interactive question 2: Dividends and retained earnings The retained earnings of a company at 1 January 20X5 were 800,000. The retained earnings at 31 December 20X5 are 1, 14 0,000. The profit for the year is 370,000. Requirement What was the total dividend paid during the year Professional skills focus: Structuring problems and solutions Working backwards from the movement in retained earnings to determine the dividend paid is a good example of how, to solve problems, you must use what you understand about the financial statements and how transactions are accounted for. You shouldn t always assume that an exam question will tell you the amount of the dividend paid. You may need to work it out from the retained earnings and profit for the year balances. --- Trang 346 --- 5 Rights issues a n d bonus issues of shares Section overview (cid:127) A rights issue of shares is made to existing owners in proportion to their shareholdings. (cid:127) Amounts from retained earnings and share premium may be reclassified as share capital in a bonus issue: DEBIT Share premium X Retained earnings X CREDIT Share capital X 5.1 Rights issues of shares Large share issues to raise new cash are often in the form of a rights issue. Definition Rights issue: New shares are offered to existing owners in proportion to their existing shareholding, usually at a discount to the current market price. For example, a company with 20 million shares in issue decides to raise more cash by issuing 5 million new 1 shares. It can offer the new shares to existing owners in a 1 for 4 rights issue: each existing owner is offered one new share for every four currently held (20 million/5 million 4). Interactive question 3: Rights issue The statement of financial position of Omnibus pic contains the following information. ASSETS 000 Non-current assets 18,600 Current assets 2,900 Total assets 21,500 EQUITY AND LIABILITIES Equity Share capital: equity shares of 20p each 6,000 Share premium 5,700 Retained earnings 7,000 Total equity 1 8,700 Total liabilities 2,800 Total equity and liabilities 21, 500 The company decides to make a 1 for 3 rights issue for cash, fully paid, at a price of 1. 80 per share. Requirement Calculate the balances for (a) Current assets (b) Share capital (c) Share premium after the rights issue. --- Trang 347 --- 5.2 Bonus issues of shares Definition Bonus issue (or capitalisation issue or scrip issue): An issue of fully paid shares to existing owners, free of charge, in proportion to their existing shareholdings. A bonus issue does not involve any cash inflow for the company. The company converts some of its reserves (share premium or retained earnings or both) into a new fully paid share capital issued at its par value. The double entry for the par value of the bonus shares issued is: DEBIT Share premium or Retained earnings or both X CREDIT Share capital X The balance o n share premium cannot (by law) be paid to owners as dividends. There are only a few transactions that can ever reduce share premium. One of these is a bonus issue of shares. Note: In an exam you should assume that a company uses the share premium account as fully as it can before using retained earnings, unless told otherwise. Context example: Bonus issue A company has the following statement of financial position. 000 ASSETS 30,000 EQUITY A N D LIABILITIES Equity Share capital: equity shares of 1 each 5,000 Share premium 1,300 Retained earnings 9,700 Total equity 1 6,000 Total liabilities 14,000 Total equity and liabilities 30,000 The company decides to make a 2 for 5 bonus issue of shares. The company is issuing ( 5m/5 x 2) 2,000,000 new shares of 1 each to its owners, in proportion to their existing shareholdings. It will: DEBIT Share premium (total balance of share premium) 1,300,000 Retained earnings (remainder) 700,000 CREDIT Share capital 2,000,000 The statement of financial position after the issue shows n o change in assets or liabilities, but equity has changed, as follows: 000 ASSETS 30,000 EQUITY A N D LIABILITIES --- Trang 348 --- Equity Share capital: equity shares of 1 each ( 5m 2m) 7,000 Share premium ( 1. 3m - 1 .3m) 0 Retained earnings ( 9.7 m - 0.7 m) 9,000 Total equity 1 6,000 Total liabilities 14,000 Total equity and liabilities 30,000 Interactive question 4 : Bonus issue The statement of financial position of Canvat pic as at 31 December 20X1 is as follows: 000 ASSETS 2,000 EQUITY A N D LIABILITIES Equity Share capital: 800,000 50p equity shares 400 Share premium 500 Retained earnings 300 Total equity 1,200 Total liabilities 800 Total equity and liabilities 2,000 The directors decide to make a 1 for 5 bonus issue, followed by a 1 for 3 rights issue at 1. 60 per share. Requirement Show the revised statement of financial position of Canvat pic after both share issues have taken place. 5.2.1 Calculating the dividends from retained earnings where there has been a bonus issue during the year If there is n o share premium account, or you are specifically told to use the retained earnings account for the issue of bonus shares, you should understand how this transaction will affect the calculation of dividends from the retained earnings account. Worked example: Bonus issue, dividends and retained earnings At the start of the year the company had 1 00,000 1 equity shares in issue and retained earnings of 800,000. During the year the company made a profit of 370,000 and made a 1 for 1 0 bonus issue of shares from the retained earnings account. At the end of the year the company had retained earnings of 1,140,000. Requirement Calculate the dividends paid during the year. Solution The total dividend paid during the year is 20,000 (W) --- Trang 349 --- WORKING Dividend paid SHARE CAPITAL B/fwd 100,000 C/fwd 110,000 Bonus issue 10,000 110,000 110,000 RETAINED EARNINGS Bonus issue 10,000 B/fwd 800,000 Dividends (bal. fig.) 20,000 Profit for the year 370,000 C/fwd 1,140,000 1,170,000 1,170,000 6 N o n - c u r r e n t l i a b i l i t i e s si Section overview (cid:127) Non-current liabilities you may be expected to account for in the Accounting syllabus include debt securities (debentures, loan stock and bonds), plus bank loans and redeemable preference shares. (cid:127) Interest on non-current liabilities is a contractual obligation and must be accrued in the calculation of profit before tax. (cid:127) Any amounts that are repayable in less than 1 2 months must be classified as current liabilities. The remaining balance is treated as non-current liabilities: long-term borrowings. A company may borrow directly from a bank or it may borrow in the form of debt securities (loan stock, debenture loans or bonds). These securities are normally issued as certificates, each with a par value, in return for cash (the loan principal). The certificate s owner is legally entitled to interest on its par value, and is entitled to repayment of the principal at maturity , ie, when the loan period reaches its end at a specifiable future date. This is known as redemption. The company has a contractual obligation to pay interest on debt securities. Interest due for the period will be included as a finance cost within the statement of profit or loss and any unpaid interest at the year end must be included in the statement of financial position within accrualsand other payables. Debt securities are similar in concept to any other type of loan. Unless they are due to reach maturity within 1 2 months, they are included in non-current liabilities in the statement of financial position. Any amount due for redemption within 1 2 months is shown under current liabilities. Debt securities, bank loans and redeemable preference shares are all types of financial instrument which are accounted for under IFRS 9, Financial Instruments, The requirements of IFRS 9 are outside the scope of the Accounting syllabus. 6.1 Accounting for non-current liabilities On issue of debt: DEBIT Cash X CREDIT Non-current liabilities X --- Trang 350 --- On repayment of debt: DEBIT Non-current liabilities X CREDIT Cash X Remember that: (cid:127) Any redeemable preference shares in issue will also be treated as liabilities (either current or non-current) rather than equity. (cid:127) Any debt that is due for repayment in less than 1 2 months after the statement of financial position date is reclassified from non-current to current liabilities. 7 Provisions (IAS 3 7 ) (FRS 1 0 2 s21) B Section overview (cid:127) Provisions are liabilities that can only be measured using estimation, so they are disclosed separately from other liabilities. (cid:127) IAS 37, Provisions, Contingent Liabilities and Contingent Assets provides guidance on when provisions and contingencies should be recognised and if so, at what amount. Provisions are liabilities of a company. Provisions are shown separately from other liabilities because the amount of a provision can be measured only by using a substantial degree of estimation. IAS 37 aims to ensure that: (cid:127) appropriate recognition criteria and measurement bases are applied to provisions (cid:127) sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount UK GAAP alert There are no significant differences in the treatment of provisions under IAS 37 and UK GAAP. Note that while this definition in IAS 37 means that provisions are viewed as a sub-class of liabilities, a provision differs from an accrual for, say, gas supplies, where it is known that there will be a gas bill, to be paid X weeks after the end of the reporting period for roughly Y. There is less certainty when creating a provision. Provisions are a common feature of financial statements and can arise from many transactions. In Accounting, you are only required to be aware of provisions that are expected to be settled within the next 1 2 months, that is, they are classified as current liabilities. IAS 37 specifies criteria that must be fulfilled in order for a provision to be recognised. In Accounting, we simplify the criteria to assume that a provision should only be created if: (cid:127) the business has a present obligation to incur the expenditure (eg, a legal obligation, for example a claim against the business); and (cid:127) it is probable (ie, more than 50% likely) that the expenditure will be incurred. Professional skills focus: Applying judgement There is a significant amount of judgment required in determining whether a provision is needed and the amount to be provided. The accountant will often seek advice from other professionals, such as lawyers, when considering legal claims. It is also an area in which ethics must be considered, as the level of judgment and uncertainty involved may mean there is increased scope for the manipulation of the financial statements. The accountant must ensure that a provision is created and accounted for in such a way that the financial statements show a true and fair view. --- Trang 351 --- 7.1 Accounting for provisions Provisions are accounted for in the following stages. Stage 1 : Create provision At the point at which a provision is created, an expense is recorded in the statement of profit or loss and a corresponding liability is recorded in the statement of financial position. The journal entry to record this is: DEBIT Expenses (P/L) X CREDIT Current liabilities X Stage 2: Incur expenditure When the expenditure for which the provision was created is incurred, it should be charged against the provision (thereby removing the provision from current liabilities). If the expenditure is greater than the amount provided, an additional charge will b e required in the statement of profit or loss. The journal entry to record the use of a provision where the expenditure exceeds the amount provided for is: DEBIT Expenses (P/L) X Current liabilities X CREDIT Cash at bank X Stage 3: Remove excess provision If the actual expenditure was less than the amount provided, any excess provision remaining in the statement of financial position should be released to profit or loss by recording the journal entry: DEBIT Current liabilities X CREDIT Expenses (P/L) X Consider the following example. fit Context example: Provision for legal claim An employee of Stop Ltd damaged his hand whilst using machinery that was not fitted with adequate safety guards. In the year ended 31 July 20X7, the employee sued Stop Ltd for 1 00,000 in respect of the damages he suffered. Stop Ltd s lawyers have indicated that the employee is 80% likely to win the case and agree that the amount payable is likely to be 1 00,000. They are not sure when the amount will be settled, but it is expected to b e within the next 12 months. As Stop Ltd expects the employee to win the case, it should provide for the likely amount payable despite the uncertainty regarding timing. The journal to record the provision in Stop Ltd s accounting records at 31 July 20X7 is: DEBIT Expenses (P/L) 100,000 CREDIT Current liabilities 100,000 Being creation of provision for legal costs O n 3 November 20X7, the claim was settled in favour of the employee and Stop Ltd paid him 80,000. The journals to record the settlement of the claim and to remove the provision are: DEBIT Current liabilities 80,000 CREDIT Cash at bank 80,000 Being settlement of claim DEBIT Current liabilities 20,000 CREDIT Expenses (P/L) 20,000 Being the removal of remaining provision --- Trang 352 --- 8 Tax Section overview (cid:127) Any tax due o n profits is the company s liability and therefore must b e shown: - as a deduction in the statement of profit or loss - as a payable in the statement of financial position (cid:127) Any over-provision or under-provision in previous reporting periods is credited/debited in the current reporting period s statement of profit or loss. A company as a separate legal entity is liable to pay tax o n its profits to HMRC itself: the liability is not that of 1 its owners . Tax is therefore treated as a deduction from profit. Any outstanding liability for unpaid tax is shown as a liability o n the statement of financial position (tax payable), either current or non-current depending o n the circumstances. 8.1 Accounting for tax Different methods of accounting for tax (excluding VAT) can be used, but in this Workbook a single tax payable ledger account is used for both the expense in the statement of profit or loss and the liability in the statement of financial position. When a tax liability arises and is identified, the double entry to record it is: DEBIT Tax expense (statement of profit or loss) X CREDIT Tax payable account X When a tax payment is made: DEBIT Tax payable account X CREDIT Cash at bank X At the end of the reporting period, any balance o n the tax payable account is carried down. Usually this is a credit balance and is shown as Tax payable under current liabilities o n the statement of financial position. Context example: Tax 1 Hardwork pic has estimated that 90,000 is payable in tax o n the profits earned in the year ended 31 December 20X1. None of this tax has been paid by the date of the statement of financial position. The tax will b e accounted for as follows: TAX PAYABLE ACCOUNT 20X1 20X1 Tax expense (statement of profit or Balance c/d 90,000 loss) 90,000 90,000 90,000 20X2 Balance b/d 90,000 Since a company s statement of profit or loss is usually prepared before the tax due is finally agreed with HMRC, the expense in the statement of profit or loss is an estimate. It nearly always proves to be too high (over-provision) or too low (under-provision). Instead of going back to the financial statements for the reporting period and changing them: (cid:127) Any over-provision from the previous reporting period reduces the tax expense for the subsequent reporting period. (cid:127) Any under-provision from the previous reporting period increases the tax expense for the subsequent reporting period. --- Trang 353 --- Context example: Tax 2 In the year to 31 December 20X2, Hardwork pic has a credit balance brought down o n its tax payable account of 90,000 (1 ), It agrees with HMRC that the tax due o n 20X1 s profits is 87,000, which it pays in February 20X2 (2). Its over-provision for 20X1 is therefore 3,000 (3). It estimates that its tax due o n 20X2 s profits should be 1 00,000 (4). Hardwork pic s net tax expense in the statement of profit or loss for the year to 31 December 20X2 will be 1 00,000 (4) less the over-provision of 3,000 (1 ) in the previous reporting period, ie, 97,000. Its statement of financial position current liability is 100,000 (5). The ledger account is as follows: TAX PAYABLE ACCOUNT 20X2 20X2 Cash (2) 87,000 Balance b/d (1 ) 90,000 Statement of profit o r loss: over- Statement of profit or loss: charge for provision 20X1 (3) 3,000 20X2 (4) 100,000 Balance c/d (5) 100,000 190,000 190,000 20X3 Balance b/d: Tax payable 100,000 Note: Any balance owed to HMRC in respect of VAT or PAYE/NIC is disclosed as other payables, not as tax payable. Professional skills focus: Assimilating and using information Information regarding tax charges for the period and any under- and over-provisions can b e complicated as you need to work with both values and dates. You need to read the information carefully to ensure you understand what the current year expense is, whether any adjustments are required and how much is unpaid at the year end. 9 Revenue (IFRS 1 5) (FRS 1 0 2 s23) B Section overview (cid:127) Revenue is income arising in the ordinary course of an entity s activities. (cid:127) Revenue includes credit and cash sales, net of discounts, refunds and VAT. (cid:127) Revenue should b e recognised when control of the goods and services is transferred from the supplier to the customer. Income is defined in the Conceptual Framework as increases in assets o r decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims (Conceptual Framework: para. 4.68). Definition Revenue: Income arising in the course of an entity s ordinary activities (IFRS 1 5: Appendix A), which includes: --- Trang 354 --- (cid:127) sales (cid:127) turnover (cid:127) royalties Revenue includes both credit and cash sales, net of trade and early settlement discounts, refunds and VAT. Notes 1 Note that gains, such as the profit made on the disposal of tangible non-current asset (see Chapter 1 0), are not included in the definition of revenue. The profit on disposal of tangible non-current assets may instead form part of other income which is presented after gross profit, or be netted off against the relevant expense category when preparing the statement of profit or loss. The long form question in the Accounting exam will indicate where such profits on disposal should be presented. 2lnterest received, for example on bank balances, and dividends received from investments are both forms of income but are not presented in revenue. They are presented as finance income (sometimes referred to as investment income ) in the statement of profit or loss. 9.1 IFRS 1 5, Revenue from Contracts with Customers IFRS 1 5 prescribes the accounting treatment of revenue. Generally revenue is recognised when the entity has transferred promised goods or services to the customer (IFRS 1 5: para. 2). IFRS 1 5 sets out the following process to determining the recognition of revenue. Identify the contract with the customer This is required in order to understand what has been agreed between the entity and the customer. In Accounting, this will be a simple sale of goods or provision of services. Identify the separate performance obligations A contract includes promises to provide goods or services to a customer. Those promises are called performance obligations. We will always assume that performance obligations are distinct and that the contract is for the delivery of one specified good or service. You can assume that performance obligations are satisfied when goods are delivered to a customer or a service is provided to a customer. Determine the transaction price The transaction price is the amount of consideration a company expects to be entitled to receive from the customer in exchange for transferring the promised good or service. Consideration is normally cash or a promise from the customer to settle in cash at a later date in a credit transaction. Allocate the transaction price to the performance obligations If a contract contains more than one performance obligation, the transaction price must be allocated to each performance obligation. For Accounting we will always assume a single performance obligation with the whole transaction price allocated to that single performance obligation, so you will not need to allocate the transaction price. Recognise revenue when (or as) a performance obligation is satisfied The entity satisfies a performance obligation by transferring control of a promised good or service to the customer. A performance obligation can be satisfied at a point in time, such as when goods are delivered to the customer, or over time, such as for an ongoing maintenance agreement. (IFRS 1 5: paras. 9, 22, 31, 38, 46, 47, 73) Worked example: Revenue recognition Atlas Ltd sells tools and hardware wholesale to DIY stores. On 1 2 April 20X4 it agreed a contract with Globe Ltd to supply it with 1 0,000 hammers. The hammers were dispatched by Atlas Ltd on 29 April 20X4. Atlas Ltd remained responsible for the hammers until they were delivered to Globe Ltd on 1 May 20X4. Globe Ltd paid for the goods on 1 June 20X4. Requirement On which date should Atlas Ltd recognise the revenue from the sale of the hammers --- Trang 355 --- Solution Revenue should be recognised when Atlas Ltd satisfies its performance obligation. In this case, the performance obligation is the supply of hammers to Globe Ltd. Atlas Ltd satisfied this obligation when control of the hammers was passed to Globe Ltd. This took place on 1 May 20X4 when the goods were delivered to Globe Ltd. Therefore, Atlas Ltd should recognise the revenue from the sale of the hammers on 1 May 20X4. U K GAAP alert Although there are differences between FRS 1 02 and IFRS 1 5, they do not affect basic transactions and therefore you are not required to be aware of them in Accounting. 1 0 The r e g u l a t o r y f r a m e w o r k f o r c o m p a n y financial statements Ml Section overview (cid:127) Extensive regulation covers the content and format of company financial statements, and the methods used to prepare some, if not all, of the figures. (cid:127) Prescribed treatments enable users to find information and to make comparisons more easily. (cid:127) The statement of profit or loss should usually cover a reporting period of 1 2 months. Both the statement of profit or loss and the statement of financial position must be clearly named and dated. Company financial statements prepared for external publication are extensively regulated to protect investors who use information to make economic decisions, especially when comparing different companies. Published financial statements are therefore prepared on the same basis by all companies so investors can make meaningful comparisons. Rules and regulations are applied to: (cid:127) content: what information the financial statements should contain, and what supporting information should go with them (cid:127) accounting concepts: how figures should be prepared (cid:127) presentation: how the financial statements should be presented The main sources of accounting regulations for companies are: (cid:127) accounting standards (IFRS Accounting Standards); and (cid:127) legislation, in particular the Companies Act 2006. In this Workbook we have already covered most of what you need to know at this stage of your studies regarding the content, concepts and presentation of financial statements prepared under IFRS Accounting Standards. We now need to draw it all together into the IAS 1 , Presentation of Financial Statements formats for the statement of profit or loss and statement of financial position and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. U K GAAP alert W The formats of financial statements for unlisted companies under UK GAAP are specified by the Companies Act 2006 and are covered in Chapter 1 4. 1 0.1 Why does IAS 1 include formats IAS 1 formats provide the minimum required presentation and disclosure requirements for company financial statements. The purpose of setting out formats for a statement of profit or loss and statement of financial position is to make it easier for the users of financial statements: (cid:127) to find the items they are particularly interested in: companies are prevented from using complex layouts and formats that make the financial statements more difficult to understand. --- Trang 356 --- (cid:127) to make comparisons of the results of different companies, or between the results of the same company from one reporting period to the next. It is for this second reason that IAS 1 requires comparative figures for the previous reporting period to be shown, as well as the figures for the reporting period being reported. In some cases a statement of financial position from an even earlier reporting period may be required as well. 1 0.2 Structure and content of financial statements On each statement of financial position and statement of profit or loss, the following information needs to be prominently displayed: (cid:127) name of the company (cid:127) date of the statement of financial position/reporting period covered - financial statements should not normally cover reporting periods longer than 1 2 months The statement of financial position must distinguish between current and non-current assets and current and non-current liabilities. Current items are to be settled within 1 2 months of the date of the statement of financial position. In the accounting policies note to the financial statements the entity must disclose the measurement basis used in their preparation (historical cost or net realisable value, for instance), and the other accounting policies used that are relevant to an understanding of the financial statements. Although not required by IAS 1, it is common to see a sub-total named Operating profit/(loss) on the face of the statement of profit or loss. This is calculated as gross profit less distribution costs, administrative expenses and any other operating expenses. You are likely to see Operating profit/(loss) presented in a statement of profit or loss in the Accounting exam. Professional skills focus: Structuring problems and solutions It is important that the IAS 1 format is adopted for limited company financial statements in order that financial information about the company is communicated to the users of financial statements in a consistent and comparable manner. 1 0.3 IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors 43 U K GAAP alert The requirements of FRS 1 02 are the same the IAS 8 requirements which you cover in Accounting. IAS 8 prescribes the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors. To be clear on the distinction between accounting policies and accounting estimates: (cid:127) Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting the financial statements (IAS 8: para. 5). The decision to value inventories using the first in, first out method, as opposed to the average cost method, is an example of an accounting policy choice. (cid:127) Accounting estimates are judgements or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements cannot be measured with precision. Examples of areas that may require the use of accounting estimates include: - allowance for receivables - inventory obsolescence - the fair value of assets and liabilities - the useful life of depreciable assets - likelihood of success of a legal claim (IAS 8: para. 32) The application of IAS 8 enhances the usefulness of financial statements by ensuring that: (cid:127) information is available about the accounting policies adopted by different entities --- Trang 357 --- (cid:127) different entities adopt a common approach to the distinction between a change in accounting policy and a change in an accounting estimate (cid:127) the scope for accounting policy changes is constrained (cid:127) changes in accounting policies, changes in accounting estimates and corrections of errors are dealt with in a comparable manner by different entities 1 0.4 Ethics as an issue for regulators As discussed in Chapter 1 , trust in the financial information produced by accountants is essential. How to ensure that information is reliable and fit for purpose is therefore a key concern of regulators and government. O n e of the ways in which this trust can b e achieved is by ensuring that the individuals involved in the production of the material are acting with integrity, which can be defined as acting in a straightforward and honest manner. Professional bodies can instil integrity in their members through their leadership, policies, the information and training they provide, and the ethical standards which members are expected to adhere to. The overall regulatory framework within a country or market can be very complex and needs to b e underpinned by ethical values. The process also needs to be: (cid:127) honest and truthful (cid:127) transparent and adaptable (cid:127) legally compliant (cid:127) consistent While the development of policy and guidance can b e useful in achieving this, a rules-based approach can also devalue the requirements o n the individuals to act ethically, as the emphasis can shift to keeping within the letter or the law, rather than the spirit of it. Summary Statement of profit or loss Limited companies Accounting implications Accounting implications Tax charge over/under Tax liability Separate legal entity ------------------ provision in the SPL Equity and reserves Nominal share capital (NV) Equity (ordinary) shares Share premium (premium) Irredeemable preference shares Other receivables (unpaid shares) Share premium B/d X Retained earnings ------------------ Profit X Bonus issue Other reserves Loss (X) DR Share premium Reserve transfers x/(X) CR Equity shares X Dividends (X) Non-current liabilities C/d ______________ X (cid:127) Loan stock Interest/dividends (cid:127) Redeemable preference shares Finance costs in SPL (cid:127) Long-term bank loans Current liabilities (cid:127) Provisions IAS 1 formats Satisfy qualitative characteristic of (cid:127) comparability (comparative year s figures required) (cid:127) understandability --- Trang 358 --- Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning 1 Where are redeemable preference shares presented in the statement of financial position (Topic 2) 2 What is the journal entry to record an equity dividend paid (Topic 4) 3 What is the difference between a rights issue and a bonus issue (Topic 5) 4 Can you explain the difference between a provision and an accrual (Topic 7) 5 What is an accounting estimate (Topic 8) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Company financial statements chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. Self-test questions Answer the following questions. 1 A company s assets and liabilities at the beginning and end of a reporting period were as follows: Beginning End Non-current assets (carrying amount) 85,000 150,000 Current assets 120,000 110,000 Equity shares of 1 100,000 125,000 Share premium 5,000 10,000 Retained earnings 50,000 67,000 Trade and other payables 30,000 40,000 Tax payable 20,000 18,000 During the reporting period the company issued a further 25,000 shares at 1. 20 each. 22,000 fortax expense was shown in the statement of profit or loss. --- Trang 359 --- Requirement The company s profit before tax for the reporting period was A 17,000 B 20,000 C 27,000 D 39,000 2 You are supplied with the following extract from Niton pic s statements of financial position at 31 January 20X9 and 20X8. 31 January 20X9 31 January 20X8 m m Equity shares of 1 each 120 100 Share premium 260 220 Notes 1 O n 1 July 20X8 there was a 1 for 10 bonus issue. 2 O n 30 September 20X8 there was a rights issue. 3 There are n o other reserve balances. Requirement What was the total amount received from the issue of shares for the year ended 31 January 20X9 A 10m B 20m C 50m D 60m 3 The figure for equity in an IAS 1 statement of financial position is represented by: A Called-up share capital plus share premium B Total assets less current liabilities C Paid share capital plus retained earnings D Total assets less total liabilities 4 Which of the following would cause a company s profit for the period to increase A Issue of 1 00,000 1 equity shares at 1 .02 B Early settlement discount provided to a customer of 255 C Disposal for 8,500 of a fork-lift truck which originally cost 1 5,000 and has a carrying amount of 9,250 D Receipt of 25 in respect of a receivable previously written off as irrecoverable --- Trang 360 --- 5 Which two of the following transactions could affect a company s retained earnings for the reporting period A Rights issue of shares B Transfer to other reserves C Purchase of land D Repayment of debentures at their par value E Increase in income tax due to HMRC 6 Raymond pic issues 1 35,000 equity shares with a par value of 3 each at a price of 5 each for cash. Requirement Which of the following journal entries would be made to record this transaction A Credit Bank 675,000, Debit Share capital 405,000, Debit Share premium 270,000 B Debit Bank 675,000, Credit Share capital 135,000, Credit Share premium 540,000 C Debit Bank 675,000, Credit Share capital 405,000, Credit Share premium 270,000 D Credit Bank 675,000, Debit Share capital 135,000, Debit Share premium 540,000 7 The following information is available in relation to the tax figures to be included in the financial statements of Godshill pic. 31 December 20X7 31 December 20X6 Tax payable 271,500 237,600 Statement of profit or loss tax expense 269,700 219,800 Requirement What is the total tax paid during the year ended 31 December 20X7 A 185,900 B 235,800 C 237,600 D 269,700 8 Munch Co is a fast food retailer. One of its customers has started a legal claim for damages after contracting food poisoning at a Munch Co restaurant. Munch Co s lawyers believe that there is a 70% chance that the claim will be successful and they estimate that the award to the customer will be 90,000. Requirement Which of the following statements is correct A Munch Co should not create a provision because payment of damages is not certain. B Munch Co should create a provision for 70% of the expected award of 90,000. C Munch Co should create a provision for the full amount of the expected award of 90,000. D Munch Co should create a provision for 90,000 plus an additional amount in case other claimants launch similar legal claims. --- Trang 361 --- 9 In the year to 31 December 20X6, Coisty had the following capital structure: 400,000 equity shares of 25p each 100,000 Share premium account 50,000 During the year, Coisty paid an equity dividend of 45p per share. Requirement What is the total dividend paid A 67,500 B 180,000 C 45,000 D 270,000 1 0 Clyde Co sold equipment to Forth Co for 1 0,000 on 28 January 20X8 and delivered that equipment to the customer on 4 February 20X8. Clyde Co retained control of the equipment until the point of delivery. In a separate contract with the same customer, Clyde Co agreed to service the equipment on an annual basis for the next three years, commencing 31 January 20X9 at a cost of 2,000 per annum. Requirement What is the total revenue that Clyde Co can recognise in the year ended 31 January 20X8 in respect of the transactions with Forth Co A Nil B 10,000 C 12,000 D 16,000 Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 The total raised on the issue of shares is 2,000,000 x 0.50 1, 000,000. DEBIT Cash 1,000,000 CREDIT Share capital 1,000,000 --- Trang 362 --- Answer to Interactive question 2 The total dividend paid during the year is 30,000 (W) WORKING Dividend paid RETAINED EARNINGS Dividend paid (bal.fig.) 30,000 B/fwd 800,000 C/fwd 1,140,000 Profit for the year 370,000 1,170,000 1,170,000 Answer to Interactive question 3 There are 30 million shares of 20p in issue ( 6 million/20p per share). A 1 for 3 rights issue involves an issue of 30 million/3 1 0 million shares at 1 .80, to raise cash of 1 8 million. The issued share capital goes u p by 1 0 million shares at 20p each, 2 million. The share premium o n the issue is 1 .80 - 20p 1. 60 per share, o r 16 million in total. 000 ASSETS Non-current assets 18,600 Current assets (2.9m 1 8m) (a) 20,900 Total assets 39,500 EQUITY A N D LIABILITIES Equity Share capital: equity shares of 20p each ((6m/3) 6m) (b) 8,000 Share premium ((6m/(0.2 x 3)) x 1 .60) 5.7m) (c) 21,700 Retained earnings 7,000 Total equity 36,700 Total liabilities 2,800 Total equity and liabilities 39,500 Answer to Interactive question 4 Canvat pic: statement of financial position as at 31 December 20X1 000 ASSETS TOTAL ASSETS (2m (320,000 x 1.60)) 2,512 EQUITY A N D LIABILITIES --- Trang 363 --- Equity Share capital (400 80 160) 640 Share premium (500 352 - 80) 772 Retained earnings 300 Total equity 1,712 Total liabilities 800 Total equity and liabilities The bonus issue is of 800,000/5 1 60,000 50p shares: DEBIT Share premium 80,000 CREDIT Share capital 80,000 The rights issue is of (800,000 1 60,000)/3 320,000 50p shares at 1 .60 each, ie, 51 2,000: DEBIT Cash 512,000 CREDIT Share capital (320,000 x 50p) 1 60,000 CREDIT Share premium (320,000 x (1. 60 - 0.50)) 352,000 The ledger accounts are as follows: SHARE CAPITAL Number Number Balance c/d 1,280,000 640,000 Balance b/d 800,000 400,000 1 for 5 bonus issue 160,000 80,000 1 for 3 rights issue 320,000 1 60,000 1,280,000 640,000 1,280,000 640,000 SHARE PREMIUM Bonus issue 80,000 Balance b/d 500,000 Balance c/d 772,000 Rights issue: cash 352,000 852,000 852,000 RETAINED EARNINGS Balance c/d 300,000 Balance b/d 300,000 --- Trang 364 --- Answers t o Self-test questions 1 D 39,000 Opening net assets (85,000 1 20,000 - 30,000 - 20,000) o r (1 0 0 5 50) 1 55,000 Closing net assets (1 50,000 1 1 0,000 - 40,000 - 1 8,000) 202,000 Increase in net assets 47,000 Less proceeds of share issue (25,000 x 1. 20) (30,000) Retained profit for reporting period (67,000 - 50,000) 17,000 Add tax charged 22,000 Profit before tax 39,000 2 D 60m SHARE CAPITAL m m Bal b/d 100 Bonus issue (1 00/1 0) 10 Bal c/d 120 Rights issue (balancing figure) 10 120 120 SHARE PREMIUM m m Bonus issue 10 Bal b/d 220 Bal c/d 260 Rights issue (balancing figure) 50 270 270 Therefore, the rights issue was of 1 0,000,000 shares at a premium of 5 per share. Total raised was 60,000,000. 3 D Total assets less total liabilities Total equity share capital and reserves net assets (assets less liabilities). 4 D Receipt of 25 in respect of a receivable previously written off as irrecoverable The premium o n the issue of shares must be credited to share premium. The discount given to customers will be deducted from revenue and therefore decrease profits. The disposal of the truck results in a loss which reduces profit. Reduction in irrecoverable debts expense increases profits. --- Trang 365 --- 5 B Transfer to other reserves E Increase in income tax due to HMRC The journal entries for each of the transactions are shown below. A DR Cash CR Share capital/share premium B DR Retained earnings CR Other reserves DR Non-current assets CR Cash D DR Debentures CR Cash Statement of profit or loss (which in turn is transferred to retained E DR earnings) CR Tax payable 6 C Debit Bank 675,000, Credit Share capital 405,000, Credit Share premium 270,000 Cash raised is 1 35,000 x 5 675,000, which is debited to cash at bank. The credit to share capital is 1 35,000 x 3 par value 405,000, while the credit to share premium is 1 35,000 x 2 270,000. 7 B 235,800 TAX PAYABLE Paid( 3) 235,800 b/d 237,600 c/d 271,500 Statement of profit or loss 269,700 507,300 507,300 8 C Munch Co should create a provision for the full amount of the expected award of 90,000. It is probable (ie, more than 50% likely) that Munch Co will have to pay damages of 90,000 to the customer, therefore a provision for this amount should be created. (A) is incorrect because payment 1 1 does not need to be certain , it must just be probable . (B) is incorrect because the full amount of the expected expenditure should be provided for. (D) is incorrect because a provision should only be made for existing obligations for which expenditure is more than 50% likely to be made. 9 B 180,000 The dividend paid is based on the number of equity shares in issue. There are 400,000 shares x 45p 180,000. The share premium is not relevant. 10 A Nil Clyde Co may not recognise any revenue relating to the sale of the equipment or the separate servicing contract in the year ended 31 January 20X8. Control of the equipment does not pass to the customer until after the year end date, and the servicing contract has not yet commenced. As such, Clyde Co has not performed its performance obligations relating to the transactions. --- Trang 366 --- Chapter 1 2 ICAEW Company financial statements under IFRS Accounting Standards Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 The statement of profit or loss (IAS 1 ) 2 The statement of financial position (IAS 1 ) 3 The statement of changes in equity (IAS 1 ) 4 Applying the IAS 1 formats Summary Further question practice Technical references Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 367 --- I n t r o d u c t i o n Learning outcomes (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcomes is: 3c Syllabus links The material in this chapter will be developed further in Professional Level Financial Accounting and Reporting, The focus of this chapter is the preparation of company financial statements under IFRS Accounting Standards only. UK GAAP financial statements are prepared in Chapter 1 4. Examination context 40% of the exam will require the preparation of single company financial statements. In the exam you will be asked to produce either a statement of profit or loss and statement of financial position, or a statement of cash flows. In practice financial statements would most likely be generated with the help of accounting software. However, manual preparation is required in the exam to ensure understanding of how a set of accounts is put together. You will be given an extract from a trial balance or draft financial statements, with additional information and will be required to complete calculations in orderto prepare the required financial statement(s) using the pro-forma which is provided in the exam software. The statement of changes in equity will be assessed in a multiple-choice, multi-part multiple choice or multiple-response questions only. In the accounts preparation question in the exam, all expenses/losses in the statement of profit or loss must be presented as negative numbers. You can choose to use a minus sign in front of the number or parentheses, eg, -2,1 40 or (2,1 40), to represent a negative number, both are acceptable. The calculations and workings will include aspects from other chapters, as the preparation of the accounts will bring together knowledge from most parts of the syllabus. You may also be examined on the contents of this chapter by multiple choice questions, which may involve calculations. Very often double entry questions are phrased in terms of preparing a journal. In the exam you may be required to: (cid:127) identify how expenses should be categorised into cost of sales, administrative expenses, distribution costs and finance costs (cid:127) specify the requirements of IAS 1 in relation to company financial statements Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. 01 c Practical significance Study approach Exam approach Interactive questions 1 The statement of Approach The ability to prepare IQ1 Statement of profit or loss (IAS 1 ) financial statements f profit or loss Review the SPL or an individual entity You have met IAS 1 , example to ensure This is a short is a fundamental part Presentation of you are happy with question to remind of the Accounting Financial Statements the format. Read the you of the IAS 1 syllabus and has a and the format of the section on format SPL and some syllabus weighting of statement of profit or classification of costs of the common 45%. loss (SPL) previously. carefully - it is adjustments you Here we will important that you In your exam you will might need to make. formalise the use the correct cost be required to adjust requirements in classifications when an initial trial balance order that you can be working with IAS 1 or draft financial confident in formats. You should statements to take preparing company attempt Interactive account of additional financial statements question 1 as a information, then --- Trang 368 --- in the required reminder of how to prepare a final format. prepare the SPL statement of financial using IAS 1 formats. position and a Rememberto enter statement of profit or expenses as negative loss using the IAS 1 numbers as you will proforma provided. need to do this in In an objective test your exam. question you may Stop and think also be required to classify expenses and Why is it important to specify the classify cost of sales requirements of IAS 1 separately from in relation to administrative company financial expenses statements. The statement of Approach As noted above, you financial position need to be able to Review the proforma (IAS 1 ) prepare primary and ensure you are financial statements You have also met happy with the key under IAS 1 formats the IAS 1 format of headings/sub- in order to answer the statement of headings and what the long-form financial position balances are question in the (SFP) previously. Here included under each. Accounting exam. we will formalise the requirements in order that you can be confident in preparing company financial statements in the required format. The statement of Approach The statement of IQ2 Statement of changes in equity changes in equity will changes in equity Once you understand (IAS 1 ) be examined by This short question the aim of the multiple choice, tests your We mentioned the statement of changes multi-part multiple understanding of statement of changes in equity, cover the choice or multiple which transactions in equity (SOCE) example in detail. response question are presented in the previously but did Although not only. statement of changes not look at it in detail. phrased as a in equity. In this topic, we will multiple-choice see that the aim of question, Interactive the SOCE is to question 2 is similar explain how the to that you may face equity section of the in the exam in that statement of financial you are asked to position has changed identify which in the period. transactions would be presented in the statement of changes in equity. Stop and think Why might the users of financial statements be interested in the statement of changes in equity --- Trang 369 --- Applying the IAS 1 Approach The ability to prepare formats financial statements Cover the worked for an individual This topic pulls example in detail. entity is a together what we Take your time and fundamental part of have learned about make sure you the Accounting the IAS 1 formats into understand all of the syllabus. As an extensive adjustments and mentioned above, example. It is where the balances you will be required important that you sit in the final to make adjustments can work through a financial statements. to an initial trial full example from trial balance from balance to final additional accounts. information then prepare a final statement of financial position and a statement of profit or loss using IAS 1 formats. Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 The statement of profit or loss (IAS 1 ) Section overview (cid:127) The statement of profit or loss must show balances as set out in the IAS 1 , Presentation of Financial Statements format, including gross profit, profit before tax and profit for the reporting period. The IAS 1 statement of profit or loss functional format to be learned is shown in the example below (Ducat pic). This includes the minimum disclosure requirements of IAS 1 . The main requirement is that all items of income and expense recognised in a period shall be included in profit or loss. Context example: Statement of profit or loss Ducat pic s statement of profit or loss is presented below. Ducat pic Statement of profit or loss for the year ended 31 December 20X3 Revenue 623,000 Cost of sales (414 ,000) Gross profit 209,000 Other income 26,000 Distribution costs (73,000) Administrative expenses (32,000) Operating profit 130,000 Finance income 5,000 Finance costs (20,000) --- Trang 370 --- Profit before tax 115,000 Income tax (35,000) Profit for the period 80,000 The Operating profit sub-total is not required by IAS 1, but is commonly presented on the face of the statement of profit or loss. Note that income tax is the term used in IAS 1 to refer to tax on the entity s profits. It is not to be confused with income tax (PAYE) on an employee s salary. We will use the term income tax throughout this Workbook to refer to the tax paid by companies. Notes 1 0ther income may include: gains on disposal of property, plant and equipment, gains on disposal of intangible assets, rent received from property and proceeds from insurance claims. Finance income may include dividends received on investments in equity shares and bank interest received. 2 You may see the term investment income used instead of finance income . The terms can be used interchangeably. 1 .1 Cost of sales, distribution costs and administrative expenses IAS 1 states that an entity shall present an analysis of expenses using a classification based on either the nature of expenses or their functions within the entity, whichever provides information that is reliable and more relevant. The format and classification used here is the functional one. Additional disclosures on the nature of expenses, including depreciation and amortisation, are required, however you are not required to be aware of those in Accounting. For the Accounting exam you should expect to make the following classifications: Cost of sales Distribution costs Administrative expenses (cid:127) Purchases (net of discounts (cid:127) Wages etc of marketing and (cid:127) Wages of administrative received) plus delivery inwards distribution staff staff adjusted for opening and (cid:127) Sales commission (cid:127) Depreciation of non- closing inventory, and any current assets used by (cid:127) Distribution expenses such as substantial losses of inventory non-production and non- vehicle running costs and carriage (cid:127) Ina manufacturing company distribution operations, outwards wages of production staff, and and any loss on disposal (cid:127) Depreciation of motor vehicles maintenance and depreciation of such assets used for distribution, and expenses of production non- (cid:127) Amortisation of intangible marketing costs such as advertising current assets, plus losses on assets and promotion, and any loss on their disposal, are also disposal of such assets (cid:127) Impairment losses on included tangible and intangible (cid:127) Depreciation of other non-current (cid:127) For a company that provides assets assets used by distribution services, cost of sales mainly operations and any loss on (cid:127) Expense of substantial comprise the cost of staff time disposal of such assets loss of inventory (cid:127) The cost of advertising and selling (cid:127) Irrecoverable debts activities, since these are a part of expense distributing goods and services to customers Professional skills focus: Structuring problems and solutions In your Accounting exam, you will not always be told which expense category a transaction should be allocated to. In these cases, you need to use your knowledge, built up as we have progressed through Accounting, to determine which category to use. For example, you should know that expenses related to inventory or providing a service are cost of sales, costs associated with getting products to customers are distribution, finance costs includes all interest and the costs of obtaining finance, and administrative expenses is used for everything else. --- Trang 371 --- Professional skills focus: Applying judgement In practice, the allocation of expenses to each of these three headings is not as straightforward as it will be in your Accounting exam and it often calls for professional judgement. The rules are not rigid and the accountant must determine what the correct classification is in order to promote consistency and comparability in the financial statements, and to ensure they present a true and fair view. 1.2 Other income Income other than revenue or finance income (investment income) should be presented separately in determining operating profit. Examples of other income include: (cid:127) rent received from property that is rented to third parties (cid:127) insurance claim proceeds (cid:127) profits on disposal of non-current assets (you may be advised that this should be presented within an expense category rather than separately being presented in other income) 1.3 Finance income Finance income (investment income) will be presented separately in the statement of profit or loss. In Accounting, finance income may include: (cid:127) dividends received on investments (cid:127) interest received on savings 1.4 Finance costs Finance costs, sometime referred to as interest expenses, are a separate expense category. In Accounting, finance costs may include: (cid:127) interest payable on bank loans and overdrafts (cid:127) interest on debt securities Interactive question 1 : Statement of profit or loss You are preparing the financial statements for Marrakesh Ltd for the year ended 31 December 20X8. You have been provided with the following extract from the initial trial balance which was extracted from the accounting software: Dr Cr Sales 489,401 Inventories at 1 January 20X8 83,496 Purchases 202,679 Distribution costs 23,890 Administrative expenses 101,436 Interest paid on bank loans 13,805 Interest received on savings 862 The following information is now available and may result in adjustments being needed to the amounts shown in the trial balance above: (1) Depreciation on buildings has been correctly calculated as 42,500 but has not yet been accounted for. Depreciation should be included within administrative expenses. (2) The year-end inventory count has been completed. Inventory costing 88,905 has been counted, however this includes an inventory line with a cost of 4,560 which is expected to be sold at 3,875. --- Trang 372 --- (3) The total interest payable o n bank loans needs to be increased by 3,1 95 to take account of interest due for the last quarter. (4) Income tax totalling 38,400 has not been accounted for. Requirement Prepare the statement of profit or loss for Marrakesh Ltd for the year ended 31 December 20X8. Revenue Cost of sales (W1) Gross profit Distribution costs Administrative expenses (W2) Operating profit Finance income Finance costs (W3) Profit before tax Income tax Profit for the year Note: The boxes in this question indicate where an answer is required and where marks are available in the CBE. You can use the add comment function to record your workings and answers. Prominent Note The interactive question above is not as extensive as the question you will face in the Accounting exam. It is intended to give you practice of how to prepare the statement of profit or loss under the IAS 1 format. 2 The s t a t e m e n t of financial p o s i t i o n (IAS 1 ) Sj Section overview (cid:127) The statement of financial position is split between total assets and total equity plus liabilities. (cid:127) Both assets and liabilities must show the current/non-current split. The IAS 1 format statement of financial position is as follows: --- Trang 373 --- Ducat pic Statement of financial position as at 31 December 20X3 ASSETS Non-current assets Property, plant and equipment 400,000 Right-of-use asset 27,000 Goodwill 15,000 Other intangible assets 110,000 552,000 Current assets Inventories 51,000 Trade and other receivables 102,000 Other current assets (eg, prepayments) 20,000 Cash and cash equivalents 33,000 206,000 Total assets 758,000 EQUITY AND LIABILITIES Equity Share capital: 1 equity shares 150,000 Share capital: 10% 1 irredeemable preference shares 20,000 Share premium 125,000 Retained earnings 161,000 Other reserves 65,000 Total equity 521,000 Non-current liabilities Long-term borrowings 100,000 Lease liability 58,000 Current liabilities Trade and other payables (including accruals) 31,000 Deferred income 2,000 Short-term borrowings 20,000 Lease liability 5,000 Provisions 10,000 Income tax payable 11,000 79,000 Total equity and liabilities 758,000 Points to note: (cid:127) All tangible assets (including land and buildings) are combined under the heading property, plant and equipment. The user would refer to the non-current assets note, as covered in Chapter 1 0, for detail. --- Trang 374 --- (cid:127) Other intangible assets will include the carrying amount of purchased intangible assets and the capitalised costs of internally developed intangible assets. (cid:127) Trade receivables and any other receivables (including VAT due) are combined as trade and other receivables; prepayments are included in the heading other current assets. The allowance for receivables is offset against trade and other receivables . (cid:127) Cash in hand and at bank are combined as cash and cash equivalents . (cid:127) Any long-term liabilities such as bank loans or debt securities that are not repayable within 1 2 months are combined as long-term borrowings under non-current liabilities. Redeemable preference shares would be included here. (cid:127) There are detailed disclosure requirements for share capital in IAS 1 , in particular of the issued, fully paid and partly paid share capital, and of the par value. The figure included in the statement of financial position is the called-up share capital, both paid and unpaid. (cid:127) Bank overdrafts, which are technically repayable on demand, are called short-term borrowings . They are not offset against any cash and cash equivalent asset balances, unless a right of set-off exists. (cid:127) Trade payables and other payables (including VAT, PAYE/NIC and sales commission owed, interest payable and accruals) are combined as trade and other payables . (cid:127) Deferred income is income that has been received before it has been earned. It is presented as a current liability as it represents the goods or services that the entity must transfer to its customers in respect of the income received. (cid:127) Income tax payable is shown as a separate item under current liabilities. 3 The s t a t e m e n t of changes i n e q u i t y (IAS 1 ) Section overview (cid:127) The statement of changes in equity explains how the equity section of the statement of financial position has changed in the reporting period. IAS 1 requires companies to prepare a statement of changes in equity as one of the primary financial statements. The statement of changes in equity explains the movement in the equity section of the statement of financial position from the previous reporting date to the current reporting date. The following should be shown in the statement of changes in equity: (a) Total comprehensive income for the period. For the purposes of Accounting, this is profit or loss for the period. (b) The amounts of transactions with owners, showing separately contributions by owners (eg, issues of share capital and any related premium) and distributions to owners (in the form of dividends). (c) For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, showing separately each change. For the purposes of Accounting, share capital, share premium, retained earnings and other reserves are the key components of equity that should be included in the statement of changes in equity. Movements in share capital result from cash share issues and bonus issues as covered in Chapter 1 1 topics 2 and 5. Movements in retained earnings result from profits earned in the year and dividends paid out to the equity owners as covered in Chapter 1 1 topics 3 and 4. Movements in retained earnings may also result from bonus issues of shares as seen in Chapter 1 1 topic 5. M Professional skills focus: Assimilating and using information The approach to preparing the statement of changes in equity is different to that for the other primary financial statements we have met so far. The statement of changes in equity uses the information already contained in the statement of profit or loss and the statement of financial position to explain how equity has changed in the period. You need to use the information relating to transactions and balances already recorded in order to prepare the statement of changes in equity. --- Trang 375 --- Worked example: Statement of changes in equity The following has been extracted from the equity section of the statements of financial position of Monty Ltd as at 30 April 20X8 and 20X9: Equity 20X9 20X8 Share capital: 1 equity shares 120,000 100,000 Share premium 70,000 60,000 Retained earnings 122,400 86,700 Other reserves 12,000 12,000 Note: Monty Ltd paid a dividend of 20p per share to all registered shareholders o n 31 December 20X8 and issued 20,000 1 equity shares at 1 .50 o n 1 February 20X9. The only other movement in equity in the year was in respect of profit for the period of 55,700. Requirement Prepare Monty Ltd s statement of changes in equity for the year ended 30 April 20X9. Solution Share Share Retained Other capital premium earnings reserves Total Balance as at 1 May 20X8 100,000 60,000 86,700 12,000 258,700 Issue of share capital 20,000 10,000 30,000 Dividends (20,000) (20,000) Profit/(loss) for the year 55,700 55,700 Balance as at 30 April 20X9 120,000 70,000 122,400 12,000 324,400 The total raised o n the issue of the shares is 20,000 shares x 1 .50 30,000. The dividend was paid to registered shareholders o n 31 December 20X8 and was therefore before the additional share issue. The dividend is therefore 1 00,000 shares x 20p 20,000 Interactive question 2: Statement of changes in equity The accountant of Millhouse Ltd is preparing its statement of changes in equity for the year ended 31 May 20X5. She has identified the following transactions which may require to be presented in the statement of changes in equity: (1) The purchase of non-current assets which were financed using a bank loan (2) Dividends paid to equity shareholders shortly before the year end (3) Dividends paid o n preference shares that are redeemable o n 31 May 20X5 (4) A bonus issue of shares is made from retained earnings during the year Requirement Identify and explain whether the above transactions would be presented in the statement of changes in equity. --- Trang 376 --- 4 Applying the IAS 1 formats B Section overview (cid:127) To apply the IAS 1 formats: - extract an initial trial balance - prepare the adjustment journals - process the adjustments and calculate the final trial balance - identify the ledger accounts to be included in the statement of profit or loss in respect of: cost of sales, administrative expenses and distribution cost headings - complete the formats for statement of profit or loss, statement of financial position and statement of changes in equity The formats we use here are adapted from IAS 1 , which sets out a minimum requirement for what should appear on the face of the statement of financial position, although additional items are allowed to make the information more relevant. No set order of items is presented in IAS 1; entities are encouraged to adapt the order and the descriptions to enhance relevance, though in practice comparability encourages similar entities to adopt similar presentations. Where a single figure or line item appears in the statement of financial position, the company must disclose further sub-classifications in the notes in a manner that is appropriate to its operations. Professional skills focus: Structuring problems and solutions As we have discussed several times in Accounting, preparing and issuing financial statements that comply with the IAS 1 formats is the key way in which accountants communicate to the users of financial statements. It is important that you are comfortable with the IAS 1 formats, as these are the formats that will be required for the long-form question in the Accounting exam. Worked example: Preparing IAS 1 format financial statements To draw together everything we have covered so far, we shall work through a full example of how to use the final trial balance to prepare an IAS 1 format statement of profit or loss, statement of financial position and statement of changes in equity. The chief accountant of Format pic has extracted the following initial trial balance from the accounting software package as at 31 December 20X2. Format pic Trial balance as at 31 December 20X2 000 000 Dr Cr Issued equity shares of 1 800 1 0% irredeemable preference shares of 1 each 200 Trade receivables and trade payables 1,820 1,866 Bank 80 Inventory at 1 .1. X2 1,950 6% loan notes 1,000 Sales 9,500 Rental income 200 --- Trang 377 --- Loan note interest (six months to 30.6.X2) 30 Administration and general expenses, excluding salaries Administration salaries 275 Distribution expenses 616 Purchases 5,125 Salaries associated with manufacture of goods 300 Delivery inwards 100 Property costs 300 Retained earnings 1,100 Freehold land, at cost 2,120 Fixtures and fittings, at cost 2,000 Accumulated depreciation, fixtures and fittings 900 Allowance for receivables 100 Development costs 300 15,666 15,666 The following items have yet to be dealt with: (1) An inventory count has revealed the closing inventory figure to be 2,020,000. (2) The company depreciates fixtures and fittings at 20% on the straight line basis. (3) The company amortises the development costs at 1 0% on the straight line basis. The charge should be to administrative expenses. (4) The credit controller has said that a debt of 1 5,000 should be written off as irrecoverable, and the allowance for receivables should be increased to 200,000. (5) The income tax due on profits for the year is estimated at 750,000. (6) The allocation of expenditure between distribution costs and administrative expenses should be as 1 follows (see allocation of expenditure table). (7) The loan notes are repayable in full in 1 0 years time. Interest is paid in two equal instalments per annum. (8) A 1 for 8 bonus issue relating to issued equity shares was made out of retained earnings on 31 December 20X2. There were no new issues of preference shares during the year. Allocation of expenditure Distribution Administrative % % Property costs 25 75 Depreciation 50 50 Requirements 1 Prepare year-end journal entries to adjust for the above items. 2 Prepare the extended trial balance of Format pic after processing the adjustments. 3 Prepare a statement of profit or loss for Format pic for the year ended 31 December 20X2 and a statement of financial position as at that date. 4 Prepare a statement of changes in equity for Format pic for the year ended 31 December 20X2 Note: In the exam, all expenses/losses in the statement of profit or loss must be included as negative numbers, ie, with a minus sign in front or in brackets. --- Trang 378 --- Solution 1 The year-end journals to be put through in the adjustments column are as follows: 000 000 1 DEBIT Cost of sales 1,950 CREDIT Opening inventory 1,950 DEBIT Cost of sales 5,125 CREDIT Pur chases 5,125 DEBIT Closing inventory 2,020 CREDIT Cost of sales 2,020 2 and 6 DEBIT Administrative expenses 200 Distribution costs 200 CREDIT Fixtures and fittings - accumulated depreciation (2,000 x 20%) 400 3 DEBIT Administrative expenses 30 CREDIT Development costs - amortisation (300 x 1 0%) 30 4 DEBIT Administrative expenses 115 CREDIT Trade receivables 15 Allowance for receivables (200 - 1 00) 100 5 DEBIT Income tax expense (statement of profit or loss) 750 CREDIT Income tax payable (statement of financial position) 750 6 DEBIT Administrative expenses (300 x 75%) 225 Distribution costs (300 x 25%) 75 CREDIT Property costs 300 7 DEBIT Loan note interest 30 CREDIT Trade and other payables 30 8 DEBIT Retained earnings 100 CREDIT Equity share capital 100 --- Trang 379 --- 2 The final trial balance is as follows: Initial trial balance Adjustments Final trial balance Debit Credit Debit Credit Debit Credit 000 000 000 000 000 000 1 equity shares 800 100 900 10% 1 irredeemable preference shares 200 200 Trade receivables 1,820 15 1,805 Trade payables 1,866 30 1,896 Bank 80 80 Inventory 1,950 2,020 1,950 2,020 6% loan notes 1,000 1,000 Sales 9,500 9,500 Rental income 200 200 Debenture interest 30 30 60 Administrative expenses 650 570 1,220 Administration salaries 275 275 Distribution expenses 616 275 891 Purchases 5,125 5,125 Manufacturing salaries 300 300 Delivery inwards 100 100 Property costs 300 300 Retained earnings 1,100 100 1,000 Freehold land - cost 2,120 2,120 Fixtures and fittings - cost 2,000 2,000 F F - accumulated depreciation 900 400 1,300 Allowance for receivables 100 100 200 Development costs 300 300 Development costs - amortisation 30 30 1,950 Cost of sales 5,125 2,020 5,055 Income tax payable 750 750 Income tax expense 750 750 15,666 15,666 10,720 10,720 1 6,946 16,946 200 (Jnl 2) 30 (Jnl 3) 1 1 5 (Jnl 4) 225 (Jnl 6) 570 200 (Jnl 2) 75 (Jnl 6) 275 --- Trang 380 --- 3 Format pic Statement of profit or loss for the year ended 31 December 20X2 000 Revenue 9,500 Cost of sales (W1) (5,455) Gross profit 4,045 Other income 200 Administrative expenses (W1 ) (1, 495) Distribution costs (W1 ) (891) Operating profit 1,859 Finance costs (60) Profit bef o re tax 1,799 Income tax (750) Profit for the period 1, 049 Format pic Statement of financial position as at 31 December 20X2 000 000 ASSETS Non-current assets Property, plant and equipment (W3) 2,820 Development costs (300 - 30) 270 3,090 Current assets Inventories 2,020 Trade and other receivables (1, 805 - 200 allowance) 1, 605 Cash and cash equivalents 80 3,705 Total assets 6,795 EQUITY AND LIABILITIES Equity Equity share capital: 1 equity shares 900 Preference share capital: 10% 1 shares 200 Retained earnings (W2) 2,049 Total equity 3,149 Non-current liabilities Long-term borrowings: 6% loan notes 1,000 --- Trang 381 --- Current liabilities Trade and other payables 1,896 Income tax payable 750 4 Format pic Statement of changes in equity for the year ended 31 December 20X2 Equity share Preference Retained capital share capital earnings Total 000 000 000 000 Balance as at 1 January 20X2 800 200 1,100 2,100 Bonus issue of share capital 100 (100) Profit/(loss) for the year 1,049 1,049 Balance as at 31 December 20X2 900 200 2,049 3,149 WORKINGS (1 ) Analysis of expenses Distribution Cost of sales costs Admin expenses 000 000 000 Per trial balance 5,055 Administrative expenses 1,220 Salaries 300 275 Distribution costs 891 Delivery inwards 100 5,455 891 1,495 (2) RETAINED EARNINGS 000 000 Share capital (bonus) 100 Balance b/d 1,100 Profit for the period (statement of Balance c/d 2,049 profit or loss) 1,049 2,149 2,149 Note: The retained earnings column in the statement of changes in equity is simply the information from the retained earnings T account presented in a columnar format. --- Trang 382 --- (3) Property, plant and equipment note Fixtures and Freehold land fittings Total 000 000 000 Cost At 1.1.X2 2,120 2,000 4,120 Additions Disposals At31.12.X2 2,120 2,000 4,120 Accumulated depreciation At 1.1.X2 900 900 Charge for the year ( 2,000 x 20%) 400 400 Disposals At 31.1 2.X 2 1,300 1,300 Carrying amount At 1.1.X2 2,120 1,100 3,220 At 31.1 2.X 2 2,120 700 2,820 Worked example: Preparing IAS 1 format financial statements in the exam We will now consider the same example as above but demonstrate how to approach this type of question in the exam. In the exam you wi (3) Property, plant and equipment note ss and a pro forma statement of financial position. You must enter the final figures in the boxes given, any workings cannot be shown on your exam submission. You will have access to a wipeable whiteboard and pen to do any calculations on, or you can use the on-screen scratch pad. You can use your own calculator or the one available in the exam software. More information on this can be found on the ICAEW website here: htt ps://www. icaew.com/for -current-aca-students/a p ply-for-exams/certificate-level- exams Exam%20quidance Method: Step 1 - Quickly read the question to get a feel for the number and complexity of adjustments and identify where expenses need to be recorded eg, amortisation on development costs in administrative expenses. Step 2 - Work down the trial balance and transfer all the figures from the trial balance to the pro formas provided, or a working on the whiteboard. If a figure requires a number of workings it is recommended that the whiteboard is used. It is common for a number of adjustments to be made to property, plant and equipment (PPE), expenses, and retained earnings (for the profit or loss and dividends). Therefore, if this is the case for the question you are working on, transfer these figures to the whiteboard using the workings shown above and below. Step 3 - Deal with one adjustment at a time. It is best to start with those you find easiest in case you run out of time. If you are not sure which are easiest, attempt the shorter ones first. When processing adjustments, make sure you are recording a debit and a credit. You can write the journals out if you find this useful or add or subtract as appropriate. For example, if you calculate depreciation you need to increase the relevant expense and decrease PPE. Step 4 - Once you have worked through all the adjustments, or have a few minutes left, add up any working you have done and transfer these numbers to the pro formas. Step 5 - Add down the statement of profit or loss and transfer the profit to your retained earnings working on the whiteboard. Transfer the PPE and retained earnings figures from the whiteboard to the pro forma and add down the statement of financial position. Step 6 - If the statement of financial position does not cast then don t worry, you may have just missed one figure. If you have time double check you recorded both sides of the adjustments. --- Trang 383 --- Tips By transferring all the figures from the trial balance first you only need to read through the trial balance once. If (say) you wanted to fill the pro formas in top to bottom you would need to read through the trial balance several times which is more time consuming. You may also miss a figure. It is helpful to write out workings for PPE, expenses and retained earnings as you will need to adjust these figures. If you simply type the draft figures into the pro formas you might then adjust the figure, get confused and have to start again which will be time consuming. You can also check your calculations if they are written down. We will now work through the question in the style of the exam: The chief accountant of Format pic has extracted the following initial trial balance from the accounting software package as at 31 December 20X2. Format pic Trial balance as at 31 December 20X2 000 000 Dr Cr Issued equity shares of 1 800 1 0% irredeemable preference shares of 1 each 200 Trade receivables and trade payables 1,820 1,866 Bank 80 Inventory at 1 .1. X2 1,950 6% loan notes 1,000 Sales 9,500 Rental income 200 Loan note interest (six months to 30.6.X2) 3 0 Administration and general expenses, excluding salaries 650 Administration salaries 275 Distribution expenses 616 Purchases 5,125 Salaries associated with manufacture of goods 300 Delivery inwards 100 Property costs 300 Retained earnings 1,100 Freehold land, at cost 2,120 Fixtures and fittings, at cost 2,000 Accumulated depreciation, fixtures and fittings 900 Allowance for receivables 100 Development costs 300 15,666 15,666 The following items have yet to be dealt with: (1) An inventory count has revealed the closing inventory figure to be 2,020,000. (2) The company depreciates fixtures and fittings at 20% o n the straight line basis. (3) The company amortises the development costs at 1 0% o n the straight line basis. The charge should be to administrative expenses. --- Trang 384 --- (4) The credit controller has said that a debt of 1 5,000 should be written off as irrecoverable, and the allowance for receivables should be increased to 200,000. (5) The income tax due on profits for the year is estimated at 750,000. (6) The allocation of expenditure between distribution costs and administrative expenses should be as 1 follows (see allocation of expenditure table). (7) The loan notes are repayable in full in 1 0 years time. Interest is paid in two equal instalments per annum. (8) A 1 for 8 bonus issue relating to issued equity shares was made out of retained earnings on 31 December 20X2. There were no new issues of preference shares during the year. Allocation of expenditure Distribution Administrative % % Property costs 25 75 Depreciation 50 50 Requirement Prepare a statement of profit or loss for Format pic for the year ended 31 December 20X2 and a statement of financial position as at that date. Solution Format pic Statement of profit or loss for the year ended 31 December 20X2 - pro forma provided in the exam 000 Revenue Cost of sales Gross profit Other income Administrative expenses Distribution costs Operating profit/(loss) Finance costs Profit/(loss) before tax Income tax expense Profit/(loss) for year Format pic Statement of financial position as at 31 December 20X2 - pro forma provided in the exam 000 Non-current assets Property, plant, and equipment Freehold land Fixtures and fittings Development costs --- Trang 385 --- Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity Equity share capital Preference share capital Retained earnings Non-current liabilities Borrowings Current liabilities Trade and other payables Income tax payable Total equity and liabilities Having read the question we can now move onto: Step 2 Work down the trial balance and transfer all the figures from the trial balance to the pro formas provided, or a working on the whiteboard. If a figure requires a number of workings it is recommended that the whiteboard is used. It is common for a number of adjustments to be made to property, plant and equipment (PPE), expenses, and retained earnings (for the profit or loss and dividends). Therefore, if this is the case for the question you are working on, transfer these figures to the whiteboard using the workings shown above and below. Format pic Statement of profit or loss for the year ended 3 1 December 20X2 000 Revenue 9,500 Cost of sales Gross profit Other income 200 Administrative expenses Distribution costs Operating profit/(loss) Finance costs (30) Profit/(loss) before tax Income tax expense Profit/(loss) for year --- Trang 386 --- Format pic Statement of financial position as at 31 December 20X2 000 Non-current assets Property, plant, and equipment Freehold land Fixtures and fittings Development costs 300 Current assets Inventories Trade and other receivables 1 ,820 - 1 00 1 ,720 Cash and cash equivalents 80 Total assets Equity Equity share capital 800 Preference share capital 200 Retained earnings Non-current liabilities Borrowings 1,000 Current liabilities Trade and other payables 1 ,866 Income tax payable Total equity and liabilities Note: The calculation of trade and other receivables cannot be shown on the pro forma in the exam as shown above. However, as this is a simple calculation this could be done on your calculator and the total typed into the box. If a calculation becomes more complicated it can be done on the white board. WORKINGS (1) Expenses Cost of sales Distribution costs Admin expenses 000 000 000 Opening inventory per trial balance 1,950 Admin etc per trial balance 650 Admin salaries per trial balance 275 Distribution expenses per trial balance 616 Purchases per trial balance 5,125 Salaries re manufacturer per trial balance 300 Delivery inwards per trial balance 100 Property costs per trial balance 75 225 --- Trang 387 --- (2) Property, plant and equipment Freehold land Fixtures and fittings 000 000 Cost per trial balance 2,120 2,000 Depreciation per trial balance (900) (3) Retained earnings Retained earnings 000 Per trial balance 1,100 Profit for the year per statement of profit or loss Steps 3 and 4 Now all the balances have been transferred from the trial balance we can move onto the adjustments. Here we will work through them in order, but they can be attempted in any order in the exam. This is steps 3 and 4. You can write journals out, as above, but here we will state which balances the adjustments affects. (1) Inventory Increase inventory on the statement of financial position pro forma and decrease cost of sales in the expenses working by 2,020. (2) Depreciation Increase expenses per split in note 6 and decrease fixtures and fittings in the workings. (3) Amortisation Decrease development costs on the statement of financial position and increase administrative expenses in the expenses working. (4) Irrecoverable debt and allowance for receivables Reduce trade receivables on the statement of financial position and increase administrative expenses in the expenses working. (5) Tax Increase the tax expense on the statement of profit or loss and increase the tax liability on the statement of financial position. (6) Expenses Note to split expenses between the categories (7) Loan interest Increase finance costs on the statement of profit or loss and increase trade and other payables on the statement of financial position. (8) Bonus issue Increase share capital on the statement of financial position and reduce retained earnings in the working. Format pic Statement of profit or loss for the year ended 31 December 20X2 000 Revenue 9,500 Cost of sales (5,455) --- Trang 388 --- Gross profit 4,045 Other income 200 Administrative expenses (1,495) Distribution costs (891) Operating profit/(loss) 1 ,859 Finance costs 30 30 (note 7) (60) Profit/(loss) before tax 1 ,799 Income tax expense (note 5) (750) Profit/(loss) for year 1,049 Format pic Statement of financial position as at 31 December 20X2 000 Non-current assets Property, plant, and equipment Freehold land 2,1 2 0 Fixtures and fittings 700 Development costs (300 - 30) (note 3) 270 Current assets Inventories (note 1 ) 2,020 Trade and other receivables (1, 820 - 1 0 0 - 1 5 - 1 00) 1 ,605 Cash and cash equivalents 80 Total assets 6,795 Equity Equity share capital (800 100) (note 8) 900 Preference share capital 200 Retained earnings 2,049 Non-current liabilities Borrowings 1,000 Current liabilities Trade and other payables (1 ,866 30) (note 7) 1 ,896 Income tax payable (note 5) 750 Total equity and liabilities 6,795 Note: The calculations for finance costs, development costs, trade and other receivables, share capital and trade and other payables cannot be shown o n the pro forma in the exam as shown above. However, as these are simple calculation this could b e done o n your calculator and the total typed into the box. If a calculation becomes more complicated it can be done o n the white board. --- Trang 389 --- (4) Expenses Cost of sales Distribution costs Admin expenses 000 000 000 Opening inventory per trial balance 1,950 Admin etc per trial balance 650 Admin salaries per trial balance 275 Distribution expenses per trial balance 616 Purchases per trial balance 5,125 Salaries re manufacturer per trial balance 300 Delivery inwards per trial balance 100 Property costs per trial balance 75 225 Closing inventory (note 1) (2,020) Depreciation expense (note 2 and note 6) 200 200 Amortisation 300 x 1 0% (note 3) 30 Irrecoverable debt (note 4) 15 Increase to allowance for receivables 100 5,455 891 1,495 (5) Property, plant and equipment Freehold land Fixtures and fittings 000 000 Cost per trial balance 2,120 2,000 Depreciation per trial balance (900) Depreciation expense 20% x 2,000 (note 2) (400) 2,120 700 (6) Retained earnings Retained earnings 000 Per trial balance 1,100 Bonus issue (note 8) (100) Profit for the year per statement of profit or loss 1,049 2,049 --- Trang 390 --- Summary IAS 1 formats I I Statement of profit or loss for Statement of financial position as at the reporting the reporting period period end 000 ASSETS Revenue 623,000 Non-current assets Cost of sales (414,000) Property, plant and equipment 400,000 Gross profit 209,000 Right-of-use asset 27,000 Other income 26,000 Intangible assets 125,000 Distribution costs (73,000) 552,000 Administrative Current assets expenses (32,000) Inventories 51,000 Finance income 5,000 Trade and other receivables 102,000 Finance costs (20,000) Prepayment 20,000 Profit before tax 115,000 Cash and cash equipments 33,000 Income tax (35,000) 206,000 Profit for period 80,000 Total assets 758,000 EQUITY AND LIABILITIES Equity Equity share capital: 1 equity shares 150,000 Preference share capital: 1 0% 1 irredeemable preference shares 90,000 Share premium 55,000 Other reserves 65,000 Retained earnings 161,000 Total equity 521,000 Non-current liabilities Long-term borrowings 100,000 Lease liability 58,000 Current liabilities Trade and other payables (including accruals) 31,000 Deferred income 2,000 Short-term borrowings 20,000 Lease liability 5,000 Provisions 10,000 Income tax payable 11,000 79,000 Total equity and liabilities 758,000 Satisfy qualitative characterstics of (cid:127) comparability (cid:127) relevance and verifiablity 1 Accounting powers (cid:127) relevant IFRS Accounting Standards are mandatory (cid:127) where no relevant IFRS Accounting Standards, apply judgement in line with Conceptual Framework (cid:127) applied consistently --- Trang 391 --- Statement of changes in equity for the reporting period Share Share Retained Other Total capital premium earnings reserves Balance as at 1 May 20X8 100,000 60,000 86,700 12,000 12,000 Issue of share capital 20,000 10,000 86,700 30,000 Dividends (20,000) (20,000) Profit/( loss) for the 55,700 55,700 year J Balance as at 3 0 April 20X9 120,000 70,000 122,400 12,000 324,400 Further question practice 1 Knowledge diagnostic Before you move o n to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning 1 Do you know what might be included in Other income and where it is presented in the statement of profit or loss (Topic 1 ) 2 What expenses would typically be recorded in distribution costs (Topic 1 ) 3 Where are irredeemable preference shares presented in the statement of financial position (Topic 2) 4 What does the statement of changes in equity reconcile (Topic 3) 5 In what column of the statement of changes in equity is dividends paid presented (Topic 3) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Company financial statements under IFRS Accounting Standards chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you d i d not answer correctly o r where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move o n to the next chapter. Technical references 1 Structure and content of company financial statements (cid:127) Comparative figures for the previous reporting period must be shown. - IAS 1 , para. 38 (cid:127) Name of the company, and the date of the statement of financial position or the reporting period covered, must be prominently displayed. - IAS 1, para. 51 --- Trang 392 --- (cid:127) Financial statements should not normally cover reporting periods longerthan one year. - IAS 1, para. 36 (cid:127) The statement of financial position must distinguish between current and non-current assets and current and non-current liabilities. Current items are to be settled within 1 2 months of the date of the statement of financial position. - IAS 1, paras. 60 and 6 1 (cid:127) Share capital and reserves disclosures. - IAS 1, para. 7 9 (cid:127) Minimum requirements and adaptation of format of statement of financial position; additional disclosures. - IAS 1, paras. 54, 55, 57, 77 (cid:127) All items of income and expense recognised in a reporting period shall be included in profit or loss; minimum disclosure requirements are set out. - IAS 1, paras. 81, 82 and 88 (cid:127) An entity shall present an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, which provides information which is more reliable and relevant. Additional disclosures on the nature of expenses, including depreciation and amortisation, are required. - IAS 1 , paras. 99, 1 03 and 1 04 (cid:127) A note must disclose the measurement bases used in preparing the financial statements, and other accounting policies that are relevant to an understanding of them. - IAS 1 , para. 117 2 Format of statement of profit or loss and statement of financial position (cid:127) Formats, including statement of profit or loss in functional format - IAS 1, Implementation Guidance 3 Additional comparative information (cid:127) When an entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements, an additional statement of financial position as at the beginning of the earliest comparative period must be presented. - IAS 1, para. 39 Self-test questions Answer the following questions. 1 Mince pic is preparing its financial statements for the year ended 30 September 20X6, having prepared an initial trial balance. The initial trial balance shows the following balances: Administrative expenses paid (including insurance) 32,874 Prepayment of insurance at 1 October 20X5 2,894 Requirement Social media marketing costs of 1, 085 which were incurred but not paid in the period have not yet been accounted for. On 31 August 20X6 Mince pic paid its quarterly business insurance in advance of 5,400. Marketing costs and insurance costs are both presented within administrative expenses. In Mince pic s statement of profit or loss the figure for administrative expenses will be: A 31,453 B 32,495 C 32,874 D 33,253 --- Trang 393 --- 2 Which three of the following would be included in liabilities in a company s financial statements A Allowance for receivables B Bank overdraft C Lease liability D Share capital E Provision for environmental damage 3 A company has a balance of 2,500 (debit) o n its tax account at 31 December 20X6 relating to the tax payable o n the 20X5 profits. The company s estimated tax liability for the year to 31 December 20X6 is 15,000. Requirement Income tax in the statement of profit o r loss for the year ended 31 December 20X6 is: A 2,500 B 12,000 C 15,000 D 17,500 4 Pear Ltd is preparing its statement of changes in equity for the year ended 31 March 20X9. The retained earnings balance at 31 March 20X8 was 1 1 2,560. Pear Ltd earned a profit of 23,890 for the year ended 31 March 20X9. It had 1 00,000 equity shares in issue at 1 April 20X8, issued 50,000 1 ordinary shares at a 1 .50 per share o n 1 May 20X8 and made a 1 for 5 bonus issue out of retained earnings o n 31 December 20X8. Pear Ltd paid a dividend of 25,000 during the year. Requirement The closing retained earnings balance in Pear Ltd s statement of changes in equity for the year ended 31 March 20X9 is: A 111,450 B 81,450 C 91,450 D 106,450 Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. --- Trang 394 --- Answers t o Interactive q u e s t i o n s Answer to Interactive question 1 Revenue 489,401 Cost of sales (W1) (197,955) Gross profit 291,446 Distribution costs (23,890) Administrative expenses (W2) (1 43,936) Operating profit 123,620 Finance income 862 Finance costs (W3) (17 ,000) Profit before tax 1 07,482 I n co m e tax (38,400) Profit for the year 69,082 WORKINGS (1) Cost of sales Cost of sales opening inventory purchases - closing inventory 83,496 202,679 - (88,905 - (4,560 - 3,875)) 197,955 (2) Administrative expenses Balance per initial trial balance 101,436 Add: depreciation expense 42,500 143,936 (3) Finance costs Balance per initial trial balance 13,805 Add: interest for final quarter 3,195 17,000 Answer to Interactive question 2 Dividends paid to equity shareholders and a bonus issue of shares are both presented in the statement of changes in equity. Dividends paid to equity shareholders reduce retained earnings and a bonus issue of shares will increase share capital with a corresponding reduction in retained earnings. Share capital and retained earnings are both part of the equity of Millhouse Ltd. --- Trang 395 --- The purchase of non-current assets using a loan impacts on assets and liabilities but does not impact on equity and therefore does not feature in the statement of changes in equity. Redeemable preference shares are classified as liabilities rather than equity and therefore the dividend paid is included as a finance cost in profit or loss and is not separately presented in the statement of changes in equity. Answers t o Self-test questions 1 D 33,253 The opening prepayment of insurance of 2,894 needs to be debited to administrative expenses, and the closing prepayment of 5,400 x 2/3 3,600 needs to be credited. Total administrative expenses will therefore be 32,874 1, 085 2,894 - 3,600 33,253. 2 B Bank overdraft E Provision for environmental damage Share capital is equity in the statement of financial position. Allowance for receivables is shown as a deduction from receivables under current assets. 3 D 17,500 Current year 15,000 Under-provision in previous year 2,500 Income tax expense in statement of profit or loss 17,500 4 B 81,450 The closing retained earnings balance will comprise: opening balance profit for the year - bonus issue - dividends Opening retained earnings 112,560 Profit for the year 23,890 Bonus issue (100,000 in issue 50,000 additional issue) 1/5 (30,000) Dividends (25,000) Closing retained earnings 81,450 --- Trang 396 --- Chapter 1 3 ICAEW S t a t e m e n t o f cash f l o w s Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 Statement of cash flows (IAS 7) 2 Format of the statement of cash flows 3 Preparing a statement of cash flows Summary Further question practice Technical References J k Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 397 --- I n t r o d u c t i o n Learning outcomes (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcome is: 3c Syllabus links The material in this chapter will be developed further in Professional Level Financial Accounting and Reporting. This is the first time that you will have come across a statement of cash flows in your studies. However, as you will see in the rest of the chapter, the information needed to prepare a statement of cash flows is contained in the statement of profit or loss and statement of financial position, both of which you will be familiar with from your studies so far. Examination context 40% of the exam will require the preparation of single company financial statements. In the exam you will be asked to prepare either a statement of profit or loss and statement of financial position, or a statement of cash flows. In practice financial statements would most likely be generated with the help of accounting software. However, manual preparation is required in the exam to ensure understanding of how a set of accounts is put together. You will be given an extract from a trial balance or draft financial statements, with additional information and be required to complete calculations in orderto prepare the required financial statement(s) using the pro-forma which is provided in the exam software. The calculations and workings will include aspects from other chapters, as the preparation of the accounts will bring together knowledge from most parts of the syllabus. You may also be examined on the contents of this chapter by multiple choice questions, which may involve calculations so that the correct answer can be selected. Very often double entry questions are phrased in terms of preparing a journal. In the exam you may be required to: (cid:127) prepare the statement of cash flows (cid:127) calculate the cash flow for a transaction using a T-account format Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Topic Practical significance Study approach Exam approach Interactive questions Statement of cash Approach You could either be flows (IAS 7) (FRS asked to produce a This topic is largely 1 0 2 s 7 ) full statement of cash background so you flows in the long form It is accepted that can cover it quickly questions, or to profit does not and spend more time prepare extracts always give a on the format in the and/or to answer a complete picture of a following topic. number of multiple company s Stop and think choice questions. It is operations. Users of a Can you think of any important therefore company s financial financial instruments that you understand statements might that would be what a statement of misinterpret a considered cash cash flow is and what reported profit figure information it equivalents as being provides. representative of how much cash the --- Trang 398 --- company has made in the period. To avoid such misinterpretation and to give users a greater understanding of the business s financial position and performance, companies are required to present a statement of cash flows, showing the cash inflows and outflows of a company during the reporting period. This first topic sets out the requirements of IAS 7, Statement of Cash Flows, Format of the Approach In the examination IQ1 Income tax statement of cash you may be asked to The best way to learn This question checks flows prepare a statement how to prepare a you are comfortable of cash flows. You Like all primary statement of cash with calculating the need to understand financial statements, flows is to work income tax paid. the format, there is a set format through the various IQ2 Cash payments particularly that there to be followed when worked examples and for PPE are three sections and preparing a statement Interactive questions two approaches to This question checks of cash flows. You in order to develop a preparing the you understand the need to know what is standard approach to statement. You also standard approach included under each calculating the cash need to be able to for calculating the of the headings and flows. perform the cash purchase of PPE, the difference Stop and think individual calculations which can be a tricky between the direct to determine the cash What does cash flows calculation. and indirect methods from operating flows for the items of presenting cash IQ3 Interest received within the statement. activities tell a user of generated from This question tests the financial operations. your understanding statements about a of how to calculate company interest received. IQ4 Bonus issue A tricky question requiring you to calculate the cash flow from the issue of shares, after adjusting for a bonus issue. Preparing a Approach You need to be statement of cash equally confident in Cover the worked flows preparing a statement example in detail. of cash flows as you This topic pulls Take your time and are in preparing other together the make sure you primary financial individual understand all of the statements. adjustments you calculations and how worked through in the cash flows are the previous topic classified. --- Trang 399 --- into a longer Stop and think preparation quest Why might a bank, ion. Rememberthat which has been asked the preparation of a to provide a loan to a statement of cash company, be flows could be interested in its required in the long- statement of cash form question. flows Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 Statement o f cash flows (IAS 7) MB Section overview (cid:127) The statement of cash flows shows movements in cash and cash equivalents. (cid:127) Both listed and unlisted companies are required to produce a statement of cash flows. (cid:127) The statement of cash flows is a useful addition to the financial statements because accounting profit is not the only indicator of performance. (cid:127) The statement of cash flows concentrates on the sources and uses of cash and is a useful indicator of liquidity and solvency. 1.1 IAS 7 Statement of Cash Flows (FRS 1 0 2 s7) Z The objective of IAS 7, Statement of Cash Flows is to provide historical information about changes in cash and cash equivalents, classifying cash flows as operating, investing and financing activities. This will provide information to users of financial statements about the entity s ability to generate cash and cash equivalents, as well as indicating the cash needs of the entity. IAS 7 sets out the structure of a statement of cash flows and it sets the minimum level of disclosure. In the exam you may be asked to prepare a statement of cash flows using the pro-forma provided in the exam software. In order to prepare the statement of cash flows, you will be provided with financial information, usually in the form of the statement of profit or loss and statement of financial position and you will be given some additional information about transactions that are relevant when calculating the correct amounts for inclusion in the pro-forma. Most computerised accounting systems can automatically produce a statement of cash flows as one of the primary financial statements of a business. It is, however, important that an accountant can understand the underlying approach to preparing the statement of cash flows and how to identify cash movements from transactions. U K GAAP alert The format of the statement of cash flows under FRS 1 02 is the same as the IAS 7 format. Entities eligible for disclosure exemptions under FRS 1 02 are also exempt from the preparation of a statement of cash flows. 1.2 Purpose of IAS 7 IAS 7 begins with the following statement. Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. (IAS 7, Objective) It has been argued that profit does not always give a useful or meaningful picture of a company s operations The users of a company s financial statements might even be misled by a reported profit figure. Consider the following: --- Trang 400 --- (a) Shareholders might believe that if a company makes a profit for the year of, say, 10 0,000 then this is the amount which it could afford to pay as a dividend. Unless the company has sufficient cash available to stay in business and also to pay a dividend, the shareholders expectations would be wrong. (b) Employees might believe that if a company makes profits, it can afford to pay higher wages next year. This opinion may not be correct: the ability to pay wages depends on the availability of cash. (c) Cash is the lifeblood of the business. Survival of a business entity depends not so much on profits as on its ability to pay its debts when they fall due. Such payments might include profit and loss items such as material purchases, wages, interest and taxation etc, but also capital payments for new non-current assets and the repayment of loan capital when this falls due (for example, on the redemption of debentures). From these examples, it is clear that a company s future performance and prospects depend not so much on the profits earned in a period, but more realistically on liquidity or cash flows. The statement of cash flows should be used in conjunction with the rest of the financial statements. Users can gain further appreciation of: (cid:127) the change in net assets (cid:127) the entity s financial position (liquidity and solvency) (cid:127) the entity s ability to adapt to changing circumstances and opportunities by affecting the amount and timing of cash flows Statements of cash flows enhance comparability as they are not affected by differing accounting policies used for the same type of transactions or events. Cash flow information of a historical nature can be used as an indicator of the amount, timing and certainty of future cash flows. Past forecast cash flow information can be checked for accuracy as actual figures emerge. The relationship between profit and net cash flow and the impact of changing prices can be analysed overtime. 1 .3 Scope IAS 7 requires all entities to include a statement of cash flows as an integral part of their financial statements. All types of entity can provide useful information about cash flows as the need for cash is universal, whatever the nature of their revenue-producing activities. Definitions Cash flows: These are inflows and outflows of cash and cash equivalents. Cash: Comprises cash on hand and demand deposits. Cash equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (maturity of three months or less from the date of acquisition). 2 F o r m a t of t h e s t a t e m e n t of cash f l o w s B Section overview (cid:127) The statement of cash flows summarises all movements of cash into and out of the business during the accounting period. The cash inflows and outflows are classified under the following headings: - Operating activities: These are primarily derived from the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. - Investing activities: These are the cash flows derived from acquisition and disposal of non-current assets and other investments not included in cash equivalents. - Financing activities: These are activities that result in changes in the size and composition of the equity capital and borrowings of the entity. (cid:127) The total cash flows for each heading are totalled to give the net inflow or outflow of cash and cash equivalents for the period. --- Trang 401 --- 2.1 Cash flows from operating activities IAS 7 defines operating activities as being the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. This is an indication of how well the entity can generate enough cash flows to maintain its operations and meet its debts without relying on external finance. Cash flows from operating activities can consist of: (cid:127) cash receipts from the sale of goods and the rendering of services (cid:127) cash receipts from royalties, fees, commissions and other revenue (cid:127) cash payments to suppliers for goods and services (cid:127) cash payments to and on behalf of employees Cash flows from interest paid and income taxes paid are also dealt with here. IAS 7 allows two possible layouts for cash generated from operations: (cid:127) the indirect method (cid:127) the direct method The direct method is preferred by IAS 7, as it is more easily understood by the users, but is not compulsory. In practical terms the indirect method is likely to be easier and less time consuming to prepare and is more likely to be examined. In the exam you should use the indirect method unless the question specifies otherwise. 2.2 Direct method Using the direct method, cash generated from operations would be analysed as follows and shown as a note to the statement of cash flows: Cash generated from operations for the year ended December 20X4 Cash received from customers X Cash payments to suppliers (X) Cash payments to and on behalf of employees (X) Cash generated from operations X The reasons for certain items being added and others being deducted is very straightforward with this method - cash inflows are added and cash outflows are deducted. Entities are encouraged to use this method as it provides information that is not available under the indirect method which may be useful in estimating future cash flows. 2.3 Indirect method Using the indirect method, cash generated from operations is calculated by performing a reconciliation between: (cid:127) profit/(loss) before tax as reported in the statement of profit or loss (cid:127) cash generated from operations This reconciliation is produced as follows: Reconciliation of profitZ(loss) before tax to cash generated from operations for the year ended 3 1 December 20X4 Profit/(loss) before tax X Finance cost X Finance income (X) Depreciation charge X --- Trang 402 --- Amortisation charge X Impairment loss X Loss/(profit) on disposal of non-current assets X/(X) (lncrease)/decrease in inventories (X)/X (lncrease)/decrease in trade and other receivables (X)/X (lncrease)/decrease in prepayments (X)/X lncrease/(decrease) in trade and other payables X/(X) lncrease/(decrease) in accruals X/(X) lncrease/(decrease) in provisions X/(X) Cash generated from operations X 2.4 Explanation It is important to understand why certain items are added and others subtracted. Note the following points: (a) Depreciation, amortisation and impairment losses are not cash expenses, but are deducted in arriving at the profit figure in the statement of profit or loss. It makes sense, therefore, to add them back to profit before tax to eliminate the impact of these non-cash expenses. (b) By the same logic, a loss on a disposal of a non-current asset (arising through the under provision of depreciation) needs to be added back and a profit on disposal needs to be deducted. Recall from NOT Chapter 1 0 that a profit or loss on disposal is the same as the proceeds received on the sale. The proceeds received are a cash flow, but they are presented in the investing activities section rather than the operating activities section. (c) An increase in inventory means the company has spent cash on buying/manufacturing inventory. (d) An increase in receivables means that more of the revenue included in profit before tax has not been collected and therefore the company has less cash. (e) Prepayments result in cash being paid out before expenses are incurred and therefore an increase in prepayments is negative for a company s cash flow. (f) If a company pays off its payables, causing the figure to decrease, again it has less cash. (g) Accruals result in cash being paid out after expenses are incurred and therefore an increase in accruals is positive for a company s cash flow. (h) Provisions are not cash flows - the cash flow occurs when the related expense is paid. An increase in provision will have decreased profit before tax and requires to be added back when calculating cash generated from operations. (i) Finance costs are added back and finance income is deducted as they are not part of the cash generated from operations sub-total. Finance costs form part of the interest paid calculation which is included in arriving at cash flow from operating activities and finance income forms part of the interest received calculation which is included in the investing activities section. Note: In your exam you should use either a negative sign or parentheses to denote a negative number eg, - 1 ,250 or (1, 250) are acceptable. Worked example: Cash generated from operations Quest pic has profit before tax for the year to 31 December 20X6 of 850, after charging 450 for depreciation on an electric car, 200 for an impairment loss on an asset which has been subject to technological advances and making a profit of 120 on the disposal of a diesel car. The statement of financial position for the year shows the following entries: 20X6 20X5 Inventories 586 763 Trade and other receivables 1,021 589 Trade and other payables 443 1,431 --- Trang 403 --- Requirement Calculate the cash generated from operations. Solution Profit before tax 850 Depreciation (add) 450 Impairment loss (add) 200 Profit on sale of property, plant and equipment (deduct) (120) Movement in inventories (add a decrease) 1 77 Movement in trade receivables (deduct an increase) (432) Movement in trade payables (deduct a decrease) (988) Cash generated from operations 1 37 Context example: Direct method Hail pic commenced trading on 1 January 20X7 following a share issue which raised 35,000. During the year the company entered into the following transactions: (cid:127) Purchases from suppliers were 19 ,500, of which 2,550 was unpaid at the year end. (cid:127) Wages and salaries amounted to 10 ,500, of which 750 was unpaid at the year end. (cid:127) Sales revenue was 29,400, including 900 receivables at the year end. Cash generated from operations would be calculated and disclosed as follows: Gross operating cash flows for the year ended 3 1 December 20X7 Cash received from customers (29,400 - 900) 28,500 Cash paid to suppliers and employees (W) (26,700) Cash generated from operations 1,800 WORKING Cash paid to suppliers (19 ,500 - 2,550) 1 6,950 Cash paid to and on behalf of employees (1 0,500 - 750) 9,750 Cash paid to suppliers and employees 26,700 2.5 Payments of interest and income tax The direct and indirect methods are different ways to calculate cash generated from operations . To arrive at net cash from operating activities , we must adjust the cash generated from operations for: (cid:127) tax paid - cash flows from operating activities also include payments and refunds of income tax unless they can be specifically identified with investing or financing activities. Income tax payments relate to profits from operations and so they are a cash flow from operating activities; and (cid:127) interest paid - cash amounts of interest paid in the period may be presented in either the operating activities or financing activities section. For the purposes of Accounting, we will always assume interest paid is presented in operating activities. Interest received may be presented in either operating activities or investing activities, but for the purposes of Accounting, we will always assume interest received is presented in investing activities. --- Trang 404 --- A similar method can be used to calculate the cash flows for interest paid and income tax paid. For each item, the information available might be: (cid:127) opening balance at the start of the period (opening statement of financial position) (cid:127) statement of profit or loss (the amount of the item, as reported) (cid:127) closing balance at the end of the period (closing statement of financial position) The cash flow is a balancing figure obtained from these three figures. A T-account can be used as a working. Context example: Interest paid A company s financial statements show the following information: For the year At 1 Jan At 31 Dec 20X2 20X2 20X2 Interest payable 54,000 63,000 Finance cost 240,000 Interest paid is calculated as follows: INTEREST PAID Cash payment (balancing figure) 231,000 Balance b/d 54,000 Balance c/d 63,000 Statement of profit or loss 240,000 294,000 294,000 Alternatively, this could be calculated as follows: (54,000 240,000 - 63,000) 231, 000 A similar technique can be used to calculate payments of income tax in the year. The taxation payment refers to payments of income tax, not to payments of sales tax (VAT) o r tax paid by employees. The opening and closing statements of financial position will show a liability for income tax. The income tax charge for the year is shown in the statement of profit o r loss. The figure for income taxes paid during the year is derived as a balancing figure. Interactive question 1 : Income Tax A company had a liability for income tax at 31 December 20X6 of 940,000 and a liability for income tax at 31 December 20X7 of 1 ,1 25,000. The income tax charge for the year to 31 December 20X7 was 1,270,000. Requirement What amount of income tax was paid during the year INCOME TAX --- Trang 405 --- Professional skills focus: Assimilating and using information You need to use the information in the statement of profit or loss and statement of financial position to calculate the cash flows for inclusion in the statement of cash flows. It is important that you understand where the figures come from and how they interact. Cash flows from investing activities are calculated separately in the statement of cash flows in order to identify the extent to which expenditures have been made on resources intended to generate future income and cash flows. These are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. This could include the following items: (cid:127) cash payments to acquire property, plant and equipment, intangible assets and other non-current assets, including those relating to capitalised development costs and self-constructed property, plant and equipment (cid:127) cash receipts from sales of property, plant and equipment, intangible assets and other non-current assets (cid:127) cash payments to acquire equity or debt of other entities (cid:127) cash receipts from sales of equity or debt of other entities (cid:127) interest received (cid:127) dividends received 2.7 Cash receipts from sales of property, plant and equipment AT-account can be used for calculating the cash receipts from sales of property, plant and equipment (PPE). The company s accounts will include the amount of any profit or loss on disposal. A note to the accounts on non-current assets will show the cost and the accumulated depreciation for property, plant and equipment disposed of during the year. The cash received from the sale is the balancing figure in the T-account. PROPERTY, PLANT AND EQUIPMENT - DISPOSAL ACCOUNT Cost/valuation of asset disposed of X Accumulated depreciation X Profit on disposal X Loss on disposal X Cash received (balancing figure) X X X Worked example: Cash receipts from sale of PPE A company s statement of financial position as at the beginning and the end of the year showed the following: Property, plant and equipment Cost At 1 January 20X7 760,000 Disposals (240,000) At 31 December 20X7 520,000 Depreciation At 1 January 20X7 270,000 Disposals (180,000) Charge for year 50,000 --- Trang 406 --- At 31 December 20X7 140,000 Carrying amount At 31 December 20X7 380,000 At 31 December 20X6 490,000 Requirement The property, plant and equipment was disposed of o n 31 December 20X7 at a loss of 7,000. Calculate the cash received on disposal of the property, plant and equipment. Solution The cash received balancing figure can be obtained by constructing a disposal of property, plant and equipment account as a working. PROPERTY, PLANT A N D EQUIPMENT - DISPOSAL ACCOUNT Cost 240,000 Accumulated depreciation 180,000 Loss o n disposal 7,000 Cash received (balancing figure) 53,000 240,000 240,000 Alternatively, the cash received could be calculated as follows: Asset at cost 240,000 Accumulated depreciation at time of sale (1 80,000) Carrying amount at time of sale 60,000 Loss o n disposal (7,000) Disposal proceeds (cash received) 53,000 2.8 Cash payments for purchase of property, plant and equipment Purchase of property, plant and equipment during a period can be calculated by means of a T-account or a working table. PROPERTY, PLANT A N D EQUIPMENT (COST) Balance b/d X Disposals X Additions (balancing figure) X Balance c/d X X X Interactive question 2: Cash payments for PPE A company s accounts show that at 31 December 20X7, it had property, plant and equipment at cost of 6,800,000. The company has a commitment to becoming carbon-neutral and as a result, during the year, it disposed of old high-emissions assets that had a cost of 850,000. It also purchased new energy-efficient equipment during the year. At 31 December 20X6, the company s property, plant and equipment at cost had been 5,100,000 --- Trang 407 --- Requirement Calculate the cash purchase of property, plant and equipment during the year ended 31 December 20X6. PROPERTY, PLANT A N D EQUIPMENT (COST) 2.9 Interest and dividends received Returns received in cash from investments will include interest and dividends received. The cash flows can be calculated by using an interest received or dividends received T-account. Both T-accounts are very similar and are prepared as follows: INTEREST/DIVIDENDS RECEIVED Balance b/d (receivable) Cash receipt (balancing figure) Finance income (statement of profit o r loss) Balance c/d (receivable) Interactive question 3 : Interest received A company had interest receivable of 35,000 at the start of the year and interest receivable of 42,000 at the end of the year. The statement of profit or loss for the year shows finance income of 90,000. Requirement What were the cash receipts for interest received in the year INTEREST RECEIVED Cash flows from investing activities Purchase of property, plant and equipment (X) Purchase of intangible assets (X) Proceeds from sale of property, plant and equipment Proceeds from sale of intangible assets Interest received Net cash from/(used in) investing activities X/(X) --- Trang 408 --- Worked example: Cash flows from investing activities Pearl pic acquired a new green factory in the year to 30 June 20X6 for a cost of 805,000. It sold its old factory for 425,000. It also received interest on surplus funds of 350,000. Requirement Calculate net cash flows from investing activities. Solution Cash flows from investing activities Purchase of property, plant and equipment (805,000) Proceeds from sale of property, plant and equipment 425,000 Interest received 350,000 Net cash used in investing activities (30,000) 2.1 0 Cash flows from financing activities This section of the statement of cash flows shows the share of cash which the entity s capital providers have claimed during the period. This is an indicator of likely future interest and dividend payments. The standard gives the following examples of cash flows which might arise under this heading Cash flows from financing activities Proceeds from issue of shares X Movement in borrowings X/(X) Dividends paid (X) Net cash from/(used in) financing activities X/(X) 2.11 Cash received from issuing shares The amount of cash received from new issues of shares can usually be calculated from the opening and closing statement of financial position figures for share capital and share premium, adjusted to take account of bonus issues of shares. As a general rule: SHARE CAPITAL AND PREMIUM Balance b/d X Bonus shares issued (from retained earnings) X Balance c/d X Cash receipt (balancing figure) X X X Recall that a company may make a bonus issue of shares from its retained earnings or share premium accounts (or both). Rememberthat in a bonus issue, the new share capital is created by means of reducing the reserve account rather than by a cash issue. If the bonus issue is made from retained earnings, the amount of the bonus issue must be reflected. No adjustment is needed in respect of bonus issues made from share premium. Worked example: Cash received from share issue Rustler pic s annual accounts for the year to 31 December 20X7 show the following figures. --- Trang 409 --- At31.12.X7 At31.12.X6 Share capital: Ordinary shares of 50p 6,750,000 5,400,000 Share premium 12,800,000 7,300,000 There were no bonus issues of shares during the year. Requirement Calculate the amount of cash that was raised from the issue of shares during the year. Solution SHARE CAPITAL AND PREMIUM Balance b/d (5,400,000 7,300,000) 12,700,000 Balance c/d (6,750,000 12,800,000) 19,550,000 Cash receipt (balancing figure) 6,850,000 19,550,000 19,550,000 Alternatively, the cash received could have been calculated as follows: Balance b/d 5,400,000 7,300,000 1 2,700,000 Cash received (balancing figure) 6,850,000 Balance c/d 6,750,000 1 2,800,000 19,550,000 Interactive question 4: Bonus issue Groat pic s accounts for the year to 31 December 20X7 show the following figures. At31.12.X7 At31.12.X6 Share capital: Ordinary shares of 1 0 p 22,500,000 10,000,000 Share premium 900,000 4,800,000 The company made a one for two bonus issue of shares at the start of the year, utilising the share premium account and 200,000 from retained earnings. Requirement Calculate the amount of cash that was raised from share issues during the year. Worked example: Cash flows from financing activities Spear pic issued 87,500 1 shares at par during the year to 31 December 20X6. Loans taken out increased from 1 8,000 at the beginning of the year to 30,000 at the end of the year. The company declared a dividend of 10p per share. Requirement Calculate the cash flows from financing activities. --- Trang 410 --- Solution Proceeds from issue of shares 87,500 Movements in borrowings 12,000 Net cash from financing activities 99,500 Note: Only dividends paid (as opposed to declared) in the period represent cash flows. Interest paid on the loans will be shown under cash flows from operating activities. Professional skills focus: Structuring problems and solutions Calculating the cash flows from the issue of shares, particularly when there is a bonus issue, can be difficult and requires understanding of the accounting adjustments to account for such transactions to then work back to calculate the cash flows. This is a good example of the practical approach you need to take when calculating cash flows - you should use the information in the opening statement of financial position and the notes regarding any bonus issue to form an expected balance for share capital/premium and compare it to the actual balances to determine the cash flow. 2.1 2 Cash from raising a loan The cash derived from obtaining a new loan during the year should be apparent from a comparison of the opening and closing statement of financial position figures for non-current interest-bearing borrowings. You should assume that an increase during the year represents new financing and should be taken as the amount of cash received from financing. It is important that all loans in the statement of financial position should be taken into consideration in the calculation. There may be a loan that is within 1 2 months of repayment. If so, it will be included within current liabilities in the year-end statement of financial position as short-term borrowings , when it would have been a non-current liability in the statement of financial position at the start of the year. The loan has not been repaid during the year, merely re-classified from non-current liability to current liability. 2.1 2.1 Repayment of non-current interest-bearing borrowings In the same way, a reduction in interest-bearing borrowings indicates that a loan has been repaid, or that loan stock or debentures have been redeemed. It should be assumed that the loans are repaid or loan stock is redeemed for cash. 2.1 2.2 Dividends paid Cash flows from dividends paid should be disclosed separately. Under IAS 7, dividends paid by the entity can be classified in one of two ways. (a) As a financing cash flow, showing the cost of obtaining financial resources (as in the worked example: cash flows from financing activities above). This is the presentation adopted in Accounting. (b) As a component of cash flows from operating activities so that users can assess the entity s ability to pay dividends out of operating cash flows. Cash flows for dividends paid can be calculated using a T-account. Exam readiness In the Accounting exam, you should always present dividends paid as a financing cash outflow. Professional skills focus: Applying judgement Determining whether to present dividends paid as a financing cash flow or as a cash flow from operating activities is a matter of judgement for accountants, depending on what they believe provides the most true and fair view of their company. --- Trang 411 --- Context example: Dividends paid A company has declared dividends on irredeemable preference shares of 7,000 . At the start of the year the statement of financial position included a liability of 3,500 for preference dividends payable. At the end of the year no amount was owing to preference shareholders in respect of dividends. The preference dividend paid for the year is not simply the 7,000 declared and reflected in retained earnings as this amount needs to be adjusted for any opening and closing liabilities. DIVIDENDS PAID Cash payment (balancing figure) 10,500 Balance b/d 3,500 Balance c/d 0 Retained earnings 7,000 10,500 10,500 The cash paid during the year of 1 0,500 is the preference dividend due from last year and the whole of this year s preference dividend (all paid during the year). Note: Dividends paid on equity shares or preference shares classified as equity may have to be derived from the retained earnings account. 2.1 3 Example: Direct method The following example statements of cash flows are provided by IAS 7 using the direct method and the indirect method. XYZ pic Statement of cash flows (direct method) Cash flows from operating activities 000 000 Cash receipts from customers 30,150 Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550 Interest paid (270) Income taxes paid (900) Net cash from operating activities 1,380 000 000 Purchase of property, plant and equipment (700) Proceeds from sale of equipment 20 Interest received 200 Net cash used in investing activities (480) Cash flows from financing activities 000 000 Proceeds from issue of share capital 250 Proceeds from long-term borrowings 250 Payment of lease liabilities (90) Dividends paid (1,200) Net cash used in financing activities (790) Net increase in cash and cash equivalents 110 Cash and cash equivalents at beginning of period 120 Cash and cash equivalents at end of period 230 --- Trang 412 --- 2.14 Example: Indirect method Statement of cash flows (indirect method) 000 000 Cash flows from operating activities Profit before taxation 3,350 Depreciation 450 Finance income (500) Finance costs 400 3,700 Increase in trade and other receivables (500) Decrease in inventories 1,090 Decrease in trade payables (1,740) Cash generated from operations 2,550 Interest paid (270) Income taxes paid (900) Net cash from operating activities 1,380 Cash flows from investing activities Purchase of property, plant and equipment (700) Proceeds from sale of equipment 20 Interest received 200 Net cash used in investing activities (480) Cash flows from financing activities Proceeds from issue of share capital 250 Proceeds from long-term borrowings 250 Payment of lease liabilities (90) Dividends paid Net cash used in financing activities (790) Net increase in cash and cash equivalents 1 1 0 Cash and cash equivalents at beginning of period 120 Cash and cash equivalents at end of period 230 Note: You are not expected to account for lease liabilities or right-of-use assets in the long form statement of cash flow question in Accounting. They are included in the example proforma for completeness. Lease liabilities are covered in Professional level Financial Accounting and Reporting. --- Trang 413 --- 3 Preparing a s t a t e m e n t o f cash f l o w s Section overview (cid:127) In essence, preparing a statement of cash flows is very straightforward. You should therefore simply learn the format and apply the steps noted in the example below. Remember the way that the following items are treated. It might seem confusing at first, but the treatment is logical if you think in terms of cash. (a) Increase in inventory is treated as negative (in parentheses). This is because it represents a cash outflow; cash is being spent on inventory. (b) An increase in receivables would be treated as negative for the same reasons; more receivables means less cash has been received. (c) By contrast an increase in payables is positive because cash is being retained and not used to pay off payables. There is therefore more cash. Worked example: Preparation of a statement of cash flows Kane pic s statement of profit or loss for the year ended 31 December 20X2 and statement of financial position as at 31 December 20X1 and 31 December 20X2 were as follows. Kane pic Statement of profit or loss for the year ended 31 December 20X2 000 Revenue 720 Cost of sales (188) Gross profit 532 Distribution costs (18) Administrative expenses (94) Operating profit 420 Finance costs (28) Profit before tax 392 Income tax expense (1 24) Profit for the period 268 Kane pic Statement of financial position as at 31 December 20X2 20X1 000 000 000 000 ASSETS Non-current assets Cost 1,596 1,560 Depreciation (318) (224) 1,278 1,336 --- Trang 414 --- Current assets Inventory 24 20 Trade receivables 66 50 Recoverable income tax 10 8 Bank 48 56 148 134 Total assets 1,426 1,470 EQUITY LIABILITIES Share capital 360 340 Share premium 36 24 Retained earnings 716 514 Non-current liabilities Borrowings 200 500 Current liabilities Trade payables 12 6 Taxation 102 86 114 92 Total equity and liabilities 1,426 1,470 Dividends totalling 66,000 were paid during the year. During the year, the company paid 90,000 for a new piece of energy efficient machinery. Included in the cost of sales is depreciation of 1 1 8,000. A loss on disposal of 1 8,000 has been included in distribution costs. Requirement Prepare a statement of cash flows for Kane pic for the year ended 31 December 20X2 in accordance with the requirements of IAS 7. Solution The following steps should be followed when preparing a statement of cash flows: (1) Set out the pro-forma statement of cash flows with all the headings required by IAS 7. In the Accounting exam, the pro forma will be provided for you. (2) Complete the cash flows from operating activities as far as possible. When calculating cash flows using the statement of financial position, you will usually have to calculate items such as depreciation, profit or loss on sale of non-current assets and profit for the year (see Step 4). Remember to use parentheses to denote a negative figure. (3) Calculate the figures for tax paid, purchase or sale of non-current assets, issue of shares and repayment of loans if these are not already given to you (as they may be). Note that you may not be given the tax charge in the statement of profit or loss. You will then have to assume that the tax paid in the year is last year s year-end provision and calculate the charge as the balancing figure. (4) If you are not given the profit figure, open up a working for the statement of profit or loss. Using the opening and closing retained earnings balances, the taxation charge and dividends paid you will be able to calculate profit for the year as the balancing figure to put in the statement. (5) You will now be able to complete the statement by slotting in the figures given or calculated. (6) Check that the net increase in cash and cash equivalents that you have calculated plus the cash and cash equivalents at the beginning of the period totals to the cash and cash equivalents at the end of the period. --- Trang 415 --- Kane pic Statement of cash flows for the year ended 31 December 20X2 (indirect method) Cash flows from operating activities 000 000 Profit before taxation 392 Loss on sale of property, plant and equipment 18 Depreciation 118 Finance costs 28 Increase in trade and other receivables (16) Increase in inventories (4) Increase in trade payables 6 Cash generated from operations 542 Interest paid (28) Income taxes paid (W1 ) (110) Net cash from operating activities 404 Cash flows from investing activities Purchase of property, plant and equipment (90) Proceeds from sale of equipment (W2) 12 Net cash used in investing activities (78) Cash flows from investing activities Proceeds from issue of share capital (360 36 - 340 - 24) 32 Proceeds from long-term borrowings (500 - 200) (300) Dividends paid (66) Net cash used in financing activities (334) Net increase in cash and cash equivalents (8) Cash and cash equivalents at beginning of period 56 Cash and cash equivalents at end of period 48 WORKINGS (1 ) Income taxes paid 000 Opening IT payable (86 - 8) 78 Charge for year 124 Net IT payable at 31.1 2.X2 (102- 10) (92) Paid 110 --- Trang 416 --- (2) Non-current asset disposals COST 000 000 At 1.1.X2 1,560 At31.12.X2 1,596 Purchases 90 Disposals 54 1,650 1,650 ACCUMULATED DEPRECIATION 000 000 At31.1.X2 318 At 1.1.X2 224 Depreciation on disposals 24 Charge for year 118 342 342 000 Carrying amount of disposals 30 Net loss reported (18) Proceeds of disposals 12 --- Trang 417 --- Summary Statement of cash flows This shows an entity s ability to generate cash and cash equivalents Cash and cash equivalents (cid:127) Cash comprises cash on hand and demand deposits (cid:127) Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value IAS 7 requires cash flows to be classified as follows Operating activities Investing activities Financing activities Direct method Indirect method Further question practice Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning 1 Can you define cash equivalents (Topic 1 ) 2 What are the three sections of the statement of cash flows and what do the cash flows presented in each section represent (Topic 2) 3 Can you explain the difference between the direct and indirect method of preparing cash generated from operating activities (Topic 2) --- Trang 418 --- 4 In which section of the statement of cash flows is the cash purchase of PPE presented (Topic 2) 5 In which section of the statement of cash flows is the repayment of loans presented (Topic 2) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Statement of cash flows chapter of the Accounting Question Bank- Refer back to the learning in this chapter for any questions which you d i d not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move o n to the next chapter. Technical References 1 Objective of the statement of cash flows (cid:127) The statement of cash flows should show the historical changes in cash and cash equivalents (cid:127) Cash comprises cash o n hand and demand deposits - IAS 7, para. 6 (cid:127) Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value - IAS 7, para. 6 2 Presentation of a statement of cash flows - Appendix A (cid:127) Cash flows should be classified by operating, investing and financing activities - IAS 7, para. 1 0 (cid:127) Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity - IAS 7, paras. 1 3-1 4 (cid:127) There are two methods of presentation for cash flows from operating activities: - direct method - IAS 7, para. 1 9 - indirect method - IAS 7 , para. 20 (cid:127) Cash flows from investing activities are those related to the acquisition or disposal of any non-current assets, o r trade investments together with returns received in cash from investments (ie, dividends and interest received) (cid:127) Financing activities include: - cash proceeds from issuing shares - cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings - cash repayments of amounts borrowed - repayment of capital amounts under lease agreements - dividends paid to shareholders - IAS 7, para. 1 6 Self-test questions Answer the following questions. 1 Which one of the following options best describes the objective of IAS 7, Statement of Cash Flows A To aid comparison of cash flows between entities B To assist users to understand the cash management and treasury practices of an entity C To assist users to confirm the going concern of an entity D To enable entities to report cash inflows and outflows analysed under standard headings --- Trang 419 --- 2 Which one of the following statements gives the best definition of cash equivalents as set out in IAS 7, Statement of Cash Flows A Cash equivalents are cash, overdrafts, short-term deposits, options and other financial instruments and equities traded in an active market B Cash equivalents are short-term highly liquid investments subject to insignificant risks of change in value C Cash equivalents are readily disposable investments D Cash equivalents are investments which are traded in an active market 3 Information concerning the non-current assets of Ealing pic is detailed in the table. During the year non- current assets which had cost 80,000 and which had a carrying amount of 30,000 were sold for 20,000. Net cash from operating activities for the year was 300,000. Start of year End of year Cost 180,000 240,000 Aggregate depreciation (1 20,000) (1 40,000) Carrying amount 60,000 1 00,000 Requirement There was n o other cash activity. As a result of the above, cash increased over the year by: A 240,000 B 260,000 C 320,000 D 180,000 4 Waterloo pic acquired a freehold building for cash, financed in full by issuing for cash 1 66,000 1 ordinary shares at a premium of 2 per share. Requirement In its statement of cash flows prepared in accordance with IAS 7, Statement of Cash Flows this transaction should b e stated as: A Inflow 498,000, outflow nil B Inflow nil, outflow nil C Inflow 498,000, outflow 498,000 D Inflow nil, outflow 498,000 5 Information from the statement of cash flows and related notes of Gresham pic for the year ended 31 December 20X1 can be found in the table below. --- Trang 420 --- Depreciation 30,000 Profit o n sale of property, plant and equipment 5,000 Proceeds from sale of property, plant and equipment 20,000 Purchase of property, plant and equipment 25,000 Requirement If the carrying amount of property, plant and equipment was 1 1 0,000 o n 31 December 20X0, what was it o n 31 December 20X1 A 85,000 B 90,000 C 70,000 D 80,000 Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive q u e s t i o n s Answer to Interactive question 1 This could be calculated as follows: ( 940,000 1, 270,000 - 1, 1 25,000) 1, 085,000 or by using the T-account format below INCOME TAX Cash payment (balancing figure) 1,085,000 Balance b/d 940,000 Income tax expense Balance c/d 1,125,000 (P/L) 1,270,000 2,210,000 2,210,000 Answer to Interactive question 2 The company started the year with PPE at cost of 5,1 00,000. It bought a further 2,550,000 of PPE, giving a total of 7,650,000 at cost. However, there were disposals of PPE with a cost of 850,000, bringing the year- end figure down to 5,800,000. PROPERTY, PLANT A N D EQUIPMENT (COST) Balance b/d 5,100,000 Disposals 850,000 Additions (balance) 1,550,000 Balance c/d 5,800,000 6,650,000 6,650,000 --- Trang 421 --- Alternatively, the additions could be calculated as follows: Cost b/d 5,100,000 Cost of asset disposed of (850,000) Additions - cash purchases (balancing figure) 1,550,000 Cost c/d 5,800,000 Answer to Interactive question 3 INTEREST RECEIVED Balance b/d 35,000 Cash received (balancing figure) 83,000 Finance income (statement of profit or loss) 90,000 Balance c/d 42,000 125,000 125,000 Alternatively, the cash received could b e calculated as follows: Balance b/d 35,000 Finance income in statement of profit or loss 90,000 Cash received (balancing figure) (83,000) Balance c/d 42,000 Answer to Interactive question 4 SHARE CAPITAL A N D PREMIUM Balance b/d 14,800,000 Balance c/d 23,400,000 Retained earnings 200,000 Cash received (balance) 8,400,000 23,400,000 23,400,000 Alternatively, the cash received could have been calculated as follows: Balance b/d 10,000,000 4,800,000 14,800,000 Bonus issue in retained earnings 200,000 Cash received (balancing figure) 8,400,000 Cost c/d 22,500,000 900,000 23,400,000 Note: It is not necessary to split out the share capital and share premium, but as shown below the same answer is arrived at if the balances are split out. --- Trang 422 --- Bonus issue: 10,000,000 x 1/2 5,000,000 DEBIT Retained earnings 200,000 DEBIT Share premium 4,800,000 CREDIT Share capital 5,000,000 Share Share capital premium Balance b/d 10,000,000 4,800,000 Bonus issue 5,000,000 (4,800,000) Cash received (balancing figure) 7,500,000 900,000 Cost c/d 22,500,000 900,000 22,500,000 900,000 The total cash received is therefore 7,500,000 900,000 8,400,000 Answers t o Self-test questions 1 D To enable entities to report cash inflows and outflows analysed under standard headings The objective per IAS 7 is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities. (IAS 7, Objective) 2 B Cash equivalents are short-term highly liquid investments subject to insignificant risks of change in value 3 D 180,000 NON-CURRENT ASSETS - COST Balance b/d 180,000 Disposals 80,000 Purchases ( 3) 140,000 Balance c/d 240,000 320,000 320,000 --- Trang 423 --- DEPRECIATION Balance b/d 120,000 Disposals 50,000 Charge in the year( 3) 70,000 Balance c/d 140,000 190,000 190,000 DISPOSALS Cost 80,000 Accumulated depreciation 50,000 Proceeds 20,000 Loss ( 3) 10,000 80,000 80,000 Cash from operations 300,000 Cash inflow: Disposal proceeds 20,000 320,000 Cash outflow: purchases of non- current assets (140,000) Net cash increase 180,000 Note: Adjustments for depreciation and loss o n disposal will already be included in net cash from operating activities. Alternatively, the solution could be calculated as follows: Net cash from operating activities (given in question) 300,000 Proceeds from sale of non-current assets 20,000 Additions of non-current assets (calculated below) (1 40,000) Increase in cash 180,000 Calculation of additions: Cost b/d 180,000 Cost of asset disposed of (80,000) Additions (balancing figure) 1 40,000 Cost c/d 240,000 --- Trang 424 --- 4 C Inflow 498,000, outflow 498,000 1 The outflow is classified under Purchase of property, plant and equipment . The inflow is classified under Proceeds from issuance of share capital . 5 B 90,000 PROPERTY (CARRYING AMOUNT) Balance b/d 110,000 Depreciation 30,000 Additions 25,000 Disposals 15,000 Balance c/d (bal.fig.) 90,000 135,000 135,000 Alternatively, the carrying amount can be calculated as follows: Carrying amount b/d 110,000 Depreciation (30,000) Disposals (20,000 - 5,000) (15,000) Additions 25,000 Carrying amount c/d 90,000 --- Trang 425 --- Chapter 1 4 ICAEW C o m p a n y f i n a n c i a l s t a t e m e n t s u n d e r U K G A A P Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 What is UK GAAP 2 Published accounts 3 UK GAAP terminology and formats Summary Further question practice Self-test questions Answers to Self-test questions --- Trang 426 --- I n t r o d u c t i o n Learning outcomes (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Identify the main components of a set of financial statements and specify their purpose and interrelationship (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcomes are: 1 d; 3a, c Syllabus links The material in this chapter will be referred to in Professional Level Financial Accounting and Reporting. Examination context Questions on the topics in this chapter will be set as multiple-choice, multi-part multiple-choice or multiple- response questions, some of which may involve calculations so that the correct answer can be selected. Very often double entry questions are phrased in terms of preparing a journal. In the exam you may be required to: (cid:127) identify what comprises UK GAAP (cid:127) specify the key differences between UK GAAP and IFRS Accounting Standards formats of financial statements, especially in terms of the net assets UK GAAP balance sheet (cid:127) use UK GAAP when identifying balances in preparing the profit and loss account and balance sheet of a company You will not be asked to prepare company financial statements using UK GAAP Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Practical significance Study approach Exam approach Interactive questions What is UK GAAP Approach You need to be able to identify what So far, we have This first topic is a comprises UK GAAP, concentrated on reminder of some key including the names preparing the points we have of the primary financial statements already discussed financial statements for entities under IFRS around UK GAAP You and common Accounting should be able to terminology. Standards, which are cover it fairly quickly. applicable to listed You will not be asked companies. However, to prepare financial most unlisted UK statements under UK companies prepare GAAP. their financial statements under a different regime, known as UK generally accepted accounting practice - UK GAAP. --- Trang 427 --- 2 Published accounts Approach As above, you need to be able to identify This topic covers You will find there is what comprises UK some of the some overlap GAAP, which includes requirements UK between IFRS the names of the companies have to Accounting Standards primary financial follow when filing UK and UK GAAP in statements and GAAP accounts. terms of the true and common terminology. fair view and what comprises a full set of financial statements so again, you should be able to cover this topic fairly quickly. Stop and think Why might a company choose to use UK GAAP rather than IFRS Accounting Standards 3 UK GAAP Approach You need to terminology and understand the Review the formats differences between terminology table the UK GAAP and You need to and ensure you are IFRS Accounting understand the happy with the Standards formats for equivalence between equivalent terms. the financial UK terminology and Stop and think statements, especially IFRS terminology and in terms of the UK Why might published the format of the financial statements GAAP balance sheet, accounts prepared. which has a different presented for external purposes provide less layout and arrives at a net assets total, and detailed information be able to use UK GAAP when identifying balances in preparing the profit and loss account and balance sheet of a company. You will not be asked to prepare company financial statements using UK GAAP. Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 W h a t is UK GAAP B Section overview (cid:127) Financial statements are prepared under UK GAAP for most private, unlisted companies In this Workbook so far, we have looked at how financial transactions are recorded in ledgers, and at the techniques that are then used to summarise those ledgers and produce: --- Trang 428 --- (cid:127) a statement of the business s financial performance over a period of time (which we have called its statement of profit or loss); (cid:127) a statement of the business s financial position at the end of that time period (which we have called its statement of financial position); and (cid:127) a statement of changes in equity, showing the movements in equity over the same time period. These techniques are universal, arising out of the key accounting principles of: (cid:127) accruals (cid:127) going concern (cid:127) double entry bookkeeping However, there are quite a number of issues in relation to which accounting practice around the world is diverse, in particular: (cid:127) terminology (cid:127) the formats used to present financial statements We have so far adopted an approach to these issues based IFRS Accounting Standards (specifically IAS 1 ) and on the Conceptual Framework. You need to be aware however that IFRS Accounting Standards are only mandatory in the UK for a limited number of companies; the majority still produce their financial statements under UK generally accepted accounting practice, or UK GAAP. Understanding the distinction and being able to prepare accounts in accordance with UK GAAP, will therefore be very important in the workplace, as well as for students who choose to study the UK GAAP version of Professional level Financial Accounting and Reporting. Definition UK GAAP: The rules, from whatever source, that govern accounting and financial reporting in the UK. 1 .1 The constituents of UK GAAP In the UK generally accepted accounting practice is a combination of: (cid:127) company law (the Companies Act 2006) (cid:127) UK accounting standards, these being FRS 1 00 to FRS 1 05 (the Accounting syllabus only covers FRS 1 02) (cid:127) the effects of stock exchange listing requirements (which apply directly to listed companies but which are influential more widely); and (cid:127) the effects of IFRS Accounting Standards. GAAP is a dynamic concept: it changes constantly as circumstances alter through new legislation, standards and practice. The problem of what is generally accepted is not easy to settle, because new practices are obviously not generally adopted yet. The criteria for a practice being generally accepted depend on factors such as whether the practice is addressed by UK accounting standards or legislation, or their international equivalents, and whether other companies have adopted the practice. Most importantly perhaps, the question should be whether the practice is consistent with the needs of users and the objectives of financial 1 statements, and whether it is consistent with the true and fair concept (see below). To understand better the importance of UK GAAP we need to look briefly at why and how companies in the UK are required to publish annual financial statements, or published accounts . 2 Published accounts Section overview (cid:127) UK companies are required by law to publish financial statements annually and file them with the Registrar of Companies ( published accounts ). (cid:127) Such accounts must show a true and fair view. --- Trang 429 --- Listed companies are required by the Listing Rules to apply IFRS Accounting Standards in preparing and presenting their published accounts. Unlisted companies may choose to use UK standards. 2.1 Publishing annual accounts Under the Companies Act 2006, UK limited companies must produce accounts (financial statements) annually, and large companies must appoint an independent person to audit and report on them. Once prepared, a copy of the accounts must be sent to the Registrar of Companies, who maintains a separate file for every company. The Registrar s files may be inspected for a nominal fee, by any member of the public. This is why the statutory accounts are often referred to as published accounts. Definition Statutory accounts: Financial statements which limited companies are obliged by law to publish in a particular form. A paper copy of the financial statements can be posted to the Registrar for filing at Companies House, or an electronic copy can be submitted online. These financial statements will then be published online here htt ps://find-and-up date.comp any-in formation.se rvice.g ov.uk/ foranyonetoview. Filing documents electronically via Companies House WebFiling service rather than posting a paper copy has the following benefits: (cid:127) Saves the company money and time - documents do not need to be printed and posted. In addition, the charges for electronic filing are less then paper filing. (cid:127) There are built in checks, and if the filing is rejected it can quickly be corrected and resent. (cid:127) There is an option to sign up to emails to help ensure timely submission of documents and help avoid late filing penalties. Documents can be submitted using a range of different third-party software. The company s directors must publish accounts which show a true and fair view (a phrase used in s393 Companies Act 2006) of the company s assets, liabilities, financial position (balance sheet) and profit or loss (profit and loss account) for a financial year. The board evidences its approval of the accounts by the signature of one director on the balance sheet. Once this has been done, and the auditors have completed their report, the accounts are sent to shareholders and, in the case of a public company, are presented to the body of shareholders at a general meeting. When the shareholders have adopted the accounts, they are sent to the Registrar for filing. 2.2 True and fair view The Companies Act 2006 requirement that the accounts show a true and fair view is paramount. A company s accounts can show a true and fair view when prepared following UK GAAP, and therefore presented using Companies Act format or when prepared using IFRS Accounting Standards and therefore presented under IFRS formats. Although the Companies Act 2006 lays down numerous rules on the information to be included in published accounts and the format of its presentation, any such rule may be overridden if compliance with it would prevent the accounts from showing a true and fair view. When prepared under UK GAAP the accounts must include: (cid:127) a profit and loss account (equivalent to a statement of profit or loss) (cid:127) a balance sheet as at the date to which the profit and loss account is made up (equivalent to a statement of financial position) (cid:127) a statement of changes in equity for the reporting period (cid:127) a directors report, and a directors remuneration report in the case of a quoted company (cid:127) an auditors report addressed to the members (not to the directors) of the company (cid:127) a strategic report to inform members of the company and help them assess how the directors have performed their duty All we are concerned with in the Accounting syllabus is the profit and loss account, the balance sheet and the statement of changes in equity. --- Trang 430 --- Professional skills focus: Applying judgement As we discussed in earlier chapters, the accountant will be required to use their judgement as to how to account for certain transactions or what values to assign to balances when preparing the financial statements. The true and fair requirement in the Companies Act requires the same level of judgment to be applied when preparing UK GAAP financial statements. 2.3 Published accounts of listed and unlisted companies Listed companies must comply with the Listing Rules set out by the UK Listing Authority (part of the Financial Conduct Authority). These require that listed companies should prepare their published accounts under international accounting standards. This is permitted by the Companies Act 2006, as we have seen above. The terminology and formats of international financial statements are different from the ones set out in the Companies Act 2006 and UK GAAP, however. In the UK therefore there is currently the situation whereby: (cid:127) listed companies produce a statement of profit or loss and statement of financial position following international terminology and formats (cid:127) non-listed companies can choose either UK GAAP or IFRS Accounting Standards for their published accounts 3 U K GAAP t e r m i n o l o g y a n d f o r m a t s Section overview (cid:127) The terminology used in UK GAAP and that used in IFRS Accounting Standards varies in a number of areas (cid:127) UK GAAP formats prescribed in the Companies Act 2006 apply a net assets approach to the balance sheet: total assets - total liabilities total equity So far in this Workbook we have exclusively used terminology and formats prescribed by IFRS Accounting Standards: we need now to introduce the UK GAAP versions. 3.1 UK GAAP terminology FRS 1 02 actually uses international (ie, IFRS) terminology, while the Companies Act 2006 uses terminology that is UK specific. In their published accounts, UK non-listed companies tend to follow Companies Act 2006 and use the UK specific terminology which is as follows: International term UK GAAP term Statement of profit or loss Profit and loss account or Income statement Statement of financial position Balance sheet Non-current asset Fixed asset Carrying amount Net book value Inventories Stock Receivables Debtors Irrecoverable debt Bad debt Irrecoverable debt expense Bad and doubtful debts expense --- Trang 431 --- Allowance for receivables Allowance for doubtful debts Retained earnings Retained profits (reserve) Payables Creditors Non-current liabilities Creditors: amounts falling due after more than one year Current liabilities Creditors: amounts falling due in less than one year Revenue Turnover Finance costs Interest payable and other similar expenses Income tax Taxation expense Professional skills focus: Assimilating and using information An accountant needs to be equally comfortable with information provided using IFRS terminology and information provided using UK GAAP terminology. It is important that you understand the different terminology and can use the equivalents. 3.2 UK formats The format of the balance sheet and profit and loss account of a limited company under the Companies Act 2006 is shown below, with some simplifications. Note in particular that the UK GAAP balance sheet presents net assets, with current liabilities deducted from current assets, and long-term liabilities deducted to arrive 1 at net assets. The lower half of the balance sheet comprises the owners interests only. Typical limited company balance sheet as at... Fixed Assets Intangible assets Development costs X X Tangible assets Land and buildings X Plant and machinery X Fixtures, fittings, tools and equipment X Motor vehicles X X X Current assets Stock X Debtors and prepayments X Cash at bank and in hand X X --- Trang 432 --- Creditors: amounts falling due within one year Bank overdraft and loans X Trade creditors X Provisions X Taxation X Accruals X (X) Net current assets (liabilities) X Total assets less current liabilities X Creditors: amounts falling due after more than one year Loans (X) Net assets X Capital and reserves Equity shares X Preference shares X Share premium account X Other reserves X Retained profits X X The UK GAAP profit and loss account is as follows: Typical limited company profit and loss account for the year ended... Turnover X Cost of sales (X) Gross profit X Distribution costs (X) Administrative expenses (X) X Other operating income X Operating profit X Interest payable and similar expenses (X) Profit before taxation X Taxation (X) Profit after taxation X Professional skills focus: Structuring problems and solutions As you are aware, the primary financial statements are the key way in which accountants communicate the results of a business to its external stakeholders. You need to be familiar with the UK GAAP format accounts as these are the ones you are more likely to see in the workplace. --- Trang 433 --- 3.3 Fixed assets 3.3.1 Intangible fixed assets Intangible fixed assets represent amounts of money paid by a business to acquire benefits of a long term nature. Goodwill, licences and development expenditure are three types of intangible assets; these were discussed in detail in Chapter 1 0 and the same principles apply under UK GAAP. If a company purchases some patent rights, or the right to use a trademark, the cost of the purchase can be accounted for as an intangible fixed asset. These assets are subject to amortisation over their useful lives 1 (called economic life under UK GAAP). 3.3.2 Tangible fixed assets Tangible fixed assets are shown in the balance sheet at their net book value (ie, at cost less accumulated depreciation, equivalent to carrying amount under IFRS Accounting Standards). Under UK GAAP a fixed asset note is normally needed to give the required detail. Alternatively on the face of the balance sheet we can present each item as follows: Cost Accumulated depreciation Net book value Land and buildings X (X) X Plant and machinery X (X) X Fixtures and fittings X (X) X Motor vehicles X X (X) X (X) X Under FRS 1 02 the accounting treatment for leased assets is different to IFRS Accounting Standards. Leased assets under UK GAAP will not be covered further in Accounting. 3.4 Current and long-term liabilities The term creditors: amounts falling due within one year is used in the Companies Act 2006 to mean current liabilities . Similarly, the term creditors: amounts falling due after more than one year is the Companies Act 2006 term for non-current liabilities. --- Trang 434 --- Summary UK GAAP: Rules that govern financial reporting in UK Companies UK accounting UK LA IFRS Act 2006 standards requirements Statutory or published accounts UK GAAP IFRS showing true and Profit and loss account Statement of profit or loss 1 fair view Balance sheet Statement of financial position Fixed assets Non-current assets Net book value Carrying amount Stock inventories Debtors Receivables Bad debt Irrecoverable debt Bad and doubtful debts expense Irrecoverable debt expense Allowance for doubtful debts Allowance for receivables Retained profits Retained earnings Creditors Payables Creditors falling due after 1 2 months Non-current liabilites Creditors falling due within 12 months Current liabilities Turnover Revenue Interest payable Finance costs Income tax Taxation expense Formats Profit and loss account Balance sheet Turnover Fixed assets (tangible/intangbl Cost of sales (X) Net current assets Gross profit Creditors: amounts falling d ue after 1 2 months (X) Administrative expenses (X) Net assets Distribution costs (X) Operating profit Capital Other operating income Reserves Interest payable (X) Profit before taxation Taxation (X) Profit after taxation Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. --- Trang 435 --- Confirm your learning 1 Who are the published accounts of UK companies filed with (Topic 1 ) 2 When is it appropriate to override the rules of the Companies Act 2006 (Topic 1 ) 3 How are net assets calculated in a UK GAAP format balance sheet (Topic 2) 4 What is the IFRS Accounting Standards equivalent term for debtors (Topic 3) 5 What is an income statement (Topic 3) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the 1 questions in the Company financial statements under UK GAAP chapter of the Accounting Question Bank, Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. Self-test questions Answer the following questions. 1 Y Ltd purchased plant on 1 January 20X0 for 38,000. The payment for the plant was correctly entered recorded in the cash at bank account but was incorrectly debited to the plant repairs account. Y Ltd charges depreciation on the straight line basis at 20% per annum. Requirement How will Y s profit for the year ended 31 March 20X0 be affected by the error A Understated by 30,400 B Understated by 36,1 00 C Understated by 38,000 D Overstated by 1,900 2 The closing stock of X Ltd was 1 1 6,400 excluding the following two stock lines: (cid:127) 400 items which cost 4 each, but which were expected to sell for 3 each, with selling expenses of 200 in total. (cid:127) 200 different items which had cost 30 each, but which are defective. Rectification work will cost 1, 200, after which they can be sold for 35 each, with selling expenses totalling 300. Requirement What amount will appear on X Ltd s balance sheet for stock A 122,300 B 121,900 C 122,900 D 123,300 --- Trang 436 --- 3 At 1 January 20X0 the capital structure of Q Limited was as follows: Issued share capital 1 ,000,000 equity shares of 50p each 500,000 Share premium account 300,000 O n 1 April 20X0 the company made an issue of 200,000 50p shares at 1. 30 each, and o n 1 July the company made a 1 for 4 bonus issue. Requirement Which of the following correctly states the company s share capital and share premium account at 31 December 20X0 Share capital Share premium Option 1 750,000 230,000 Option 2 875,000 285,000 Option 3 750,000 310,000 Option 4 750,000 610,000 A Option 1 B Option 2 C Option 3 D Option 4 4 W Ltd bought a new printing machine at a cost of 80,000. The installation costs were 5,000 and the employees received training o n how to use printing machines at a cost of 2,000. A regulatory test to ensure the machine functioned safely cost 1,000. Requirement What is the cost of the machine in the company s balance sheet A 80,000 B 85,000 C 86,000 D 88,000 5 The electricity account for the year ended 30 June 20X1 was as follows: Opening balance for electricity accrued at 1 July 20X0 300 Payments made during the year 1 August 20X0 for three months to 31 July 20X0 600 1 November 20X0 for three months to 31 October 20X0 720 1 February 20X1 for three months to 31 January 20X1 900 3 0 June 20X1 for three months to 30 April 20X1 840 --- Trang 437 --- Requirement Which of the following is the appropriate entry for electricity Charge to profit and loss account year ended 30 Accrued at 30 June 20X1 June 20X1 Option 1 Nil 3,060 Option 2 460 3,320 Option 3 560 3,320 Option 4 560 3,420 A Option 1 B Option 2 C Option 3 D Option 4 6 The year end of M Ltd is 30 November 20X1. The company pays for its gas by a standing order of 600 per month. O n 1 December 20X0 the statement from the gas supplier showed that M Ltd had overpaid by 200. M Ltd received gas bills for the four quarters commencing o n 1 December 20X0 and ending o n 30 November 20X1 for 1, 300, 1, 400, 2,1 0 0 and 2,000 respectively. Requirement Which of the following is the correct charge for gas in M Ltd s profit and loss account for the year ended 30 November 20X1 A 6,800 B 7,000 C 7,200 D 7,400 7 Teasdale Ltd, whose year end is 31 December, bought a car o n 1 January 20X0 for: Cost 10,000 Road tax 150 Total 10,150 The car was depreciated at 25% per annum reducing balance then traded in for a replacement vehicle o n 1 January 20X3 at an agreed value of 5,000. Requirement What was the profit o n disposal of the car A 718 B 781 C 1,788 D 1,836 --- Trang 438 --- 8 Which of the following items does not appear under the heading reserves o n the balance sheet of a company applying UK GAAP A Share premium account B Retained profits C Loans D Other reserves 9 Which of the following statements regarding a company preparing its profit and loss account under UK GAAP is correct A The Companies Act 2006 defines the expenses which are reported under cost of sales . B Depreciation appears as a separate heading in the profit and loss account. C Interest payable is deducted from profit after taxation. D Bad debts are included under one of the statutory expense headings (usually administrative expenses). 1 0 At the end of its first year of trading o n 30 June 20X7 Lindman Ltd s net assets are 324,854. It has 25p share capital of 100,000 issued at 50p each, and a retained profits reserve of 59,854. Requirement In relation to Lindman Ltd s balance sheet which of the following statements could be true A It has share premium of 1 1 5,000. B It has other reserves of 65,000. C It has share capital of 200,000. D It has other reserves of 1 1 5,000. Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Self-test questions B Understated by 36,1 0 0 DEBIT Fixed assets 38,000 CREDIT Plant repairs 38,000 DEBIT Dep n expense (3/12 x 20% x 38,000) 1,900 CREDIT Accumulated dep n Profit is understated by 38,000 - 1 ,900 36,1 0 0 --- Trang 439 --- 2 C 122,900 Draft figure 116,400 Line 1: (400 x 3) - 200 1,000 Line 2: (200 x 35) - 300 - 1, 200 5,500 Final valuation 122,900 3 C Option 3 Share capital 1.1. 20X0 500,000 Issue on 1. 4.20X0 (200,000 50p) 1 00,000 Bonus issue (1, 2m/4) 50p 1 50,000 Share capital as at 31. 1 2.20X0 750,000 Share premium 1. 1. 20X0 300,000 1. 4.20X0 200,000 shares (1 30p - 50p) 1 60,000 Bonus issue (as above) (1 50,000) 310,000 4 C 86,000 Cost of machine 80,000 Installation 5,000 Testing 1, 000 86,000 The employee training is general and not specifically related to bringing the asset into use, so its cost cannot be included. --- Trang 440 --- 5 C Option 3 ELECTRICITY ACCOUNT Balance b/fwd 300 20X0: 1 August Paid bank 600 1 November Paid bank 720 20X1: 1 February Paid bank 900 30 June Paid bank 840 30 June Accrual 840 x 2/3 560 Profit and loss a/c 3,320 3,620 3,620 6 A 6,800 GAS SUPPLIER ACCOUNT Balance b/fwd 200 Bank 600 x 12 7,200 28 Feb invoice 1,300 31 May invoice 1,400 31 Aug invoice 2,100 30 Nov invoice 2,000 bal. 30 Nov c/d 600 7,400 7,400 GAS ACCOUNT 28 Feb invoice 1,300 31 May invoice 1,400 31 Aug invoice 2,100 30 Nov invoice 2,000 30 Nov Profit and loss a/c 6,800 6,800 6,800 --- Trang 441 --- 7 B 781 Cost 10,000 20X0 Depreciation 25% (2,500) 7,500 20X1 Depreciation 25% (1,875) 5,625 20X2 Depreciation 25% (1,406) 4,219 20X3 Part exchange value (5,000) Profit on disposal 781 8 C Loans This is correct because loans are accounted for as liabilities in the financial statements. 1 and 2 are statutory reserves, while the other reserves can be created by the company if its constitution allows. 9 D Bad debts are included under one of the statutory expense headings (usually administrative expenses). Company will usually include this under distribution costs or administrative expenses. (1) Incorrect, the expenses in cost of sales are not defined by statute. (2) Incorrect, depreciation is included under the relevant statutory expense heading (eg, office equipment depreciation goes into administrative expenses). (3) Incorrect, profit after taxation is calculated after interest has been deducted. 10 B It has other reserves of 65,000. Share capital 100,000 Share premium 100,000 Retained profits reserve 59,854 Balancing figure 65,000 Net assets 324,854 This figure could be other reserves of 65,000 --- Trang 442 --- Chapter 1 5 ICAEW S o l e t r a d e r f i n a n c i a l s t a t e m e n t s u n d e r U K G A A P Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1 Sole trader financial statements Summary Further question practice Self-test questions Answers to Interactive questions Answers to Self-test questions --- Trang 443 --- I n t r o d u c t i o n Learning outcomes (cid:127) Record and account for transactions and events resulting in income, expenses, assets, liabilities and equity in accordance with the appropriate basis of accounting and the laws, regulations and accounting standards applicable to the financial statements (cid:127) Record and account for changes in the ownership structure and ownership interests in an entity (cid:127) Identify the main components of a set of financial statements and specify their purpose and interrelationship (cid:127) Prepare and present a statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flows (or extracts) from the accounting records and trial balance in a format which satisfies the information requirements of the entity Specific syllabus learning outcomes are: 1d, e; 3a, c Syllabus links You will encounter the accounting principles relating to changes in ownership structure later in Professional Level Financial Accounting and Reporting. Accounting for sole traders is not otherwise developed further at the Professional Level. Examination context Questions on the topics in this chapter will be set as multiple-choice, multi-part multiple choice or multiple- response questions, some of which may involve calculations. Very often double entry questions are phrased in terms of preparing a journal. In the exam you may be required to: (cid:127) manipulate opening and closing balance sheets for sole traders to identify profit for the year using the accounting equation (cid:127) use UK GAAP terminology when identifying figures in the profit and loss account and balance sheet of a sole trader Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. Study approach Exam approach Interactive questions 1 Sole trader financial Approach You will not be IQ1 Sole trader statements required to prepare financial statements Read through the sole trader financial Many businesses are theory in the section, This question tests statements in the long not incorporated as noting the key your understanding form question. companies, instead differences, but pay of the capital section operating as single- most attention to the Multiple choice of a sole trader s owner entities (sole worked example, questions on this balance sheet. traders) or focusing on the topic may involve partnerships of two or capital section. calculations and/or more people. In such the preparation of a Stop and think entities, there is no journal. Why is there no tax separation of You need to be able shown in the accounts ownership and to manipulate of a sole trader control and therefore opening and closing the financial balance sheets for statements of sole sole traders, to traders and general identify profit for the partnerships are year using the generally far less accounting equation --- Trang 444 --- regulated than those and use UK GAAP for companies. They terminology when do not have to identifying figures in produce and file the profit and loss published accounts, account and balance and they usually only sheet of a sole trader. produce financial statements (known as the profit and loss account and balance sheet) because these are needed by HMRC and to present to banks or other providers of finance. Once you have worked through this guidance you are ready to attempt the further question practice included at the end of this chapter. 1 Sole t r a d e r financial statements B Section overview (cid:127) Sole trader financial statements are similar in terminology and format to those of company financial statements prepared under UK GAAP, but there are important differences. (cid:127) Tax is not included in sole trader accounts. (cid:127) There are no formal requirements as to headings in the profit and loss account. (cid:127) The ownership interest half of the balance sheet shows opening capital, plus capital introduced, less drawings, plus profits, less losses to arrive at the closing net assets figure at the balance sheet date. There is no requirement for a sole trader to produce a statement of changes in equity. The approach to preparing sole trader financial statements and the terminology used in them are very similar to a profit and loss account and balance sheet prepared under UK GAAP for a limited company. Where they differ is in relation to: (cid:127) tax: a business operated by a sole trader has no legal identity separate from its owner, so the liability to pay tax on profits is the owner s and not the business s. This means that there is no tax expense in the profit and loss account, and no tax creditor in the balance sheet. (cid:127) the format of the profit and loss account: there is no need to aggregate expenses under set headings. (cid:127) the ownership interest half of the balance sheet: sole traders do not have share capital or reserves. Instead they show the following (this should look similar to the capital part of the accounting equation): Opening capital net assets at start of period X Capital introduced in the period X Net profit/net loss of the period X/(X) Drawings (of cash, or of stock at cost) (X) Closing capital net assets at end of period X Worked example: Sole trader financial statements Wasto had the following trial balance as at 31 December 20X4: --- Trang 445 --- 000 000 Owner s capital at 1.1 ,X4 450 Bank loan 613 Freehold land and buildings 430 Freehold land and buildings - accumulated depreciation 2 0 Plant and machinery - cost 830 Plant and machinery - accumulated depreciation 222 Stock 190 Sales 2,695 Purchases 2,152 Loan interest 1 0 Wages and salaries 254 Drawings 31 Sundry expenses 113 Suspense account 420 Debtors 464 Creditors 195 Cash at bank 141 4,615 4,615 The following matters have now been discovered: (1) O n 1 January 20X4 Wasto injected a further 1 90,000 into the business. The entry made was to debit cash at bank and credit the suspense account. (2) O n 1 January 20X4 an item of high emissions plant that had cost 350,000 and o n which depreciation of 74,000 had been charged was disposed of for 230,000. The only entry made was to debit cash at bank and credit the suspense account. (3) Depreciation of 36,000 needs to b e charged o n the remaining plant and machinery, and 5,000 o n the land and buildings. (4) Loan interest of 1 0,000 should b e accrued at 31 December 20X4. (5) Stock o n hand at 31 December 20X4 cost 220,000. Requirement Prepare Wasto s profit and loss (P L) account for the year ended 31 December 20X4 and the balance sheet at that date. Solution Wasto s final trial balance can be calculated as follows: Initial TB Adjustments Final TB Debit Credit Debit Credit Debit Credit 000 000 000 000 000 000 Owner s capital at 1.1. X4 450 450 Bank loan 613 613 Freehold land and buildings 430 430 Freehold land and buildings - accumulated depreciation 20 5 25 --- Trang 446 --- Plant and machinery - cost 830 350 480 Plant and machinery - accumulated depreciation 222 74 36 184 Stock 190 220 190 220 Sales 2,695 2,695 Purchases 2,1 52 2,152 Loan interest 10 10 20 Wages and salaries 254 254 Drawings 31 31 Sundry expenses 113 113 Suspense account 420 420 Debtors 464 464 Creditors 195 195 Cash at bank 141 141 Capital introduced 190 190 Disposals 276 230 46 Depreciation expense 41 41 Accruals 10 10 2,152 Cost of sales 190 220 2,122 4,615 4,615 3,383 3,383 4,362 4,362 Wasto: Profit and loss account for year ended 31 December 20X4 000 000 Sales 2,695 Cost of sales (2,122) Gross profit 573 Expenses Loan interest 20 Wages and salaries 254 Sundry expenses 113 Loss on disposal 46 Depreciation expense 41 (474) Net profit 99 --- Trang 447 --- Wasto: Balance sheet as at 3 1 December 20X4 Cost Acc. depn. 000 000 000 Fixed assets Freehold land and buildings 430 25 405 Plant and machinery 480 184 296 910 209 701 Current assets Stock 220 Debtors 464 Cash 141 825 Current liabilities Accruals 10 Creditors 195 205 Net current assets 620 Non-current liabilities Bank loan (613) 708 Ownership interest Opening capital 450 Capital introduced 190 Profit for year 99 Drawings (31) Closing capital 708 Professional skills focus: Assimilating and using information The financial statements of sole traders are prepared for the sole trader alone and the financial information is not communicated to any external user groups. The sole trader is, however, likely to use the information within the financial statements for the purposes of their tax return and to provide to providers of finance. Interactive question 1 : Sole trader financial statements In 20X5 Wasto takes drawings of 40,000 and ends 20X5 with net assets of 850,000. Wasto d i d not introduce any capital in the year. Requirement What was Wasto s net profit in 20X5 --- Trang 448 --- Professional skills focus: Structuring problems and solutions The previous activity is a good example of how you may be expected to work backwards from information in the capital section of the balance sheet to determine profit for the period. You may often find information gaps when preparing financial statements. Understanding the relationship between different balances 1 should help you to calculate key balances even when the usual information is not provided. Summary Sole trader financial statements (cid:127) Less regulated, so can show expenses separately in profit and loss account (cid:127) Tax does not appear (cid:127) Ownership interest: Opening capital/net assets X Capital intoduced X Net profit/(loss) X/(X) Drawings (X) Closing capital/net assets Further question practice 1 Knowledge diagnostic Before you move on to question practice, confirm you are able to answer the following questions having studied this chapter. If not, you are advised to revisit the relevant learning from the topic indicated. Confirm your learning WWhheerree are drawings presented in sole trader financial statements (Topic 1 ) 2 Chapter self-test question practice Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the questions in the Sole trader financial statements under UK GAAP chapter of the Accounting Question Bank. Refer back to the learning in this chapter for any questions which you did not answer correctly or where the suggested solution has not provided sufficient explanation to answer all your queries. Once you have attempted these questions, you can move on to the next chapter. --- Trang 449 --- Self-test questions Answer the following questions. 1 Madro had net assets of 35,000 at 1 January 20X8, and these grew by 22,500 in the year. Madro took drawings of 14,000 and made a net profit of 23,900. How much capital d i d Madro inject in the year A 9,900 B 12,600 C 67,400 D 102,400 2 Serko commenced trading as a sole trader in 20X6 and made a profit of 20,000 in that year. Serko made a net profit of 50,000 in 20X7. Serko has calculated that tax at 25% is due o n the 20X7 profit. Serko took drawings of 40,000 in 20X7. What is the tax charge in Serko s profit and loss account for 20X7 A 0 B 10,000 C 12,500 D 17,500 Now g o back to the Introduction and ensure that you have achieved the Learning outcomes listed for this chapter. Answers t o Interactive questions Answer to Interactive question 1 000 Opening capital 708 Capital introduced in the period 0 Net profit of the period (balancing figure) 1 82 Drawings (40) Closing capital net assets 850 --- Trang 450 --- Answers t o Self-test questions 1 B 12,600 (35,000 23,900 - 1 4,000 - (35,000 22,500)) ( 1 2,600). This is the amount of capital Madro would need to inject if the accounts are to balance. 2 A 0 As the business is a sole tradership, n o tax charge or tax liability will appear in the financial statements. --- Trang 451 --- Appendix ICAEW N o t e s You can use this section in the ePub reader to add your own further comments or content. To do thi s, highlight a number from the list below and use the add comment function to include your own text. Chapter 1 1 2 3 4 5 6 7 8 9 10 Chapter 2 1 2 3 4 5 6 7 8 9 10 Chapter 3 1 2 3 4 5 6 7 8 9 10 Chapter 4 1 2 3 4 5 6 7 8 9 10 Chapter 5 1 2 3 4 5 6 7 8 9 10 Chapter 6 1 2 3 4 5 6 7 8 9 10 Chapter 7 1 2 3 4 5 6 7 8 9 10 Chapter 8 1 2 3 4 5 6 7 8 9 10 Chapter 9 1 2 3 4 5 6 7 8 10 Chapter 10 1 2 3 4 5 6 7 8 10 Chapter 11 1 2 3 4 5 6 7 8 10 Chapter 1 2 1 2 3 4 5 6 7 8 10 Chapter 13 1 2 3 4 5 6 7 8 10 Chapter 1 4 1 2 3 4 5 6 7 8 9 10 Chapter 15 1 2 3 4 5 6 7 8 9 10 --- Trang 452 --- Glossary o f t e r m s ICAEW AVCO (average cost) As purchase prices can change with each new consignment received, the average cost of an item is constantly changing. Each item at any moment is assumed to have been purchased at the average price of all the items together, so the cost of inventory remaining is therefore calculated at the most recent average price. Accounting equation assets capital liabilities Accrual accounting Accrual accounting requires that transactions are recorded in the period in which they occur even if the resulting cash receipts and payments occur in a different period. (Conceptual Framework, para.1. 1 7) Accruals (accrued expenses) Expenses which are charged against the profit for a particular period, even though they have not yet been paid for. Accumulated depreciation The total amount of the asset s depreciation amount that has been allocated to reporting periods to date. Allowance for receivables An amount in relation to the probability of the non-recovery of debts that reduces the receivables asset to its prudent valuation in the statement of financial position. The allowance is a separate account which is offset against trade receivables, which are shown at the net amount. Artificial intelligence Artificial Intelligence involves the creation and use of advanced computer systems to perform tasks that traditionally require human intelligence. This includes: learning from data; reasoning and problem-solving; sensory understanding; language processing; and recognising patterns. Al systems are characterised by their ability to adapt to new information or environments, operate with a degree of autonomy, and make informed decisions. Al often, but not always, involves using Machine Learning. Asset The Conceptual Framework states that an asset is a present economic resource controlled by the entity as a result of past event. An economic resource is a right that has the potential to produce economic benefits. (Conceptual Framework: paras. 4.3 and 4.4) Asset register A listing of all non-current assets owned and leased by the organisation, broken down by department, location or asset type, and containing non-financial information (such as chassis numbers and security codes) as well as financial information. --- Trang 453 --- Bank reconciliation A comparison of a bank statement (usually daily but perhaps weekly or monthly for a smaller business) with the cash at bank account. Differences between the balance on the bank statement and the cash at bank account should be identified and satisfactorily reconciled. The cash at bank account should be updated accordingly, usually by posting a journal entry. Bank statement A record of transactions on the business s bank account maintained by the bank in its own accounting records. Bonus issue (or capitalisation issue or scrip issue) An issue of fully paid shares to existing owners, free of charge, in proportion to their existing shareholdings. Business entity concept A business is a separate entity from its owner. Capital The Conceptual Framework states that capital (which it calls equity in the context of a company, as we shall see in Chapter 1 1 ) is the residual interest in the assets of the entity after deducting all its liabilities. (Conceptual Framework , para. 4.63) Capital expenditure Expenditure which results in the acquisition of non-current assets or an improvement or enhancement of their earning capacity. Capital income Proceeds from the sale of non-current assets. Carrying amount Cost less accumulated depreciation less accumulated impairment losses. Cash Comprises cash on hand and demand deposits. Cash accounting basis Under this method, a company records customer receipts in the period that they are received, and expenses in the period in which they are paid. It is easier to use and can be useful for a smaller company, especially for tax purposes where cash flow may be an issue. Under the accruals basis, a company may have to pay tax on profits before the cash is actually received by the business. Cash equivalents Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (maturity of three months or less from the date of acquisition). Cash flows These are inflows and outflows of cash and cash equivalents. Cheques A written order from an account holder to their bank directing the bank to pay a specified sum to a particular individual or organisation. Cloud accounting Cloud accounting refers to performing accounting tasks using cloud computing software, often delivered in a software-as-a-service (SaaS) model. --- Trang 454 --- Cloud computing Cloud computing is on-demand access, via the internet, to computing resources - applications, servers (physical servers and virtual servers), data storage, development tools, networking capabilities, and more - hosted at a remote data centre managed by a cloud services provider (or CSP). Compensating errors Errors which are, coincidentally, equal and opposite to one another. Conversion costs Any costs involved in converting raw materials into final product, including labour, expenses directly related to the product and an appropriate share of production overheads (but not sales, administrative or general overheads). Cost of inventories All costs of purchase, of conversion (eg, labour) and of other costs incurred in bringing the items to their present location and condition. Cost of purchase The purchase price, import duties and other non-recoverable taxes, transport, handling and other costs directly attributable to the acquisition of finished goods and materials. Cost of sales Opening inventory purchases delivery inwards - closing inventory cost of sales. This amount is then deducted from revenue to arise at the business s gross profit. Credit note A document issued to a customer relating to returned goods, or refunds when a customer has been overcharged for whatever reason. It can be regarded as a negative invoice. It is a source document for credit transactions. Creditor A party (normally an individual, another business or a financial institution) to whom a business owes money. Current asset An asset is current when it is expected to be realised in, or intended for sale or consumption in, the entity s normal operating cycle, or it is held for being traded, or it is expected to be realised within 12 months of the date of the statement of financial position, or it is cash or a cash equivalent. Current liabilities Debts of the business that must be paid within one year, or within the entity s normal operating cycle, or that are held to be traded. Debtor A party who owes money to the business. Depreciation The systematic allocation of the cost of an asset, less its residual value, over its useful life. Double entry bookkeeping Each transaction has an equal but opposite effect. Every accounting event must be entered in ledger accounts both as a debit and a credit. Drawings Money and goods taken out of a business by its owner. --- Trang 455 --- Early settlement discount A percentage reduction in the amount payable in return for payment within an agreed period. Economic life The total period over which an asset is expected to be economically usable by one or more users. Equity The amount invested in a business by the owners (IAS 1 refers to owners rather than equity holders or shareholders ). The Conceptual Framework defines equity as the residual interest in the assets of the entity after deducting all its liabilities (Conceptual Framework: para. 4.63). Error of commission A mistake is made in recording transactions in the ledger accounts by recording a debit entry or a credit entry in the wrong account. Error of omission Failing to record a transaction at all. Error of principle Posting a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the rules of an accounting principle or concept. A typical example of such an error is to treat revenue expenditure incorrectly as capital expenditure. Expenses Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those 1 relating to distributions to holders of equity claims. (Conceptual Framework: para. 4.69) FIFO (first in, first out) Items are assumed to be used in the order in which they are received from suppliers, so oldest items are issued first. Inventory remaining is therefore the newer items and cost is measured as such. Fair presentation The faithful representation of the effects of transactions, other events and conditions in accordance with the Conceptual Framework. Going concern The entity is viewed as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or ceasing to trade. Historical cost Transactions are recorded at their cost when they were incurred. Income Income is increases in assets or decreases in liabilities that result in increases in equity (capital), other than those relating to contributions from holders of equity claims. (Conceptual Framework: para. 4.68) It can include both revenue and gains. Initial trial balance A list of nominal ledger account balances shown in debit and credit columns at a point in time, usually the end of the accounting year. The initial trial balance is not part of the double entry system, it is extracted from the double entry system. It is the starting point to preparing the financial statements. --- Trang 456 --- Inventories Assets: (cid:127) held for sale in the ordinary course of business; (cid:127) in the process of production for such sale; or (cid:127) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Irrecoverable debt A debt which is not expected to be paid. LIFO (last in, first out) Items issued are assumed to be part of the most recent delivery, while oldest consignments are assumed to remain in the stores. LIFO is not allowed under IFRS Accounting Standards and it not considered further in Accounting. Liability The Conceptual Frame wo restates that a liability is a present obligation of the entity to transfer an economic 1 resource as a result of past events. (Conceptual Framework: para. 4.26) Loss The excess of expenses over income. Material Information is material if omitting, misstating or obscuring it could, individually or collectively, reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or the nature of an item, or a combination of both, could be the determining factor. (IAS 1 : para. 7) Net assets Assets less liabilities Nominal ledger The main accounting record in which financial transactions are recorded. Non-current assets Assets acquired for continuing use within the business, with a view to earning income or making profits from their use, either directly or indirectly, over more than one reporting period. Non-current liability A debt which is not payable within one year. Any liability which is not current must be non-current. Payroll The record of wages and salaries costs. Prepayments (prepaid expenses) Expenses which have been paid in one reporting period but are not charged against profit until a later period, because they relate to that later period. Profit The excess of income over expenses. --- Trang 457 --- Receivables ledger The receivables ledger is a listing of all transactions with each individual credit customer. The receivables ledger is divided into individual (personal) accounts, one for each credit customer, and shows the total balance due from that customer at any point in time. The receivables ledger is separate to the nominal ledger and does not form part of the double entry system. It is used for record-keeping purposes only and is therefore often referred to as a memorandum ledger. Reducing balance depreciation The annual depreciation charge is a fixed percentage of the brought forward carrying amount of the asset. Residual value The estimated amount that the entity would obtain from disposing of the asset at the end of its useful life, after deducting estimated disposal costs. Retained earnings A reserve used to accumulate the company s retained earnings. Revenue Income arising in the course of an entity s ordinary activities (IFRS 1 5: Appendix A), which includes: (cid:127) sales (cid:127) turnover (cid:127) royalties Revenue expenditure Expenditure which is incurred either: (cid:127) for trade purposes. This includes purchases of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs; or (cid:127) to maintain the existing earning capacity of non-current assets. Revenue income Income derived from: (cid:127) the sale of trading assets, such as goods held in inventory (cid:127) the provision of services (cid:127) interest and dividends received from business investments Rights issue New shares are offered to existing owners in proportion to their existing shareholding, usually at a discount to the current market price. Statement of financial position A list of all the assets controlled and all the liabilities owed by a business as at a particular date: it is a snapshot of the financial position of the business at a particular moment. Monetary amounts are attributed to assets and liabilities. It also quantifies the amount of the owners interest in the company, which is known as equity. Statement of profit or loss A statement displaying items of income and expense in a reporting period as components of profit or loss for the period. The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period). Statutory accounts Financial statements which limited companies are obliged by law to publish in a particular form. --- Trang 458 --- Straight line depreciation The depreciable amount (cost less residual value) is charged in equal instalments to each reporting period over the useful life of the asset. (In this way, the carrying amount of the non-current asset declines at a steady rate, or in a straight line over time.) Suspense account A temporary account used when the computerised accounting system or the bookkeeper is unsure of how to record one side of a transaction. Sustainability Meeting the needs of the present without compromising the ability of future generations to meet their own needs. While environmental and climate change considerations are the current predominant issue, it is vital to remember when looking at sustainability that it also encompasses important social and governance issues. The payables ledger The payables ledger is a listing of all transactions with each individual credit supplier. Consistent with the receivables ledger described above, the payables ledger includes a personal account for each credit supplier which shows the total amount owed to that supplier at any point in time. Consistent with the receivables ledger, the payables ledger is separate to the nominal ledger, does not form part of the double- entry system and is maintained for record-keeping purposes only. Trade discount A percentage discount deducted from the list price of goods owing to the nature of the trading transaction. Trade payables The amounts due to credit suppliers. Trade payables account In the nominal ledger, the trade payables account is used to record transactions involving credit suppliers in total, and the balance on this account at any time will be the total amount owed by the business to all its credit suppliers. Trade receivables The amounts owed by credit customers. Trade receivables account In the nominal ledger, the trade receivables account is used to record transactions relating to credit customers in total. The balance of the trade receivables account at any time will be the total amount due to the business from all its credit customers. Transposition errors When two digits in an amount are accidentally recorded the wrong way round. UK GAAP The rules, from whatever source, that govern accounting and financial reporting in the UK. Useful life The estimated period for which an item of PPE is expected to be available for use to a business. Writing off Charging the cost of the debt against the profit for the period.