Accounting Guide
Accounting Guide
Accounting Guide
Share Capital Retained Earnings (profits earned from operations and not
(arise from yet distributed as dividends)
issue of shares)
Beginning + Current Period – Dividend
Retained (year or month)
Earnings Profit
Revenue -
Expenses
$ $
Consulting Revenue […]
Rental Revenue […]
Total Revenue […]
Less
Salary expense (…)
Rent expense (…)
Utilities expense (…)
Insurance expense (…)
Supplies expense (…)
Depreciation expense (…)
Total expense (…)
Balance sheet:
Company name
Statement of Financial Position
As at [date, month, year]
$m $m
Fixed assets
Accumulated depreciation
Net fixed assets
Current assets
Cash (…)
Prepaid Insurance
Accounts Receivable
Debtors
Stocks
Total current assets
Current liabilities
Overdraft
Accounts payable
Salary payable
Unearned Revenue
Creditors
Short term loans
Total current liabilities
Net current assets (working capital)
Net assets
Financed by:
Share capital (…)
Retained Earnings (…)
Total Equity
Total Liabilities and Equity
Company name
Statement of Cash Flows
Adjusting Entries
There are 3 categories of adjustments: prepaids (deferrals), accruals and depreciation.
Prepaid / Deferrals
Accruals
Status as Timing of Effect of entry Journalized
at year- cash
end
Accrued Expense Pay cash Balance sheet: ADJUSTING ENTRY: When company
Expense incurred later Salary payable as receives goods or service from supplier
(e.g. accrued a liability before cash is paid:
salaries, increases Dr Expense
utilities) Cr [...] Payable
Profit and Loss:
Salary expense When cash is paid
increases Dr […] Payable
Cr Cash
Financial Ratios
Liquidity Ratios Current Ratio Current Assets / Current Ability to pay current
Liabilities liabilities with current
assets
Acid-Test Ratio Liquid Assets / Current Ability to pay current
Liabilities liabilities with quick
assets (includes cash,
short-term investments
and net accounts
receivables. Excludes
inventories and prepaid
expenses). Liquid assets
is a subset of current
assets.
Solvency Ratio Debt Ratio Total liabilities / Total Proportion of assets
assets financed by creditors (as
opposed to being
financed through
equity)
Bank Reconciliation
[Company Name]
Bank Reconciliation, [Date]
Bank ending balance Books ending balance (cash a/c)
+ deposit in transit + bank collection items (Dr Bank, Cr AR)
e.g. dd 30 Aug 200 + interest earned on bank a/c (Dr Bank, Cr Interest)
dd 31 Aug 20 - GIRO payments (Dr Expense, Cr Bank)
- Outstanding cheques - bank service charges (Dr Bank charge, Cr Bank)
e.g. #[cheque number]. Xx - NSF / bounced cheques (Dr AR, Cr Bank)
+/- corrections of book errors
Adjusted bank balance Adjusted book balance
^ because the company originally recognized the cash and Dr Cash Cr A/R
Note Receivables
For sales Dr Notes Receivable
Cr Sales Revenue
For extension of AR Payment terms Dr Notes Receivable
Cr Accounts Receivable
For lending Dr Notes Receivable
Cr Cash
At maturity date, the company will collect the principal + interest due.
Step 2: If an A/R is impaired @ balance sheet date, recognize the Allowance for A/R impairment. Suppose it
is estimated that there is an 80% chance that the entire $10k owed by Co A will be uncollectible:
Dr A/R Impairment Loss 8k
Cr Allowance for A/R impairment 8k
Aging of Receivables
Step 3: Based on FRS 109, the provision matrix will be used to collectively assess the rest of the accounts.
All invoices are categorized according to whether and for how long they are overdue @ balance sheet
date. Uncollectible amounts are estimated for each age category.
Efficiency ratios
Accounts Receivable Sales / Average net A/R Average net A/R = Measure how fast A/R is
Turnover beginning + ending net being collected
receivables / 2
Days’ Sales in 365 / A/ R turnover Measures how many
Receivables days it takes to collect
A/R
Inventory turnover COGS (EB – BB) / Average inventory No. of times average
inventory was sold
during period
Inventory resident 365 / inventory turnover No of days it takes to
period sell inventory
A/P turnover COGS / Average A/P Measures how fast A/P
is being paid
A/P outstanding period 365 / A/P turnover Measures how fast A/P
is being paid
Cash conversion cycle A/R collection period + Inventory resident period – Measures no. of days
A/P outstanding period cash is tied up in
operations
Total assets turnover Sales / Average total assets Ability to use assets to
generate sales
Inventory
First-In-First-Out – assumption that the earliest units on hand at that point in time are sold first
Date Purchases COGS Ending Inventory balance
1 Jan 2 units @ $35 $70
2 Mar 2 units @ $40 $80 2 units @ $35 $150
2 units @ $40
3 May 1 unit @ $35 $35 1 unit @ $35 $35
2 units @ $35 $80
4 Jun 2 units @ $40 $80 1 unit@ $35 $115
2 units @ $40
5 Oct 1 unit @ $50 $50 1 unit @ $35 $165
2 units @ $40
1 unit @ $50
6 Dec 1 unit @ $40 $40 1 unit @ $35 $125
1 unit @ $40
1 unit @ $50
COGS for year $155
Weighted Average – after each purchase, weighted average cost of all units on hand is computed. Next sale
transaction is costed at that particular weighted average cost computed
Date Purchases COGS Ending Inventory balance
1 Jan 2 units @ $35 $70
2 Mar 2 units @ $40 $80 2 units @ $35 $150 /4 =
2 units @ $40 $37.50
(Weighted
Average
Cost)
3 May 3 units @ $112.50 1 unit @ $37.50 $35
$37.50
Dr COGS
Cr Inventory
Loss recognized in advance in 2017 No loss suffered in 2018
To reduce value of inventory and recognize
unrealized loss
This number would be finalized for balance sheet (Inventory) and Income Statement / Profit and Loss
statement (COGS)
PPE
After the PPE is placed in service, there may be subsequent expenditure on the PPE. The key issue is to
decide whether the subsequent expenditure is capital expenditure (to recognize in carrying amount of the
PPE e.g. major engine overhaul) or revenue expenditure (to charge to income statement immediately e.g.
lubrication). R&D cost is a revenue expenditure and development cost is a capital expenditure only if
technological and commercial viability of product is established.
IF CAPITAL EXPENDITURE Dr Asset
IF REVENUE EXPENDITURE Dr Expense
Materiality principle: many companies expense off items below a certain $ value, regardless of their
nature.
Depreciation
Cost = Depreciable Amount + Residual Value
Straight-Line (equal Depreciation Rate = Cost – Residual Value / Useful Life in Years
depreciation expense / year) Dr Depreciation Expense
Cr Accumulated Depreciation
Units of production (recognize Depreciation Rate = Cost – Residual Value / Useful Life in Years
depreciation expense in Depreciation Expense in Year X = Depreciation Rate x No. of Units
connection with actual asset Produced in the Year
use) Dr Depreciation Expense
Cr Accumulated Depreciation
Double-Declining Balance DDB rate = 2 x Straight-line rate
(assumes that the asset Depreciation expense in Year X
generates higher revenue in its = Net book value @ beginning of Year X x DDB Rate
early years)
However, in the last year, the DDB rate should not be used as the
accumulated depreciation might exceed the depreciable amount. Thus,
the last year’s expense should be just whatever that is left of the
depreciable amount.
Impairment
An asset is considered impaired when the asset’s NBV > its recoverable cost, where recoverable cost = the
higher of the net amount that can be obtained from selling the asset now and the value derived from
continuing to use the asset over its remaining useful life. The PPE’s carrying amount should be written
down to its recoverable amount. → E.g. if NBV is 0.5 million higher than recoverable cost:
Dr Impairment Loss (P&L) 0.5 million
Cr Accumulated Impairment Loss (B/S) 0.5 million
Revaluation of PPE
Companies have to choose between cost and revaluation model:
Cost model Cost less accumulated depreciation and impairment
Revaluation model Fair value (aka current selling price) at the last revaluation date less accumulated
depreciation and impairment
Derecognition of PPE
Discarding Assets Dr Depreciation expense This brings the NBV up-to-date.
Cr Accumulated depreciation
Intangible items
Whether an intangible asset has to be amortized (reduced in value) and the timing of impairment testing.
Patent Dr Patent
Cr Cash
(To acquire a patent)
Known Liabilities
Refundable deposits Dr Cash
Cr Deposit
^ The deposit is a liability as the cash must be refunded to the customer.
GST Payable Dr Cash
Cr Sales Revenue
Cr GST Payable
CPF Payable Dr Salary expense
Cr Salary payable
Cr Employee CPF payable
Cr Employer CPF payable
Notes payable Dr Cash
Cr Notes Payable
^ Issuance of note payable
Dr Interest expense
Cr Interest payable
^ Interest accrued
Dr Note Payable
Cr Cash
^ Repayment of note payable
The provision would usually be higher or lower than the actual claims. In this case, there is an
overprovision of 5k:
Provision for Warranty
Claims 30k 1/1/19 35k
31/12/19 5k
Expense 45k
31/12/19 adj bal. 30k
Contingent Asset
If future gain / receipt is… Action
Probable If reliable estimate, make provision
e.g. Dr Estimated lawsuit loss (Expense)
Cr Estimate liability for lawsuit loss (Provision)
Not probable / remote Disclose nature in notes and estimate impact (if available) –
no recording
Remote No action
Issuing of shares
Issue of Ordinary Shares for Cash Dr Cash (Cost per share multiplied by no. of shares)
Cr Share Capital - Ordinary
Issue of Shares for Other Assets Dr Land
Cr Share Capital – Ordinary
^ Fair value of the asset received should be used but if it
cannot be estimated reliably, then fair value of shares issued
is used
Cash Dividends
Declaration Date (dividend is declared) Dr Retained Earnings
Cr Dividend Payable
Record Date (owner of shares entitled to NO JE
dividend)
Payment Date (actual payment of Dr Dividend Payable
dividend) Cr Cash
Share split – division of existing shares issued. E.g. 2-for-1 split – no. of shares double, cost per share
decreases by half. NO JOURNAL ENTRY REQUIRED.
Share buybacks REMEMBER THAT TREASURY SHARES AND TREASURY SHARE TRANSACTION RESERVE IS A
CONTRA-EQUITY ACCOUNT
Bought it back to cancel Dr Share Capital or Retained Earnings
Cr Cash
Bought it back to hold as Dr Treasury Shares (Contra-equity account- have to go into B/S –
treasury shares Retained Earnings less Treasury Shares)
Cr Cash
At every year-end, the investment amounts are adjusted to reflect their current fair value (FV) which
results in a gain or loss.
- Held-for-Trading (HFT) investments (investments purchased with the intent of selling them within a
short period of time) → gain or loss recognized in income statement (FVPL investment)
- Non-HFT investments → gain or loss recognized in other comprehensive income (FVOCI
investment)
When market value exceeds carrying amount, it is a gain, vice versa.
FVPL Dr Investment (FVPL)
Cr Fair Value Gain (P/L)
^ Unrealized FV gain reported part of P&L
Dividend yield = Annual cash dividend per share / Market price per share
This is the % of market value of company’s shares that is returned to shareholders as dividend each year.
Cash Flow Statements (CASH EQUIVALENT NOT REPORTED ON CFS – e.g. treasury bills, short-term
money market funds, short-term notes issued by large corporations)
Operating cash flow (Cash, A/R, Inventories, A/P, Sales to customer (A/R)
Salary Payable) Goods for resale
Services received
Salaries of employees
Income taxes
Investing cash flow (PPE, long-term investments, Sales of PPE
short-term note receivable, short-term Sale of investments
investments) Collection of notes receivables
Purchase of PPE
Purchase of investments
Long-term loans to others
Financing cash flow Borrowing (short-term & long-term debt)
Issuing shares
Selling treasury shares
Repaying debts
Paying dividend
Purchasing treasury shares
[Company name]
Statement of Cash Flows (Direct Method)
For the year ended [….]
Interest Revenue
Account Receivable
Payments to suppliers
Payment to employees
Payments for rent
Payments for other
operating expenses
Payments for tax
Borrowings
Issues of shares
Purchase of treasury shares
Dividends paid
Profitability ratios
Gross profit margin Gross profit / sales Profitability of core
business
Net profit margin Net profit / sales Profitability of overall
operations
Return on assets Net profit / average total assets
Return on equity Net profit – preference dividend / average ordinary Profit earned from
shareholders’ equity ordinary
shareholders’ equity
Price-Earnings Ratio Market price per ordinary share / earnings per share
Dividend yield Annual cash dividend per share / Market price per share
DuPont Analysis
This measures return on equity and analyses the drivers of return of earnings.
Net profit margin x Asset turnover x Financial leverage
= (Net profit / sales) X (Sales / average total assets) x (Average total assets / Average ordinary
shareholders’ equity)