Accounting Basics 16-10-11

KONSEP + PRINSIP
PERAKAUNAN ASAS
By : Krishnan KSM
Chartered Accountant (M)
SEMINAR FOCUS
Acquire basic financial skills
Understanding how the accounting process is carried out
using a computerized system.
Gain hands on knowledge
Training on specific aspects of accounting process
Analysis business transactions
Double entry skills
Journals and ledgers
Year end adjustments
Preparing final accounts
SEMINAR FOCUS
Improving the effectiveness and
productivity of your accounts department.
Examining the problem areas of your

accounts department and obtaining
solutions.
MODULE 1
INTRODUCTION
Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users
User
Information
Needs
Economic Data Accounting

and Activities System
User
Reports
Decisions
Users
Users of
of Accounting
Accounting Information
Information
investors
Financial Accounting creditors
EXTERNAL USERS regulators
consumers
competitors
Managerial Accounting
INTERNAL USERS Managers
Data versus
Information
Data are raw facts about events
that have no organization or
meaning.
Information is data that have been
processed and is meaningful and useful
to users.
Power of Accounting
is a
Identifies
Accounting system that
Records
information
Relevant Communicates
that is
Reliable
Consistent
to help users make
Comparable better decisions.
Accounting and Technology
Reduces time, effort
and cost of
record-keeping
Improves clerical
accuracy
Changes the way we

store, process and
Technology summarize large
masses of data
Focus of Accounting

Identifying Recording
Economic Economic
Events Events
Reporting
and
Analyzing
Economic
Events
9. Prepare
1. Analyze 10. Reverse
Post-Closing
Transactions (Optional)
Trial balance
2. Journalize 8. Close
7. Prepare
3. Post
Statements
4. Prepare 6. Prepare
Unadjusted 5. Adjust Adjusted Trial
Trial Balance Balance
Steps in Processing Transactions
Assets = Liabilities + Equity
and analyze
Step 1 transactions.
Examine source
documents
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4 Step 3 Step 2

Prepare unadjusted Post the journal Record transactions
trial balance. information to a ledger. in a journal.
Financial information should be
Accurate free from error of content or principle
Material available in time to support decision
making
Relevant to the issue. Applicable to the purpose
required
Reliable a complete and faithful representation
Comparable consistent approach to provide
meaningful comparisons
Clear and understandable capable of being
understood by those for whom the information has
been prepared
Inaccurate record keeping
Inaccurate record keeping leads to :
Incorrect information being used as the basis
for forecasts and decisions
Late or non-payment or incorrect payment of
creditors
Late or non-payment or incorrect payment by
debtors
Inaccurate profit calculations and incorrect tax
assessment
Inaccurate record keeping
Inaccurate record keeping leads to :
Poor cost control
Poor working capital control
Cash flow problems
Loss of confidence on the part of management,
future investors, financiers, customers,
suppliers and employees
MODULE 2
DOCUMENTS USED IN
BUSINESS TRANSACTIONS
Source Documents
Source documents identify
and describe transactions Cheques
and events and are the
source of accounting Purchase
information. Orders
Bank
Statement
Sales
Invoices
Source Documents
DISCUSSION
Source documents and their
functions in the accounting
process
MODULE 3
RECORDING &
ANALYSING BUSINESS
TRANSACTIONS
Accounting Elements
ASSETS
LIABILITIES
EQUITIES
REVENUES
EXPENSES
Asset Accounts
Notes
Cash Prepaid Receivable
Expenses
Accounts Land
Receivable Prepaid
Insurance
Office Buildings
Supplies Equipment
Store
Supplies
Liability Accounts
Accounts Notes
Payable Payable
LIABILITIES
Accrued
Liabilities Unearned
Revenues
Equity Accounts
Owners
Owners Owners
Owners
Capital
Capital Withdrawal
Withdrawal
Equities
Equities
Revenues
Revenues Expenses
Expenses
Capital and Revenue Expenditures
Purchasing a new fax machine
Installing an air purification system in an office building
Painting the interior walls of an office building
Installing an overhead crane in a warehouse
Rebuilding a machine so it will last 10 years beyond the
original estimate of its useful life
Paying for a service call to repair a photocopy machine
Upgrading the processor on a PC from an older, slower
CPU chip to a modern, ultra-fast processing CPU.
Capital and Revenue Expenditures
EXPENDITURE
Increases Revenue
Increases
Operating Expenditure
Useful Life
Efficiency or No No (Debit
(Extraordinary
Adds To maintenance
Repairs)?
Capacity? and repairs
expense)
Yes Yes
Capital Expenditure Capital Expenditure

(Debit plant assets) (Debit accumulated
depreciation)
ACCOUNTING
PRICINPLES / CONCEPTS
ACCOUNTING PRICINPLES / CONCEPTS
Importance of these accounting concepts in preparing

Financial Statements.
To treat the accounting transactions according to
acceptable concepts and principles
To avoid misleading financial statements

To reflect true and fair picture of the state of
business affairs.
Everyone involved in accounting function should

understand these concepts and their applications to
avoid misleading financial information.
Tax authorities (IRB) , KLCE and SC require strict

compliance of these accounting concepts and
principles in the preparation of financial statement.
The Going Concern Assumption
An entity will have a continuing existence for the
foreseeable future.
Entity Concept
Company is a legal entity, separate from owner.
If company unable to settle debts and become
bankrupt the owners or shareholders not required to
pay the debts from their private resources.
The liability of the shareholders is limited to the
amount of their shareholding in the company.
Realization concept
Profit deemed to have arisen at the point at which goods
change hands
Profit is realized when goods are delivered and invoiced
Accrual concept
Expense items should be recorded when incurred or
used and not when paid for.
Acceptable Accounting rule business should maintain
their accounting records on the accruals basis.
The alternative to accrual accounting is cash basis
accounting.
ACCRUALS CONCEPT .cont
Cash basis accounting a method of accounting in
which financial transactions are recorded only
when cash is involved.
Ex : Sale is recorded only when cash is received
Accrual basis accounting Financial transactions
are recorded when they actually happen, even if
the payment is made later.
Ex : A sale on credit is recorded when the
customer is invoiced.
Prudence concept
Often known as conservatism convention.
Basic principle include the figure most likely to
produce a lower profit than higher profit
It is better to underestimate profit now rather than
over estimate profit with possibly disastrous
effects in the future If the profit figure is
artificially higher, a firm may end up reinvesting
heavily than it could afford.
Example provision for bad debts, contingencies,
stock losses etc
Materiality concept
The materiality of item determines how
they will be recorded in the accounts.
Low value items may be written off and
high value items may be capitalized (shown
as an asset in balance sheet)
A less material item for one firm could be
considerable material item for another firm.
Small accounting errors may not worth the
effort to be traced.
Consistency concept
Accounting principles / methods should be
used / applied consistently to produce
realistic profits / losses
Frequent changes in the Accounting
methods may influence the profit reporting
in the accounts.
The method change should be supported by
a good reason.
Revenue Recognition
Revenues are recorded when two main
criteria are met: What are they?
The earning process is

substantially complete
Cash has either been

collected or collection
is reasonably assured.
Cash Versus Accrual
Cash Basis Accounting
Revenues are recognized when received.
Expenses are recognized when paid.
Not allowed by GAAP.
Accrual Basis Accounting

Revenues are recognized when earned.
Expenses are recognized when incurred.
Income Vs. Cash Flow:
Not the Same! Income Cash
66,000 55,000
Services performed for customers, $66,000, of
which 1/6 remained uncollected at quarter-end.
Borrowed cash from bank, $30,000 30,000
Purchased truck, cost $9,000. Paid 30% down, -2,700
financed the balance on credit.
Expenses: $36,000, of which 1/6 remained unpaid
at quarter-end. -36,000 -30,000
Service supplies purchased for use in the business,
$3,000, of which 1/4 remained unpaid (on credit)at -2,400 -2,250
quarter-end. Also, 1/5 of these supplies were
unused at quarter-end.
Wages earned by employees, $21,000, of which
1/2 remained unpaid at quarter-end. -21,000 -10,500
6,600 39,550
DOUBLE ENTRY SYSTEM
Single entry bookkeeping
This is used for small cash based businesses
and clubs and societies
A cash based business will not have debtors
(because it sells its goods and services for cash
not credit) or creditors (because it pays for its
inputs in cash). Therefore it will not have the
complications associated with a more
sophisticated business
This type of business will rely on the use of its
cash book as the main source of information
Double entry bookkeeping
All transactions have a twofold effect
Double entry records that twofold effect
Double entry bookkeeping requires that there
must always be a debit entry and a credit entry
when recording financial transactions
The system works on the principle that
whenever value is given, value must also be
received
Exhibit 3.3
The T-Account
The T-account is used as a simple tool for
illustrating the balance in a given account.
CAUTION!
Account Title The terms debit
and credit DO
(Left Side) (Right Side) NOT mean
Debit Credit increase or
decrease they
only mean left
side or right
side
What Is the Rule of Double-Entry
Accounting?
The debits must always equal the

credits.
Exhibit 3.7
Double-Entry Accounting
Assets
Assets = Liabilities
Liabilities + Equity
Equity
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit

+ - - + - +
Transactions and the Accounting
Equation
The accounting equation must remain in balance
after each transaction.
Assets
Assets = Liabilities
Liabilities + Equity
Equity
Debit and credits
Accountants view the two fold effects of all
transactions on a particular account from a
receiving and giving perspective
A debit means
To receive value or value received
That a transactions has been received into an account
A credit means
To give value or value given
That a transaction is given by an account
For every debit there must be a credit
Debits and credits
A debit entry indicates A credit entry indicates
An increase in assets A decrease in assets
An increase in expenses A decrease in expenses
A decrease in liabilities An increase in liabilities
A decrease in revenue An increase in revenue
A decrease in capital An increase in capital
And is shown on the And is shown on the
left hand side of an right hand side of an
account account
The Accounting Equation
Resources
What are an organizations resources called?

Resources = Sources
Assets
Cost of What are the

resources used sources of the
in the business assets?
Resources = Sources
Liabilities
Assets
Owners
Equity
Cost of Resources
resources used supplied by
in the business creditors and
owners
Resources = Sources
Capital
Liabilities Structure
Assets
Owners
Equity
Cost of Resources
resources used supplied by
in the business creditors and
owners
Business
Business Transactions
Transactions
a. You decide to begin your business by depositing

RM10,000 in a business current account.
ASSETS LIABILITIES
= OWNERS EQUITY
Business
Transactions
b. You buy a RM50,000 condo, paying RM5,000

down and using a new mortgage to handle the
balance.
LIABILITIES
ASSETS
= OWNERS EQUITY
Business
Transactions
c. Buy RM3,000 of furniture on account.
ASSETS LIABILITIES
= OWNERS EQUITY
Business
Transactions
d. Pay off the account payable.
ASSETS LIABILITIES
= OWNERS EQUITY
KEMAS
KEMAS S/B
S/B
BALANCE
BALANCE SHEET
SHEET
DECEMBER
DECEMBER 1,
1, 2010
2010
ASSETS LIABILITIES
Cash 2,000 Mort.payable 45,000

Furn. 3,000 Total liab. 45,000
Condo 50,000 = OWNERS EQUITY
Total 55,000
Owners Capital 10,000
Total 55,000
Types of book-keeping error
Of omission transaction not recorded
Of commission transaction recorded in the wrong
account
Of principle transaction recorded in the wrong
class of accounts e.g. as an asset rather than a liability
Of original entry transaction recorded but the
wrong amount a transaction entered incorrectly in
both accounts
Of reverse entries recorded in the correct amounts
but the wrong side of the account entered a credit as
debit and vice versa
Compensating error errors which cancel each
other out the trial balance will wrongly balance
MODULE 4
BOOKEEPING STAGES
Account
An account is
An explanation, a record, a listing of a particular
event
A statement of indebtedness from one person to
another person to another
A named segment of a ledger recording
transactions relevant to the person or matter named
Book of account
These are ledgers and day books in which a
business records its transactions
Bookkeeping
Bookkeeping is concerned with the
Recording
Classification
Organizing
Of all financial transactions by a business

Five stages in the process
Stage 1 original (prime) documents
Stage 2 Book of prime entry: day books or
journals
Stage 3 Ledger accounts: all financial
transactions are recorded by making double
entries in the ledger
Stage 4 Trial balance : drawn up to check
the accuracy of the ledger entries
Stage 5 Final accounts : profit and loss
account, balance sheet
Stage 1
Prime documents
Stage one prime documents
These business documents are the source of all
accounting records they are the raw materials of the
bookkeeping and accounting system
We can track the flow of document in a credit
transactions :
Purchase order placed by the customer
Delivery note attached to the goods
Invoice requesting payment
Credit note (where necessary) as a refund for unsatisfactory
goods
Statement of account a summary of the account
Remittance note advising of payment
Cheque or other system of payment
Receipt to acknowledge payment
Documents originating with the buyer
Purchase order order placed for goods

Remittance advice advising of payment
made
Cheques means of payment
Document originating with the seller
Delivery note with goods advising customer of
goods delivered
Invoice a document sent to a credit customer
demanding payment, usually within a stipulated time
Credit note a document that details the amount of
allowance to be made when a purchases returns faulty
goods to the supplier
Statement of accounts summary of the transactions
that have taken place between, a supplier and
customer. It itemises invoices sent, monies received,
discounts allowed and all returns
Receipts acknowledgement of payment
Stage 2
Books of prime entry
Books of prime entry
Information from prime documents is initially
recorded in the following books of prime entry :
Sales day book records invoices for sales
Purchases day book records invoice received
from suppliers
Sales returns day book returned goods
Purchase returns day book returned goods
Cash book cash transactions
Day books
The day books are the primary accounting record
Day books or books of prime entry are books or
accounts in which certain types of transaction are
recorded before becoming part of the double entry
bookkeeping system
Purchases and sales on credit are entered in day
books using details from invoices and credit notes
These books are organised on a day by day basis and
summarise the information from the prime documents
Day book entries are transferred to ledgers while
totals of entries are transferred to the nominal ledger
Entering in books of prime entry
Document Entered in
Credit sales Sales day book
Credit purchases Purchases day book
Returns inwards Returns inward day
book
Returns outwards Returns
outward day book
Cash receipts and payments Cash book

Sales day book
Also known as a sales journal
It lists all credit sales written up from copy
sales invoices sent to customers
Postings are made from this book to ledgers :
As a debit entry to the customers account in the
sales ledger
As a credit entry to the sales account in the
general or nominal ledger
Purchases day book
Also known as purchases journal
This is a book of prime entry in which
invoiced amounts of purchases are recorded
It is written up from purchase invoices
received from suppliers of goods
Information from this book is posted
As credits to personal accounts in the purchase
ledger
As debits in the purchase account of the general or
nominal ledger
Cash book
The cash book is a book of prime entry which
records bank and cash transactions
This includes receipts from customers and
payments to suppliers
The cash book records all transactions for
bank account and cash account
It records transactions in date order
The petty cash book records low value cash
payments including transactions not made
through a bank account
CASH BOOK
Discussion areas
Layout of Cash Book

Bank reconciliation statement
Main cash book v petty cash book
Stage 3
Ledgers
Ledgers
A ledger is a collection of accounts of a
similar type
All transactions are recorded by making
double entries in the ledger
This reflects the dual aspects of all financial
transactions
Credits are shown on the right and debits on
the left
Double entry book keeping in ledgers
Each transaction from the books of original
entry (day books) is entered into double entry
accounts contained in the ledgers
Sales ledger accounts of debtors
Purchase ledger accounts of creditors
General (or nominal) ledger all other accounts
Cash books for bank and cash transactions
Each transaction is recorded in two different
ledgers
Purchases ledger
This contains the accounts of all credit suppliers
of the business and it records
Purchases made on credit from suppliers
Purchases returns made by the business
Payments made to creditors
Cash discounts received for prompt payment
It does not record cash purchases
The ledger contains an account for each creditor
and records the transactions with that creditor
Sales ledger
This contains the accounts of all the businesss credit
customers
Sales on credit to customers
Sales returned by customers
Payments received from debtors
Cash discounts for prompt payment
The sales ledger contains an account for each debtor
and records the transaction with that debtor
Cash sales do not appear in this ledger
This ledger is also known as the debtors ledger
Any balance outstanding on any of the accounts is
money owed by the debtor
General ledger
This contains all impersonal accounts this ledger is
distinguished from personal ledgers which contain
accounts of customers and suppliers
Nominal accounts where revenues and expenses are
recorded
Sales account cash and credit sales, sales returns
Purchases account cash and credit purchases, purchases
returns
Expenses and income, loans, capital and drawings
Service tax
Profit and loss
Real accounts transactions dealing with tangible fixed
assets
Fixed assets
Stock
Tracking credit transactions
Transaction Document Prime entry Ledger entry
Goods sold to Sales Invoice Sales day book General

customers Sales
Good Purchases Purchase day General

Purchased Invoice book Purchases
Returns inwards Credit note Sales return day

General
sent book Sales
Returns Credit note Purchase returns General

Outwards received day book Purchases
Cash transactions
Transaction Book of original Ledger
entry
Customer pays Cash book Sales ledger

with cheque
Supplier is paid Cash book Purchasers ledger

with a cheque
Stage four
Trial Balance
Trial Balance
A Trial balance is
A summary of balances of all the accounts at the
end of the accounting period
A listing of debit and credit balances to check the
correctness of the double entry system
The bringing together of figures from double entry
accounts in the ledgers in the form of a list
A trial balance is drawn up periodically to
check the accuracy of ledger entries
It is an arithmetic checking of double entry
book-keeping
Trial balance
The trial balance consists of list of all debit balances
and all credit balances from all the individual
accounts of the business
These are taken from the ledgers
The debit balances and credit balances are set out in
separate columns
The debit and credit columns are then totalled
The total of all credits should equal the total of all
debits
If the totals do equate then we can be reasonably
confident that bookkeeping procedures are carried out
accurately
Functions of the trial balance
The trial balance summarises information from the ledgers
Final accounts are prepared using information from the
trial balance
The trial balance provides information for internal control
purposes e.g the amount owed and amount owing
The arithmetic accuracy of entries made in books of
account can be confirmed
If the credit and debit columns of the trial balance are the
same, it proves that debit entries and credit entries were
matched when the book-keeper posted entries into the
accounting system
But certain errors such as the omission of a transactions or
erroneous entries will not be disclosed by a trial balance
A Trial Balance for company X at 30/06/11
Item Debit Credit Transferred to

(RMk) (RMk)
Capital 20 Balance sheet
Bank 4 Balance sheet
Cash 1 Balance sheet
Purchases 20 P&L account
Wages 30 P&L account
Sales 45 P&L account
Debtors 5 Balance sheet
Creditors 5 Balance sheet
Total 65 65
Trial Balance
Normally debit Normally credit
Cash account Sales account
Purchases account Capital account
Fixed assets account Loans to the business
Expenses accounts creditors accounts
Drawings account
Debtors account
Stock
Stage four
FINAL ACCOUNTS
FINAL ACCOUNTS
Manufacturing account
Trading and profit and loss account
These two are statements measuring profit (or
loss) for an accounting period
Balance sheet
A statement of assets, liabilities and capital at the
end of an accounting period
Cash flow statement
A statement of cash inflow and cash outflow over
the past accounting period
MODULE 5
GENERAL LEDGER
&
POSTING ENTRIES
General Ledger Page
A
C COUNTNA
M E
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D
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alance
Journals
Accounting personnel record transactions in a journal.
The journal is a chronological record of business events by
account.
A journal may be a general journal or a special journal.
A general journal allows any type of accounting
transaction to be recorded.
A special journal captures specific types
of transactions.
Ledgers
A ledger may be a general ledger or a
subsidiary ledger.
A general ledger is a collection of detailed
monetary information about an organizations
assets, liabilities, revenues, and expenses.
A subsidiary ledger contains detailed records
pertaining to a particular account in the general
ledger.
General Journal Page
G
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R A
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URN
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Pag
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D
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esc
rip
tio
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ebit Cre
dit
Journal Entries
Example 1
On January 1, 2011, Kemas S/B
borrowed RM10,000 from the bank.
Prepare the appropriate journal entry
for the above transaction.
Journal Entries
Solution 1
Two accounts are affected:
Cash is increased by RM10,000.
Loan is increased by RM10,000.
Journal Entries
Solution 1
Cash is increased by RM10,000.
Loan is increased by RM10,000.
GENERAL J OURNAL
Page: 1
Date Description PR Debit Credit
1-J an Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Journal Entries
Example 2
On January 20, 2011, Kemas S/B paid
the RM400 electric bill for January.
Prepare the appropriate journal entry
for the above transaction.
Journal Entries
Solution 2
Utility Expense is increased by RM400.
Cash is decreased by RM400.
Journal Entries
Solution 2
Utility Expense is increased by RM400.
Cash is decreased by RM400.
GENERAL J OURNAL
Page: 1
20-J an Utility Expense 511 400
Cash 100 400
to record payment of J anuary
electric bill
Posting To The GL
Example
GENERAL J OURNAL
Page: 1
1-J an Cash 100 10,000
Start with the journal entry from the

General Journal.
Posting To The GL
Next, find the appropriate page
in the General Ledger for Cash.
GENERAL J OURNAL
Page: 1
1-J an Cash 100 10,000
ACCOUNT NAME: CASH ACCOUNT No. 100

Beginning Balance 0 0
Posting To The GL
Example
Enter the information about the change in
Cash intoGENERAL J OURNAL
the General Ledger.
Page: 1
1-J an Cash 100 10,000

1-Jan Loan from bank G1 10,000
Posting To The GL
Example
Enter the information about the change in
GENERAL J OURNAL
Cash into the General Ledger.
Page: 1
1-J an Cash 100 10,000

1-Jan Loan from bank G1 10,000 10,000
Update the General Ledger balance.

Posting To The GL
Examine the next journal entry.
Example
GENERAL J OURNAL
Page: 1
15-J an Trucks 150 9,500
Cash 100 9,500
to record purchase of truck

Posting To The GL
Example
Post GENERAL
the journal entry.
J OURNAL
Page: 1
15-J an Trucks 150 9,500
Cash 100 9,500
to record purchase of truck

15-Jan Purchase of truck G1 9,500 500
Update the General Ledger balance.

The Closing Process
Wages Expense Fees Earned
Bal. 4,525 Income Summary Bal. 16,840
Rent Expense Rent Income

Bal. 1,600 Bal. 120
Depreciation Expense
Bal. 50
Utilities Expense Note: The balances
Bal. 985 Retained Earnings shown are adjusted
balances before closing.
Supplies Expense The following sequence
Bal. 2,040 demonstrates the closing
process.
Insurance Expense
Bal. 100
Dividends
Miscellaneous Expense
Bal. 4,000
Bal. 455
The Closing Process
Bal. 4,525 Income Summary 16,840 Bal. 16,840
Rent Expense 16,960 Rent Income

Bal. 1,600 Total Bal. 120
120
Revenues
Bal. 50
Utilities Expense
Close Revenues
Bal. 985 Retained Earnings
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Dividends
Bal. 4,000
Bal. 455
The Closing Process
Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840
Rent Expense 9,755 16,960 Rent Income

Bal. 1,600 1,600 Total Total Bal. 120
120
Expenses Revenues
Bal. 50 50
Utilities Expense
Close Revenues
985
Supplies Expense Close Expenses
Bal. 2,040 2,040

Insurance Expense
Bal. 100 100
Dividends
Bal. 4,000
Bal. 455 455
The Closing Process

Bal. 1,600 1,600 7,205 120 Bal. 120
Closed
Bal. 50 50
Utilities Expense
Close Revenues
985
Supplies Expense 7,205 Close Expenses
Bal. 2,040 2,040 Net Income Close Income Summary

Insurance Expense
Bal. 100 100
Dividends
Bal. 4,000
Bal. 455 455
The Closing Process

Bal. 1,600 1,600 7,205 120 Bal. 120
Closed
Bal. 50 50
Utilities Expense
Close Revenues
985
Supplies Expense 4,000 7,205 Close Expenses
Dividends Net Income
Bal. 2,040 2,040 Close Income Summary
Insurance Expense
Bal. 100 100 Close Dividends
Dividends
Bal. 4,000 4,000
Bal. 455 455
Closed
The Closing Process

Income Summary
Rent Expense Rent Income
Utilities Expense
Retained Earnings
4,000 7,205 Dividends
Supplies Expense
Bal. 3,205 Net Income
Insurance Expense
All temporary accounts
Dividends now have zero balances
Miscellaneous Expense and are ready for the
next accounting period.
Trial Balances
Once an AIS records journal entries and posts them to
the general ledger, the system can create a trial
balance.
Three end of period trial balances are needed:
A preadjusting trial balance after all entries have
been posted;
An adjusted trial balance after adjustments have
been recorded and posted;
A postclosing trial balance after temporary
accounts have closing entries have been recorded and
posted.
MODULE 6
ADJUSTING ENTRIES
YEAR END ADJUSTMENTS
ACCRUALS
Accrued Expense Accrued Revenue
1. Expense incurred & recorded in 1. Revenue earned & recorded

current period. in current period.
2. Payment made in future period. 2. Payment received in future
3. D/Entry : DR Expense A/C (P&L) period.
: CR Accrued expenses 3. D/Entry : DR AR (B/S - CA)
(B/S CL) CR Revenue (P&L)
YEAR END ADJUSTMENTS
PREPAYMENTS
Prepaid Expense Prepaid Revenue
1. Payment made in current period 1. Payment received in current

2. Expense to be incurred & recorded period
in the future period 2. Revenue to be earned &
3. D/Entry : DR: Prepaid expenses recorded in future period
(B/S C/A) 3. D/Entry : DR: Bank (B/S)
CR: Bank CR: Prepaid revenue
(B/S CL)
DEALING WITH HIRE PURCHASE
TRANSACTIONS
Under HP care should be taken to separate the principle

portion and interest portion in the monthly fixed
installment amount.
Double Entry rule :

(i) When deposit is paid to purchase a fixed asset :
DR Fixed Asset (at cost)
CR Bank
(with the deposit asset)
TRANSACTIONS
ii) When HP Loan is released :

(
DR Fixed Asset ( at cost)

CR HP Creditor
(with the principle amount of the loan)
(iii) When the monthly installment is paid :

DR HP Creditor
DR HP Interest Separate principle & interest
CR Bank
(with the installment amount)
TRANSACTIONS
(iv) Any overdue or penalty interest paid :

DR Penalty Interest
CR . Bank
Depreciation for Accounting purpose is always

base on the historical cost value of the Fixed
Asset and not on the paid portion of the Fixed
Asset.
MODULE 7
ACCOUNTING FOR FIXED ASSETS
Cost to Acquire Plant Assets -
Examples
Purchase price
Transportation
Engineers fee to set up and adjust the machine to required
specifications
Electricians fee to install a new power outlet required by the
machine
Repairs made to wall as a result of damage during installation of
the new power outlet
Cost of chips and circuit boards used to test the new machine
before it is used in production
Cost of 3 year service contract requiring the manufacturer of the
machine to make any repairs needed, at no cost
Costs of Acquiring Plant Assets
INCLUDES:
Sales tax and freight costs
Installation and assembling
Repairs and reconditioning (used assets)
Testing and modifying
Insurance while asset is in transit
EXCLUDES:
Vandalism and uninsured theft
Mistakes in installation
Damage during unpacking and installing
DEPRECIATION
Depreciation is the process of allocating the
cost of plant assets to the periods that will
be benefited from its use.
Depreciation is a cost allocation process and

has nothing to do with an assets market
value.
Recording Depreciation
Purchase
Purchaseequipment
equipmentfor
forRM16,000.
RM16,000.Residual
Residualvalue
value
A
is
is RM1,000
RM1,000and
anduseful
usefullife
lifeis
is55years.
years.
B Record
Recordstraight-line
straight-linedepreciation
depreciationfor
forfirst
firstyear.
year.
General Ledger
General Journal
Description Debit Credit Equipment
Equipment 16,000 A 16,000

A Cash 16,000
Accum. Depreciation
B Depreciation Expense 3,000 3,000 B
Accum. Depreciation 3,000
$16,000 - $1,000 B 3,000
= $3,000
5 years
Calculation of Book Value
General Ledger
Equipment
A 16,000 Original Cost $16,000
Less Accum. Depr. 3,000
Accum. Depreciation Book Value 13,000
3,000 B
B 3,000
Accounting for Plant Asset Disposals
When Plant Assets lose their usefulness, they

may be disposed of in one of the following ways:
1. discarded,
2. sold, or
3. traded (exchanged) for other assets.
Required entries will vary with type of
disposition and circumstances, but the following
entries will always be necessary:
Asset account must be credited to remove the
asset from the ledger, and the related
Accumulated Depreciation account must be
debited to remove its balance from the ledger.
Sale of Plant Assets
When Plant Assets are sold, the owner may

break even, sustain a loss, or realize a gain.
1. If the sale price is equal to book value,
there will be no gain or loss.
2. If the sale price is less than book value,
there will be a loss equal to the difference.
3. If the sale price is more than book value,
there will be a gain equal to the difference.
Gain or loss will be reported in the Income
Statement as Other Income or Other Loss.
Loss
MODULE 8
ACCOUNTING FOR BADS
UNCOLLECTIBLE
ACCOUNTS (Bad Debts)
How is the estimated amount for the
adjusting entry determined ?
Estimating Bad Debts Expense
The provision method uses two ways to estimate the
amount debited to Bad Debts Expense.
Expense
1. Estimate based on a percentage of Sales.

If credit sales for the period are RM300,000 and it
is estimated that 1% will be uncollectible, the
Bad Debts Expense is RM3,000.
2. Estimate based on analysis of Receivables.
If Accounts Receivable are RM86,300 and the
Allowance for Bad Debts is RM510 and it is
estimated that RM3,390 of the receivable will be
uncollectible, the Bad Debts Expense is RM2,880
(RM3,390 RM510).
Accounts Receivable Aging and Uncollectibles
Days Past Due

over
Customer Balance Not Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470
J. Zimmer Co. 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%
Uncollectible percentages based on

experience and industry averages.
Accounts Receivable Aging and Uncollectibles
Days Past Due

over
Customer Balance Not Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470
J. Zimmer Co. 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%
AMOUNT $3,390 = $1,500 $200 $310 $380 $360 $400 $240

Year-End Adjustment for Uncollectibles
General Ledger Balance Sheet

Accounts Receivable Accounts receivable $86,300
A 86,300 Less allowance for
bad debts 3,390
Allowance for Bad Debts
Net accounts receivable 82,910
510 A
A Balances before adjustment
Bad Debts Expense


bad debts 3,390
Allowance for Bad Debts
510 A
2,880 B
Bad Debts Expense B Year-end adjustment

$3,390 - $510 = $2,880
B 2,880

bad debts 3,390 C
Allowance for Bad Debts.
510 A
2,880 B
3,390 C
Bad Debts Expense B Year-end adjustment

$3,390 - $510 = $2,880
B 2,880
C Balance after adjustment
ACCOUNTING TREATMENT
Bad Debts written off
Trade debts written off as bad
Considered bad and irrecoverable after all efforts failed.
Basis for writing off a debt as bad
Circumstances when a debt considered bad Refer PR 1/2002
The value of the debtor as a current asset falls to zero when a debt
is written off.
Application of prudence concept all foreseen losses accounted
for to maintain realistic profit & loss account and balance sheet
values
Double Entry : DR Bad debts (expense A/c)
: CR Trade debtors (current asset A/c)
Recovery of bad debts written off
Any recovery of a trade debt previously written off as
bad should be shown in the profit and loss account as
additional income for the period in which it is
received.
Double Entry : DR Bank

: CR Bad debts recovered (entered
in P& L as revenue)
No adjustment required in the debtors account

PROVISION FOR DOUBTFUL DEBTS
SPECIFIC PROVISION FOR DOUBTFUL DEBTS
Making the specific provision

- Evaluate each debt separately to determine
likelihood of recovery
- Done at the end of particular accounting year.
- Refer to para 3.2.3 of PR 1/2002
- An aging report will be an valuable tool for
evaluation.
SPECIFIC PROVISION FOR DOUBTFUL DEBTS .cont
Double Entry rule :

DR. Bad debts
CR. Provision for Doubtful debts
(1st year )
Increase or decrease in the specific provision

- A change in the amount of specific provision
in a
subsequent year requires adjustment
SPECIFIC PROVISION FOR DOUBTFUL DEBTS .cont
- Increase in provision :
DR. Bad debts This year provision minus
CR. Provision for doubtful debts last year provision
- Decrease in provision
DR. Provision for doubtful debts This year provision
CR. Bad debts (or Bad Debts recovered minus last year
provision
Refer to Para 3.2.4 of PR 1/2002 (Ex 3)

GENERAL PROVISION FOR
DOUBTFUL DEBTS
A general provision for doubtful debts is
usually made based on % of total sales or
year end debtors balance.
A more appropriate method used by
Malaysian companies is based on % of year
end debtors balance.
Double entry rule is same as in the specific
provision for doubtful debts.
GENERAL PROVISION FOR DOUBTFUL
DEBTS Cont
Under specific or general provision for doubtful

debts, the individual debtors ledger accounts are
not adjusted with the provision. The ledger
accounts show the full unpaid invoice value.
The provision for doubtful debts amount is

deducted (contra) from the total debtors account
in the Balance Sheet.
MODULE 9
ACCOUNTING TREATMENT
FOR INVENTORIES
Ending Inventory & COGS
Cost of goods Beginning Net
= +
available for sale inventory purchases
The question is where is the inventory

that could have been sold this period?
Only two choices:
At periods end, is allocated between

inventory still remaining (an asset), and
inventory sold during the period (an expense, Cost of Goods
Sold).
What are the Two Methods for
Accounting for Inventory?
Perpetual Periodic
Records are updated when a Records are not updated
purchase or sale is made. when a purchase or a sale is
Records reflect total items in made.
inventory or sold at any Only the dollar amount of
given time. the sale is recorded.
Most often used when Used when
each item has a relatively inventory is composed of a
high value, or large number of diverse
the cost of running out of or items,
overstocking an item is each with a relatively low
expensive. value.
Inventory Systems
Perpetual Method
Gives a continual record of the amount of inventory on
hand. When an item is purchased, it is added into
inventory. When an item is sold it is removed from
inventory and recorded in the accounts o Goods Sold
Periodic Method
Requires updating the inventory account only at the end of
the period by either an adjusting or closing entry.
Acquisition of merchandise inventory is recorded in a
temporary account.
Costs Included in Inventory
Invoice price
Transportation in
Insurance while in transit
Other costs to get the inventory ready for
sale
Items Included in Inventory
All inventory on hand when the physical inventory is
taken.
+ Merchandise in transit that was purchased FOB
shipping point.
+ Merchandise in transit that was sold FOB destination
+ Merchandise on consignment in other locations that is
still owned by the company taking the inventory count
- Merchandise included in the inventory on hand that
belongs to another company but is being held on
consignment.
MODULE 10
FINAL ACCOUNTS
Financial Statements
Financial statements are the primary
output of a financial accounting system.
These statements include:
Balance Sheet
Statement of Changes in Equity
Income Statement
Cash Flow Statement
Exhibit 2.1
Previewing Financial Statements

Income
Statement
Statement of
Owners
Beginning Equity Ending
Balance Balance
Sheet Statement of Sheet
Cash Flows
Point in time Period of time Point in time

Vertical format Balance Sheet
Fixed assets Fixed assets are shown at
historical value less
accumulated depreciation
+ Net current assets Current assets less

current liabilities . Also
known as working capital
- Long term Long term loans to the

business
Liabilities
= Shareholders funds / Money raised from a

share issue and
Owners equity reserve e.g. retained
A simplified balance sheet (RM)
Fixed assets less depreciation
600
Current assets (stock, debtors and cash) 250
Current liabilities 140
Net current assets (CA CL)

110
Total assets less current liabilities

710
Long term liabilities

470
Balance Sheet Simple structure
RM RM
Fixed Assets (Book value) 10,000
Current Assets 5,000

Less : Current liabilities 3,000
WORKING CAPITAL 2,000
12,000
Less : Long term liabilities 4,000
NET ASSETS / NET BUSINESS WORTH (A) 8,000
====
Financed By :
Share Capital 6,000
Accumulated Reserves (profits etc) 2,000
Shareholders funds or equity (B) 8,000
====
Note : (A) must equal to (B)

Components of the trading and profit and
loss account
Sales Income earned from
selling goods
Cost of sales The cost of directly

providing the sales
Gross profit Sales less cost of sales.
Profit after deducting direct
costs
Other income Non-trading income which
the firm has earned e.g. income
from investment and from the sale
of fixed assets
Expenses Indirect costs-overheads such as
rent, light and heat
Profit & Loss Account Simple Structure
RM
Sales 50,000
Less : Cost of sales 20,000
GROSS PROFIT 30,000
Operating expenses (15,000)
PROFIT BEFORE FINANCE COSTS 15,000
Finance charges (2,000)
PROFIT BEFORE TAX 13,000
TAX PAYABLE (3,000)
PROFIT AFTER TAX 10,000
Dividends to shareholders 8,000
RETAINED PROFIT 2,000
(Transferred to Balance Sheet) ====
A profit and loss account for year
ending 31/3/20xx (RMm)
Sales revenue 18.2
Less : cost of sales 10.1
= Gross profit 8.1
Less : overheads expenses 5.0
= Net profit 3.1
Less : tax 1.0
= Profit after tax 2.1
Dividend paid 1.5
Retained profit 0.6

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KONSEP + PRINSIP

Examining the problem areas of your

Economic Data Accounting

Changes the way we

Date Description PR Debit Credit Balance

Step 4 Step 3 Step 2

Capital Expenditure Capital Expenditure

Importance of these accounting concepts in preparing

To avoid misleading financial statements

Everyone involved in accounting function should

Tax authorities (IRB) , KLCE and SC require strict

The earning process is

Cash has either been

Accrual Basis Accounting

The debits must always equal the

Debit Credit Debit Credit Debit Credit

What are an organizations resources called?

Cost of What are the

a. You decide to begin your business by depositing

b. You buy a RM50,000 condo, paying RM5,000

c. Buy RM3,000 of furniture on account.

d. Pay off the account payable.

Cash 2,000 Mort.payable 45,000

Of all financial transactions by a business

Purchase order order placed for goods

Credit sales Sales day book

Credit purchases Purchases day book

Returns inwards Returns inward day

Returns outwards Returns

outward day book

Cash receipts and payments Cash book

Layout of Cash Book

Goods sold to Sales Invoice Sales day book General

Good Purchases Purchase day General

Returns inwards Credit note Sales return day

Returns Credit note Purchase returns General

Customer pays Cash book Sales ledger

Supplier is paid Cash book Purchasers ledger

Item Debit Credit Transferred to

Start with the journal entry from the

ACCOUNT NAME: CASH ACCOUNT No. 100

ACCOUNT NAME: CASH ACCOUNT No. 100

ACCOUNT NAME: CASH ACCOUNT No. 100

Update the General Ledger balance.

ACCOUNT NAME: CASH ACCOUNT No. 100

ACCOUNT NAME: CASH ACCOUNT No. 100

Update the General Ledger balance.

Wages Expense Fees Earned

Bal. 4,525 Income Summary Bal. 16,840

Rent Expense Rent Income

Wages Expense Fees Earned

Bal. 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 16,960 Rent Income

Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,755 16,960 Rent Income

Bal. 2,040 2,040

Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840