First published in the Republic of Singapore by Jump Grades Education Copyright © Caleb Ho, 2010 All rights reserved. Ho Caleb. Jump Grades’ Guide to Excelling in Principles of Accounts/Caleb Ho. 103p. 17cm x 25cm ISBN 978-981-08-2575-1 1. O’/N’ Levels Study Guide. 2. Principles of Accounts. Printed in Singapore Cover Design by Florence Wong Layout by Reggie Ibarra This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out, or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. Jump Grades’ Guide to Excelling in Principles of Accounts. by Caleb Ho Copyright © 2010 This publication is copyrighted. Unauthorised duplication is prohibited by law. For more information, email info@jumpgrades.com.sg or visit our website at www.jumpgrades.com.sg Jump Grades offers excellent discounts on this book when ordered in bulk. For more information, please contact: Schools and Private Institution Sales, schools@jumpgrades.com.sg FIRST EDITION Printed in Singapore ISBN: 978-981-08-2575-1
Guide to Excelling in
Principles of Accounts Caleb Ho
B. Acc
Contents 02 06 11 15 22 25 32 36 40 45 52 55 60 63 69 77 81 83 91 93 96
CHAPTER 1 : Introduction to the world of Accounting CHAPTER 2 : The Accounting Equation CHAPTER 3 : The Double Entry System CHAPTER 4 : Source Documents, Journals and Ledgers CHAPTER 5 : The Imprest System and Cash Book CHAPTER 6 : Bank Reconciliation CHAPTER 7 : The Trial Balance CHAPTER 8 : Trading, Profit and Loss Accounts CHAPTER 9 : Balance Sheet CHAPTER 10 : Accounting for Assets (*Disposal of Fixed Assets) CHAPTER 11 : Bad Debts and Provision for Doubtful Debts CHAPTER 12 : Balance Day Adjustments CHAPTER 13 : Control Accounts CHAPTER 14 : Amalgamation of Businesses and Goodwill CHAPTER 15 : Partnership CHAPTER 16 : Incomplete Records* CHAPTER 17 : Stock Valuation CHAPTER 18 : Analysis and Interpretation of Final Accounts* Appendix A : Essential Formats Appendix B : Common Transactions Appendix C : Tips on Exam Success
* Not tested in GCE N’ Level examinations
Preface Jump Grades’ guide is developed from notes that have been used with great success in the classroom. It is specially written based on the latest Principles of Accounts syllabus and is intended to stimulate the student’s interest in the subject and provide ample opportunities for them to prepare for their tests and examinations. All the information is presented in expertly designed pages to make learning easy. The key concepts are presented in a simple and concise manner with clearlydrawn diagrams. Where necessary, the chapters provide carefullydesigned worked examples phrased intentionally to stimulate critical thinking, train the student’s use of analytical skills and logical application of accounting concepts. Students can also refer to Jump Grades' POA website which contains web links, video tutorials, additional problems and exercises all linked to learning objectives.
11
The Double Entry System
chapter 3
The Double Entry System Businesses use the double entry system for recording transactions. It is a rule which requires every transaction entries to have equal debits and credits of the dollar value involved.
Rules of Double Entry 1. There must be a credit for every debit and the total debits are equal to total credits, it may involve more than two accounts. The equality of the debits and the credits and the credits will always be maintained. 2. Whoever owes the business is a debtor (debited) and whoever the business owes is a creditor (credited).
Steps for recording transactions in the ledger account Transactions
Analysed and are classified into:
Assets
Expenses
Owner’s Equity
Revenues
Liabilities
Determine the Accounts Involved Cash Premises Debtors Stock
Rent Salaries Purchases
Capital Drawings
Discount Commission Interest Sales
Rules for recording transactions
Debit – Increase account Credit – Decrease account
Debit – Decrease account Credit – Increase account
Bank Loan Creditors
15
Source Documents, Journals and Ledgers
chapter 4
Source Documents, Journals and Ledgers Source documents are specially designed forms which supply the details of business transactions and the evidence that the transactions have taken place.
List of Documents Source Document 1. Invoice
Journals Purchases
2. Credit Note
Purchase Returns
3. Debit Note
Purchases
Uses To inform buyer of the amount to pay for goods and services supplied by the seller. To correct an overcharge or issued when buyer returns goods. To correct an undercharge.
4. Payment Voucher
-
As evidence of payment by the business to a third party.
5. Cheque and cheque counterfoil
-
Records payment by cheque.
6. Receipts/ cash register slip
Cash Book
Acknowledgement of payments
7. Bank Statement
-
Summary of monthly transactions of current account holders with the bank
8. Petty Cash Voucher
-
To record payment of money, either cash or cheque.
Visit principlesofaccounts.com.sg/study-guide for samples of real life documents.
Purpose of source documents 1. Serves as the evidence that a transaction has occurred 2. Information in documents used as a basis for making entries in the books 3. Enable the auditing (checking) of accounts
Journals Journals are books where every business transaction is recorded from source document(s). They are also known as day books or books of prime/original entry.
60
Guide to Excelling in Principles of Accounts
chapter 13
Control Accounts Some general ledger accounts are made up of many sub-components. For instance, a business may have debtor amounts worth $20,000, consisting of amounts due from Caleb, Trevor and Simon. The accounting system must be sufficient to reveal the total debtors, as well as amounts due from the creditors. Control accounts are set up for the purpose of monitoring these components.
Other uses of Control Accounts: a. To detect irregularities and fraud. b. To reduce the large volumes of transactions in the ledger accounts. c. Serve as an independent check on the sales and purchases ledger d. Provide totals of creditors and debtors. Format of the Sales Ledger Control Account Debtor (or Sales Ledger Control Account) 2008 Jan 31
Feb 1
Balance b/d CREDIT SALES Bank (Dishonoured Cheque) Discount Allowed Interest Received Carriage Outwards Balance b/d
$ 8,400 5,120 160 400 200 200 14,280 3,000
2008 Jan 1 Returns Inwards 31 Discount Allowed Cash/Bank Bad debts Creditor (Contra) Balance c/d
$ 1,500 180 8,600 400 400 3,000 14,280
Creditor (or Purchase Ledger Control Account) 2008 Jan 1 31
Returns Outwards Discount Received Cash/Bank Debtor (Contra) Balance c/d
$ 7,940 4,300 370 300 10,500 22,740
2008 Jan 31 Balance b/d CREDIT PURCHASES Carriage Inwards Interest Expense
Feb 1 Balance b/d
$ 12,300 10,040 400 330 22,740 10,500
IMPORTANT NOTE 1. A debit balance in a Sales Ledger/ debtor’s account indicates the amount owing by the customer to the business. All debtors’ accounts are recorded in the Sales Ledger. 2. Cash sales, bad debts recovered and increase/decrease in provision for doubtful debts should not appear in the Sales Ledger Control Account
83
Analysis and Interpretation of Final Accounts
chapter 18
Analysis and Interpretation of Final Accounts* Need for analysis and interpretation of final accounts The analysis and interpretation of final accounts is used to identify the trends and relationships between financial statement items. Both internal users (managers) and external users (such as the bank, trade creditors and investors) of the financial statements need to evaluate a business’ profitability, liquidity and solvency. It is important for an accountant to analyse the final accounts for the following reasons: 1. To measure the financial performance of the business. 2. To compare the financial performance of different accounting periods to see if there have been any significant changes. 3. To use the information to make certain business decisions, budgets and forecast. 4. To compare the results with similar businesses in the industry.
Importance of measuring the liquidity of a business Liquidity refers the ability of a business to convert its assets into cash to meet short term liabilities. A business’ inability to meet its short term liabilities may affect the business’s operations and in many cases it may affect its reputation. Lack of cash or liquid assets on hand may force a business to miss the incentives given by suppliers of credit, services, and goods. Loss of such incentives may result in higher cost of goods which in turn affect the profitability of the business. Business owners expect to draw out profits in the form of cash from their investment. Hence, it is important for a business to measure and maintain a certain degree of liquidity.
Profitability Profitability refers to the ability of a business to pay its debts and return profits to its owners.
Ratio Analysis Liquidity Ratios
Profitability Ratios
Purpose
Category
Measure a business’ short-term ability to meet its current liabilities
Measure a business’ profitability relative to its assets and to its income
Measure of efficiency of a business’ assets
Activity Ratios
Example(s)
Current ratio
Gross margin Operating Margin Profit Margin
Inventory turnover Asset turnover
Analysis and Interpretation of Final Accounts
87
5. Percentage of expenses to turnover The percentage of expenses to turnover refers to the amount of expenses in percentage per dollar of sale. When doing the exam question, take note of any unusual increase in this ratio, compared to an increase in sales in two accounting periods.
Identify a particular expense causing the increase by expressing separately each major expense group as a percentage of turnover. Major groups may include:
i. General (wages, rent and utilities) ii. Selling and distribution (carriage outwards, marketing or advertising iii. Purchasing (carriage inwards and import duties) iv. Finance (interest and discounts)
EXAM TIP! You will be required to interpret the ratios and performance indicators calculated i.e. give possible reasons for a change in ratios or the significance of ratios in relation to a given situation. When making analysis on the final accounts, consider the performance in respect of the nature of industry, its past performance, stock level, storage costs, goods sold mainly in cash or credit terms and indicators like cost of goods sold (increased marketing efforts, sales promotions and product improvement will increase the COGS in the short term). Questions may require students to suggest the kind of industry a business is in and to give reasons for the answer. When commenting on the liquidity and profitability of a business, supporting figures should be given or calculated. This should be specially considered when comparing figures for two years. You should analyse individual categories (not just the totals). For example, an increase in a gross profit figure must be considered together with the sales revenue and cost of sales figures. An increase in the sales revenue figure may not result in higher gross profit because of relatively higher in cost of sales. You should compare performances both in terms of dollar values and percentages.
93
Appendix B: Common Transactions
Appendix B:
53 Commonly Tested Transactions in the Examinations No
Transactions
Journal Entry Debit
Credit
A. Business Commencement: Owner’s Contribution into the business 1
Started business with cash
Cash
Capital
2
Brought in motor vehicle for business’ use
Motor Vehicle
Capital
B. Business Commencement: Financing from borrowing 3
Borrowed from Bank
Bank
Bank Loan
4
Repaid Loan from Investor using cheque
Loan from Investor
Bank
C. Purchase of Fixed Assets 5
Bought office furniture using cheque
Office Furniture
Bank
6
Bought machinery from Leong, on credit
Machinery
Creditor: Leong
7
Paid Leong for machinery bought using cheque
Creditor: Leong
Bank
D. Trading: Purchase of Goods from Supplier and Return Outwards 8
Purchase of goods by cheque
Purchases
Bank (Cr: Cash, if bought using cash)
9
Purchase of goods from Daniel on credit
Purchases
Creditor: Daniel
10
Faulty goods returned to Daniel
Creditor: Daniel
Return Outwards
11
Paid Daniel for the amount owing
Creditor: Daniel
Cash/Bank
12
Paid DHL for delivering goods into premises
Carriage Inwards
Cash/Bank
13
Received cash discount from Daniel for early payment
Creditor: Daniel
Paid creditor, Samuel $550 cash, in full settlement of a $800 debt
Creditor: Samuel 800
14
Discount Received (record as other income in P &L )
Discounts Received 250 Cash 550
E. Trading: Sold Goods to Customer and Return Inwards 15
Sold goods for cash
Cash
Sales
(Dr: Cheque, if bought using cash)
16
Sold goods to Nicole on credit
Debtor: Nicole
Sales
17
Nicole returned defective goods
Return Inwards
Debtor: Nicole
(or Sales Returns)
18
Nicole paid for the amount owing
Cash/ Bank
Debtor: Nicole
F. Cash Discount Allowed 19
Cash Discount to Nicole who paid amount owing promptly
Discount Allowed
Debtor: Nicole
20
Received cheque of $650 from Moses, a debtor, in full settlement of account for $700
Bank 650 Discount Allowed 50
Debtor: Moses
700
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