BAFS F.4 Notes

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Introduction
to Double Entry
Accounting ()
Reference:
Chapter 1 6 (p. 1 58)
1
P.1
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(A) Introduction to
Accounting
Bookkeeping () vs. Accounting ()

Bookkeeping:
records
the accounting data in the books.
Accounting:
provides
important information to the owners and

managers of a firm.
records data; classifying and summarises data;
communicates information.
Users of accounting information:

Internal:
owners, managers, employees.

External: lenders, suppliers, customers, competitors,
government, the public.
P.2
(B) Accounting Equation

Assets ()
Capital ()
Liabilities ()
(Resources
= (Resources + (Resources
in the
supplied by
supplied by
business)
the owner)
outsiders)
e.g.
Assets
Bank
Cash
Machinery
Fixtures
Stock
Debtors
Motor Vehicles
Land
Building
Capital
Capital:
Chan
Capital:
Lee
Liabilities
Creditors
Bank overdraft
Bank loan
Loan: Cheung
P.3
Assets = Liabilities + Capital

After making profit:
Assets = Liabilities + Capital + Profit (Income Expenses)
Examples of Income
Sales,
Rental income,
Commission received,
Interest received,
Returns outwards
Examples of Expenses
Purchases, Rent
Commission,
Interest expenses,
Electricity,
Wages and salaries,
Depreciation,
Returns inwards
P.4
After drawings by the sole proprietor (owner):

Assets = Liabilities + Capital + Profit - Drawings
Definition of Drawings ()
The sole proprietor may take cash, stock or
other assets from the business for private use.
P.5
Class work and Homework

Accounting
equation (p. 14-16)
Class work: Ex. 2.6, 2.8, 2.10, 2.11,2.13

Homework: Ex. 2.7X, 2.9X, 2.12X,2.15X
P.6
(C) The Double Entry System
Definition
Every transaction are entered into two T-accounts,
one in debit (Dr.) side and the other in the credit
(Cr.) side.
Format of a T-account:
Name of the T-account
Date Particular
Dr
Date Particular
Cr
7
P.7
5-steps (RC3D) for the double entry system:

1. Recognize the names of accounts
2. Classify the types of accounts (assets, liabilities,
capital, income, expenses or drawings)
3. Decide the increase or decrease of the accounts
4. Decide the debit or credit of the accounts
5. Draw up the T-accounts
Examples to apply the 5-steps:

On January 1, 2008, Chan started the business
with $1000 cash.
P.8
Cash
Assets
Increase
Dr.
Dr. Cash
Capital:
Chan
Capital
Increase
Cr.
Cr. Capital:
Chan
Dr. Cr.
Assets
Dr.
Liabilities
2008
Capital
Jan 1 Capital: Chan 1000
Incomes
Expenses +
Drawings
Dr.
2008
Cash
$
Cr.
2008
Capital: Chan
$
Cr.
2008
Jan 1 Cash
1000
P.9
Double entry system

Supplementary Exercises (Worksheet)
Assets, liabilities and capital (p.25-27)
Class
work: Ex. 3.6, 3.8-3.10

Homework: Ex. 3.7X, 3.11X, 3.12X
The treatment of stock (p.37-40)

Class
work: Ex. 4.5, 4.8-4.10

Homework: Ex. 4.6X, 4,7X, 4.12X, 4.13X
Revenue and expenses (p.48-50)

Class
work: Ex. 5.6, 5.8, 5.10

Homework: Ex.
10
P.10
(D) Balancing the Account
Close (balance-off) the accounts at the

end of each month.
For examination, it may close the accounts
at the end of the year.
5 steps to balance-off an accounts:
1. Add the totals of debit and credit.
2. Find the difference between debit and credit.
(The difference
Balance c/d)
3. Enter the Balance c/d on the side with smaller
total.
4. Enter the totals on both sides at the same level.
5. Bring the Balance c/d to the opposite side as
Balance b/d on the first day of next month.
11
P.11

Balancing-off
Supplementary Exercises (Worksheet)

Double
entry system and balancing-off)
Class
work: Ex. 7.6, 7.7, 7.9

Homework: Ex. 7.8X, 7.10X
12
P.12
Final Accounts
References
Chapter 7 to 10 (P. 59-113)
P.13
Trial Balance ()
A trial balance is a list of debit balances and
credit balances in the books of accounts
The total of debit balances and the total of
credit balances are equal. If not, errors are
needed to identitied.
Trial balance is the basis for preparing final
accounts (Trading and profit and loss A/C;
Balance Sheet).
P.14
Examples of Trial Balance

Leungs Company
Trial Balance
for the year ended 31 December, 2008
$
Sales
Returns inwards
Stock as at 1 January, 2008
Purchases
Returns outwards
Carriages inwards
Rental income
Commission received
Rent
Commission
Electricity
Rates
1010
10
100
530
20
10
100
50
120
30
150
50
P.15
Land and building

Office Furniture
Fittings
Office equipment
Machinery
Motor vehicles
Debtors
Bank
Cash
Creditors
Bank overdraft
Capital
Drawings
Bank loan
LoanMr. Cheung
1000
700
500
500
1000
500
1500
400
80
1000
500
3000
100
1000
600
7280
Stock as at 31 December, 2008 is $120
7280
P.16
B Trading A/C
Gross profit:
Net Sales>Cost of sales
Function:
Calculate the gross profit or gross loss.
Net SalesCost of goods sold Gross profit /

Gross loss
Net Sales =
Sales Returns
inwards
Cost of goods sold =

Opening stock
(Net Purchases+Carriage inwards)
- Closing stock
Net Purchases =
Purchases Returns
outwards
Gross loss:
Cost of sales>Net sales
P.17
Put the above formulas () into a

statement, a Trading A/C is formed.
Trading A/c has vertical form and
horizontal form.
P.18
Examples of vertical form
Leungs Company
Trading A/C
$
$
Sales
LessReturns inwards
Net Sales
LessCost of goods sold
Stock as at 1 January,2006
AddPurchases
530
LessReturns outwards 20
Net purchases
510
AddCarriage inwards
10
1010
10
1000
100
520
620
LessStock as at 31 December, 2006 120
Gross profit
500
500
P.19
Examples of horizontal formT form
Leungs Company
Trading A/C
$ $
$
Opening Stock
AddPurchases
100
530
LessReturns outwards 20
Net purchases
510
AddCarriage inwards 10 520
620
LessClosing stock
120
Cost of goods sold
500
Gross profit c/d
500
1000
Sales
1010
LessReturns inwards 10
Net Sales
1000
1000
P.20
Profit and loss A/C
Functions: calculate the net profit / net loss.

Net profit:
Gross profit+Income>Expenses
Gross profitOther incomeExpensesNet profit / Net loss
Other income=
rental income + commission income+
Net loss:
Expenses>Gross profit+Income
Expenses=rent and rates+commission

+electricity+
P.21
Put the above formulas () into a

statement, a Profit and loss A/C is
formed.
Trading A/c has vertical form and
horizontal form.
P.22
10
Vertical form
Leungs Company
Profit and loss
$
$
Gross profit
500
Add Rental income
100
Commission income
50
650
LessExpenses
Rent
120
Commission
30
Electricity
150
Rates
50
350
Net Profit
300
P.23
11
Examples of horizontal form (T form)

Leungs Company
Profit and loss A/C
$
$
Rent
120 Gross profit b/d 500
Commission
30 Rental income 100
Electricity
150 Commission income 50
Rates
50
Net profit
300
650
650
P.24
12
D Balance Sheet
Balance sheet is a statement to record
the balances of assets, liabilities and
capital at the end of the accounting period.
Assets*Liabilities**Capital***
*AssetsNon-current assetsCurrent assets
**LiabilitiesCurrent liabilitiesLong-term liabilities
***Capital:
Opening capitalNet profitCapitalClosing capital
P.25
13
D1 Non-current Assets
Non-current assets have a long life and
are to be used in the business.
The non-current assets is not bought
for resale.
E.g. Land and building, Furniture,
Fixtures and fitting, Office equipment,
Machinery, Motor vehicles
P.26
14
Non-current assets are listed in the

order of permanency in the Balance
Sheet are as follows:
Non-current assets
Land and building
Furniture
Fixtures and fittings
Office equipment
Machinery
Motor vehicles
P.27
15
D2 Current assets
Current assets are likely to be
converted into cash in the short term
(i.e. within 1 year) or items having a
short life.
E.g. Stock, Debtors, Prepayment, Bank,
Petty cash, Cash
P.28
16
Current assets are listed starting the

most difficult to be turned into cash,
and the last one is Cash:
Current assets
Stock
Debtors
Prepayment
Bank
Cash
P.29
17
D3 Long-term Liabilities
Long-term liabilities do not have to
have in the near future (i.e. longer than
1 year)
e.g. Bank loan, Loan: Mr. Cheung,
Debentures
P.30
18
D4 Current liabilities
Current liabilities are to be paid in the
near future (i.e. within 1 year).
e.g.Creditors, Accruals, Bank
overdraft
Current assetsCurrent liabilitiesWorking Capital
P.31
19
Balance Sheet has vertical form and

horizontal form.
The format of vertical is as follows:
P.32
20
Leungs Company
Balance Sheet
as at 31 December, 2008
$
$
Non-current assets
Land and building
1000
Furnitures
700
Fixtures and fittings
500
Office equipment
500
Machinery
1000
Motor vehicles
500
4200
P.33
21
Current assets
Stock
Debtors
Bank
Cash
LessCurrent liabilities
Debtors
Bank overdraft
Working capital
120
1500
400
80
2100
1000
500
1500
600
4800
P.34
22
Capital
Capital as at 1 January, 2008
AddNet profit
LessDrawings
Capital as at 31 December, 2008
Long-term Liabilities
Bank loan
LoanMr. Cheung
500
$
3000
400
3400
100
3300
1000
1500
P.35
4800
23
Horizontal form T form

Leungs Company
Balance Sheet
As at 31 December, 2006
$
$
$
$
Fixed assets
Capital
Land and buildings 1000
Capital as at 1 January, 2008 3000
Furniture
700
AddNet profit
300
Fixtures and fittings 500
3300
Office equipment
500
LessDrawings
100
Machinery
1000
Capital as at 31 December, 2008 3200
Motor vehicles
500
4200 Long-term Liabilities
Current assets
Bank loan
1000
Stock
120
Loan-Mr. Cheung 600
1600
Debtors
1500
Current Liabilities
Bank
400
Creditors
1000
Cash
80
2100
Bank overdraft 500 1500
6300
6300
P.36
24
Books of Original Entry ()

and Ledgers ()
References
Chapter 11-14, 19
P.37
A Introduction
Books to record all the T accounts.
The expansion of the business,
transactions increasethe numbers
of T accounts are numerous.
Thus the T accounts are classified
into 3 Ledgers and 7 Books (Books
of Original Entry).
P.38
Books of Original Entry

1 Sales Journal ( Day Book)
2 Purchases Journal (Day Book)
3 Returns Inwards Journal (Day Book)
4 Returns Outwards Journal (Day Book)
5 Cash BookExplain later
6 Petty Cash BookExplain later
7 JournalExplain later
P.39
Transactions
Classifying the transactions
Credit Credit Returns

Sales Purchases Inwards
Cash and
cheque
Returns receipts
Outwards
and
payment
Others
Returns Returns
Sales Purchases Inwards Outwards Cash Book/
Petty Cash Journal
Journal
Journal
Book
Journal
Journal
p. 116
Posting to the double entry

accounts in the ledgers
Sales ledger
Purchases ledger
General ledger
P.40
Ledgers
3 kinds of ledgers
Sales ledgerrecords each debtors T A/C
Purchases ledgerrecords each creditors T A/C
General ledger records the rest of the accounts,
such as expenses, Fixed assets, capital, etc.
P.41
D Sales Journal and Sales Ledger

D1 Sales Journal
Record all credit sales
There is no debit items in Sales A/C, so
the Sales A/C transforms to a
statement(), i.e, Sales Journal.
P.42
Examples of Sales Journal

The credit sales transactions in January, 2008 of
Green Co. are as follow
Jan 5, sold $500 goods on credit to Rabbit Co.
and offered 1% trade discounts* to Rabbit Co.
Jan 15, sold $100 goods on credit to Pepper Co.
If Pepper Co. pays the debt within 1 month,
Pepper can enjoy 2% cash discounts**
Jan 28, sold $500 goods to Pump Co. and
offered 1% trade discounts. If Pump Co. pays
the debt within 1 weeks, Pump can enjoy 2%
Cash discounts.
You are required to prepare
The Sales Journal to record the above transaction.
P.43
7
*Trade discount:
offered to customers to attract largequantity transactions.

Directly deducted from the list price, no
double entry is required.
**Cash discounts:
Encourage the early repayment of debts

The entry is recorded at the time of
repayment of debts.
P.44
2008
Jan 5
15
28
31
Sales Journal
Particular
Inv. No. $
Rabbit Co
495
Pepper Co
100
Pump Co
495
Transferred to sales A/C 1090
(in General Ledger)
P.45
D2 Sales Ledger
After recording each transaction in the
Sales Journal, the transaction is posted to
the Debtors A/C in the Sales Ledger.
At the end of month or year, the total of
the Sales Journal is posted to the Sales
A/C in the General Ledger.
P.46
10
Posting each sales

transactions
Sales Journal
Record each credit sales
Sales Ledger
Debtors: Rabbit Co.
Dr.
Posting the total

to the Sales A/C
General Ledger
Sales A/C
Cr.
$
P.47
11
Purchases Journal and

Purchases Ledger
E1 Purchases Journal
Record all credit purchases
There is no credit items in Purchases
A/C, so the Purchases A/C
transforms to a statement(), i.e,
Purchases Journal.
P.48
12
Examples of Purchases Journal

The credit purchases transactions of Cucumber Co. in February
2008 are as follows
Feb 6, bought goods $200 on credit from Celery Co., and
received 1% trade discounts.
Feb 17, bought $100 goods on credit from Carrot Co. If the
debt is repaid within 1 week, 2% cash discounts is offered.
Feb 27, bought $200 goods on credit from Spinach Co, and
received 1% trade discounts. If the debt is repaid within 1
week, 2% cash discounts is offered.

The Purchases Journal to record the above transaction.
P.49
13
2006
Feb 6
17
27
28
Purchases Journal
Particular
Celery Co.
Carrot Co.
Spinach Co.
Inv. No.
Transferred to Purchases A/C
$
198
100
198
496
(in General Ledger)
P.50
14
E2 Purchases Ledger
After recording each transaction in the
Purchases Journal, the transaction is
posted to the Creditors A/C in the
Purchases Ledger.
At the end of month or year, the total of
the Purchases Journal is posted to the
Purchases A/C in the General Ledger.
P.51
15
Posting the total to

the Purchases A/C
Purchases Journal
Posting each
purchases transaction
Record the credit purchases
General Ledger
Purchases
Dr.
Purchases Ledger
Creditors: Celery Co
Cr.
P.52
16
Returns Inwards Journal
()
Customers (Debtors) demand to return goods to
our company. When we accept the goods returned,
we issue a Credit noteto the customers.
Examples
Goods returned to Cucumber Co in March, 2006
are as follows
March 1, Rabbit Co. returned $50 goods to us
(After deducted 1% trade discounts).
March 10, Pepper Co. returned $10.
The Returns Inwards Journal to record the above
transaction.
P.53
17

Credit Note No.
2006
Particular
Mar 1
Rabbit Co.
10 Pepper Co.
31 Transferred to returns inwards A/C
$
50
10
60
(in General Ledger)
P.54
18
Posting the total

to the returns
inwards A/c

(Record each items in Credit Notes)
General Ledger
Returns Inwards A/C
Dr.
Posting each
returns transaction
Sales Ledger
Debtors: Carrot Co.
Cr.
P.55
19
G Returns Outwards Journal

Our company demands to returns the goods to
suppliers (Creditors). We issue a Debit note
with the goods returns to the suppliers.
Examples
Cucumber Co returned goods in March, 2006
are as follows
March 1, returned $20 goods to Celery Co.
(After deducted 1% trade discounts).
March 5, returned $10 goods to Carrot Co.
The Returns Outwards Journal to record the
above transaction.
P.56
20
Returns Outwards Journal
2006 Particular Debit Note No.

Mar 1 Celery Co.
5 Carrot Co.
31 Transferred to returns Outwards A/C
$
20
10
30
(in General Ledger)
P.57
21
Posting each
transaction in debit
notes
Returns Outwards Journal

(Recording each items in Debit Notes)
Purchases Ledger
Creditors: Celery Co.
Dr.
Posting the total to

the Returns
Outwards A/C
General Ledger
Returns Inwards A/C
Cr.
P.58
22
H Classification of T Accounts
T
Accounts
Personal
Accounts
Debtors
(Sales Ledger)
Creditors
(Purchases
Ledger)
Impersonal
Accounts
Real Accounts
Nominal
Accounts
Records
Records
expenses,
assets
incomes,
and
Liabilities and Capital
in General in General
Ledger
Ledger
P.59
23
Cash Book ()
References
Chapter 15-16(P.152)
P.60
A Type of Bank Accounts

()
Mainly has two types ()

Current account ()allows holders to
withdraw money and make payments to other
people and firms with cheques.
Deposit account ()Interest is given

on money deposited in deposit account.
Deposit account includes saving accounts and
time deposit account.
P.61
B Two Columns Cash Book

()
Two columns are the cash and bank

column.
Put the Cash A/C and Bank A/C together
into one A/C. T
All cash transactions record in the cash

column.
All transactions of cheques record in the
bank column.
P.62
Example of Two Column Cash Book

Melon Companys cash and cheques transactions in January,

2007 were as follows:
20071
Jan 1
Sole trader Mr. Ho invested $1000 cash.
11
$1000
Jan 5
Deposited $900 cash into bank.
15
$900
Jan 10
Paid rent by $100 cheque.
110
$100
Jan 15
Cash purchases $200
115
$200
Jan 25
Cash Sales $300
125
$300
Two column Cash Book
P.63
4
2007
11
15
125
$
1000
300
1300
2007
21 200
2007
$
15900
900 110
115
200
131200
900
1300
$
100
800
900
800
P.64
Exercises Ex. 16.8

Homework Ex.16.9X
P.65
C Cash Discounts and Trade Discounts

()
1 Trade discounts
Offered to attract large quantity purchase.
2 Cash discounts
Offered to encourage early repayment of debts.
Two types of cash discounts

Discounts allowed
Discounts received
P.66
Accounting entries ()
Debit
Trade Discounts
Discounts
Allowed
Discounts
Received
Credit
No entry is required
Discounts
Allowed
Debtors X Ltd.
X
Creditors Y Ltd.
Y
Discounts
Received
P.67
Example of Discounts Allowed
On 5 January, 2006, Lemon Ltd. sold goods $10,000

on credit to Mr. Chan and gave him 5% trade
discounts. If Mr. Chan could repay the debt within
1 week, he could enjoy 5% cash discount. Mr. Chan
repaid the debt on 10 January.
200615$10000
5%5%
110
$9500
$9500
$9025
$475
$9500
P.68
Example of Discounts Received
On 10 January, 2006, Lemon Ltd. purchased $800

goods on credit from Mr. Lam. If Lemon Ltd. could
repay debts within 1 week, he could enjoy 2% cash
discount. Mr. Lam repaid the debt on Jan. 15.
2006110$800
2%115
$800
$800
$800
$784
$16
P.69
10
D Three Columns Cash Book
Three columns are cash, bank and

discount.
Discount column on the debit is

Discounts Allowed
Discount column on the credit is

Discounts Received
P.70
11
Example of Three Columns

Cash Book
The transactions in January 2008 of Coconut Ltd. are as follows:

20071
Jan 1
Balances: Cash $100, Bank $2000
11 $ 100$ 2000
Jan 5
Cash purchases $500
15$500
Jan 10 Cash Sales $800
110$800
Jan 15 Deposited $400 cash to bank.
115$400
Jan 20 Received a cheque from Mr. Lam for paying $2000 debt, and enjoyed 2% discount.
120$20002%
Jan 25 Paid Mr. Chan by cheque to settle $1500 debts and enjoyed 2% discount.
125$15002%
Three columns cash book.
P.71
12
2007
2007
$
11
110
115
120 40
** 40
2007
21
$
100
800
900
2000 15
115
400 125 30
1960
131
4360
** 30
500
400
1470
900
2890
4360
2890
**
P.72
13
Exercises Ex. 16.10, 16.11

Homework Ex.16.12X, 16.13X
P.73
14
Petty Cash Book and Imprested System
Reference: Chapter18 (p.194)

18 (p. 210)
P.74
A Petty Cash Book

A petty cash book is a cash book for
recording small cash payment.
P.75
Imprested System
The imprested system is a system by which the

amount spent in a period would be reimbursed (
) and the petty cash balance in the next period
would be made equal to the original amount (cash
float ) started with.
e.g. The opening balance (cash float) was $100, the

petty cash payment was $80, the reimbursed
amount would be $80
$100$80
P.76
$80
3
Example of Petty Cash Book
p. 196-197 18.2 (English version)

p. 212-21418.2 ()
P.77
Class work: Ex.18.6,18.8,

Homework: Ex. 18.7X, 18.9X
Ex. 15.3, 15.4
Ex. 15.5X, 15.6X
P.78
Journal
Reference: Chapter 19 (p.206)

19 p. 222
1
P.79
A Uses of Journal
The entries, that are not recorded in

the other six books of original entries,
would be recorded in the Journal.
E.g. purchases or sales of fixed assets

on credit, bad debts written off,
corrections of errors, opening entries,
closing entries.
P.80
Format of the Journal
2007
Jan 1
Journal
Particular
Dr. Cr.
$
XX
A/C name to be debited

A/C name to be credited
Narration
11
XX
$
XX
XX
3
P.81
Format of the Journal
Write the debit entry first and then

the credit entry.
The amount of debit entry must equal

to the credit entry.
The number of debit entries may not be

equal to those of credit entries.
4
P.82
Examples of Journal
Record the following transactions of January 2007

in the Journal:
Jan 1 Mr. Cheung invested $30,000 cash to open
Violet Company.
Jan 10 Purchased $4,800 machinery on credit from
Chans Company.
Jan 20 Mr. Cheung brought $1,000 Furniture and
$2,000 Office Fitting into the company.
20071
11 $30000
110 $4800
5
120 $1000$2000
P.83
2007
11

$
$
30000
30000
110
4800
4800
120
1000
2000
3000
6
P.84
Homework:
Use Journal to record the entries:
Ex.
Class work:
Use Journal to record the entries:
:
Ex7.3, 7.4, 7.5 (p.78-79)
:
Ex.7.6X, 7.7X (p.80-81)
7
P.85
7 Accruals and Prepayment
(Accrued expenses, Prepaid expenses,

Revenues in arrears, Revenues in advance)
()
(p.239)
P.86
Accrued Expenses
Definition: Accrued expense is an expense
which has been incurred, but has not yet
been paid for.
E.g. The rent of Tai Tai Co.is $1,200

for a year, $1,100 rent was paid for the
year ended 31 December 2008.
$1200
8$1100
P.87
1100
$
1200
100
1200
1200
P.88
Exercise 1
The rates of Siu Siu Co. for a year

is $240,$220 rates was paid for
the year ended 31 December 2008.
$240
20081231$220
P.89
220
20
240
240
240
P.90
Prepaid Expenses
Definition:
Prepaid expense is an expense to be
incurred in the following period, but
which has been paid in advance.
E.g. The annual rent for Tai Tai Co. is

$2,400. $2,600 was paid for the year
ended 31 December 2008.
$2400
8$2600
P.91
2600 2400
200
2600
2600
P.92
Exercise 2
The annual rates for Siu Siu Co. was

$360. $390 rates was paid for the year
ended 31 December 2008
$360
20081231$390
P.93
390
360
30
390
390
P.94
$5200$330
P.95
10
5200
4800
5200
400
5200
P.96
11
330
360
30
360
360
P.97
12
Revenue in arrears
Definition:
Revenue in arrears / Accrued revenue
means other revenue earned by the
firm which has not been received at the
end of the period.
P.98
13
Example: Annual rental income for Lee

Wan Co. is $2,400. $2,200 rental income
was received for the year ended 31
December 2008.
$2400
20081231
$2200
P.99
14
2400
2200
200
2400
2400
P.100
15
Exercise 4
The rental income of Fa Fa Co. for the year

ended 31 December 2008 was $3,600. Only
$3,300 was received.
20081231
$3600 $3300
P.101
16
3600
3300
300
3600
3600
P.102
17
Revenue in advance
Definition:
Revenue in advance / Prepaid revenue is the
other revenue to be earned in the next period
but which has been received in advance
Example: Annual rental income of Woody Co.

was $7,200. $7,800 rental income was received
for the year ended 31 December 2008.
$7200
20081231$7800
P.103
18
7200
$
7800
600
7800
7800
P.104
19
Exercise 5
Annual rental income for View Co. was

$4,800. $5,200 rental income was received
for the year ended 31 December 2008.
$4800
20081231$5200
P.105
20
4800
5200
400
5200
5200
P.106
21
$6500$1820
$140
P.107
22
6000
6500
500
6500
6500
P.108
23
1960
1820
140
1960
1960
P.109
24
Year-ended adjustment in the final

accounts
Profit and Loss A/C
for the year ended 31 December 2008
Rent
Rental income
Rates
Commission
received
P.110
25
Year-ended adjustment in the final

accounts
20081231
$
P.111
26
Amount recorded in the Profit and Loss
This accounting
period
Last accounting
period
Accrued expenses
Add
Less
Prepaid expenses
Less
Add
Accrued revenues
Add
Less
Prepaid revenues
Less
Add
P.112
27
Balance Sheet(Extracted)
as at 31 December 2008
$
Current Assets
Prepaid expenses
Accrued incomes
Current Liabilities
Accrued expenses
Prepaid incomes
P.113
28
()
20081231
$
P.114
29
Capital Expenditure and

Revenue Expenditure

21 (p. 258)
P.115
Reasons to distinguish Capital

and Revenue Expenditure
Capital expenditure
Recording as the
cost of fixed
assets
Revenue expenditure
Recording as
expenses
P.116
Capital Expenditures
Definition: Capital expenditure is made when a

firm spends money to buy fixed assets, and
add value to an existing fixed asset.
e.g. cost of buying a lorry, the delivery

charge of transporting fixed assets, the legal
fee for purchasing building, other costs needed
to get the fixed assets ready to use.
P.117
The entry for Revenue

expenditures:
Dr. Motor Vehicles
Cr. Bank / Creditors
P.118
Revenue Expenditures
Definition: Revenue expenditure

includes expenses needed for the
day-to-day running of the business.
e.g.: rent, electricity, petrol for a

van
P.119
The entry for capital expenditures:

Dr. Motor expenses
Cr. Bank / Creditors
P.120
Exercises
Ex. 21.6 (p.242)
Ex. 21.8 (p.243)
Ex. 21.9 (p.243)

Ex. 22.3 (p.238)
Ex. 22.5 (p.239)
Ex. 22.6 (p.239)
P.121
Capital Income
Definition: Capital income is

receipts from the sale of fixed
assets
E.g. receipts from sales of motor

vehicles (fixed assets)
$1000
P.122
Revenue Income
Definition: Revenue income is receipts

from the sale of goods and services,
plus other revenues from the
operation of the business.
E.g. Sales, Revenue received,

Commission received, Rental received
9
P.123
Depreciation and Disposal

of Fixed Assets
References: Chapter 22 (p.244) - 23 (p.255)

22 (p. 265)23 (p. 277)
P.124
A Definition of Depreciation
Depreciation is
cost allocation of
fixed assets,
consumed during
its useful life.
Depreciation is
the expense of
the company.
P.125
B Causes of Depreciation
Physical
deterioration, e.g.
wear and tear,
erosion, rusting, rot
and decay.
Economic factors, e.g.
obsolescence,
inadequacy.
Time factor, e.g.
amortization
(patent); depletion
(silver mines)
P.126
C Methods for Calculating Depreciation
1 Straight-line Method
Calculating the
average depreciation
of the fixed assets.
The depreciation is
the same during the
useful lives.
P.127
1 Straight-line Method
Depreciation Cost*Residual Value** Estimated Useful life
OR Depreciation Cost*Residual Value** Depreciation rate
*Cost is the acquisition cost of the fixed assets

**Residual value is the estimated value when scraping the assets
1
***
***
*
**
P.128
Repairs
Depreciation
1st
year
2nd
year
3rd
year
4th
year
5th
year
P.129
e.g. 1: Apple Co. bought $2,000 furniture by

cheque on 1 January 2006. The useful life
is 5 years and the scrap value after 5
years is $100. Calculate the depreciation
for 5 years.
200611$2000
55
$100
($2000$100)5
$380
P.130
e.g. 2: Melon Co. bought $5,000 office fittings

by cheque on 1 January 2006. The
depreciation rate is 10% per annum (p.a).
The residual value is $500. Calculate the
depreciation for 5 years.
200611$5000
10%$500
($5000$500)10%
$450
P.131
2 Reducing balance Method

Calculate the depreciation based on the Net Book Value
of the fixed asset.
Net Book Value = Cost Accumulated depreciation
Depreciation CostAccumulated depreciation) Depreciation rate
2
*
* / /
P.132
e.g. 3: Lemon Co. bought $2,000 machinery by

cheque on 1 January 2006. The depreciation
rate is 10% p.a. and the scrap value is $200.
Calculation the depreciation from 2006 to
2008.
200611$2000
10%$200
$200010%$200
$2000$20010%$180
$2000$200$18010%
$162
P.133
10
Repairs
Depreciation
1st
year
2nd
year
3rd
year
4th
year
5th
year
P.134
11
Ex.: Lime Co. bought $4,000 motor vehicles by

cheque on 1 January 2007. The depreciation
rate is 10% p.a. and the residual value is $400.
Calculate the depreciation from 2007 to 2009.
(Using reducing balance method)
200711$4000
10%$400
$400010%$400
$4000$40010%$360
P.135
$4000$400$36010%$324
12
3 Revaluation Method
Calculate low valued fixed
assets, e.g. Loose tools,
Stationery.
e.g. The details of the
loose tools of Pepper Co.
are as follows:
Opening balance of loose
tools $500
Bought $1,000 loose tools
during 2005
Closing balance of loose
tools $400
Calculate the depreciation
for loose tools in 2005
$500
2005
$1,000
$400
P.136
13
2005
2005
$500
$1000
$1500
$400
$1100
P.137
14
Ex.: Cabbage Co used wooden containers for

packing the products. The followings are the
details:
Opening balance of wooden containers $800
Wooden containers bought during 2008 $2,000
Closing balance of wooden containers $900
Calculate the depreciation for 2008.
$800
2008$2,000
$900
P.138
15
2005
$800
$2000
$2800
$900
2005 $1900
P.139
16
4 Depletion Unit Method

Used the raw material
extracted from the
fixed asset as a
percentage to
calculate the
depreciation.
Natural resources,
such as oil well, gold
mines, adopt this
method to calculate
depreciation.
P.140
17
e.g. Narcissus Co. Bought a stone

quarries by $10,000 cheque. It was
estimated to extracted 1,000 tons stone.
During 2008, the company extracted 50
tons stone. Calculate the depreciation
for 2008.
$10,000
1,000200650
2008
$10,0001,00050
$500
P.141
18
Ex.: Lily Co. bought a coal mine by $20,000.

It was estimated to extract 2,000 tons
coal. During 2008, the company
extracted 30 tons coal. Calculate the
depreciation for 2008.
$20,000
2,000200830
2008
$20,0002,00030
$300
P.142
19
Accounting treatment for depreciation
1. Dr. Profit and loss

Cr. Provision for
Depreciation
2. Balancing-off as
other accounts
1.
2.
P.143
20
Examples for Depreciation

John started business on 1 January 2006. The
motor van were bought in cash as follows:
Motor Van
Date
Cost
1
1 Jan., 2006
$10,000
2
1 July, 2007
$15,000
3
1 Nov., 2007
$18,000
The depreciation is calculated at 20% p.a., using straightline method. The depreciation is charging on a
monthly basis.
You are required to:
Prepare the following accounts for three years starting
from 1 January 2006:
(a) Motor van
(b) Provision for
depreciation
(c) Profit and loss (extracted) (d) Balance sheet
P.144
(extracted)
21
E Disposal of Fixed Assets

After sales of fixed
assets, it is need to
calculate the profit or
loss on disposal.
Accounting entries:
1.
1. Cancel the accounts of
cost of the fixed asset (e.g.
Motor vehicles)
Dr. Disposal: Motor vehicles
Cr. Motor vehicles
P.145
22
Cancel the amount of

accumulated depreciation
in the Provision for
Depreciation A/C.
Dr. Provision for depreciation:
Motor vehicles
Cr. Disposal: Motor vehicles
Record the amount

received from the disposal
of fixed assets.
Dr. Cash / Bank
P.146
23
Balancing-off: Calculate
the profit or loss on
disposal.
If Dr. is larger than Cr., there
is loss on disposal
Dr. Profit and loss
Or
If Cr. Is larger than Dr., there
is gain on disposal
Dr. Disposal: Motor vehicles
Cr. Profit and loss
P.147
24
e.g.: Plum Co. bought $500

machinery on 1 January 2006.
The company used straightline method to calculate the
depreciation. The estimated
useful life is 5 years and the
scrap value is 50. On 1
January 2008, the company
sold the machinery for $200.
The end of accounting period
is 31 December.
You are required to prepare the
following accounts from
2006 to 2007:
(a) Machinery
(b) Provision for depreciation
(c) Disposal: Machinery
(d) Profit and loss (extract)
(e) Balance sheet (extract)
200611
$500
$50
52008
11$200
12
31
20062007
2008
(a)
(b)
(c)
(d)
P.148
(e) 25
(a)
2006
$ 2006
$
11 500 1231 500
2007
2007
11 500 1231 500
2008
2008
11 500 11 500
P.149
26
(b)
2006
$ 2006
1231 90 1231
$
90
2007
2007
1231 180 11
1231
180
90
90
180
2008
2008
11180 11 180
P.150
27
(c)
2008
11
$ 2008
$
500 11 180
11 200
1231* 120
500
500
*
P.151
28
(d)
2006
2007

1231
$
90
90
2008
120
P.152
29
(d)
1231
$
2006
500
90 410
2007
500
180 320
P.153
30
Bad Debts and

Provision for Bad Debts
and Discounts Allowed
10
Reference: Chapter 24 (p. 277)

24 (p.301)
P.154
A Bad Debts
Definition: It is the
amount of debt that the
debtor is unable to
repay.
Accounting records:
Dr. Bad Debts
Cr. Debtors
Dr. Profit and Loss
Cr. Bad Debts
P.155
Example:
A Co. sold $100

goods to Mr.
$100
Lee. Mr. Lee
was insolvent. A
Co. decided to
write off the
debt.
P.156
Answer:
Dr. Bad Debts $100

Cr. Debtors-Mr. Lee
$100
Dr. Profit and loss

$100
Cr. Bad debts
$100
$100
$100
$100
$100
P.157
Exercise
B Co. sold $200
goods to Mr.
Cheung. Mr.
Cheung became
bankrupt. B Co.
decided to write
off the debts.
$200
P.158
Answer
Dr. Bad Debts $200
Cr. Debtors: Mr.
Cheung
$200
$200
$200
Dr. Profit and loss $200
Cr. Bad debts $200
$200
$200
P.159
B Provision for Bad Debts
Definition: Provision
for bad debts is an
expense that
estimates the debts
likely to be bad.
Calculation of

Provision for bad
X ?%
debts
(Debtors - Bad debts) X ?%
P.160
Calculation of Provision for Bad Debts

Year
ended 31
December
20X5
20X6
20X7
20X8
Debtors at the end

of the year (before
bad debts written
off
Bad
debts
written
off
Provision for
bad debts
(1%)
Increase /
Decrease in
Provision for
bad debts
30,400
200
302
+302
Dr. Profit and loss 302
283
-19
Dr. Provision for bad debts
453
+170
Dr. Profit and loss 170
150
-303
28,700
45,900
15,300
400
600
300
Entries to record
the Provision for
bad debts
Cr. Provision for bad debts
Cr. Profit and loss 19

Cr. Provision for bad debts
Dr. Provision for bad debts

P.161
Increase in Provision
for bad debts:
Dr. Profit and loss
Cr. Provision for bad
debts
Decrease in Provision
for bad debts:
Dr. Provision for bad
debts
Cr. Profit and loss
P.162
Example 1
On 31 December 2008,
the balance of debtors
is $1,020. $20 debts is
needed to be written
off. The rate of
provision for bad
debts is 3%.

20081231
$1 020$20
3%
P.163
$20
$20

Cr. Bad Debts
$20
$20
$20

debts (Increase) $30
$30
()$30
Answer
Dr. Bad Debts
Cr. Debtors
$20
$20
P.164
Example 2
On 31 December 2008,
the balance of debtors
is $2,040. $40 debts is
needed to be written
off. The rate of
provision for bad
debts is 3%. The
provision for bad
debts for last year was
$70.

20081231
$2 040$40
$70
3%
P.165
Answer
$40
$40

Cr. Bad Debts
$40
$40
$40
Dr. Provision for bad

debts (Decrease) $10
Cr. Profit and loss $10
()$10
$10
Dr. Bad Debts

Cr. Debtors
$40
$40
P.166
Bad Debts and Provision for Bad

Debts Recording in Final Accounts
()
Profit and loss (extract)

$
Bad Debts
Increase in
Provision
for bad
debts
$
Decrease in
Provision
for bad
debts
()
()
P.167
()
Balance Sheet (extract)

$
Current asset
Debtors
Less:
Provision for
bad debts
()
:
P.168
Exercise
The debtors for Chong Ho
Co. on 31 December 2005
was $10,200. $200 debts
would be written off. The
company decided to
provide 5% provision for
bad debts on the debtors
after deducting the bad
debts.
You are required to prepare:
(a) Provision for bad debts
(b) Profit and loss (extract)
(c) Balance sheet (extract)
20051231
$10 200$200
5%
2005
(a)
(b)()
(c)()
P.169
D Provision for Discount Allowed
Definition:

Provision for
discount allowed
shows the
estimated total
amount which will
be deducted when
debtors pay their
accounts within
the credit period.

P.170
Increase in Provision
for discounts allowed:
Dr. Profit and loss
Cr. Provision for
discounts allowed
Decrease in Provision
for discounts allowed :

Dr. Provision for
discounts allowed
Cr. Profit and loss

P.171
Example
The debtors for Ka Ka Co.
was $4,000 on 31
December 2008. $200
provision for bad debts
would be provided for
2008. The company
made a provision for
discounts allowed of 2%
on the remaining debtors.
Required:
Show the Provision for
discount allowed A/C to
record the above
transaction.
20081231
$4000
$200
2%
P.172
Answer
$76
()
$76
debts (Increase) $76
($4000-$200) X 2%
P.173
E Bad Debts Recovered

Definition: A debt
written of in
previous year to be
recovered in later
year.
P.174
Accounting records:
1 Debts written off and

1
recovered in the same year
Dr. Debtors
Cr. Bad debts

/
Dr. Cash / Bank
Cr. Debtors
2 Debts written off and
recovered in different year
Dr. Debtors
Cr. Bad debts recovered
Dr. Cash / Bank
Cr. Debtors
Dr. Bad debts recovered
Cr. Profit and loss
P.175
Example:
$200 bad debts

written off on 31
December 2006 was
recovered and
received cash on 1
July 2006.
20051231
$2002006
71
P.176
Example:
Debts written off and

recovered in different
year
Dr. Debtors
$200
Cr. Bad debt
$200
recovered
$200
$200
$200
$200
$200
Dr. Bad debt

$200
recovered
$200
$200
Dr. Cash / Bank

Cr. Debtors
$200
P.177
11
Bank Reconciliation Statement

17 (p.191)
P.178
Reasons for the Preparation of Bank

Reconciliation Statement
Explain the reasons for

the differences between
the balances of Cash
Book and Bank
Statement
The reasons include:
Bookkeepers or
banks mistakes
The time-lag of the
entries recorded
P.179
B.
Example of Bank Statement
Bank Statement
Dr. Cr.
2005
1/12
$
Bal. b/f
15/12 Cheque
31/12 Bank
charges
Bal.
$
2005
400 Cr
1/12
60 460 Cr
20
440 Cr
400()
15/12
31/12
60 460()
440()
20
P.180
C Causes for Differences in Balances

between Cash Book and Bank Statement
Recorded in Cash Book,

but not recorded in Bank
Statement
1.
2.
Unpresented Cheques
The drawee ()has
not yet presented ()
the cheque drawn by the
firm into his bank.
(Payment)
Uncredited Items / Bank
lodgement not yet credited
by bank The firm has
not yet presented ()
the cheque in the bank. /
The deposited cheque has
not yet appeared in the
bank statement (Receipt)
1.
()
2.
()
P.181
Recorded in Bank
Statement, but not
recorded in Cash Book:
1. Credit transfer Direct money transfer
to the firmss bank
account without
using a cheque.
(Receipt)
2. Dishonoured
cheques The drawer
() may not
have enough money
in the current account
causing the bank
cannot pay money to
the drawee, i.e. the
firm. (Payment)
[Dr.Debtors Cr.Bank]
1.
(
)
2.
()
P.182
Bank charges Service

charges of the banks
have been deducted
directly from the firms
bank account. (Payment)
Standing Order
Instructions given by the
firm to make regular
payments to specified
accounts with fixed
amounts automatically.
(Payment)
Autopay - Instructions
given by the firm to let
specified parties to
collect money with
variable amounts and
from time to time
(Payment)
Errors Cash Book Error
and Bank Statement
(Receipts / Payment)
3 -
()
4
(
)
()
6
(/
)
P.183
Post-dated cheque the

date written on the
cheque is after the
particular date when it is
drawn. No transaction
needs to be made. If the
firm recorded the entries:
Dr. Bank Cr. Debtors.
The correcting entries is
Dr. Debtors Cr. Bank
Stale Cheques
Cheques have not
presented more than 6
months. If the entries
was recorded, the
correcting entries is Dr.
Bank Cr. Creditors
7 -
P.184
Methods for the Preparation of Bank

(1)Updated the Cash Book and

(1)
then prepared the Bank

Enter the following items
in the Cash Book: Credit
transfer, Dishonoured
cheques, Bank charges,
Standing Order, Autopay,
Post-dated cheque, Stale
Cheques
Prepare the Bank
with the remaining items:
Unpresented Cheques ,
Uncredited Items / Bank
lodgement not yet credited
by bank
P.185
Updated Cash Book
Cash Book
$
Balance b/f
Bank charges
Credit
transfer
Dishonoured
cheques
Standing
order
Autopay
Balance c/f
P.186
Prepare Bank Reconciliation

Statement
Bank Reconciliation Statement
31 December 2006
20061231
Adjusted Cash Book

Balance
()
Add: Unpresented cheques
Less: Uncredited items
Balance as per Bank

Statement
P.187
10
(2) Prepare the Bank

Reconciliation
Statement only, begin
with the Cash Book
balance
Prepare the Bank
Reconciliation
Statement with all
the items.
(2)
P.188
11
Bank Reconciliation Statement 31 December 2006

$
Balance as per Cash Book

Add: Unpresented Cheques
Credit transfer
Less: Uncredited items
Standing order
Bank charges
Autopay
Dishonoured cheques
Balance as per Bank Statement
P.189
12
20061231
$
P.190
13
(3) Prepare the Bank

Reconciliation
Statement only, begin
with the Bank
Statement balance
Prepare the Bank
Reconciliation
Statement with all
the items.
(3)
P.191
14
Bank Reconciliation Statement 31 December 2006

$
Balance as per Bank Statement

Add: Uncredited items
Standing order
Bank charges
Autopay
Dishonoured cheques
Less: Unpresented cheques
Credit transfer
Balance as per Cash Book
P.192
15
20061231
$
P.193
16
Summary:
(2) Begin with Cash (3) Begin with Bank

Book Balance
Statement Balance
Unpresented Cheque
Credit transfer
Uncredited items
Standing order
Bank charges
Autopay
Dishonoured cheques
+
P.194
17
13
Corrections of Errors (1):

Errors not affecting the Trial Balance
agreement
(1)

25 (p.319)
P.195
Two Types of Errors:
(1) Errors not affecting the Trial

Balance agreement
The errors result in the same
amounts in debit and credit
sides.
For example, both debit and
credit sides are omitted.
(1) Errors affecting the Trial
Balance agreement
Different amounts are
entered in debit and credit
side.
For example, only debit entry
is recorded and credit entry is
omitted.
(1)
-
(2)
-
P.196
Six Kinds of errors not affecting the

agreement of Trial Balance
()
(1) Errors of commission

(2) Errors of principles
(3) Errors of original entry
(4) Errors of Omission
(5) Compensating errors
(6) Complete reversal of
entries
(1)
(2)
(3)
(4)
(5)
(6)
P.197
Definitions and Examples of Errors not

affecting the Trial Balance agreement
(1)Errror of Commission:
entered in a wrong
persons A/C
Sales to Mr Cheung
recorded in Mr. Chens A/C
e.g. 1
On 1 May 2009, credit sales
of $500 to A Co. wrongly
recorded in B Co.
(1)

(1)
200951
$500
P.198
Correcting Entry:
Journal
Dr.
$
2009
May 1
DebtorsA Co.
DebtorsB Co.
Cr.
$
500

$
$
2009
51
500
500
500
P.199
(2)Errors of Principle
entered in the wrong type
of A/C
Motor expenses A/C
wrongly entered in the
Motor Car A/C
e.g. 2
On 1 June 2009, purchases
$1,000 machinery wrongly
recorded in the purchases
A/c
(2)

(2)
200961
$1000
P.200
Correcting Entry:
Journal
Dr.
$
2009
June 1
Machinery
Purchases
Cr.
$
1000
2009
61
1000
Dr.
$
Cr.
$
1000
1000
P.201
(3)Errors of Original Entry

Incorrect amounts
entered in the debit and
credit of ledger accounts
e.g. 3:
On July 1 2009, credit
sales $500 to C Co., both
debit and credit
recorded as $5000.
(3)

(3)
200971
$500
$5000
P.202
Correcting Entry:
Journal
Dr.
$
2009
July 1
Sales
Debtors
C Co
Cr.
$
4500
Dr.
$
2009
71
4500
Cr.
$
4500
4500
P.203
(4) Errors of Omission

Both debit and credit are
not recorded.
e.g. 4:
On 1 August 2008, credit
purchases of $300 from D
Co. are omitted in the
ledger.
(4)

(4)
200881
$300
P.204
Correcting Entry:
Journal
Dr.
$
2008
Aug. 1
Purchases
CreditorsD Co.
Cr.
$
300
2008
81
300
Dr.
$
Cr.
$
300
300
P.205
(5) Compensating Errors

An error in debit side are
set off an error in credit
side.
e.g. 5
On 30 September 2008,
the total purchases
overcasted by $100 and
the total sales also
overcasted by $100.
(5)

(5)
2008930
$100
$100
P.206
Correcting Entry:
Journal
Dr.
$
2008
Sept. 1
Sales
Purchases
Cr.
$
100
2008
930
100
Dr.
$
Cr.
$
100
100
P.207
(6)Complete Reversal of Entries

The debit entry wrongly
recorded in credit and the
credit entry wrongly recorded
in debit at the same time.
e.g. 6:
On 1 October 2008, received
$500 from C Co., the entry
wrongly debited the C Co. and
credit the cash book.
(6)

(6)
2008101
$500
P.208
Correcting Entry:
Journal
Dr.
$
2008
Oct. 1
Cash
DebtorsC Co.
($500x2)
Cr.
$
1000
Dr.
$
2008
101
1000
-
($500x2)
Cr.
$
1000
1000
P.209
14
Corrections of Errors (2):

Errors affecting the Trial
Balance agreement
(2)
26 (p.336)
P.210
Reasons affecting the Trial Balance

agreement
1. Incorrect addition
in any account
2. Omit one of the
entry (debit /
credit)
3. The amount in
debit is different in
the credit side
1.
2.
3.
P.211
B Suspense Account
A suspense
account is an
account showing a
balance equal to
the difference in
the trial balance
totals.
P.212
The Effects of Errors on Profits
If the errors effect

the items (i.e.
Income, Expenses,
Stock) in the
Trading and Profit
and Loss A/C,
these items are
needed to be
adjusted in the
Statement of
Corrected Profit
P.213
Example:
On 31 December 2008, there is a shortage of $77 on debit
side of Trial Balance. A suspense account was opened for
the difference. In 8 January 2009, the following errors
made in 2008 was found:
(i) Cheque $150 issued to Mr. Kwan only recorded in
Cash Book, but omitted in Mr. Kwans ledger account.
(ii) Purchases undercasted by $20.
(iii) $93 cheque received from Mr. Sun recorded in the
Cash Book, but omtted in Mr. Suns ledger account.
(a)
Journal to correct the above errors;
(b)
Suspense account
(c)
Statement correcting the net profit ( Net profit is $2200)
P.214
:20081231$77
$77
(i)$150
(ii)$20
(iii)$93
(a)
(b)
(c)($2200)
P.215
(a)
Journal
Dr.
$
2008
Jan. 8
(i)
Creditor Mr. Kwan

Suspense
(ii) Purchases
Suspense
(iii) Suspense
Debtor Mr.
Sun
Cr.
$
150
150
20
20
93
93
P.216
(a)
2008
18 (i) -
(ii)
(iii)
-
150
150
20
20
93
93
P.217
(b)
Suspense A/C
2008
Jan.
8
2008
Balance b/f
77 Jan. (i) Creditor - Mr.

8
Kwan
15
0
(iii) Debtor - Mr.

Sun
93
20
(ii) Purchases
170
17
0
P.218
(b)
2008
18
2008
77 18 -
93
170
150
20
170
P.219 10
(c)
Statement correcting net
profit
for the year ended 31 December
2008
$
Net profit before corrections
Add : Purchases undercast
Net profit after corrections
2200
20
P.220 11
2180
(c)
20081231
$
2200
20
2180
P.221 12
Control Accounts
Reference:
Chapter 27 (p. 338)
P.222
Functions of Control A/C

Locate errors;
Provide a summary of the total of
debtors and creditors;
Cross-check to avoid fraud.
P.223
Revision
Books of original entries and Ledgers
7 books: Sales journal, Purchases
journal, Returns inwards journal,
Returns outwards journal, Cash book,
Petty cash book, Journal
3 ledgers: Sales ledger, Purchases
ledger, General ledger
Original
documents
7 books
Posting
3 ledgers
P.224
Original
documents
Sales /
Purchases
Journals
(7 books)
General ledger
Sales and
Purchases a/c
Sales /
Purchases ledgers
Debtors /
Creditors a/c
Trial
Balance
Double entry system
Sales ledger control account

Purchases ledger control account
For memorandum purposes
posting
extracting
P.225
Sales Ledger Control a/c

Sales Ledger Control a/c
2008
Dec 1 Balance b/f
2008
(a) Dec 1 Balance b/f
(h)
31 Sales
(b)
31 Returns inwards
(i)
31 Cash / Bank (Refund)
(c)
31 Cash / Bank
(j)
31 Bank(Dishonoured cheques) (d)
31 Set-off
(k)
31 Interest received
(e)
31 Discounts allowed
(l)
31 Bad debts recovered
(f)
31 Bad Debts
(m)
31 Balance c/f
(g)
31 Balance c/f
(n)
X
P.226
Items
(a)
Total of opening debit balances of debtors
(b) Total credit sales

(c)
Cash refund to a customer
(d) Dishonoured cheques

(e)
Interest charged by us on overdue debts
(f)
Bad debts recovered
(g) Total of closing credit balances of debtors

(h) Total of opening credit balances of debtors
(i)
Returns inwards
(j)
Cash or cheques received from debtors
(k)
Balances in sales ledger set off against credit

balances in purchases ledger
(l)
Discounts allowed
(m) Bad debts written (not provision for bad debts)

(n) Total of closing debt balances of debtors
Sources
Sales ledger
Sales journal
Cash book
Cash book
Journal
Journal
Sales ledger
Sales ledger
Returns inwards journal
Cash book
Journal
Cash book
Journal
P.227
Sales ledger
D Purchases Ledger Control a/c

Purchases Ledger Control a/c
2008
Dec 1 Balance b/f
2008
(a) Dec 1 Balance b/f
(g)
31 Returns outwards
(b)
31 Purchases
(h)
31 Cash / Bank
(c)
31 Cash / Bank
(i)
31 Set-off
(d)
31 Bank
(j)
31 Discounts received
(e)
31 Interest expenses
(k)
31 Balance c/f
(f)
31 Balance c/f
(l)
P.228
Items
Sources
(a) Total of opening debit balances of creditors
Purchases ledger
(b) Returns outwards
Returns outwards journal
(c) Cash or cheques paid to creditors

(d) Balances in purchases ledger set off against
debit balances in sales ledger
(e) Discounts received
(f) Total of closing credit balances of creditors
(g) Total of opening credit balances of creditors
(h) Total credit purchases
(i) Cash refund from suppliers who have
overcharged us
(j) Dishonoured cheques returned from creditors
(k) Interest payable on overdue debts
(l) Total of closing debt balances of creditors
Cash book
Journal
Cash book
Purchases ledger
Purchases ledger
Purchases journal
Cash book
Cash book
Journal
PurchasesP.229
ledger
15
NON-PROFIT MAKING
ORGANIZATION
Reference:
Chapter 28 (p. 359)
28 (p. 385)
P.230
Non-profit Making Organization
Example, club and

association.
The establishing goal
is not for profit
making.
As there is no gain or
loss, trading and
profit and loss
account is not needed.
A receipts and
payment account and
Income and
expenditure account
are prepared.
2
P.231
Receipts and Payment Account
A summary of actual
receipts and
payments
Similar to Cash Book
3
P.232
Format of Receipts and Payment A/C

Oriental Club
Receipts and Payment A/C
Receipts
$ Payments
$
Opening cash and bank
balance
XXX
Wages of the stadium
XX
Subscriptions received
in 2009
XXX
Stadium repairs
XX
Rental income
XX
Closing cash and bank

balance
XXX
P.233
4
20091231
$
P.234
5
Income and Expenditure A/C
An account used to
calculate the
surplus (net profit)
or deficit (net
loss).
Similar to a profit
and loss account.
The income and
expenses recorded
subject to the yearended adjustment,
i.e. accruals and
prepayment.
6
P.235
Format of Income and Expenditure A/C

Oriental Club
Income
$
$
Subscriptions
XX
Rental income
XX
XXX
Less: Expenditures
Wages of the stadium
XX
Stadium repairs
XX
XX
Surplus
XX P.2367
20091231
$
XX
XX
XX
XX
$
XXX
XX
XX
P.237
8
Bar Trading Account
If a non-profit making
organization involves
activities making
profit, a bar trading
A/C is used to
calculate the profit
or loss.
E.g. a bar operated in
a golf club.
Expenses related to
the bar operation are
recorded in the Bar
Trading A/C (not in
the Receipts and
Payment A/C
P.238
Format of Bar Trading A/C

Oriental Club
$
Bar Taking
LessCost of goods sold
Opening bar stock
AddBar purchases
LessClosing bar stock
Gross profit
LessWages of bartender
Profit to Income and Expenditure A/C
1000
100
500
600
150
450
550
150
400
P.239
10
20061231
$
1000
100
500
600
150
450
550
150
400
P.240
11
Balance Sheet
The balance sheet is

similar to that of
profit making
organization, except
the capital.
In non-profit making
organization, the
capital is called
the Accumulated
Fund.
Accumulated Fund
+ Liabilities = Assets
12
P.241
Format of Balance Sheet

Oriental Club
Balance Sheet as at 31 December 2009
$
Fixed Assets
Property
Current Asset
Bar Stock
Cash
Less: Current Liabilities
Bar Creditors
10,000
1,000
1,000
2,000
1,000
Financed by:
Accumulated fund as at 31 December 2008
Add Surplus
400
1,000
11,000
10,600
P.242
13
20051231
10,000
1,000
1,000
2,000
1,000
1,000
11,000
10,600
400
11,000
P.243
14
F
If
Subscription
there is no
subscription in arrear or
in advance, the amount
of subscription in the
Receipts and payment A/C
will be recorded in the
Income and Expenditure
A/C
If there are subscription
in arrear and advance
presented, the following
adjustments are to be
made:
Subscription (in I & E)
= Subscription (in R & P)
+ In arrear (this year)
- In advance (this year)
- In arrear (last year)
+ In advance (last year)
15
P.244

Subscription
in Arrear and in Advance
At the year ended,

the subscriptions in
arrear and
subscriptions in
advance of the year

are to be recorded
in the Balance Sheet.
Subscription in
arrear is Current
Assets
Subscription in
advance is Current
Liabilities
16
P.245
G
Donations and Entrance Fees
Donations are income

and are recorded in
the Income and
Expenditure A/C
Entrance fees are
income and received
when the member
joined the
organization. Also
recorded in the
Income and
Expenditure A/C
17
P.246
Life Membership
Member can pay a lump

sum of subscription in
one times and enjoy
the membership in his
lifetime.
Life membership is an
income, it needed to
spread the life
membership into
several years. So it
needed to credit the
Income and Expenditure
A/C for several years
18
P.247
16
Manufacturing Accounts
Reference
Chapter 29 (p. 385)
35
(p. 424)
P.248 1
Manufacturing Company ()
and Manufacturing Accounts ()
Trading company purchases

goods for resale;
manufacturing company
manufactures goods for
sales.
The final accounts for
manufacturing company
are almost the same as
trading company. An
additional account,
Manufacturing Account.
P.249 2
Manufacturing Accounts
Manufacturing accounts is
used to calculate the
Production cost of goods
completed.
Prime cost
Factory overhead
Opening work-in-progress
Closing work-in-progress
Production cost of goods completed
P.250 3
Prime Cost (Direct Cost)
Direct materials
Direct labour
Direct expenses
Prime cost
P.251 4
C1
C1
Direct Material (Cost of raw material consumed)

()
Stock of raw materials as at 1 Jan 20X7

AddPurchases of raw material
50000
Less Returns Outwards
2000
Net Purchases
48000
Add Carriage inwards
1000
LessStock of raw materials as at 21 Dec 20X7
Cost of raw materials consumed
5000
49000
54000
3000
51000
5000
50000
1000
51000
2000
49000
54000
3000
51000
P.252 5
C2
Direct Labour
Wages for workers directly

participate in
manufacturing the products.
C3
Direct Expenses
Cost can be allocated to the

units of good manufactured.
E.g. royalties , and
subcontracting costs
P.253 6
Factory Overhead (Indirect Cost)
Costs cannot be easily

traced to the
manufactured items;
costs occurred indirectly

during production.

E.g., wages of cleaners,
rent and rates of the
factory, wages of
foremen, depreciation
of the factory plant and
machinery
P.254 7
Other
Administrative expenses
(e.g. wages of the
management, rent of the
office, depreciation of office
equipment)
Selling and distribution
expenses (e.g. wages and
commission of the
salesmen, carriage
outwards, depreciation of
delivery van, advertising
expenses. )
Administrative expenses
and Selling and distribution
expenses are recorded in
the Profit and Loss
Accounts.
)
(
P.255 8
F Format of Manufacturing Account

Miu Miu Clock Co.

Manufacturing A/C
for the year ended 31 December 20X7
$
$
Stock of raw materials as at 1 Jan 20X7
AddPurchases of raw materials 50000
AddCarriage inwards
1000
51000
LessReturns Outwards
2000
5000
49000
54000
LessStock of raw materials as at 31 Dec 20X7 3000
Cost of raw material consumed
51000
P.256 9
Cost of raw materials consumed

Direct expenses
Direct labour
Prime Cost
Factory Overhead
Factory electricity
Indirect wages
Depreciation of machinery
Factory rent
15000
5000
8000
20000
$
51000
10000
20000
81000
48000
129000
P.25710
129000
AddWork-in-progress as at 1 Jan 20X7
20000
149000
Less Work-in-progress as at 31 Dec 20X7 25000
Production cost of goods completed c/d 124000
P.25811
20071231
$
50000
1000
51000
2000
$
5000
49000
54000
3000
51000
P.259
51000
10000
20000
81000
15000
5000
8000
20000
48000
129000
P.260
129000
20000
149000
25000
124000
P.261
Trading Account in
Manufacturing company
Miu Miu Clock Co.

Trading A/C
$
Sales
Less:Cost of goods sold
300000
50000
AddProduction cost of goods completed 124000
174000
Less: Stock of finished goods as at 1 Jan 20X760000 114000
Gross profit
186000
15
Stock of finished goods as at 1 Jan 20X7
P.262
G
20071231
$
300000
50000
124000
174000
60000 114000
186000
P.263
Balance Sheet (extracted)

in Manufacturing Company
Miu Miu Clock Co.
Balance Sheet (extracted)

as at 31 December 2007
$
Current assets
StocksRaw material
Finished goods
Work-in-progress
Debtors
Bank
Cash
3000
60000
25000
80000
70000
20000
58000
P.26417
H ()
()
20071231
3000
60000
25000
80000
70000
20000
258000
P.265

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Bookkeeping () vs. Accounting ()

the accounting data in the books.

important information to the owners and

Users of accounting information:

owners, managers, employees.

(B) Accounting Equation

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Assets = Liabilities + Capital

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After drawings by the sole proprietor (owner):

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Class work and Homework

equation (p. 14-16)

Class work: Ex. 2.6, 2.8, 2.10, 2.11,2.13

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(C) The Double Entry System

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5-steps (RC3D) for the double entry system:

Examples to apply the 5-steps:

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Jan 1 Capital: Chan 1000

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Class work and Homework

Double entry system

work: Ex. 3.6, 3.8-3.10

The treatment of stock (p.37-40)

work: Ex. 4.5, 4.8-4.10

Revenue and expenses (p.48-50)

work: Ex. 5.6, 5.8, 5.10

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(D) Balancing the Account

Close (balance-off) the accounts at the

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Class work and Homework

Supplementary Exercises (Worksheet)

entry system and balancing-off)

work: Ex. 7.6, 7.7, 7.9

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Examples of Trial Balance

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Land and building

Stock as at 31 December, 2008 is $120

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Net SalesCost of goods sold Gross profit /

Cost of goods sold =

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Put the above formulas () into a

Examples of vertical form

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Examples of horizontal formT form

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Profit and loss A/C

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Functions: calculate the net profit / net loss.

Gross profitOther incomeExpensesNet profit / Net loss

Expenses=rent and rates+commission

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Put the above formulas () into a

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Examples of horizontal form (T form)

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