Learning Online Principles Of Accounting Courses

Test Your Knowledge/Questions On Costs Classification or Cost Concept

2009-11-09T04:28:00.001-08:00

1 Classify each of the following as being fixed(F), variable(V) or semi-variable(SV):

(a) direct labor;
(b) depreciation on machinery;
© factory rental;
(d) supplies and other indirect materials;
(e) advertising;
(f) maintenance of machinery;
(g) factory manager’s salary;
(h) supervisory personnel;
(i) royalty payments.

2 Which of the following costs are likely to be controllable by the head of the production department?

(a) price paid for materials;
(b) charge for floor space;
(c) raw materials used ;
(d) electricity used for machinery;
(e) machinery depreciation;
(f) direct labour;
(g) insurance on machinery;
(h) share of cost of industrial relations department.

3. For the relevant cost data in items (1) to (7), indicate which of the following is the best classification:

(a) sunk cost
(b) incremental cost
(c) variable cost
(d) fixed cost
(e) semi-variable cost
(f) semi-fixed cost
(g) controllable cost
(h) non-controllable cost
(i) opportunity cost

1) A company is considering selling an old machine. The machine has a book value of $15,000. In evaluating the decision to sell the machine, the $ 15,000 is a …..

2) As an alternative to the old machine, the company can rent a new one. It will cost $10,000 a year. Analysing the cost-volume behaviour the rental is…

3) To run the firm’s machines, there are 2 alternative courses of actions. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operator a…

4) As an alternative, the firm can pay the operator a flat salary. It would then use 1 machine when volume is low, 2 machines when it expands, and 3 during peak periods. This means that the total operator cost would now be a….

5) The machine mentioned in (1) could be sold for $11,000. If the firm considers retaining and using it, the $11,000 is a….

6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a …

7) The machine is charged to the foreman of each department at a rate of $13,000 a year. In evaluating the foreman, the charge is a …

4. A company manufactures and retails clothing. You are required to group the costs which are listed below and numbered (1) – 20) into the following classifications (each cost is intended to belong to only one classification);

(a) direct materials
(b) direct labor
(c) direct expenses
(d) indirect production overhead
(e) research and development costs
(f) selling and distribution costs
(g) administration costs
(h) finance costs

(1) Lubricant for sewing machines
(2) Floppy disks for general office computer
(3) Maintenance contract for general office photocopying machine
(4) Telephone rental plus metered calls
(5) Interest on bank overdraft
(6) Performing rights society charge for music broadcast throughout the factory
(7) Market research undertaken prior to a new product launch
(8) Wages of security guards for factory
(9) Carriage on purchase of basic raw materials
(10) Royalty payable n number of units of product XY produced
(11) Road licences for delivery vehicles
(12) Parcels sent to customers

Manufacturing Accounts

2009-07-28T07:13:00.001-07:00

Test Your Knowledge on Manufacturing account:

Is the Manufacturing account an internal management account? If yes,what is the purpose of producing such report?
What types of cost are included in a manufacturing account?
What is "prime cost" What is factory cost?
What is the purpose of apportioning overheads?
What is a profit centre

Revision Note On Manufacturing Accounts

2009-07-28T07:06:00.000-07:00

SALIENT POINTS on the topic of Manufacturing Accounts:

1.0 Manufacturing accounts are prepared for internal management purpose only. This report helps management to distinguish between the costs and profitability associated with the manufacturing operations and those associated with trading ( shown in the trading account)

2.0 In a manufacturing account, we have:

PRIME COST= Cost of raw materials + direct labor employed in production

FACTORY COST OF GOODS PRODUCED= Prime Cost+Indirect facoty expenses plus or minus any movement over the period in the cost of work in progress

FACTORY PROFIT=a notional profit earned in the manufacturing operation, reflecting the relative cheapness of manufacturing goods compared with buying them from outsiders

TRANSFER PRICE OF FINISHED GOODS PRODUCED=Factory Cost+ Factory Profit. This transfer price appears in the trading account as part of the cost of goods sold.

How To Prepare the Financial Statements For A Manufacturing Company

2009-07-27T08:05:00.000-07:00

Append below are:

(a) The following financial statements for a manufacturing company:

Statement of Cost Of Goods Manufactured
Income Statement
Balance Sheet

(b) Salient points to note in a manufacturing company:

There are three (3) types of inventories namely:

Raw materials, work in progress and finished goods
Remember that:

Cost of Goods Manufactured = Beginning Work in progress Plus Total current manufacturing cost( direct labor + factory overheads) Minus Ending work in progress

==============================================

FORMAT of Statement of Cost Of Goods Manufactured for year ended 31st December 2008

	$		$
Opening work in progress			XXX
Direct material
Opening inventories	XXX
+ Purchases	XXX
Raw material available for use	XXX
-Closing inventories	(XX)
Raw material consumed/used		XXX
Direct labor		XXX
Factory overhead:
Indirect material	XX
Indirect labor	XX
Others	XX
Total factory overhead		XXX
			XXX
Less: Closing work in progress			(XXX)
Total current manufacturing cost			XXX

FORMAT of Income Statement for the year ended 31st Dec 2008

	$	$
Sales Revenue		XXXX
Less: Cost of Goods Sold
Beginning Finished Goods Inventory	XXX
Cost of Goods Manufactured	XXX
Cost of Goods Available for Sale	XXX
-Ending Finished Goods Inventory	(XXX)
Cost of Goods Sold		(XXX)
Gross Profit		XXXX
Less: Operating Expenses		XXXX
Selling Expenses		XXX
Administrative Expenses		XXX
Net Income/(loss)		XXX

Format of Balance Sheet As At 31 st December 2008 ( extracted only Current Asset portion )

	$	$
Current Assets
Cash		XXX
Accounts Receivable		XXX
Inventories:
Raw Materials	XX
Work in progress	XX
Finished goods	XX	XXX

Sundry deposits and prepayment		XXX
Total Current Assets		XXX

How To Prepare The Financial Statements

2009-07-26T07:31:00.000-07:00

The following are simple snapshot to prepare the following financial statements:

(a) Income Statement
(b) Owner's Equity Statement
(c) Balance Sheet

========================================================

(a) How to prepare the Income Statement:

All temporary or nominal accounts relating to incomes and expenses are closed by using closing entries and transferred to the Income Statement/Summary

Journalize the closing entries as follows:

For all Revenue accounts:

Debit Revenue Account Credit Income Summary

For all Expenses accounts:

Debit Income Summary Credit Expense Account

(b) How to prepare Owner's Equity Statement:

From (a) the Income statement is transferred to the Owner's Equity Statement

For Profit in the Income Summary:

Debit Income Summary Credit Owner's Capital

For Loss in the Income Summary:

Debit Owner's Capital Credit Income Summary

The Owner's drawing account which is part of temporary/nominal account is similarly closed by using closing entry and transferred to the Owner's Equity Statement

Accounting entries:

Debit Owner's Capital Credit Drawings Account

All permanent or real accounts like all asset accounts, all liability accounts and owner's capital account are not closed and transfer to the Balance Sheet(refer to vertical and horizontal format)

LCCI Accounting Third Level-Accounting Questions on Clubs and Societies Accounts

2009-07-08T06:17:00.000-07:00

Append below are five LCCI Accounting Third Level questions from 1995 to 2003 which are testing the candidates on non trading organization re: club & society accounts.

The accounting test questions on club & society typically asked are:

Calculates the subscription rates, its breakeven point, comment whether subscription or bar pricess should be increase and
Calculaes the accumulated Fund
Prepare subscription accounts
Prepare Bar Trading account,Income & Expenditure account and Balance Sheet

Click the image:

Accounting for Club And Society: Understand What is The Receipts And Payments Account and Income and Expenditure Account

2009-07-08T00:03:00.000-07:00

In a non trading concern like a club or a society, besides the usual Balance Sheet and a Trading Account ( if it runs a restaurant or bar), we see two unique Accounts called the Receipts & Payments Account and Income And Expenditure Account
Actually, the Receipts & Payments Account, Income And Expenditure Account in a non trading concern are like the Cash Book and Income Statement respectively in a trading concern.

Below article describes further the salient features:

RECEIPTS & PAYMENTS A/C
1. Is equivalent to the Cash Book of a trading concern.
2. Contains both revenue and capital items
3. Contains the part actually received or paid plus items relating to preceding or succeeding periods
4. If positive bank balance then include as Current Assets in the Balance Sheet otherwise as overdraft classified under Current Liability

INCOME AND EXPENDITURE A/C
1. Summary of all revenue income earned and all revenue expenditure incurred in the current year, the balance being surplus or deficit.
2. Only revenue items are included.
3. Also based on accrual basis where all income and revenue expenditures attributable to the current period are included
4. If surplus balance is added to the Accumulated Fund in the Balance Sheet. Vice versa, if deficit, to deduct from Accumulated Fund in the Balance Sheet.

Accounting for Club And Society: What are the Sources of Income And Normal Expenditure

2009-07-08T00:00:00.000-07:00

The following are some of the major sources of Income In a Non-Trading Concern:

Revenue in nature:
Entrance fees;
Subscriptions;
Interest from investment;
Visitors fees;
Lockers fees;
Gross trading profit from bar or restaurant;
Refreshment receipts;
Donations;

Capital in nature
Legacies;
Donations ( if stated for capital purpose like building a swimming pool)

Please note that:-

Only the revenue income are included in the Income & Expenditure Account ( Profit & Loss A/c for a trading concern) to determine the Surplus or Deficit for the current year activities ( contrast with the trading concern - profit or loss for the current year )

Next are some of the normal expenditure in a Non-Trading Concern:

Revenue expenditure:
· Rent for club/association building;
· Staff wages;
· Maintenance costs of club/association;
· Honorarium;
· Insurance, printing and others

Capital expenditures:
Fixed assets

Please note that:-

Purchases of fixed assets cannot be taken up in the Income and expenditure account only the depreciation of the fixed asset is permitted.

What Are The Differences Between A Normal Trading And Non Trading Concern.

2009-07-07T23:58:00.000-07:00

This article describes the major differences between a normal trading and non-trading concerns ( like clubs and societies)

In the case of the Trading Concern:

Profit-motive
The incomes derived mainly from the trading in the buying and selling of goods and services
Maintain Cash Book
Maintain a Profit & Loss Account
The word Capital is used

As for the Non-Trading Concern like a club or a society:

It is normally non profit motive
Sources of Income mainly related to clubs, societies and associations
The Cash book is called Receipts and Payments Account
The Profit & Loss Account or Income Statement is called Income and Expenditure Account
Instead of using Capital, it is called Accumulated Fund

PRINCIPLES OF ACCOUNTS GCE ORDINARY LEVEL SYLLABUS 7092 (2010)

2009-07-07T22:53:00.000-07:00

Earlier the syllabus for year 2009 for Principles of Accounts Ordinary level was mentioned, again extracted below from the Singapore Examinations and Assessment Board are the syllabus 7092 for 2010 PRINCIPLES OF ACCOUNTS GCE ORDINARY LEVEL:

INTRODUCTION

The syllabus aims to develop an understanding of the principles and concepts of accounting and their applications in a variety of business situations. Candidates will acquire basic knowledge in double entry and develop the ability to prepare, present, analyse and interpret financial statements.

The syllabus is organised into six sections:

(i) role of accounting which is to provide information for monitoring and decision making by different users;

(ii) double entry system of book-keeping which comprises the accounting equation, source
documents, books of prime entry, the cash book, the general journal, the ledger and the trial balance;

(iii) accounting procedures regarding capital and revenue expenditure, depreciation,
adjustments to ledger accounts, the correction of errors and control accounts;

(iv) fundamentals of preparing the final accounts i.e. Trading Account, Profit and Loss
Account, Balance Sheet and the operation of partnerships;

(v) preparation of final accounts for sole traders and partnerships, including the use of incomplete records; and

(vi) analysis and interpretation of final accounts involving ratios.

AIMS

To enable students to:
• acquire knowledge and understanding of fundamental accounting concepts, principles, and
procedures in the context of business aims and activities;
• develop skills in preparing, analysing and interpreting accounting information and understanding their implication;
• develop an understanding of the role of accounting in providing an information system for monitoring and decision making;
• develop skills of numeracy, information technology literacy, communication, inquiry, presentation and interpretation;
• develop attitudes of accuracy, orderliness and logical thought and an appreciation of professional ethics.

SYLLABUS CONTENT

The syllabus content is presented together with learning outcomes to provide teachers with more specific guidance as to what each of the syllabus areas requires.
The arrangement of the topics in this section is not an indication of the sequence in which they should be taught.

1 THE ROLE OF ACCOUNTING
1.1 Book-keeping and Accounting
- Difference between book-keeping and accounting
- Role of accounting
- Define book-keeping
- Define accounting
- Explain the main difference between book-keeping and accounting
- Explain the main role of accounting
- Explain how past performance can be analysed to provide a guide for future
decision making

In this syllabus, the definition of accounting is defined as the process of recording,
summarising, reporting, analyzing and interpretation of financial information of an organisation.

1.2 Accounting Principles

- Main accounting concepts and principles underlying the preparation of final accounts
- Explain the basic accounting concepts and principles
- accounting entity (or business entity)
- accounting period
- accrual concept/matching principle
- consistency
- duality
- going concern
- historical cost
- monetary assumption or money measurement
- materiality
- objectivity
- prudence or conservatism
- realisation concept
- Identify the accounting concepts and principles applied in given situations
Candidates should be introduced to these accounting concepts and principles at relevant sections of
the syllabus, where appropriate.

2 DOUBLE ENTRY SYSTEM OF BOOK-KEEPING

2.1 The Accounting Equation
- Assets, Liabilities and Owners’ Equity
- Accounting equation: relationship between Assets, Liabilities and Owners’ Equity
- Cash and credit transactions
- Explain the meaning of assets, liabilities and owners’ equity
- List examples of assets, liabilities and owners’ equity
- Classify items as assets and liabilities
- State the accounting equation: Assets = Capital + Liabilities
- Calculate the value of assets, liabilities and capital using the accounting
equation
- Analyse and state the effects of transactions on the accounting equation
- Distinguish between cash transactions (resulting in immediate cash payment)
and credit transactions (payments are postponed)

2.2 - The Double Entry System

- Process accounting data using the double entry system
- Double entry rules
- Explain the meaning of revenue and expenses
- State the double entry rules
- Identify the accounts to be debited and credited for various transactions
- Apply the double entry rules for recording:
- purchases and sales of stock on cash and on credit terms
- returns of stock previously purchased on cash and/or credit terms
- returns of stock previously sold on cash and/or credit terms
- withdrawal of stock and cash for owners’ personal use
- all other cash and credit transactions

2.3 Source Documents

- Purpose of source documents
- Types of source documents
- Explain the purpose of source documents
- Identify and state the use of the following source documents:
- invoice
- credit note
- debit note
- payment voucher
- cheque and cheque counterfoil
- receipt and cash register slips
- bank statement
- petty cash voucher

Candidates will not be required to know the details in these
documents.

2.4 Books of Prime Entry

- Purpose of books of prime entry
- Advantages of using subsidiary books
- Explain the purpose of using books of prime entry
- Explain the usefulness of recording transactions in the subsidiary books e.g.
- records similar transactions
- reduces unnecessary details in the ledger as only totals are posted to the
ledger
- Identify the types of books of prime entry:
- special journals i.e. purchases journal, purchases returns journal, sales
journal and sales returns journal
- cash book (including petty cash book)
- general journal
Candidates are required to know that books of prime entry are also known as books of original entry or
day books.

2.4.1 Purchases Journal
- Purpose of purchases journal
- Trade discount
- Explain the purpose of the purchases journal
- State the source document for recording transactions in the purchases journal
- Interpret the items posted from the purchases journal to the appropriate
accounts in the ledgers
- Explain the meaning of trade discount
- Outline the reasons for giving trade discount
- Calculate trade discount given by suppliers
Questions will not be set on drawing up the purchases journal.

2.4.2 Purchases Returns Journal or Returns Outwards Journal
- Purpose of purchases returns
journal
- Explain the purpose of the purchases returns journal
- Outline the reasons why goods previously purchased are returned to suppliers
- State the source document for recording transactions in the purchases returns
journal
- Interpret the items posted from the purchases returns journal to the appropriate
accounts in the ledgers
- Calculate the amount of returns allowance taking into consideration the trade
discount received on purchase of goods

Questions will not be set on drawing up the purchases returns
journal.

2.4.3 Sales Journal
- Purpose of sales journal
- Trade discount
- Explain the purpose of the sales journal
- State the source document for recording transactions in the sales journal
- Interpret the items posted from the sales journal to the appropriate accounts in
the ledgers
- Calculate trade discount given to customers

Questions will not be set on drawing up the sales journal.

2.4.4 Sales Returns Journal or Returns Inwards Journal
- Purpose of sales returns journal
- Explain the purpose of the sales returns journal
- Outline the reasons why goods previously sold to customers are returned
- State the source document for recording transactions in the sales returns journal
- Interpret the items posted from the sales returns journal to the appropriate
accounts in the ledgers
- Calculate the amount of returns allowance taking into consideration the trade
discount given on sales of goods

Questions will not be set on drawing up the sales returns journal.

2.5 The General Journal
- Purpose of general journal
- Explain the purpose of the general journal i.e. to record the following:
- opening entries
- closing entries
- purchase and sale of fixed assets on credit
- correction of errors, adjustments and transactions not recorded in the other
subsidiary books
- Post transactions from the general journal to the appropriate accounts in the
ledgers
Questions will not be set specifically on recording closing entries in the general journal as
part of the process of transferring expenses and revenue to the Trading and Profit and Loss
Accounts on balance day.

2.6 The Cash Book
- Dual function as a book of prime entry and as a ledger account for bank and cash by use of analysis
columns
- Cash discount
- Dishonoured cheques
- Explain the advantages of keeping cash in the bank
- Explain the purpose of the cash book
- Record transactions in the cash column and bank column of the cash book
- Post the entries from the cash book to the respective ledgers
- Interpret transactions and details in the cash book e.g. discount, total banked or
withdrawn etc.
- Explain the meaning of cash discount
- Outline the reasons for giving cash discounts
- Calculate cash discounts
- Explain the differences between cash discount and trade discount
- Explain the effect of giving and receiving cash discount on net profit
- Outline the reasons for a dishonoured cheque
- Record dishonoured cheque and discounts disallowed in the ledgers

Questions will not be set on drawing up a 3-column cash book.

2.6.1 Bank Reconciliation Statement

- Causes of discrepancy between the cash book balance and the bank
statement balance
- Purpose of preparing bank reconciliation statement
- Explain the differences between bank loan and bank overdraft
- Classify bank accounts, bank overdrafts and bank loans correctly in the Balance
Sheet
- Interpret a bank statement
- Identify and explain the causes of discrepancy between the cash book balance
and the balance on the bank statement
- Explain the need for preparing a bank reconciliation statement
- Reconcile the cash book balance with the bank statement balance by adjusting
entries in the cash book and preparing a bank reconciliation statement, in
respect of the following: unpresented cheques, dishonoured cheques, bank
charges, direct debits, standing orders, credit transfers, dividends, correction of
errors and uncredited deposits

2.6.2 Petty Cash

- Need for a petty cash fund
- Purpose of petty cash book
- Advantages of the imprest system
- Explain the need for a petty cash fund
- Explain the purpose of a petty cash book in relation to the cash book
- Explain the meaning of ‘float’
- Explain the meaning of the imprest system
- Outline the advantages of the imprest system of keeping petty cash
- Interpret the details in the petty cash book
- Calculate and record the amount of reimbursement required to restore the petty
cash balance to the imprest amount
Questions will not be set on drawing up a petty cash book.

2.7 The Ledger
- ‘T’ accounts
- Prepare ledger accounts using ‘T’ account format
- Analyse transactions and post relevant details to the appropriate accounts in the
ledgers
- Balance ledger accounts as required
- Interpret the details and the balances in ledger accounts
Candidates are not required to
- know the use of the folio columns
- give headings to the columnar details i.e. date, particulars and amount in the ‘T’ account.
- Sub-division of ledger into the sales ledger, purchases ledger and the general ledger
- Explain that with the high volume of credit transactions involving debtors and
creditors, separate ledgers are kept for debtors and creditors i.e.
- all trade debtors accounts are kept in the sales ledger
- all trade creditors accounts are kept in the purchases ledger
- all other accounts are kept in the general ledger
- Transactions related to drawings - Explain the meaning of drawings
- Distinguish between withdrawals of stock for business use and for owners’ use
- Record drawings of stock, cash or other assets for owners’ use
- Record the transfer of drawings to the capital account
- Explain the effect of drawings on capital
- Transactions relating to stock
- Explain the purpose of preparing the following accounts:
- Purchases account
- Sales account
- Returns inwards account (or sales returns account)
- Returns outwards account (or purchases returns account)
- Draw up the following accounts to record transactions pertaining to the
movement of stock:
- Purchases account
- Sales account
- Returns inwards account (or sales returns account)
- Returns outwards account (or purchases returns account)

2.8 The Trial Balance

- Purpose of a trial balance
- Limitations of a trial balance
- Errors not revealed by a trial balance
- Errors revealed by a trial balance
- Explain what is meant by a trial balance
- Explain the purpose of preparing a trial balance
- Prepare a trial balance
- Explain why an agreed trial balance is not an absolute proof of accuracy
- Explain the limitations of a trial balance i.e. unable to reveal certain errors
- State the types of errors that are not revealed by a trial balance:
- compensating errors
- complete reversal of entries
- errors of commission
- errors of omission
- errors of original entry
- errors of principle
- Explain the effect of errors on the profit and asset valuation
- State the types of errors that are revealed by a trial balance i.e.
- errors in calculation
- errors in omitting either the debit or the credit entry
- posting of entries to the wrong side of the account
- errors in debiting an account with one amount and crediting the
corresponding account with another amount
- Prepare an adjusted trial balance after correcting errors

3 ACCOUNTING PROCEDURES

3.1 Capital and Revenue Expenditure
- Distinction between capital and revenue expenditure
- Explain the meaning of capital and revenue expenditure
- Distinguish and account for the different treatment of capital and revenue
expenditure
- Classify business expenditure into capital or revenue expenditure
- Explain and show by calculation the effect of the treatment of expenditure on
profit and asset valuation
- Distinguish between capital and revenue receipts

3.2 Accounting for Depreciation
- Causes of depreciation
- Need for provision for depreciation
- Methods of calculating depreciation
- Disposal of fixed asset
- Gain or loss on disposal of fixed assets
- Explain the meaning of depreciation
- Outline the causes of depreciation
- Explain the need for provision for depreciation
- State the methods of calculating depreciation: the straight-line, reducing
(diminishing) balance and revaluation methods
- Calculate depreciation using the straight-line, reducing (diminishing) balance and
revaluation methods
- Compare the straight-line, reducing (diminishing) balance and revaluation
methods of calculating depreciation
- Outline the advantages and disadvantages of the straight-line, reducing
(diminishing) balance and revaluation methods of calculating depreciation
- Calculate the rate of depreciation, length of useful life, amount of depreciation,
cost of fixed asset from given information
- Interpret the depreciation account and provision for depreciation of fixed asset
account
- Prepare the following accounts to record depreciation:
- fixed asset account
- depreciation account
- provision for depreciation account
- Profit and Loss Account
- Explain the effect of the depreciation methods employed on the net profit figure
for the earlier and later years after the acquisition of the fixed asset
- Prepare the following accounts to record the disposal of fixed asset:
- fixed asset account
- provision for depreciation account
- disposal of fixed asset account
- Profit and Loss Account
- Calculate the gain or loss on disposal of fixed assets

The suggested accounting entries for depreciation are as follows:
- debit Depreciation account
- credit Provision for depreciation account

Close the Depreciation account and transfer the balance to the Profit and Loss Account
- debit Profit and Loss Account
- credit Depreciation account

The fixed asset accounts show fixed assets at cost price i.e. no entry is made in the asset
accounts for depreciation.

Questions will not be set on tradein of fixed asset in the acquisition of new asset.

3.3 Adjustments of Ledger Accounts

3.3.1 Accruals and Prepayments
- Accrued expenses and revenue
- Prepaid expenses and revenue
- Prepare adjusting entries in the ledgers for:
- accrued expenses
- accrued revenue
- prepaid expenses
- prepaid revenue
- Show workings to determine the adjusted expenses/revenue and prepayments/
accruals to be transferred to the Profit and Loss Account and the balance to appear in the Balance Sheet

For adjusting entries, it is not required to - draw up the accrued expense and revenue accounts
- make reversing entries in these accrued expense and revenue accounts.

3.3.2 Bad Debts and Provision for Doubtful Debts
- Reasons for incurring bad debts
- Difference between bad debts and doubtful debts
- Provision for doubtful debts
- Explain the reasons for incurring bad debts
- Explain the difference between bad debts and doubtful debts
- Explain the need for provision for doubtful debts
- Prepare adjusting entries in the general journal and ledgers for:
- writing off bad debts
- recovering bad debts including partial settlement of debts
- provision for doubtful debts i.e. creating, increasing and reducing the
provision for doubtful debts
Explain the effect of bad debts, recovery of bad debts and provision for doubtful
debts on net profit and net debtors in the Balance Sheet
Candidates are required to calculate provision for doubtful debts based on the adjusted value
of debtors i.e. after writing off all bad debts.

The suggested accounting entries for provision for doubtful debts are shown below. Alternative methods, which are in line with the accounting conventions, are accepted.

1. Creating provision for doubtful debts and increasing the provision for doubtful debts
- debit Doubtful debts account
- credit Provision for doubtful debts account

Close the Doubtful debts account and transfer the balance to the Profit and Loss Account
- debit Profit and Loss Account
- credit Doubtful debts account

Doubtful debts will be deducted from gross profit as an expense in the Profit and Loss Account.

2. Decreasing the provision for doubtful debts is as follows:
- debit Provision for doubtful debts account
- credit Decrease in doubtful debts account

Close the Decrease in doubtful debts account and transfer the balance to the Profit and Loss Account
- debit Decrease in doubtful debts account
- credit Profit and Loss Account

Decrease in doubtful debts will be added to gross profit as ‘revenue’ in the Profit and Loss Account.

3.4 Correction of Errors

- Double entry to correct errors
- Effects of errors on the profit
- Write up journal entries and/or draw up ledger accounts to correct errors not revealed
by trial balance i.e. errors of omission, errors of commission, errors of principle,
errors of reversal of entries, errors of original entry, compensating errors
- Explain the effects of errors on profit
- Prepare a statement of adjusted profit after correcting errors, both revealed and not
revealed by trial balance
- Prepare an adjusted Balance Sheet or an extract of the Balance Sheet after
correcting the errors, both revealed and not revealed by trial balance

Questions will not be set on suspense account.

3.5 Control Accounts
- Debtors control account
- Creditors control account
- Advantages of control accounts
- Sources of information for control
accounts
- Explain the purpose of the Debtors control account
- Explain the purpose of the Creditors control account
- State the ledger in which the Debtors control account and Creditors control
account are found
- Outline the advantages of keeping control accounts e.g. serve as an
independent check on the sales and purchases ledgers, used to provide totals of
debtors and creditors etc.
- Identify the sources of information for the control account entries from the books
of original entry
- Draw up the Debtors control account showing details in total figures of items
such as credit sales, amount received from debtors, cash discounts allowed,
returns inwards, bad debts, dishonoured cheques, interest on overdue accounts,
and contra entries to Creditors control account etc.
- Draw up the Creditors control account showing details in total figures of items
such as credit purchases, amount paid to creditors, cash discounts received,
returns outwards, carriage charges and contra entries to Debtors control account
etc
Questions will not:
- be set on reconciliation of control accounts
- involve refunds to customer or from supplier
- involve credit balances in the Debtors control account
- involve debit balances in the Creditors control account.

4 FUNDAMENTALS OF PREPARING THE FINAL ACCOUNTS

4.1 Trading Account
- Purpose of Trading Account
- Gross profit/loss
- Cost of purchases
- Stock
- Explain the purpose of the Trading Account
- Explain the meaning of gross profit/loss
- Identify the components which contribute to the cost of goods purchased i.e.
cost of item purchased + carriage inwards + freight inwards + insurance for
shipment of item to business + all other related cost in getting the item ready for
sale
- Explain why closing stock is valued at cost price or net realisable value, whichever is lower i.e. prudence concept
- Define net realisable value
- Prepare a Trading Account in a suitable format from a list of account balances or
a trial balance with the following details:
- opening stock
- net purchases (cost of purchases less returns outwards)
- cost of goods available for sale
- closing stock
- cost of goods sold
- net sales/turnover (sales - returns inwards)
- gross profit/loss
- Calculate the gross profit/loss, based on accounting principles, for a specified
period
Calculation of net realisable value (saleable value less expenses needed before completion of sale)
is not required.

4.2 Profit and Loss Account
- Purpose of Profit and Loss Account
- Net profit/loss
- Operating expenses
- Realisation of profit
- Explain the purpose of the Profit and Loss Account
- Explain the meaning of net profit/loss
- Distinguish the various operating expenses from the cost of purchases
- Explain the differences between gross profit and net profit
- Prepare a Profit and Loss Account in a suitable format from a list of account
balances or a trial balance
- Explain that net profit is represented by a net increase in assets, not necessarily
an increase in cash

Candidates should be able to distinguish between a trading and service business, recognising
terminology such as ‘fees’, ‘income’ as well as ‘sales’.
Candidates are not required to classify expenses.

4.3 Balance Sheet
- Differences between fixed assets,current assets, intangible assets,long-term liabilities, current
liabilities and capital
- Effect of business transactions on the Balance Sheet
- Define Balance Sheet
- Explain the meaning of fixed assets, current assets, intangible assets, long term
liabilities, current liabilities, owners’ equity, working capital and capital employed
(owners’ equity + long-term liabilities)
- Explain the basis of valuation of assets i.e.
- fixed assets at cost less provision for depreciation (or accumulated
depreciation)
- stock in trade at cost or net realisable value, whichever is lower
- trade debtors at expected collectible amount i.e. after deduction of provision
for doubtful debts
- Prepare a classified Balance Sheet in a suitable format showing:
- fixed assets and current assets
- long term liabilities and current liabilities
- details of the capital of the proprietor
- Compute the net worth of the business from details of assets and liabilities
presented in the Balance Sheet
- Explain the effects of business transactions on items in the Balance Sheet
- State the effect of transactions on working capital, capital owned and capital
employed
- Draw up an adjusted Balance Sheet after taking into account transactions that
occurred after the preparation of the Balance Sheet

Candidates are not required to prepare the Balance Sheet in statement form.

5 PREPARATION OF FINAL ACCOUNTS

5.1 Sole Trader
- Prepare Trading Account, Profit and Loss Account and Balance Sheet
- Make adjustments for provision for depreciation using straight-line, diminishing
(reducing) balance and revaluation methods
- Make adjustments for provision for doubtful debts
- Make adjustments for accruals and prepayments to take account of accrued and
prepaid expenses and outstanding and prepaid income
- Make adjustments for goods taken by owner for own use
Questions may be set on service businesses where a Trading Account is not required.

5.2 Partnership
- Advantages and disadvantages of forming a partnership
- Need for partnership agreement
- Common terms in partnership agreement
- Features and capital structure
- Capital accounts
- Current accounts
- Profit and Loss Appropriation
Account
- Explain the advantages and disadvantages of forming a partnership
- Explain why a partnership agreement is drawn up
- List the common terms contained in the Partnership Agreement
- Apply the rules governing the interests of partners in the Partnership Act,
Singapore, in the absence of the partnership agreement, i.e.
- all partners share the profits and losses equally
- no interest on capital will be paid
- no partners are entitled to salary
- loans by partners are paid an interest of 5% per annum
- Compare and contrast sole trader with partnership in terms of their features,
capital structure and profit sharing
- Record the capital contributions made by partners both in cash or non-cash
assets in the formation of a partnership
- Explain the advantages of using current accounts to record appropriated profits,
interest on capital, interest on partners’ loans and drawings of partners etc
- Explain why a current account may have a debit balance
- Draw up the Trading, Profit and Loss and Appropriation Accounts and Balance
Sheet of a partnership
- Draw up partners’ capital and current accounts both in ledger form or as part of a
balance sheet presentation
- Prepare the final accounts of a partnership showing the treatment of interest on
capital, partners’ salaries, interest on drawings and interest on partners’ loans
where appropriate In the absence of a partnership agreement, the rules governing the interests of partners in the Partnership Act will be provided in the question.

Candidates will present:
- partners’ capital accounts separate from the current accounts in the Balance Sheet
- interest on partners’ loans in the Profit and Loss Account
- interest on capital, partners’ salaries, and interest on drawings in the Appropriation Account in a suitable format.

5.2.1 Amalgamation of Businesses

- Reasons for amalgamation
- Need for revaluation of assets
- Meaning of goodwill
- Factors contributing to goodwill
- Need for determining the value of goodwill
- Classification of goodwill
- Explain why two sole proprietors amalgamate their businesses to form a
partnership
- Explain the need to revalue assets of the existing businesses upon the
amalgamation of two sole proprietorships
- Adjust the capital accounts of the two sole proprietorships when assets are
revalued and liabilities paid off before the amalgamation
- Draw up the revised Balance Sheets of the two sole proprietors after the
adjustments
- Draw up the Balance Sheet of the newly formed partnership
- Explain the meaning of goodwill
- State the factors that give rise to goodwill e.g. management skill or “know-how”,
reputation for service and quality of goods, favourable location of the business,
good public relations, branding strategy etc.
- Explain the need for determining the value of goodwill when the ownership of
business changes
- Prepare a Goodwill account i.e. debit goodwill account, credit capital account for
a sole proprietorship
- Classify goodwill in the Balance Sheet as an intangible asset
Candidates are not required to draw up a revaluation account.

The following are not required:
- admission of partner
- dissolution of partnership
- purchase of a business
- premium paid for goodwill
- writing off goodwill.

5.3 Incomplete Records
- Determine a business’ profit or loss from incomplete records, by - comparing changes in capital
over time
- analysing records to derive the missing information in preparing the final accounts
- Explain why accounting information may be incomplete e.g. due to nonadherence
to the double-entry system of recording transactions or unfortunate
circumstances e.g. fire destroying partial records etc.
- Prepare opening and closing statement of affairs
- Calculate net profit/loss by comparing the capital at the end of the period with
capital at the beginning of the period, with adjustments made to drawings and
new capital contributions
- Compute figures from incomplete information:
- Capital: drawing up a statement of affairs with adjustments made to assets
and liabilities (e.g. depreciation, bad debts etc.)
- Credit sales: drawing up debtors account from information available
- Total sales: deriving the total sales figure from information available
- Credit purchases: drawing up creditors account from information available
- Total purchases: deriving the total purchases figure from information
available
- Expenses: drawing up the expense account from information available to
ascertain the actual amount of expenses incurred, taking into account the
prepayments and accruals
- Depreciation: calculate rate of depreciation, length of useful life, amount of
depreciation, cost of fixed asset
- Gain/loss on disposal of assets: disposal of asset account to ascertain the
gain or loss on assets disposed for the period
- Financial ratios and formulae: calculate mark-up, margin and stockturn (or
rate of stock turnover)

6.1 Financial Relationships

- Users of accounting information
- Importance of professional ethics in
accounting
- Accounting ratios and formulae
- Identify the internal and external users who have an interest in the accounting
information of a business e.g. internal users include owners and managers;
external users include prospective partner, prospective buyer, creditors,
competitors and the bank
- Explain the importance of professional ethics in accounting
- Explain how the stewardship function of accounting for business units requires
objectiveness
- Explain the need to report and present a true and fair view of the profit or loss
and financial position of business
- Explain how a user would use business reports
- Calculate the following accounting ratios and formulae:
- Working capital ratio (current ratio)
- Quick ratio (acid test ratio)

Guidance should be given to candidates to relate the importance of professional ethics
to the accounting theories.
- Gross profit margin (gross profit as a percentage of sales)
- Mark-up on cost
- Percentage of expenses to turnover
- Net profit margin (net profit as a percentage of sales)
- Stockturn (or rate of stock turnover)

Questions will not be set on return on capital employed.
- Effect of stock valuation on profit,
capital and assets
- Explain the importance of measuring the liquidity and profitability of a business
- Interpret the ratios and performance indicators calculated e.g. give possible
reasons for a change in ratios or the significance of ratios in relation to a given
situation.
- Compare the liquidity and profitability of a business over two years or with that of
another business i.e. comment with supporting figures given or calculated
- Explain the effect of incorrect valuation of stock (i.e. understatement or
overstatement) on
- gross profit, net profit, capital and asset valuation
- current and following year’s gross and net profits
Questions will not be set on:
- goods received or sent on
sale or return basis
- adjusting stock take figures before and after balance-day.

SUMMARY OF ACCOUNTING RATIOS AND FORMULAE

1. RATIOS MEASURING THE LIQUIDITY OF A BUSINESS:

a. Working capital ratio (current ratio) =
Current Liabilities/Current Assets

b. Quick ratio (acid test ratio) =
Current Liabilities/(Current Assets - Stock – Prepayments)

2. FORMULAE MEASURING THE PROFITABILITY OF A BUSINESS:
a. Gross profit margin = 100%
Turnover (Net Sales)
Gross Profit
×
b. Mark-up on cost = 100%
Cost of Goods Sold
Gross Profit
×
c. Percentage of expenses to turnover = 100%
Turnover (Net Sales)
Total Expenses
×
d. Net profit margin = 100%
Turnover (Net Sales)
Net Profit
×
e. Stockturn (rate of stock turnover) =
Average Stock at Cost Price
Cost of Goods Sold
= number of times
3. OTHER FORMULAE:
a. Working capital = Current Assets - Current Liabilities
b. Capital owned = Total Assets - Total Liabilities
c. Capital employed = Owners’ Equity + Long-term Liabilities

ASSESSMENT OBJECTIVES
The assessment objectives tested in Principles of Accounts are broadly categorised in the following hierarchical order:
AO1 Knowledge with understanding
AO2 Knowledge with application
AO3 Analysis
AO4 Evaluation
A description of each assessment objective is as follows:
AO1 Knowledge with understanding
Candidates should be able to:
-demonstrate knowledge and understanding of facts, concepts, principles and
procedures appropriate to the syllabus;
-demonstrate understanding of knowledge through numeracy, literacy, presentation and
comprehension;

AO2 Knowledge with application

Candidates should be able to:
-apply knowledge and information to various accounting situations and problems;

AO3 Analysis
Candidates should be able to:
-select, analyse and order information in written, numerical and tabular form;
-present appropriate information in an accepted accounting form;

AO4 Evaluation
Candidates should be able to:
- interpret and evaluate accounting information and to draw reasoned conclusions.

SPECIFICATION GRID
The relationship between the assessment objectives and components of the scheme of
assessment is as follows:
Assessment
Objectives
AO1 Knowledge with understanding
AO2 Knowledge with application
AO3 Analysis
AO4 Evaluation

Overall Weighting
Paper 1 15% 10% 10% 5% 40%
Paper 2 10% 20% 20% 10% 60%
Total 25% 30% 30% 15% 100%

The assessment objectives are weighted to give an indication of their relative importance.
They are not intended to provide a precise statement of the number of marks in particular
skills.

SCHEME OF ASSESSMENT
DETAILS DURATION WEIGHTING
Paper 1
3 to 4 compulsory structured questions
(40 marks)
1 hr
40%

In Paper 1 candidates will write their answers on the question paper.
DETAILS DURATION WEIGHTING
Paper 2
4 structured questions (60 marks)
Section A (48 marks)
3 compulsory structured questions
Section B (12 marks)
Choose 1 out of 2 structured questions
2 hrs
60%

In Paper 2 Section A will have one question on the preparation of final accounts, which carries 20 marks. Candidates will be provided with multi-column accounting stationery for answering questions in this Paper.

While candidates are expected to have exposure to the use of IT in the preparation and presentation of accounting information, the use of computerised accounting software is not required in the examination. An appreciation of the usefulness of computerised accounting systems in the preparation of accurate accounting information will suffice

PRINCIPLES OF ACCOUNTS GCE ORDINARY LEVEL SYLLABUS 7092 (2009)

2009-07-07T22:48:00.000-07:00

Extracted from Singapore Examinations and Assessment Board are the 2009 GCE Ordinary level Principles of Accounts Syllabus:

INTRODUCTION

The syllabus aims to develop an understanding of the principles and concepts of accounting and their applications in a variety of business situations. Candidates will acquire basic knowledge in double entry and develop the ability to prepare, present, analyse and interpret financial statements.
The syllabus is organised into six sections:

(i) role of accounting which is to provide information for monitoring and decision making by different users;

(ii) double entry system of book-keeping which comprises the accounting equation, source documents, books of prime entry, the cash book, the general journal, the ledger and the trial balance;

(iii) accounting procedures regarding capital and revenue expenditure, depreciation,
adjustments to ledger accounts, the correction of errors and control accounts;

(iv) fundamentals of preparing the final accounts i.e. Trading Account, Profit and Loss
Account, Balance Sheet and the operation of partnerships;

(v) preparation of final accounts for sole traders and partnerships, including the use of
incomplete records; and

(vi) analysis and interpretation of final accounts involving ratios.

AIMS

To enable students to:
• acquire knowledge and understanding of fundamental accounting concepts, principles, and procedures in the context of business aims and activities;

• develop skills in preparing, analysing and interpreting accounting information and understanding their implication;

• develop an understanding of the role of accounting in providing an information system for monitoring and decision making;

• develop skills of numeracy, information technology literacy, communication, inquiry, presentation and interpretation;

• develop attitudes of accuracy, orderliness and logical thought and an appreciation of professional ethics.

SYLLABUS CONTENT

The syllabus content is presented together with learning outcomes to provide teachers with more specific guidance as to what each of the syllabus areas requires.
The arrangement of the topics in this section is not an indication of the sequence in which they should be taught.

CONTENT

CANDIDATES SHOULD BE ABLE TO: REMARKS

1 THE ROLE OF ACCOUNTING
1.1 Book-keeping and Accounting
- Difference between book-keeping and accounting
- Role of accounting
- Define book-keeping
- Define accounting
- Explain the main difference between book-keeping and accounting
- Explain the main role of accounting
- Explain how past performance can be analysed to provide a guide for future
decision making In this syllabus, the definition of accounting is defined as the
process of recording, summarising, reporting, analyzing and interpretation of financial
information of an organisation.

1.2 Accounting Principles
- Main accounting concepts and principles underlying the preparation of final accounts
- Explain the basic accounting concepts and principles
- accounting entity (or business entity)
- accounting period
- accrual concept/matching principle
- consistency
- duality
- going concern
- historical cost
- monetary assumption or money measurement
- materiality
- objectivity
- prudence or conservatism
- realisation concept

- Identify the accounting concepts and principles applied in given situations

Candidates should be introduced to these accounting concepts and principles at relevant sections of the syllabus, where appropriate.

2 DOUBLE ENTRY SYSTEM OF BOOK-KEEPING

2.1 The Accounting Equation
- Assets, Liabilities and Owners’ Equity
- Accounting equation: relationship between Assets, Liabilities and Owners’ Equity
- Cash and credit transactions
- Explain the meaning of assets, liabilities and owners’ equity
- List examples of assets, liabilities and owners’ equity
- Classify items as assets and liabilities
- State the accounting equation: Assets = Capital + Liabilities
- Calculate the value of assets, liabilities and capital using the accounting equation
- Analyse and state the effects of transactions on the accounting equation
- Distinguish between cash transactions (resulting in immediate cash payment) and credit transactions (payments are postponed)

2.2 - The Double Entry System

- Process accounting data using the double entry system
- Double entry rules
- Explain the meaning of revenue and expenses
- State the double entry rules
- Identify the accounts to be debited and credited for various transactions
- Apply the double entry rules for recording:
- purchases and sales of stock on cash and on credit terms
- returns of stock previously purchased on cash and/or credit terms
- returns of stock previously sold on cash and/or credit terms
- withdrawal of stock and cash for owners’ personal use
- all other cash and credit transactions

2.3 Source Documents

- Purpose of source documents
- Types of source documents
- Explain the purpose of source documents
- Identify and state the use of the following source documents:
- invoice
- credit note
- debit note
- payment voucher
- cheque and cheque counterfoil
- receipt and cash register slips
- bank statement
- petty cash voucher

Candidates will not be required to know the details in these documents.

2.4 Books of Prime Entry

- Purpose of books of prime entry
- Advantages of using subsidiary books
- Explain the purpose of using books of prime entry
- Explain the usefulness of recording transactions in the subsidiary books e.g.
- records similar transactions
- reduces unnecessary details in the ledger as only totals are posted to the
ledger
- Identify the types of books of prime entry:
- special journals i.e. purchases journal, purchases returns journal, sales
journal and sales returns journal
- cash book (including petty cash book)
- general journal
Candidates are required to know that books of prime entry are also
known as books of original entry or day books.

2.4.1 Purchases Journal

- Purpose of purchases journal
- Trade discount
- Explain the purpose of the purchases journal
- State the source document for recording transactions in the purchases journal
- Interpret the items posted from the purchases journal to the appropriate
accounts in the ledgers
- Explain the meaning of trade discount
- Outline the reasons for giving trade discount
- Calculate trade discount given by suppliers
Questions will not be set on drawing up the purchases journal.

2.4.2 Purchases Returns Journal or Returns Outwards Journal

- Purpose of purchases returns
journal
- Explain the purpose of the purchases returns journal
- Outline the reasons why goods previously purchased are returned to suppliers
- State the source document for recording transactions in the purchases returns
journal
- Interpret the items posted from the purchases returns journal to the appropriate
accounts in the ledgers
- Calculate the amount of returns allowance taking into consideration the trade
discount received on purchase of goods
Questions will not be set on drawing up the purchases returns journal.

2.4.3 Sales Journal

- Purpose of sales journal
- Trade discount
- Explain the purpose of the sales journal
- State the source document for recording transactions in the sales journal
- Interpret the items posted from the sales journal to the appropriate accounts in
the ledgers
- Calculate trade discount given to customers
Questions will not be set on drawing up the sales journal.

2.4.4 Sales Returns Journal or Returns Inwards Journal
- Purpose of sales returns journal
- Explain the purpose of the sales returns journal
- Outline the reasons why goods previously sold to customers are returned
- State the source document for recording transactions in the sales returns journal
- Interpret the items posted from the sales returns journal to the appropriate
accounts in the ledgers
- Calculate the amount of returns allowance taking into consideration the trade
discount given on sales of goods

Questions will not be set on drawing up the sales returns journal.

2.5 The General Journal

- Purpose of general journal
- Explain the purpose of the general journal i.e. to record the following:
- opening entries
- closing entries
- purchase and sale of fixed assets on credit
- correction of errors, adjustments and transactions not recorded in the other
subsidiary books
- Post transactions from the general journal to the appropriate accounts in the
ledgers

Questions will not be set specifically on recording closing entries in the general journal as
part of the process of transferring expenses and revenue to the Trading and Profit and Loss
Accounts on balance day.

2.6 The Cash Book

- Dual function as a book of prime entry and as a ledger account for bank and cash by use of analysis columns
- Cash discount
- Dishonoured cheques
- Explain the advantages of keeping cash in the bank
- Explain the purpose of the cash book
- Record transactions in the cash column and bank column of the cash book
- Post the entries from the cash book to the respective ledgers
- Interpret transactions and details in the cash book e.g. discount, total banked or
withdrawn etc.
- Explain the meaning of cash discount
- Outline the reasons for giving cash discounts
- Calculate cash discounts
- Explain the differences between cash discount and trade discount
- Explain the effect of giving and receiving cash discount on net profit
- Outline the reasons for a dishonoured cheque
- Record dishonoured cheque and discounts disallowed in the ledgers

Questions will not be set on drawing up a 3-column cash book.

2.6.1 Bank Reconciliation Statement

- Causes of discrepancy between the cash book balance and the bank
statement balance
- Purpose of preparing bank reconciliation statement
- Explain the differences between bank loan and bank overdraft
- Classify bank accounts, bank overdrafts and bank loans correctly in the Balance
Sheet
- Interpret a bank statement
- Identify and explain the causes of discrepancy between the cash book balance
and the balance on the bank statement
- Explain the need for preparing a bank reconciliation statement
- Reconcile the cash book balance with the bank statement balance by adjusting
entries in the cash book and preparing a bank reconciliation statement, in
respect of the following: unpresented cheques, dishonoured cheques, bank
charges, direct debits, standing orders, credit transfers, dividends, correction of
errors and uncredited deposits

2.6.2 Petty Cash

- Need for a petty cash fund
- Purpose of petty cash book
- Advantages of the imprest system
- Explain the need for a petty cash fund
- Explain the purpose of a petty cash book in relation to the cash book
- Explain the meaning of ‘float’
- Explain the meaning of the imprest system
- Outline the advantages of the imprest system of keeping petty cash
- Interpret the details in the petty cash book
- Calculate and record the amount of reimbursement required to restore the petty
cash balance to the imprest amount
Questions will not be set on drawing up a petty cash book.

2.7 The Ledger

- ‘T’ accounts
- Prepare ledger accounts using ‘T’ account format
- Analyse transactions and post relevant details to the appropriate accounts in the
ledgers
- Balance ledger accounts as required
- Interpret the details and the balances in ledger accounts

Candidates are not required to
- know the use of the folio columns
- give headings to the columnar details i.e. date, particulars and amount in the ‘T’ account.
- Sub-division of ledger into the sales ledger, purchases ledger and the
general ledger

- Explain that with the high volume of credit transactions involving debtors and
creditors, separate ledgers are kept for debtors and creditors i.e.
- all trade debtors accounts are kept in the sales ledger
- all trade creditors accounts are kept in the purchases ledger
- all other accounts are kept in the general ledger
- Transactions related to drawings - Explain the meaning of drawings
- Distinguish between withdrawals of stock for business use and for owners’ use
- Record drawings of stock, cash or other assets for owners’ use
- Record the transfer of drawings to the capital account
- Explain the effect of drawings on capital
- Transactions relating to stock
- Explain the purpose of preparing the following accounts:
- Purchases account
- Sales account
- Returns inwards account (or sales returns account)
- Returns outwards account (or purchases returns account)
- Draw up the following accounts to record transactions pertaining to the
movement of stock:
- Purchases account
- Sales account
- Returns inwards account (or sales returns account)
- Returns outwards account (or purchases returns account)

2.8 The Trial Balance

- Purpose of a trial balance
- Limitations of a trial balance
- Errors not revealed by a trial balance
- Errors revealed by a trial balance
- Explain what is meant by a trial balance
- Explain the purpose of preparing a trial balance
- Prepare a trial balance
- Explain why an agreed trial balance is not an absolute proof of accuracy
- Explain the limitations of a trial balance i.e. unable to reveal certain errors
- State the types of errors that are not revealed by a trial balance:
- compensating errors
- complete reversal of entries
- errors of commission
- errors of omission
- errors of original entry
- errors of principle
- Explain the effect of errors on the profit and asset valuation
- State the types of errors that are revealed by a trial balance i.e.
- errors in calculation
- errors in omitting either the debit or the credit entry
- posting of entries to the wrong side of the account
- errors in debiting an account with one amount and crediting the
corresponding account with another amount
- Prepare an adjusted trial balance after correcting errors

3 ACCOUNTING PROCEDURES

3.1 Capital and Revenue Expenditure
- Distinction between capital and revenue expenditure
- Explain the meaning of capital and revenue expenditure
- Distinguish and account for the different treatment of capital and revenue
expenditure
- Classify business expenditure into capital or revenue expenditure
- Explain and show by calculation the effect of the treatment of expenditure on
profit and asset valuation
- Distinguish between capital and revenue receipts

3.2 Accounting for Depreciation

- Causes of depreciation
- Need for provision for depreciation
- Methods of calculating depreciation
- Disposal of fixed asset
- Gain or loss on disposal of fixed assets
- Explain the meaning of depreciation
- Outline the causes of depreciation
- Explain the need for provision for depreciation
- State the methods of calculating depreciation: the straight-line, reducing
(diminishing) balance and revaluation methods
- Calculate depreciation using the straight-line, reducing (diminishing) balance and
revaluation methods
- Compare the straight-line, reducing (diminishing) balance and revaluation
methods of calculating depreciation
- Outline the advantages and disadvantages of the straight-line, reducing
(diminishing) balance and revaluation methods of calculating depreciation
- Calculate the rate of depreciation, length of useful life, amount of depreciation,
cost of fixed asset from given information
- Interpret the depreciation account and provision for depreciation of fixed asset
account
- Prepare the following accounts to record depreciation:
- fixed asset account
- depreciation account
- provision for depreciation account
- Profit and Loss Account
- Explain the effect of the depreciation methods employed on the net profit figure
for the earlier and later years after the acquisition of the fixed asset
- Prepare the following accounts to record the disposal of fixed asset:
- fixed asset account
- provision for depreciation account
- disposal of fixed asset account
- Profit and Loss Account
- Calculate the gain or loss on disposal of fixed assets

The suggested accounting entries for depreciation are as follows:

- debit Depreciation account
- credit Provision for depreciation account

Close the Depreciation account and transfer the balance to the
Profit and Loss Account

- debit Profit and Loss Account
- credit Depreciation account

The fixed asset accounts show fixed assets at cost price i.e. no
entry is made in the asset accounts for depreciation.
Questions will not be set on trade in of fixed asset in the acquisition
of new asset.

3.3 Adjustments of Ledger Accounts

3.3.1 Accruals and Prepayments

- Accrued expenses and revenue
- Prepaid expenses and revenue
- Prepare adjusting entries in the ledgers for:
- accrued expenses
- accrued revenue
- prepaid expenses
- prepaid revenue
- Show workings to determine the adjusted expenses/revenue and prepayments/
accruals to be transferred to the Profit and Loss Account and the balance to
appear in the Balance Sheet For adjusting entries, it is not required to
- draw up the accrued expense and revenue accounts
- make reversing entries in these accrued expense and
revenue accounts.

3.3.2 Bad Debts and Provision for Doubtful Debts

- Reasons for incurring bad debts
- Difference between bad debts and doubtful debts
- Provision for doubtful debts
- Explain the reasons for incurring bad debts
- Explain the difference between bad debts and doubtful debts
- Explain the need for provision for doubtful debts
- Prepare adjusting entries in the general journal and ledgers for:
- writing off bad debts
- recovering bad debts including partial settlement of debts
- provision for doubtful debts i.e. creating, increasing and reducing the
provision for doubtful debts

Explain the effect of bad debts, recovery of bad debts and provision for doubtful
debts on net profit and net debtors in the Balance Sheet

Candidates are required to calculate provision for doubtful debts based on the adjusted value
of debtors i.e. after writing off all bad debts.
The suggested accounting entries for provision for doubtful debts are shown below. Alternative methods, which are in line with the accounting conventions, are accepted.

1. Creating provision for doubtful debts and increasing the provision for doubtful debts
- debit Doubtful debts account
- credit Provision for doubtful debts account

Close the Doubtful debts account and transfer the balance to the Profit and Loss Account
- debit Profit and Loss Account
- credit Doubtful debts account

Doubtful debts will be deducted from gross profit as an expense in the Profit and Loss Account.

2. Decreasing the provision for doubtful debts is as follows:
- debit Provision for doubtful debts account
- credit Decrease in doubtful debts account

Close the Decrease in doubtful debts account and transfer the balance to the Profit and Loss Account
- debit Decrease in doubtful debts account
- credit Profit and Loss Account

Decrease in doubtful debts will be added to gross profit as ‘revenue’ in the Profit and Loss Account.

3.4 Correction of Errors

- Double entry to correct errors
- Effects of errors on the profit
- Write up journal entries and/or draw up ledger accounts to correct errors not revealed
by trial balance i.e. errors of omission, errors of commission, errors of principle,
errors of reversal of entries, errors of original entry, compensating errors
- Explain the effects of errors on profit
- Prepare a statement of adjusted profit after correcting errors, both revealed and not
revealed by trial balance
- Prepare an adjusted Balance Sheet or an extract of the Balance Sheet after
correcting the errors, both revealed and not revealed by trial balance

Questions will not be set on suspense account.

3.5 Control Accounts

- Debtors control account
- Creditors control account
- Advantages of control accounts
- Sources of information for control accounts
- Explain the purpose of the Debtors control account
- Explain the purpose of the Creditors control account
- State the ledger in which the Debtors control account and Creditors control
account are found
- Outline the advantages of keeping control accounts e.g. serve as an
independent check on the sales and purchases ledgers, used to provide totals of
debtors and creditors etc.
- Identify the sources of information for the control account entries from the books
of original entry
- Draw up the Debtors control account showing details in total figures of items
such as credit sales, amount received from debtors, cash discounts allowed,
returns inwards, bad debts, dishonoured cheques, interest on overdue accounts,
and contra entries to Creditors control account etc.
- Draw up the Creditors control account showing details in total figures of items
such as credit purchases, amount paid to creditors, cash discounts received,
returns outwards, carriage charges and contra entries to Debtors control account
etc
Questions will not:
- be set on reconciliation of control accounts
- involve refunds to customer or from supplier
- involve credit balances in the Debtors control account
- involve debit balances in the Creditors control account.

4 FUNDAMENTALS OF PREPARING THE FINAL ACCOUNTS

4.1 Trading Account
- Purpose of Trading Account
- Gross profit/loss
- Cost of purchases
- Stock
- Explain the purpose of the Trading Account
- Explain the meaning of gross profit/loss
- Identify the components which contribute to the cost of goods purchased i.e.
cost of item purchased + carriage inwards + freight inwards + insurance for
shipment of item to business + all other related cost in getting the item ready for
sale
- Explain why closing stock is valued at cost price or net realisable value,
whichever is lower i.e. prudence concept
- Define net realisable value
- Prepare a Trading Account in a suitable format from a list of account balances or
a trial balance with the following details:
- opening stock
- net purchases (cost of purchases less returns outwards)
- cost of goods available for sale
- closing stock
- cost of goods sold
- net sales/turnover (sales - returns inwards)
- gross profit/loss
- Calculate the gross profit/loss, based on accounting principles, for a specified
period
Calculation of net realisable value (saleable value less expenses
needed before completion of sale) is not required.

4.2 Profit and Loss Account
- Purpose of Profit and Loss Account
- Net profit/loss
- Operating expenses
- Realisation of profit
- Explain the purpose of the Profit and Loss Account
- Explain the meaning of net profit/loss
- Distinguish the various operating expenses from the cost of purchases
- Explain the differences between gross profit and net profit
- Prepare a Profit and Loss Account in a suitable format from a list of account
balances or a trial balance
- Explain that net profit is represented by a net increase in assets, not necessarily
an increase in cash

Candidates should be able to distinguish between a trading and service business, recognising
terminology such as ‘fees’, ‘income’ as well as ‘sales’.

Candidates are not required to classify expenses.

4.3 Balance Sheet
- Differences between fixed assets, current assets, intangible assets,
long-term liabilities, current liabilities and capital
- Effect of business transactions on the Balance Sheet
- Define Balance Sheet
- Explain the meaning of fixed assets, current assets, intangible assets, long term
liabilities, current liabilities, owners’ equity, working capital and capital employed
(owners’ equity + long-term liabilities)
- Explain the basis of valuation of assets i.e.
- fixed assets at cost less provision for depreciation (or accumulated
depreciation)
- stock in trade at cost or net realisable value, whichever is lower
- trade debtors at expected collectible amount i.e. after deduction of provision
for doubtful debts

- Prepare a classified Balance Sheet in a suitable format showing:
- fixed assets and current assets
- long term liabilities and current liabilities
- details of the capital of the proprietor
- Compute the net worth of the business from details of assets and liabilities
presented in the Balance Sheet
- Explain the effects of business transactions on items in the Balance Sheet
- State the effect of transactions on working capital, capital owned and capital
employed
- Draw up an adjusted Balance Sheet after taking into account transactions that
occurred after the preparation of the Balance Sheet

Candidates are not required to prepare the Balance Sheet in statement form.

5 PREPARATION OF FINAL ACCOUNTS

5.1 Sole Trader
- Prepare Trading Account, Profit and Loss Account and Balance Sheet
- Make adjustments for provision for depreciation using straight-line, diminishing
(reducing) balance and revaluation methods
- Make adjustments for provision for doubtful debts
- Make adjustments for accruals and prepayments to take account of accrued and
prepaid expenses and outstanding and prepaid income
- Make adjustments for goods taken by owner for own use
Questions may be set on service businesses where a Trading
Account is not required.

5.2 Partnership
- Advantages and disadvantages of forming a partnership
- Need for partnership agreement
- Common terms in partnership agreement
- Features and capital structure
- Capital accounts
- Current accounts
- Profit and Loss Appropriation Account
- Explain the advantages and disadvantages of forming a partnership
- Explain why a partnership agreement is drawn up
- List the common terms contained in the Partnership Agreement
- Apply the rules governing the interests of partners in the Partnership Act,
Singapore, in the absence of the partnership agreement, i.e.
- all partners share the profits and losses equally
- no interest on capital will be paid
- no partners are entitled to salary
- loans by partners are paid an interest of 5% per annum
- Compare and contrast sole trader with partnership in terms of their features,
capital structure and profit sharing
- Record the capital contributions made by partners both in cash or non-cash
assets in the formation of a partnership
- Explain the advantages of using current accounts to record appropriated profits,
interest on capital, interest on partners’ loans and drawings of partners etc
- Explain why a current account may have a debit balance
- Draw up the Trading, Profit and Loss and Appropriation Accounts and Balance
Sheet of a partnership
- Draw up partners’ capital and current accounts both in ledger form or as part of a
balance sheet presentation
- Prepare the final accounts of a partnership showing the treatment of interest on
capital, partners’ salaries, interest on drawings and interest on partners’ loans
where appropriate In the absence of a partnership agreement, the rules governing
the interests of partners in the Partnership Act will be provided in the question.

Candidates will present:
- partners’ capital accounts separate from the current accounts in the Balance
Sheet
- interest on partners’ loans in the Profit and Loss Account
- interest on capital, partners’ salaries, and interest on drawings in the Appropriation
Account in a suitable format.

5.2.1 Amalgamation of Businesses
- Reasons for amalgamation
- Need for revaluation of assets
- Meaning of goodwill
- Factors contributing to goodwill
- Need for determining the value of goodwill
- Classification of goodwill
- Explain why two sole proprietors amalgamate their businesses to form a
partnership
- Explain the need to revalue assets of the existing businesses upon the
amalgamation of two sole proprietorships
- Adjust the capital accounts of the two sole proprietorships when assets are
revalued and liabilities paid off before the amalgamation
- Draw up the revised Balance Sheets of the two sole proprietors after the
adjustments
- Draw up the Balance Sheet of the newly formed partnership
- Explain the meaning of goodwill
- State the factors that give rise to goodwill e.g. management skill or “know-how”,
reputation for service and quality of goods, favourable location of the business,
good public relations, branding strategy etc.
- Explain the need for determining the value of goodwill when the ownership of
business changes
- Prepare a Goodwill account i.e. debit goodwill account, credit capital account for
a sole proprietorship
- Classify goodwill in the Balance Sheet as an intangible asset

Candidates are not required to draw up a revaluation account.

The following are not required:
- admission of partner
- dissolution of partnership
- purchase of a business
- premium paid for goodwill
- writing off goodwill.

5.3 Incomplete Records
- Determine a business’ profit or loss from incomplete records, by
- comparing changes in capital over time
- analysing records to derive the missing information in preparing the final accounts
- Explain why accounting information may be incomplete e.g. due to nonadherence
to the double-entry system of recording transactions or unfortunate
circumstances e.g. fire destroying partial records etc.
- Prepare opening and closing statement of affairs
- Calculate net profit/loss by comparing the capital at the end of the period with
capital at the beginning of the period, with adjustments made to drawings and
new capital contributions
- Compute figures from incomplete information:
- Capital: drawing up a statement of affairs with adjustments made to assets
and liabilities (e.g. depreciation, bad debts etc.)
- Credit sales: drawing up debtors account from information available
- Total sales: deriving the total sales figure from information available
- Credit purchases: drawing up creditors account from information available
- Total purchases: deriving the total purchases figure from information
available
- Expenses: drawing up the expense account from information available to
ascertain the actual amount of expenses incurred, taking into account the
prepayments and accruals
- Depreciation: calculate rate of depreciation, length of useful life, amount of
depreciation, cost of fixed asset
- Gain/loss on disposal of assets: disposal of asset account to ascertain the
gain or loss on assets disposed for the period
- Financial ratios and formulae: calculate mark-up, margin and stockturn (or
rate of stock turnover)

6.1 Financial Relationships
- Users of accounting information
- Importance of professional ethics in accounting
- Accounting ratios and formulae
- Identify the internal and external users who have an interest in the accounting
information of a business e.g. internal users include owners and managers;
external users include prospective partner, prospective buyer, creditors,
competitors and the bank
- Explain the importance of professional ethics in accounting
- Explain how the stewardship function of accounting for business units requires
objectiveness
- Explain the need to report and present a true and fair view of the profit or loss
and financial position of business
- Explain how a user would use business reports
- Calculate the following accounting ratios and formulae:
- Working capital ratio (current ratio)
- Quick ratio (acid test ratio)

Guidance should be given to candidates to relate the importance of professional ethics
to the accounting theories.

- Gross profit margin (gross profit as a percentage of sales)
- Mark-up on cost
- Percentage of expenses to turnover
- Net profit margin (net profit as a percentage of sales)
- Stockturn (or rate of stock turnover)

Questions will not be set on return on capital employed.
- Effect of stock valuation on profit, capital and assets
- Explain the importance of measuring the liquidity and profitability of a business
- Interpret the ratios and performance indicators calculated e.g. give possible
reasons for a change in ratios or the significance of ratios in relation to a given
situation.
- Compare the liquidity and profitability of a business over two years or with that of
another business i.e. comment with supporting figures given or calculated
- Explain the effect of incorrect valuation of stock (i.e. understatement or
overstatement) on
- gross profit, net profit, capital and asset valuation
- current and following year’s gross and net profits
Questions will not be set on:
- goods received or sent on sale or return basis
- adjusting stock take figures before and after balance-day.

1. RATIOS MEASURING THE LIQUIDITY OF A BUSINESS:

a. Working capital ratio (current ratio) =
Current Liabilities
Current Assets

b. Quick ratio (acid test ratio) =
Current Liabilities
Current Assets - Stock - Prepayments

2. FORMULAE MEASURING THE PROFITABILITY OF A BUSINESS:
a. Gross profit margin = 100%
Turnover (Net Sales)
Gross Profit
×
b. Mark-up on cost = 100%
Cost of Goods Sold
Gross Profit
×
c. Percentage of expenses to turnover = 100%
Turnover (Net Sales)
Total Expenses
×
d. Net profit margin = 100%
Turnover (Net Sales)
Net Profit
×
e. Stockturn (rate of stock turnover) =
Average Stock at Cost Price
Cost of Goods Sold
= number of times

3. OTHER FORMULAE:
a. Working capital = Current Assets - Current Liabilities
b. Capital owned = Total Assets - Total Liabilities
c. Capital employed = Owners’ Equity + Long-term Liabilities

ASSESSMENT OBJECTIVES
The assessment objectives tested in Principles of Accounts are broadly categorised in the following hierarchical order:
AO1 Knowledge with understanding
AO2 Knowledge with application
AO3 Analysis
AO4 Evaluation
A description of each assessment objective is as follows:
AO1 Knowledge with understanding

Candidates should be able to:

-demonstrate knowledge and understanding of facts, concepts, principles and
procedures appropriate to the syllabus;

-demonstrate understanding of knowledge through numeracy, literacy, presentation and
comprehension;

AO2 Knowledge with application

Candidates should be able to:

- apply knowledge and information to various accounting situations and problems;

AO3 Analysis

Candidates should be able to:
- select, analyse and order information in written, numerical and tabular form;
- present appropriate information in an accepted accounting form;

AO4 Evaluation

Candidates should be able to:

- interpret and evaluate accounting information and to draw reasoned conclusions.

SPECIFICATION GRID

The relationship between the assessment objectives and components of the scheme of
assessment is as follows:

Assessment
Objectives
AO1 Knowledge with understanding
AO2 Knowledge with application
AO3 Analysis
AO4 Evaluation

Overall Weighting
Paper 1 15% 10% 10% 5% 40%

Paper 2 10% 20% 20% 10% 60%

Total 25% 30% 30% 15% 100%

The assessment objectives are weighted to give an indication of their relative importance.
They are not intended to provide a precise statement of the number of marks in particular
skills.

SCHEME OF ASSESSMENT
DETAILS DURATION WEIGHTING
Paper 1
3 to 4 compulsory structured questions
(40 marks)
1 hr
40%

In Paper 1 candidates will write their answers on the question paper.
DETAILS DURATION WEIGHTING
Paper 2
4 structured questions (60 marks)
Section A (48 marks)
3 compulsory structured questions
Section B (12 marks)
Choose 1 out of 2 structured questions
2 hrs
60%

In Paper 2 Section A will have one question on the preparation of final accounts, which carries 20 marks. Candidates will be provided with multi-column accounting stationery for answering questions in this Paper.

While candidates are expected to have exposure to the use of IT in the preparation and presentation of accounting information, the use of computerised accounting software is not required in the examination. An appreciation of the usefulness of computerised accounting systems in the preparation of accurate accounting information will suffice.

[ Also refer to Year 2010 Syllabus for Principles Of Accounts ]

AAT Accounting Questions For Club And Society Accounts

2009-07-07T07:47:00.001-07:00

Append below are six AAT's questions on club and society accounts for candidates to practise on.

Some of key salient features to remember are:
(a) The Income and Expenditure is correctly recorded in the appropriate ledger accounts
(b) Any accrued or prepaid income and expendidture is correctly identified and adjustments made
(c) The organization's policies, regulations, procedures and timescales are observed
(d) Income and expenditure is analyzed in accordance with defined requirements and appropriate information is passed to management
(e) Discrepanices, unusual features or queries are identified and being resolved.

Accounting questions on the topic on Fixed Assets and Accounting for Depreciation by AAT

2009-07-07T07:12:00.000-07:00

The accounting topic on fixed assets and depreciation is a popular topic for many examination board.
Below are four samples of AAT's questions on depreciation of fixed assets, Click the images.

Year 2004 LCCI Accounting Third Level(3001)-Series 3, Singapore- Sample Accounting Questions Test Paper

2009-07-07T06:16:00.001-07:00

For the Year 2004 Singapore Series 3, LCCI Accounting Third level, there are six questions which tested on:

Cash flow statement;

Limited Company -Final Accounts;

Partnership A/c;

Ratio Analysis/Interpretation;

Share redemption/issue-preference shares/debenture and

Stock valuation/fire claim

Click the images for the questions:-

Diagrammatic View Of The Relationships Between The Income Statement, Balance Sheet, Statement Of Earnings and The Cash Flow Statement Of a company

2009-07-07T03:19:00.000-07:00

The above diagram demonstrates the relationship between the company's Income Statement, Balance Sheet, Statement Of Earnings and its Cash flow statement.

FRS 107:Indirect Format Of A Cash Flow Statement And Explanation Of Terms Used In The Cash Flow Statement

2009-07-03T02:21:00.000-07:00

Indirect Method Cash Flow Statement

2009

Cash flows from operating activities

Profit before taxation

3,350

Adjustments for:

Depreciation

Foreign exchange loss

Investment income

Interest expense

Increase in trade and other receivables

Decrease in inventories

Decrease in trade payables

450
40
(500)
400 3,740

(500)
1,050
(1,740)

Cash generated from operations

2,550

Interest paid

(270)

Income taxes paid

(900)

Net cash from operating activities

1,380

Cash flows from investing activities

Acquisition of subsidiary X net of cash acquired

(550)

Purchase of property, plant and equipment

(350)

Proceeds from sale of equipment

Interest received

200

Dividends received

200

Net cash used in investing activities

(480)

Cash flows from financing activities

Proceeds from issue of share capital

250

Proceeds from long-term borrowings

250

Payment of finance lease liabilities

(90)

Dividends paid

(1,200)

Net cash used in financing activities

(790)

Net increase in cash and cash equivalents

110

Cash and cash equivalents at beginning of period

120

Cash and cash equivalents at end of period

230

Explanation of terms used in a Cash Flow Statement:

Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash flows are inflows and outflows of cash and cash equivalents.

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

More examples of cash flows from operating activities are as follows:

cash receipts from the sale of goods and the rendering of services;

cash receipts from royalties, fees, commissions and other revenue;

cash payments to suppliers for goods and services;

cash payments to and on behalf of the employees;

cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;

cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and

cash receipts and payments from contracts held for dealing or trading purposes.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

More examples of cash flow from investing activities:

cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment;

cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;

cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);

cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);

cash advances and loans made to other parties (other than advances and loans made by a financial institution);

cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);

cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and

cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

More examples of cash flow from financing actitivities are:

cash proceeds from issuing shares or other equity instruments;

cash payments to owners to acquire or redeem the entity’s shares;

cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings;

cash repayments of amounts borrowed; and

cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

What are the benefits of having a cash flow statement

2009-07-03T02:13:00.000-07:00

The following are some of the benefits of having Cash flow information:

The cash flow statement when used in conjunction with the rest of the financial statements provides information that enable users to evaluate (a) the changes in net assets of an enterprise; (b) its financial structure(including liquidity and solvency) and (c) its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities
The cash flow statement is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enable users to develop models to assess and compare the present value of the future cash flows of different enterprises.
The cash flow statement assists in enhancing the comparability of the reporting of operating performance by different enterprises because it eliminates the effect of using different accounting treatments for the same transactions and events.
Historical cash flow information is often used as an indicator of the amount,timing and certainty of future cash flows.
Useful in checking the accuracy of past assessments of future cash flows and in examing the relationship between profitability and net cash flows and the impact of changing prices

Sample Of LCCI Management Accounting Level Question And Answer Paper

2009-07-02T08:23:00.000-07:00

Click the below link to see the pdf.file:

LCCI Management Accounting Level 3 Questions & Answers for Year 2004

True Or False Question (1) On Interpretation of Final Accounts/Financial Statements

2009-07-01T06:33:00.001-07:00

[ Click the two(2) images]

Attached herewith are 25 true or false accounting questions for the readers to practise on the topic on interpretation of final accounts/financial statements

Multiple Choice Question(1) on Interpretation Of Final Accounts/Financial Statements

2009-07-01T06:28:00.000-07:00

[ click the image ]
Append herewith a multiple choice question for readers to practise the topic on interpretation of final accounts/financial statement.

Worked Example On Cost Volume Profit Analysis (2)

2009-06-30T23:31:00.000-07:00

Question A

ABC Limited sells a product at $4 per unit and the variable cost of the product is $2 per unit. The current fixed cost is $30,000. What is the break-even point, the firm must produce?

Suggested Solution To Question A

Applying the following formula:

=Fixed costs/Selling price/unit –Variable cost per unit

= Break-even
= $30,000/$4-$2
=15,000unit

Question B
Multiproducts Ltd expects a total sales of $200,00 for this year. Its variable costs totaled $120,000 and fixed costs $40,000. What is its sales volume in order to break-even

Suggestion solution to Question B

Formula = Fixed costs /(Sales-Variable costs/Sales)
=$40,000/($200,000-$120,000)/$200,000
=$40,000/$80,000/$200,000
=$40,000 x $200,000/$80,000
=$100,000

Worked Example On Cost Volume Profit Analysis (1)

2009-06-30T23:29:00.000-07:00

Question:

The data for Company XYZ is as follow:-Volume of sales 20,000 units
Sales price per unit $10
Total fixed costs $50,000
Variable cost per unit $5

Compute the new break-even point with the following effect of:

(a) a 20% increase in selling price
(b) a 20% increase in fixed costs
(c) a 20% decrease in variable costs
(d) a 10% increase in volume of sales

Suggested Solution:

(a) Effect of a 20% increase in selling price
New Break-even point
=Fixed cost/(Sales price per unit-Variable cost per unit)
=$50,000/($12-$5)
=7,144 units

(b) Effect of a 20% increase in fixed costs
New Break-even point
=Fixed cost/(Sales price per unit-Variable cost per unit)
=$50,000 x 1.2/($10-$5)
=$60,000/$5
=12,000 unit

© Effect of a 20% decrease in variable costs
New Break-even point
=$50,000/($10-$5x(1-0.2))
=$50,000/$6
=8,333 units

(d ) Effect of a 10% increase in volume of sales
Original sales =20,000 unit x $10 per unit =$200,000
New sales =$200,000 x 1.1 =$220,000
Be=$100,000 or 10,000 units

How to construct or prepare a break-even chart.

2009-06-30T23:24:00.000-07:00

In break-even chart, the unit of production are measured on the horizontal axis and costs and revenues on the vertical axis. Fixed costs are shown as a constant in a line parallel to the horizontal axis.

The following steps are used to construct a break-even chart:-

Prepare a graph with the horizontal axis representing activity and vertical axis representing costs and revenues
Draw the fixed cost line at the appropriate point on the chart
Draw the total cost line starting from the point where the fixed cost line cut the vertical axis.
Draw the sales revenue line starting at zero and finishing at point of maximum sales.
Write on the completed break-even chart suitable description e.g. break-even point, profit,etc

Understand The Assumptions And Limitation Underlying Break-Even Analysis

2009-06-30T23:23:00.000-07:00

Like all other financial/costing model, break-even analysis using break-even chart to understand the business’s break-even point has also certain assumptions and limitations underlying it.

Some Of the Assumptions & Limitation are as follows:

1.0 It assumes that fixed costs remain the same at different level of activity

2.0 It assumes that the total cost line is shown as a straight line when in actual fact, costs do not usually vary in direct proportion to volume. Each unit produced and sold may not necessarily incur the same variable cost as attempts to sell more units may increase the variable cost at a faster rate than activity

3.0 It assumes that revenue is perfectly variable with activity, showing a straight line on the break-even chart which is unrealistic as very often in order to increase sales volume, it may be necessary to give extra discount or reduce the selling price. The sale revenue line will therefore no longer be linear but curved.

4.0 Break-even charts are only true within the minimum and maximum ranges of activity. Any attempt to determine figures outside this range of activity is not valid

5.0 Break-even analysis assumes that all units produced are sold

6.0 Break-even chart has a life span as the nature of variable and fixed cost change with time. It would then be necessary to construct new charts based on different circumstances

7.0 In a multi-product firm, each possible product mix will tend to incur different costs so that with any change in the product mix, a new break-even chart is required. Thus in a break-even chart of such firm, the sales mix is assumed to remain constant throughout its level of activity

8.0 It assumes as in conventional accounting that monetary values are stable. In order to establish the break-even point in real terms it may be necessary to adjust revenues and costs to current purchasing powers.

Understanding the Importance of the business’s break-even point

2009-06-30T23:22:00.000-07:00

Break-even point is important for business decisions as it marks the very lowest level to which activity can drop without putting the life of the company in jeopardy. By understanding break-even analysis, a firm can decide on which following strategies to use in order to increase profit or decrease loss like:

Increase sale volume
Increase selling price per unit
Decrease fixed costs
Decrease variable cost per unit

What is A Break-Even Chart?

2009-06-30T23:21:00.000-07:00

The analysis of revenues and costs in relation to the volume of production is known as break-even analysis. This relationship can be best shown in a break-even chart where the point at which total revenue equals total costs is the break-even point. This break-even point is where a company is neither making a profit or loss.

Standard Costing-The Sources of Variances

2009-06-29T03:26:00.000-07:00

In standard costing, the idea is establish the attainable standards and then work out the variance between the standard and the actual. By reviewing the variances,managers can immediately take the necessary corrective actions. Therefore it is necessary for them to understand the various type of variances that they are facing and their sources.

Append below is a snapshot or summary of type of variances and its sources:

Variance:Sales PRICE
Source:Actual selling price

Variance:Sales VOLUME
Source:Actual units sold

Variance: Direct materials PRICE
Source:Actual cost of materials

Variance: Direct materials USAGE
Source:Actual usage of materials

Variance: Direct materials MIX
Source:Material Mix

Variance:Direct materials YIELD
Source:Actual output

Variance:Direct labor RATE
Source:Actual labor rate

Variance:Direct labor EFFICIENCY
Source:Actual productivity

Variance:Variable production overhead EFFICIENCY
Source:Actual consumption per unit of output

Variance:Variable production overhead EXPENDITURE
Source:Actual variable production overhead

Variance:Fixed production overhead EXPENDTIURE
Source:Actual fixed production overhead

What are the required Qualitative characteristic of the financial statement

2009-06-29T03:10:00.000-07:00

One of the examination question asked about on financial statement is on the qualitative aspect of the financial statement.

Normally, candidates are asked to quote some qualitative characteristic of the financial statement or to elaborate on any of the following qualitative characteristic:

1.0 UNDERSTANDABLE & USEFUL

• Accounting information should be readily understandable to the intended users of the information.
• This is a function of both the intended users and the intended uses of the information. Accounting systems that define either the users or uses narrowly may justify more complex information requirements and standards. Accounting systems that envision a broad body of users and/or uses would tend towards less complexity in published information and standards.
• Typically the belief that, for information to be understandable, information contained in the various financial disclosures and reporting must be transparent (i.e., clearly disclosed and readily discernable).

2.0 RELEVANT

The information should be relevant to the decision-making users of the information. It should make a difference in their decisions. Typically, this means the information must
be:
• Timely
• Have predictive value
• Provide useful feedback on past decisions

3.0 RELIABLE

The information should be reliable and dependable. This usually includes the concepts of:

• Representational faithfulness - the information represents what it claims to represent. For example, if the reported value of a common stock holding purports to be the current market value, that value should be approximately what the stock could be sold for by the company holding it.

• Verifiability - another person or entity should be able to recreate the reported value using the same information that the reporting entity had.

• Completeness - the reported information should not be missing a material fact or consideration that would make the reported information misleading.

• The concept of neutrality is sometimes incorporated into the concept of reliability.

4.0 COMPARABLE AND CONSISTENT

• For accounting information to be usable, it must allow for comparisons across time and across competing interests (such as competing companies or industries).

• This leads to a need for some consistency, wherever such comparisons are to be expected. For example, comparisons of two companies would be very difficult and potentially misleading if one discounts all its liabilities while the other discounts none of its liabilities.

5.0 UNBIASED

• Information that is biased can be misleading.
• Biased information is not useful unless the users understand the bias, any bias is consistently applied across years/firms/industries, and the users can adjust the reported results to reflect their own desired bias.
• When faced with uncertainty, there is a need to either require reporting of unbiased values accompanied with sufficient disclosure, or require the reporting of biased (prudent or œconservative) values with the bias determined in a predictable, consistent fashion.

6.0 COST-BENEFIT EFFECTIVE

• General understanding that the development of accounting information consumes resources.

• As such, the cost of producing such information should be reasonable in relation to the expected benefit.

• Use the materiality accounting rule - may not have to be fully followed for immaterial items if full compliance would result in unwarranted higher costs.

Worked Example On Correction Of Errors

2009-06-28T04:39:00.000-07:00

Typical examination questions from LCCI Accounting and other asked for identification of the type of errors, its general journal entries to correct the errors and would like to see the Suspense Account being corrected and to see the original difference of the suspense account re: which is a balancing figure.

Above represents a worked question and answer to such typical questions from examiners.
{click above image to enlarge}

Worked Example No 1 On Balance Sheet Classifications

2009-06-28T03:30:00.000-07:00

Question No 1:
List the amount of Total current assets from below listing:

Patents,trademark =$100,000
Accounts Receivable=$30,000
Inventory=$100,000
Investment in subsidiaries=$200,000
Property, plant and equipment=$600,000
Cash & Bank=$40,000
Total Current Assets= ?

Answer:
Total Current Assets=Accounts Receivable+Inventory+Cash & Bank=$170,000

Question No 2:

Insert the following to classify the Balance Sheet items:

Current Asset; Non Current Asset; Intangible asset
Current Liability; Non Current Liability, Equity

a ________ Trademarks
b ________ Retained earnings
c ________ Salaries payable
d ________ Income Tax payable
e ________ Accruals
f ________ Prepayments
g ________ 15 year mortage owned by the company
h ________ Accounts Payable
i ________ Petty Cash
j ________ Land
k ________ Sundry deposits like rent
l ________ Fixed Deposit with bank

Answer:
a Intangible asset
b Equity
c Current liability
d Current liability
e Current liability
f Current asset
g Non Current liability
h Current liability
i Current asset
j Non Current asset
k Current asset
l Current asset

Format Of Balance Sheet: The Horizontal And Vertical Presentation

2009-06-28T03:13:00.000-07:00

A Balance Sheet is also called the Statement of Financial Position. It is a snapshot of a company's financial position at a particular point in time. The Accounting equation which is Assets=Liabilities+Stockholder's Equity is closely link to the Balance Sheet. Because of this accounting equation and the double entry system, the Balance sheet must always tally.

Append below are two format namely the Horizontal and Vertical Presentation to display the Balance sheet of a company.

(a)Format of A Balance Sheet: Horizontal Presentation

The horizontal presentation uses a format that present assets on the left and liabilities and equity on the right

XYZ Company

Balance Sheet As at December 31st 2008

Assets		Liabilities & Stockholders’ Equity
	$		$
Current Assets		Current Liabilities
Cash	10,000	Accounts payable	15,000
Accounts Receivable	20,000	Salaries Payable	9,000
Inventories	30,000	Total Current Liabilities	24,000
Deposits, prepayments	5,000	Bonds payable	20,000
Total Current Assets	65,000	Mortgages	35,000
		Total Liabilities	79,000
		Stockholders’ equity
Property, plant and equipment, net	55,000	Common stock	50,000
Intangible assets	10,000	Retained earnings	1,000
Total Assets	130,000	Total Liabilities and Stockholders’ equity	130,000

(b) The Vertical Presentation of The Format Of A Balance Sheet

The vertical presentation show the assets followed by liabilities and equity directly below the assets.

XYZ Company

Balance Sheet As At 31 st December 2008

Assets
Current Assets
Cash	10,000
Accounts Receivable	20,000
Inventories	30,000
Deposits, prepayments	5,000
Total Current Assets	65,000

Non Current Assets
Property, plant and equipment, net	55,000
Intangible assets	10,000
Total Non Current Assets	65,000
Total Assets	130,000
Liabilities & Stockholders’ Equity
	$
Current Liabilities
Accounts payable	15,000
Salaries Payable	9,000
Total Current Liabilities	24,000

Non Current Liabilities
Long Term Bonds payable	20,000
Mortgages	35,000
Total Non Current Liabilities	55,000
Total Liabilities	79,000
Stockholders’ equity
Common stock	50,000
Retained earnings	1,000
Total Liabilities and Stockholders’ equity	130,000

Income Statement Format –Single Step Format

2009-06-28T03:09:00.000-07:00

Earlier article describe the fundamental accounting concepts underlying the Income Statement.

Here, we look at the type of format, Income Statement can be displayed namely the Single Step Format and Multiple-Step Income Statement. Also the advantages and disadvantages of using the different method will be discussed.

Format of A Single Step Income Statement

	$
Revenues
Net Sales	180,000
Gains	10,000
Total revenues	190,000
Expenses
Cost of goods sold	55,000
Selling and administrative expenses	24,000
Interest expenses	10,000
Losses	8,000
Income tax expenses	15,000
Total expenses	112,000
Net Income	78,000

Format of A Multiple Step Income Statement

	$
Net Sales	180,000
Cost of goods sold	55,000
Gross Profit	125,000
Selling and administrative expenses	24,000
Operating Profit	101,000
Other revenues and gains	10,000
Other expense and losses	18,000
Pretax income from continuing operations	93,000
Income tax expenses	15,000
Net Income	78,000

Whether you use the Single Format Income Statement or Multiple Step Income Statement, you will still get the end result/bottom line re: same net income.

The advantages of using the multiple step income statement format are:

It clearly display important financial and managerial information
The four measures of profitability are revealed at four critical areas of a company’s operation namely gross profit, operating profit/operating income, pretax income and after tax net income

As for the single step format of Income Statement, the advantage is that is relatively simple to prepared and understand however, the gross and operating income figures are not stated which need to be computed.

What Are The Basic Accounting Concepts Underlying The Income Statement

2009-06-27T21:13:00.000-07:00

The Income Statement is previously called the Profit & Loss Account. This Income statement shows the revenues and expenses for the period and calculates the bottom line-net income.

The following are a few fundamental basic accounting concepts which underline the Income Statement namely:

1. Accrual concept/principle of accounting where the income statement does not coincide with the actual receipt and disbursement of cash ( namely the income statement measures profitability NOT cash flow)

2. The Revenue Recognition concept/principle requires that revenue be recognized in the financial statements when the revenue is realized and earned.

Revenues being realized when products/services are exchanged or performed for cash or claims to cash (accounts receivable)
Revenue being earned when an entity has substantially completed what is must do to be entitled to the benefits represented by the revenues

3. The Matching principle/concept guides how the Income Statement should recognize the expenses. It requires that expenses be matched with revenues whenever it is reasonable and practical to do so.

[ click here for article to understand the Single Step & Multiple Step Format of Income Statement]

Worked Example On Capital,Revenue Expenditure

2009-06-27T09:09:00.000-07:00

Before attempting this question, refresh yourself by going to the main topic on capital & revenue expenditure

1.0 From the following items of expenditure of " Tommy Garage" classify between them capital and revenue expenditure:

(a) Wages for workers
(b) Purchase of a Tow Truck
(c) Telephone accunt
(d) Purchase a Breakdon vehicle
(e) Insurance
(f) Trolley jack
(g) Uniform for his workers
(h) Allowances for his workers
(i) Vehicle lift
(j) Hand cleaner
(k) Lubricating oil pump
(l) Cost of printing business card
(m) Purchase of a new Car
(n) Entertainment charges incurred
(o) Purchase a new office safe
(p) Cost of installing office sale
(q) Heating and lighting-quarterly account
(r) Office files, punch and sundry stationery items
(s) Purchase a new printer for computer

Answer:
(a) revenue expenditure
(b) capital expenditure
(c) revenue expenditure
(d) capital expenditure
(e) revenue expenditure
(f) capital expenditure
(g) & (h) revenue expenditure
(i) capital expenditure
(j) capital expenditure
(k) capital expenditure
(l) revenue expenditure
(m) capital expenditure
(n) revenue expenditure
(o) capital expenditure
(p) capital expenditure
(q) revenue expenditure
(r) revenue expenditure
(s) capital expenditure

Understand the terms:-Capital Expenditure,Revenue Expenditure,Capital Receipts And Revenue Receipts

2009-06-27T07:35:00.000-07:00

Candidates in the LCC Bookkeeping, GCE O Level And AS Level are frequently being asked to differentiate and understand the importance of such terms:-Capital Expenditure, Revenue Expenditure, Capital Receipts And Revenue Receipts.

Capital Expenditure is the acquisition of a fixed asset or adding value to it. All expenses incurred like carriage, import duty, testing,installation and legal charges to put the asset in a working condition is also classified as capital expenditure.

Whereas:

Revenue Expenditure is the day-to-day expenses that are paid by the firm for example rent, lighting, insurance,etc

Illustration:

Company A obtained a loan to purchase a fixed asset of $100,000. Every month, the company is required to pay to the bank monthly interest of $1,000. In this case, explain what is capital and revenue expenditure

As the loan is used for buying the fixed asset for company's expansion it is a capital expenditure. However, as the loan interest is paid monthly it becomes a part of day-to-day expense hence it is a revenue expenditure.

Next what is so important to differentiate Capital and Revenue Expenditure?

Capital expenditure is not charged to Income Statement but revenue expenditure is charged into the Income Statement which will affect the bottom-line namely the profits of the company.

Incidentally, there are many accounting fraud/scandal where these concept of capital versus revenue expenditure has been greatly abused. The crooks would cook up the accounting profit of the company but classifying revenue expenditure as capital expenditure namely the expenses do not go into the Income Statement and are taken up into the Balance Sheet item as capital expenditure

In brief, the accounting treatment of capital expenditure and revenue expenditure are different:-

Revenue expenditure must be charged out to the Income Statement using the accrual and or matching concept

whereas

Capital expenditure goes into the Balance Sheet Item therefore not affecting the profits of an entity.

Similarly, Capital Receipts relates to in-flows or proceeds from the disposal of capital items like fixed assets(plant and machinery, land, building,etc,)

whereas

Revenue Receipts received by an entity are proceeds or inflows received in the course of the year like sales, commission received, discount received and others

In this case, both receipts whether they are capital or revenue, they are still taken up into the Cash Book of the company.

Test Your Knowledge: The Role/Purpose Of Accounting

2009-06-27T07:23:00.000-07:00

Test Your Knowledge from the following structured questions:

Briefly explain what is accounting
Identify the users of accounting
List three objectives of financial accounting
List seven general characteristics of useful information
What is the difference between financial accounting from managerial accounting?
What are the four primary financial statements?
Identify the major similarities between financial accounting and managerial accounting

Opportunity, Incremental or Differential Cost And Avoidable Cost For Short Term Decisions

2009-06-26T03:06:00.000-07:00

Earlier article, we discuss about relevant costs-its importance and functions on short term decisions.

In this articles we look at other costs namely OPPORTUNITY COST, INCREMENTAL OR DIFFERENTIAL COST AND AVOIDABLE COST which are also relevant or useful to management decision makings:

OPPORTUNITY COST

Represents the opportunities which have been forgone by following one course of action rather than an alternative course.

The opportunity cost in this case is the profit foregone by utilizing scarce resources for one particular course of action.

Example:

Company A may either manufacture or buy a component from an outside supplier.

If it buys from outside, the spare capacity can be rented out to another manufacturer for $20,000.

The opportunity cost of making the component would be to lose the opportunity to earn the $20,000

Note that the opportunity cost does not involve cash transaction but it is â€œrelevantâ€� to decision making.

INCREMENTAL OR DIFFERENTIAL COST

Incremental cost is used interchangeably with differential cost.

Incremental cost is the additional cost and revenue that may result from each degree of change in the level or nature of activity.

Whilst Differential cost is the difference in the cost and revenue between two alternatives.

Example:

Company A need to consider whether or not to accept a special order.

One relevant piece of information will be the variable cost.

The relevant cost before taking this special order is $25,000 and after taking the order it is $35,000.

Therefore the differential or incremental cost is $35,000-$25,000 which is $10,000

AVOIDABLE COST

Is cost that can be avoided if a given alternative is not adopted.

Example:

Assuming that a manufacturer decides not to proceed with a new product line which enable total savings in direct material, labor, direct expenses and variable costs of $10,000.

In this case, the differential cost of $10,000 can be avoided. The $10,000 is the avoidable cost.

Notional, Sunk And Committed Costs

2009-06-26T02:58:00.000-07:00

Earlier articles relate to relevant costs and other alternative costs like opportunity cost, incremental or differential cost and avoidable costs. Below are more costs that we need to understand before we embark on tackling short term decisions making questions often asked by the various examination boards.

Notional Costs

Notional costs are also known as imputed cost. The primary objective of charging notional costs is to enable management to make clearer internal decisions by making sure that internal decision making become more realistic by assuming that the cost of all resources consumed reflects the full economic value - usually by applying market prices.

Notional charges are typically used to charge responsibility centres.

Notional interest is often charged for the use of internally generated funds.

Examples of using notional cost to enhance internal management making decisions:

Charging of ’market rent’, where buildings have been purchased on a freehold basis. Such a mechanism helps to focus management attention on making best use of space so that surplus space across the whole organisation might then be sold or rented to another user.

Intra division charges to enable management to see the true performance of certain departments

Sunk Costs:

Sunk cost is defined by ICMA terminology as

A past cost not directly relevant in decision making.

If we refer to relevant costs, the main feature is that we are referring to FUTURE costs.
As Sunk costs are cost which have already been incurred therefore it should be ignored when making any decisions.
Sunk costs are irrelevant costs which are simply costs that will not affect the decision.
By analyzing these type of sunk costs, management will be wasting their time and efforts as these costs do not affect the decision they are going to make.

In short term decision making, fixed costs are generally regarded as sunk costs.

Illustration:

Say Company A has a factory which produced product A. Earlier last year it has extended and renovated the factory at an additional cost of $500,000 to produce product B. Now management is thinking of whether to let outsiders produce product B or not. Should this $500,000 be considered?

$500,000 is sunk costs which existed as a result of previous decision.

Committed Costs:

These costs are similar to sunk costs in that they exist as a result of previous decisions although the ‘charge’ has yet to be incurred or the cash released.
Committed costs are costs that have been committed by management.
Examples are like renovation of factory premises, capital expenditures being incurred as company’s purchase orders have been issued or work done is partially completely and payment to suppliers still outstanding

However, the above mentioned costs committed contractually is effectively a sunk cost.

Illustration:

Question:

Say company A is unable to rent out its building/workshop but there is a need to sign off a contract to spend $50,000 on an air conditioning system. Would this make any difference to management decision?

Answer:
None whatsoever. This type of situation might be awkward but past costs (and mistakes) should not impact upon the logic of financial decision making. The $50,000 that has been committed contractually is effectively a sunk cost.

Relevant Costs-Its Importance or Function or Features

2009-06-26T02:47:00.000-07:00

Examination questions often touched on relevant cost. It tests the candidates whether they appreciate them in making short term decisions

Understanding relevant costs is important once we realize that there are many areas where relevant costs concepts are applied namely:

· Limiting factor due to scarce resources;

· Make or Buy decision;

· Accept or Reject special order;

· To continue or discontinue or shut down decisions;

· Pricing

In all the above situation, management needs sufficient and relevant information make the correct decisions. Therefore it leads to the need to understand what really is relevant costs.

A relevant cost:

· Relates to future expected costs that will differ with each alternative used.

· Because of the difference amongst alternative, hence it has a bearing on the decision to be made.

· Irrelevant costs simply are costs that will not affect the decision. By analyzing these type of irrelevant costs, management will be wasting their time and efforts as these costs do not affect the decision they are going to make.

Some of the features or criteria of Relevant costs are as follows:

a. Relevant cost is a cost that will be incurred in the future. Historical costs are sunk costs which has no relevancy in the decision making.

b. The costs must differ between alternatives. If a cost is the same whether we choose alternative A or B then this is an irrelevant cost. A good example is factory rental which remains the same irrespective of management wanting to manufacture product A or B.

c. Only CASH flow item And Incremental fixed costs are relevant. Non cash item like depreciation and absorbed fixed overheads are not relevant costs as they do not involve any additional cash flow.

Worked Example On The Effect Of Sales Expansion On The Working Capital

2009-06-26T02:19:00.000-07:00

Earlier article shows the effect of sales expansion on the working capital of a company.

Below is an additional worked example of the impact of sales expansion in the event the company extend its credit term.

Worked Example:

Company ABC Ltd has a current sales of $2.6 million. It wants to increase its sales by relaxing its credit policy. The current credit term is 45 days and the proposed terms of credit is 60 days. However the company believes that bad debts will increase from 1.5% to 2% of sales and sales should increase by 10%. The variable operating costs are 72% of the sales. The corporate tax rate is 35% and that the company requires an after-tax return of 15% on its investment.

Question:

Should Company ABC Ltd extend its credit policy from 45 days to 60 days?

Suggested Solution

	$	$
Sales Increase (10 % of $2.6m)		260,000
Contribution margin (100-72%=28%)		72,800
Less:
Bad debts
1.5% x$2.6m	39,000
2.0% x($2.6×1.1=$2.86m)	58,000
Incremental bad debts		(19,000)
Operating profit before tax		53,800
Operating profit after tax		34,970

Increase in receivables investment
=(New sales/360 days x 60 days) deduct (Old sales/360 days x 45 days)	$476,660-$325,000	151,660

Expected rate of return =Operating profits after tax/Increase in receivables investment		34,970/151,660 =23.06%
Less: Original rate of return		15%
Incremental rate of return		8.06%

Yes, it is to the advantage of Company ABC Ltd to extend its credit policy as it achieve a higher rate of return of 8.06%

The Effect of Sales Expansion On Working Capital

2009-06-26T01:02:00.000-07:00

This article looks in particular the effect of Sales Expansion On Working Capital.

Managing Accounts Receivables has a critical impact on the company’s working capital. In fact, credit sales normally form a very large portion of the sales re: about 15% to 25% of a firm’s assets. To increase sales, top management will resort to increasing/extending the credit period to the customers. Examination question often ask candidates to assess the viability of such sales expansion in terms of increase in credit period.

Append below showed how we compute the viability when a firm relax or extend its credit period to boost its sales.

HOW TO COMPUTE THE FINANCIAL VIABILITY/IMPACT OF A FIRM WHEN THERE IS AN INCREASE IN ACCOUNTS RECEIVABLE.

Step:

(1) Compute the additional profit from the increase in sales from the extension of credit terms to its customers

(2) Compute the cost of additional investment in accounts receivable

(3) Compute the cost of additional bad debts.

(4) Finally, sum up step (1) to step (3) to see whether there is a net gain to the firm

· Additional profit from in increase in sales minus(-)

· additional cost of additional investment in accounts receivable +

· Additional cost of additional bad debts

SIMPLE ILLUSTRATION

Company ABC has a yearly sale volume of $12 million. The cost of goods is 80% of annual sales. Top management wants to increase sales by 10% by extending its credit terms from 30 days to 45 days. Bad debts is estimated to increase from 1% to 2% of yearly sales.

Company ABC’s cost of tying up funds in accounts receivable is 10%.

Required:

Should Company ABC relax or extend its credit terms from 30 to 45 days?

Operating Budget: The Production Budget, Functions & Role in an organization

2009-06-25T22:23:00.000-07:00

This article explain some key features,functions and role of the Production Budget

For the production manager to know how much to produce during the budgeted period, obviously he/she needs to know the sales budgeted. Only then can he consider the production capacity and also to take account the planned closing stocks of finished goods.
Once the volume of production is ascertained, he has to prepare a statement of expected manufacturing costs. Costs should be classified into fixed and variable costs to allow for flexible budgeting.
In the initial stages,the production budget is in terms of quantity.Later the quantity is expressed in terms of costs.
Production budgets are based on sales, machine utilization,purchasing, labor and overhead budgets. Hence it is a summary of all those budgets
Production budgets may be analyzed by products, production departments and period
The key factors must be determined before adopting a plan.
The size and nature of the business will influence the preparation of production budgets.

Operating Budget: The Sales Budget, Functions & Role in an organization.

2009-06-25T22:22:00.000-07:00

The Sales Budget is the first budget prepared. It is derived from the sales forecast (estimate of sales revenue for the budget period).

Salient points about the Sales Budget:

The formula is simple namely Sales Forecast=Quantities forecast X Selling prices

It has a detailed breakdown by product,area,timing, volume and value. The detailed breakdown is to enable the preparation of production budget as well as the company’s cash budget.

In preparing the budget,the sales personnel may rely on the following:

Salesmen reports where the salesmen are in direct contact with the customers and are therefore able to prepare detailed estimates of sales for the budgeted period
Market survey: some companies employ market researchers to anaylze the demand for their products;
General business conditions: a political social, economic or technological change must be considered as it may affect the demand for their products
Company’s policy: any change in company’s policy relating to the products sold must be considered.

Important to identify the principal budget factor because it will be crucial in the preparation of the sales budget. For example, if the plant capacity is incapable of producing the expected volume of sales then the sales budget must be determined by output.

Since demand is influenced by price the sales should be prepared only after the selling price has been fixed.

Explain the difference between Summary Budget and Master Budget b

2009-06-25T22:15:00.002-07:00

Sometimes we are confused with the term Summary Budget and Master Budget.

This article seeks to explain the difference:

The Summary Budget:-

In earlier articles we have the capital expenditure budget and the various operating budgets like sales, production, overheads and others. Basically, Summary Budget as it being coined is merely a summary of all the abovementioned budgets. The ultimate output of the Summary Budget will show:

Budgeted Income Statement
Budgeted Balance Sheet
Budgeted Cash Flow

Whereas:-

The Master Budget:-

Once the summary budget is prepared, it is a DRAFT Master Budget. This draft master budget is submitted to the budget committee for approval.

Next when the budget committee has thoroughly review the draft master budget, it is then submitted to the Board Of Directors once again for the ultimate approval. Upon the approval from the Board of Directors, the draft master budget then becomes the Master Budget. The budget is now an order from the board and the manager responsible must see to it that it is implemented as effectively as possible.

What Are The Different Types Of Budgets And Their Functions In An Organization.

2009-06-25T22:15:00.001-07:00

We can basically classify budgets into two categories namely:

Capital Budgets
Operating Budgets

Below explain their functions:

Capital Budget:

is concerned with the provision of resources for the long-term running of a business for example, the Capital Expenditure Budget

Operating Budget:

Is concerned with the DAY-TO-DAY operating activities of the business.
Usually prepared for a normal operating cycle of one year.
Common operating budgets includes the following:
Sales Budget
Production Budget
Machine Utilization Budget
Material Budget
Labor Budget

Overhead Budget- the Production Overhead Budget, Administration Budget, Selling Overhead Budget and Distribution Overhead Budget
Research and Development (R&D) Budget
Working Capital Budgets which includes the Stock Budge, Debtors Budget and Creditor Budget
Cash Budget

What Do We Mean By Responsibility Accounting In Budgetary Control

2009-06-25T22:07:00.000-07:00

Responsibility Accounting is a system where:

Managers are held responsible for the difference between the actual performance and those budgeted;

Managers are closely involved in the planning and controlling of the resources and having responsibility center which can be a division or department in the organization to be responsible for their performance.

There are basically the following four types of Responsibility centers:

COST CENTER

Here, the manager is responsible for costs.

Examples like the manager for Purchasing department and Maintenance department

REVENUE CENTER

Here, the manager is responsible for generating sales.

A typical example is the Sales Department

PROFIT CENTER

The manager is responsible for both revenue and cost. The reason been Revenue minus Cost is the Profit.

The manager is therefore overall responsible or accountable for making profit for the company.

A company has many restaurants which are all profit center. A manager is assigned to each restaurant to make sure it is a profit center.

INVESTMENT CENTER

An example of an investment center is a Corporate division responsible for project investments.

Here, the manager is responsible for the investments which includes all the revenue, costs and investments (invested capital or assets)

How to or Steps To Establish A Flexible Budget

2009-06-24T08:32:00.000-07:00

Earlier article describe the steps to prepare a budget and this article looks at how to establish a FLEXIBLE BUDGET.

Select the measure of activity like the units of production;

Define the relevant rage of activity for the budgeted performance based on the step 1;

Identify the cost items to be included in the budget;

Determine the cost behavior of each item over the relevant range;

Separate the cost items into variable, fixed and mixed;

Select the specific levels of activity to be budgeted;

Use the cost behavior under item 4 to estimate the budgeted amounts for each cost item at the different levels selected in step 6.

Role Of Budget Committee And Purpose Of A Budget Manual

2009-06-24T08:11:00.000-07:00

Part A of this article look at the roles of a Budget Committee and Part B on the purpose of a Budget Manual.

Part A: Roles/objectives of a Budget Committee:

Reconciles differences of opinion between departmental managers;
Resolves disputes between managers;
Give advice to board of directors and chief executive;
Reviews department budgets and making recommendations;
Examines periodic reports showing actual performance compared with the budget Significant variances are identified and recommendation made on actions to be taken;
Develop and examines long term plans;
Identifies budget objectives;
Creates a better understanding and awareness among managers of the role of each others deparment;
Coordination of budgets or budgeting;
Review external conditions such as economic conditions for the ensuing period; and
Considers forecasts compiled by departmental managers.

Part B: Roles/Functions Of Setting Up Budget Manual:

The budget manual documents the administration of budgeting. It contains the purpose of, procedure for and responsibility of the people involved in budgeting.

Others details includes:

The objectives of the business and the part which budgetary control plays in achieving these objectives;
The procedures to be adopted in operating the budgetary control system;
The responsibilities and duties of those connected with the preparation of the budgets;
The reports and statements required for each budget period;
The functions of the budget committee and
The accounts classification to be used

What are the key features of A Budgetary Control System

2009-06-24T08:08:00.000-07:00

Append below some of the key features of a budgetary control system:

Setting attainable objectives;
Assigning executive responsibility;
Planning the activities to achieve the objectives;
Comparing actual results against the plan;
Taking corrective actions and
Reviewing and revising plans in the light of changes.

Explain the difference between Budget And Budgetary Control

2009-06-24T08:05:00.000-07:00

In examination question, under short question, candidates are being asked the difference between budget and budgetary control.

Tabulate below the major differences:

A Budget

Is a predetermined statement of a company’s objectives during a period of time.

The budget is like a plan which guides the managers who are responsible for achieving certain business objectives.

The budget normally has an overall or master budget which is made up of sectional/subsidiary budgets prepared by the different sections in the company.

Be careful that a budget is a plan but a forecast is merely a prediction of what will happen as a result of a given set of circumstances.

Budgetary Control

Is a system which uses the budgets for planning and controlling a business activities.

It quantifies and is financially oriented to guides the managers to achieve certain business objectives..

Managers will compare the actual with the budgeted figures and the variances will then be investigated and corrective actions be taken

How To or Steps to Establish A Budget

2009-06-24T08:04:00.000-07:00

The steps are as follow:

(1) Select a budget period:

The length of the budget period depends on the kind of plan being made. Some budget periods will follow the natural cycle time, for example, one year for a sales budget. Other budget periods may be determined by management, for example five years for capital expenditure budget.

(2) Setting or ascertaining the objectives:

The objectives of the business have to be set so that the plans may be prepared to achieve those objectives;

(3) Prepare basic assumptions and forecasts.

A statement of the basic assumptions on which the individual budgets are to be base must be prepared. A forecast is then made of the general economic climate and conditions in the industry and for the company. Forecasts are made for the following areas: sales, productions, selling and distribution expense, administrative expense, production expense, research and development expense, cash, purchases, capital expenditure, working capital and master forecast namely the Income Statement and Balance Sheet Forecasts.

(4) The need to consider any limiting factor.

A limiting factor prevents a company from expanding to infinity. Limiting factors affect budgeting and they must be considered to ensure that the budgets can be attained. Examples are: raw material shortage, labor shortage, insufficient production capacity, low demand for products, lack of capital,etc

(5) Finalizing forecasts:

The forecasts are finalized and now become budgets which are formally accepted.

(6) Implement the budget:

Budgets which are accepted must be implemented. The budget becomes the standard by which performance is measured.

(7) Review forecasts and plans:

Forecasts and budgets have to be reviewed at regular intervals. Changing environment may require changes to be made. Revised budgets may have to be prepared.

Key Factors Or Processes For the Successful Establishment of Budget

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We need to understand what factors that can make successful budgets in an organization. Tabulated some of the key factors or process:

The Key Factors/Processes For The Successful Establishment Of Budgets:

There should a clear effective communication of the company’s objectives and strategy to those responsible for preparing budgets.This is quite critical otherwise there is no proper focus on the overall company’s goal like achieving X revenue or XX profitability and others.The strategy document should be clear as to the overall objectives of the organization and should able to reflect the impact on the various division.

There should be a clear effective communication of the overall and detailed procedures for preparation of the budgets.Preferably a budget manual should be set up to communicate all the essential procedures like the time line to complete the budget, formats to be used, organization chart and others

Determine the key and/ limiting factors which normally comprise sales to be achieved, availability of materials, capital and others

The organization need to ensure the proper setting up of budget centers or department. Who to do what is the basic otherwise the relevant managers might be confused of their roles.

There should be availability of adequate/detailed accounting records. If the accounting systems does not maintain the correct detailed past records of transactions, it will make the forthcoming budgeting very difficult and cumbersome

It is important to set up a proper budget committee to coordinate all the work connected with the budgets.This committee can assist to:

formulate a general program for preparing the budgets and exercising overall control,
review and co-ordinate the budgets,
negotiate budgets with line managers
finally accept the final form of the budgets

Benefits Of Budgets And Understanding Its Limitations

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Earlier article describe the objectives of having budget, here this article describes the benefits that may accrue from budgeting and then what can be its limitations.

Benefits Of Budgeting:

Reinforce the management process of planning ahead. In fact, budget compel the managers to think and anticipate of future challenges, formulate strategies ,etc so as to achieve the desired company’s goals;

A budget is in reality a set of plan. This plan is created by all the relevant managers to create a course of action for future action(s)

Create a basis for Performance Evaluation of Managers’ performance. Incentives are based on how much have been achieved against the budgeted figures. Hence, if budgets are set up realistically will assist to motive manager and employees positively.

Aid in resource planning and allocation, key or scarce resources or capital expenditure are carefully review during the establishment of the budgets;

Promote continuous improvement. In the budgeting stage, non-value adding activities shall be eliminated, new or enhanced processes are designed to increase productivity, etc.;

Budgeting is the best time for all level of manager to co-ordinate together so as to plan ahead, promotes teamwork, process improvement and goal congruency between the company and the employees.

Delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feels that they are in control of the various business activities of the company.

Limitation Of Budgeting:

De-motivation of employees as they feel that the budgeted figures are way too high to achieve;

Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management’s reprimanding them;

A budget tends to emphasize on results and the real reasons are being ignored;

Unrealistic budgets can lead managers to make decisions that might be detrimental to the company. A good example of over-ambitious sales budget will lead to disastrous impact like giving steep discount to increase volume,etc.;

No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company;

There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.

Budgets if not properly buy in by all relevant parties will not get the full cooperation hence it might lead to the motto:Planning to fail