Append below some questions to test the knowledge of those who have just studied topic on subsidary books:
Append below some questions to test the knowledge of those who have just studied topic on accounting concepts and double entry system:
In bookkeeping, there are two essential flowcharts which must be properly understood namely the “ACCOUNTING CYCLE” AND THE INTER-RELATIONSHIP AMONGST the financial statements like the Income Statement, Balance Sheet, Statement of Owner’s and Cash flow statements.
As mentioned, the acccounting cycle enable us to have a snapshot of whats should be done from source documents to preparation of financial statements whilst the below demonstrates the double entry effect which has inter-relationship between the various financial statements:
As discussed earlier on the two formats of Income statement, similarly we have two formats normally prepared by bookeepers for their companies.
Before preparing the format we need to understand that a Balance Sheet is called the Statement of Financial Position. as 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.
Below we have two formats 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
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Assets |
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Liabilities & Stockholders’ Equity |
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$ |
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$ |
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| Current Assets |
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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 |
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Total Liabilities |
79,000 |
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Stockholders’ equity |
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| 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 |
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|
|
| 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 |
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|
|
| Non Current Liabilities |
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| 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 |
For bookkeeper, it is important to understand that there are a few ways of preparing the format of an Income statement. Basically, there are two formats namely the Single Step Format and Multiple-Step Income Statement.
Below are the format for both the Single step and Multiple-Step Format of Income Statement. Also mentioned are their advantages and disadvantages.
Format of A Single Step Income Statement
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|
$ |
| 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.
Snapshot of how to prepare the Income statement,Owner’s equity statement and Balance sheet statement
Append below, a simple snapshot of preparing the following financial statements:
(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
(c) How to prepare the Balance Sheet:
- 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)
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CONCEPT OF AN ASSET |
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CONCEPT OF A LIABILITY |
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CONCEPT OF EQUITY |
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CONCEPT OF INCOME |
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CONCEPT OF EXPENSE |
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Note the following salient points:
For example, when we buy fixed asset like factory machinery, this is merely an advance payment of which we expect that this fixed asset is able to enhance or earn certain earnings for the business. Over a period of time, the fixed asset we buy will become valueless or unable to generate the necessary earnings. To reflect this continuing diminution in the value of the factory machinery, we need to apply depreciation accounting. WHY DO WE NEED depreciation:
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2. LEARN THE THREE(3) MAJOR METHOD OF DEPRECIATION:
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3. REMEMBER DOUBLE ENTRY TREATMENT FOR DEPRECIATION OF FIXED ASSETS:
Notes: Depreciation of assets is treated as expenses, therefore it should be disclosed in the debit side of the Profit & loss account. In the Balance sheet, remember to present the Cost of Fixed Assets ( in categories like motor vehicles, plant and machinery, furniture & fitting, etc ) less Provision for depreciation ( accumulated depreciation ) which is equal the book value of the fixed assets.
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4. LEARN TO DEAL WITH DISPOSAL OF FIXED ASSET Main objective when an asset is disposed off or sold is to determine the GAIN/(LOSS) from the sale. Following steps: |
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(a) when an asset is disposed off, transfer it to a Disposal account namely Debit Disposal account and credit assets account (based on the original purchase price.
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(b) next, transfer the total ACCUMULATED depreciation of the asset from purchase date to disposal date to Disposal account by Debit: Provision for Depreciation on Fixed Asset a/c and Credit: Disposal account.
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© when cash/cheque is received, Debit bank/cash account and Credit: Disposal account ( based on disposal price or selling price)
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(d) finally balance the disposal account to find the gain/loss from the sale of the asset. For gains/profit Debit: Disposal Account and Credit Profit & Loss Account. For Loss: Debit Profit & Loss Account and Credit Disposal Account
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Notes on Gain or Loss in the Disposal of Fixed Assets: When there is a profit on disposal of assets, it is treated as an income of the business. Therefore, it will appear on the CREDIT side of the Profit & Loss account. When there is a loss on disposal of assets, it is treated as an expense of the business. Therefore it will appear on the DEBIT side of the Profit & Loss account.
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QUESTION:Mr. A extracted a Trial Balance at 31 st December 2005 and found that it did not balance. He posted the difference to a Suspense Account. Later he found the following errors which accounted for the difference:
Required: (a) Prepare the journal entries necessary to correct the errors and omission (19 marks) (b) Prepare the Suspense Account showing the original difference in the Trial Balance ( 6 marks )
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ANSWER(a) Mr. A’s Journal Entries
(b) Suspense Account
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| QUESTION:
Mr. Steven is a retailer whose accounting year ends on 30 June 2006. He has extracted a Trial Balance, before producing his final accounts and the following are some of the balance included in that Trial Balance:
The following information is also available: (a) The Insurance Account was charged with $39 which relates, in fact to advertising. (b) The Insurance Account includes a premium of $144 for the year ended 30 September 2006 (c) The sale of motor vehicle for $1,000 on 30 April 2006 was recorded in the ledger. No other entries have been made. The cost of the motor vehicle sold was $5,310 and the depreciation to the disposal date was $3,740 (d) Depreciation of $4,100 is to be provided on the motor vehicles for the year ended 30 June 2006 (e) During the year, the local garage repaired one of Mr. Trader’s motor vehicles. No payment has been made for this work. Instead, Mr. Trader supplied the garage owner with goods with a retail value of $393 (f) Creditor’s account balances at 30 June 2006 totalled $22,785 The differences from the Purchases Ledger Control Account was accounted for by purchases returns. These had been correctly dealt with in the suppliers Personal Accounts but have not been entered in the Purchases Ledger Control Account. Required: In the books of Mr.Steven, open the seven Ledger Accounts named and enter the balances given. Post the entries necessary to deal with the matters specified in (a) to (f) and balance the accounts. (25 marks) |
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ANSWER Insurance Account
Motor Vehicle Account
Provision For Depreciation of Motor Vehicles Account
Disposal Of Motor Vehicles Account
Repairs To Motor Vehicles Account
Sales Account
Purchase Ledger Control Account
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