Basic by rizalray6151

COURSE MODULE

BASIC ACCOUNTING Course Code: BBM205/03

Course adapted by : Mr. Lim Peng Keat School of Business and Administration (SBA)

PROJECT ADVISOR Professor Dr Zoraini Wati Abas COURSE MODULE DEVELOPMENT TEAM Content Adapter: Lim Peng Keat Lead Instructional and Visual Designer: Fauziyah Md Aris Instructional and Visual Designers: Norliza Mhd Rodzi and Nurain Mohd Hassan Language Editor: Ong Cheng Teik Proof Reading: Jeanne Chow Min Hian Margin Setting: Magic Khaw Yoke Yee Cover Page and Content Design: Nurain Mohd Hassan COURSE COORDINATOR Lim Peng Keat DESIGNED AND DEVELOPED BY Online Digital Learning Lab (ODL Lab) PRODUCED BY Instructional Design for Engaging Experiences (IDeX) Wawasan Open University

Acknowledgement: This course module has been adapted by the School of Business and Administration (SBA) from the Online Course Materials for the Business Accounting I (BBM205/05) developed by Wawasan Open University.

First edition, December 2019 This course material was published to support the learning of students registered with Wawasan Open University. Wawasan Open University does not grant any degree, certification or credits based solely on your completion of this course material. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from Wawasan Open University.

ÂŠ 2019 Wawasan Open University Wawasan Open University is Malaysiaâ&#x20AC;&#x2122;s first private not-for-profit tertiary institution dedicated to adult learners.

TABLE OF CONTENTS

Part 1 | About the Course

Part 2 | Course Overview Course Synopsis

Course Learning Outcomes Course Contents Study Schedule Assessment Methods

04 05

Part 3 | Course Study Guide Unit 1

Accounting in Business

Unit 2

Double Entry Bookkeeping

Unit 3

Performing Advanced Transactions

Unit 4

Internal Control for Cash and Correction of Errors

Unit 5

Preparing Basic Financial Statements and Cash Budgets

Part 4 | References

Part 5 | Feedback Form

PART 1 ABOUT THE COURSE COURSE DETAILS School Course Type Credit Hours Learning Hours Course Title Course Code

: : : :

School of Business & Administration (SBA) Core Course 3 hours 120 hours

: Basic Accounting : BBM 205/03

Course Coordinator Email

: Mr. Lim Peng Keat : pklim@wou.edu.my

Core Reading Material(s)

: BBM205/05 Business Accounting I

ALLOCATION OF STUDENT LEARNING TIME

No.

Activities

No. of Hours

Study Learning Materials, Learning Activities and SelfTests

Attending 5 Tutorial Classes (2 Hours per class)

Participation in Online Forum Discussions

Completing the Course Assignments (CA1 & CA2)

Exam Revision

Examination

8 3

BUY NOW

Total

BBM205/03 Basic Accounting

121

PART 2 COURSE OVERVIEW

COURSE SYNOPSIS This course equips the student with the essential concepts and principles of accounting and familiarises the student with the basics of preparing the books of accounts and financial statements. The course first introduces the student to the basic building blocks and major components of financial reporting and to the context within which accounting operates. This includes the organisations where accounting transactions are performed; the accounting equation, a brief introduction to the basic financial statements, the users of the accounting information and accounting concepts. The student will then learn how to prepare general journals, specialised journals, ledgers, trial balance, and the financial statements. Besides that, the student will also learn the basic business documentation, practical knowledge of internal controls relating to cash, correcting errors, preparing petty cash accounts, bank reconciliation, suspense accounts, and cash budget.

COURSE LEARNING OUTCOMES (CLOS)

By the end of this course, you should be able to: 1.

Discuss and apply the basic concepts and Principles of Accountancy.

Display and apply the competencies in the knowledge of Accounting and recording Business Transactions.

Apply and demonstrate skills in Double Entry System, Preparation of Financial Statements and the Procedures of the Accounting Cycle.

BBM205/03 Basic Accounting

COURSE CONTENT

Course topics include: 1.

Accounting in Business.

Double Entry Bookkeeping.

Performing Advanced Transactions.

Internal Control for Cash and Correction of Errors.

Preparing Basic Financial Statements and Cash Budget.

BBM205/03 Basic Accounting

STUDY SCHEDULE (Weekly topic and study activity for each unit) Week

Topic

Focus

Learning Activities/ Self-Check

1.1 & 1.2

Importance of Accounting

Video Self-Check 1.1 &1.2

1.3

Accounting Equation

Video Self-Check 1.3

1.3

Accounting Equation

Video Self-Check 1.3

1.4

Business Documents

Self-Check 1.4

2.1

Journal Entries

Self-Check 2.1

2.2

T-Ledger G-Ledger

Video Self-Check 2.2 & 2.3

2.3 & 2.4

Trial Balance

Self-Check 2.4

3.1

Accruals & Prepayments

Videos Self-Check 3.1

3.2

Bad Debts

Self-Check 3.2

3.3

Depreciation

Video Self-Check 3.3

3.4

Control Accounts

Self-Check 3.4

3.5 & 3.6

Inventory Valuation

Self-Check 3.6

4.1 & 4.2

Control for Cash

Self-Check 4.1 & 4.2

4.3

Bank Reconciliation

Self-Check 4.3

4.4

Suspense Accounts

Self-Check 4.4

5.1

Closing Entries

Self-Check 5.1

5.2

10-Column Worksheet

Self-Check 5.2

5.3 & 5.4

Financial Statements & Cash Budgets

Self-Check 5.3 & 5.4

Unit

BBM205/03 Basic Accounting

ASSESSMENT METHODS

COURSE ASSIGNMENT 1 (CA1) Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.

COURSE ASSIGNMENT 2 (CA2)

Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.

25% The student will be assessed through the following methods

25%

TOTAL 100%

FINAL EXAM 50%

Note: The grade for a course is assigned based on the overall score, which combines both the continuous assignments and the final examination components (please refer to the Student Handbook for details).

BBM205/03 Basic Accounting

PART 3 TABLE OF CONTENTS U1 : ACCOUNTING IN BUSINESS 1.1 1.2 1.3 1.4

Introducing Accounting Objectives and Users of Financial Statements Demonstrate and Justify the Accounting Equation Explain and Prepare the Basic Financial Statements

U2 : DOUBLE ENTRY BOOKKEEPING 2.1 Books of Prime Entry & Journals 2.2 Double Entry Recording 2.3 General Ledger 2.4 Trial Balance U3 : PERFORMING ADVANCED TRANSACTIONS 3.1 3.2 3.3 3.4 3.5 3.6

Accruals and Prepayments Bad Debts and Provision for Doubtful Debts Depreciation on Fixed Assets Preparing Control Accounts and Subsidiary Ledgers Inventory Valuation Perpetual Inventory System and Periodic Inventory System

U4 : INTERNAL CONTROL FOR CASH & CORRECTION OF ERRORS 4.1 4.2 4.3 4.4

Internal Control for Cash Preparing Petty Cash Accounts Performing Bank Reconciliation Suspense Accounts and Correction of Errors

U5 : PREPARING BASIC FINANCIAL STATEMENTS & CASH BUDGETS 5.1 5.2 5.3 5.4

Performing Closing Entries Preparing the ten-column Worksheet Preparing Basic Financial Statements Preparing Cash Budgets

BBM205/03 Basic Accounting

COURSE MODULE

ACCOUNTING IN BUSINESS

UNIT STRUCTURE 1.1

Introducing Accounting Learning Activity 1.1 Self-Check 1.1

1.2

Objectives and Users of Financial Statements Learning Activity 1.2 Self-Check 1.2

1.3

Demonstrate and Justify the Accounting Equation Learning Activity 1.3 Self-Check 1.3

1.4

Explain and Prepare the Basic Statements Learning Activity 1.4 Self-Check 1.4

1.5

Summary

1.6

References

BBM205/03 Basic Accounting

ACCOUNTING IN BUSINESS

INTRODUCTION Please watch this video. Title: Introduction to Accounting Duration : 2.08 minutes

Source: https://bit.ly/2IWjiUo What is money as related to accounting? If money is the resource then accounting is the system to track the money. In this course, you will learn the fundamental skills to trade and plan this resource in your business. Welcome to the first unit of BBM205/03 Basic Accounting. The first unit is meant to give you a brief introduction to the Process of Accounting before you start learning how to prepare Journals, Ledgers, Trial Balance, and the detailed Financial Statements. You are going to come across many new terms and concepts. Do not worry if you are not familiar with them at this moment. They will be revisited many times in the other four units. Nevertheless, whenever you meet a new term or concept, be sure to maintain a list of these items cross-referenced to their explanation or definition in the course unit. The actual time you need depends on your rate of study. To complete this unit, you need to work diligently through all the activities.

BBM205/03 Basic Accounting

UNIT LEARNING OUTCOMES By the end of this Unit 1, you should be able to: 1.

Describe what accounting is and examine the accounting concepts.

Illustrate the uses of accounting for different categories of users.

Demonstrate and justify the accounting equation.

Explain and prepare the basic financial statements.

1.1 INTRODUCING ACCOUNTING Accounting is an information system that identifies, records, and communicates relevant, reliable, and comparable information on the entire organisationâ&#x20AC;&#x2122;s business activities (Wild, Shaw, & Chiappetta, 2016). A business must first identify its business activity. For example, Starbucks needs to know how much coffee it sells for the day and, similarly, Wawasan Open University needs to know how many students enrolled for a course for the new semester. Before we introduce the basics of preparing accounts, you will need to understand the basic accounting concepts. These concepts are the fundamentals in the preparation, understanding, and interpretation of financial statements. Here is the list of accounting concepts that you need to know. All of them are important! (see Figure 1.1).

1. Going concern

5. Materiality

2. Accruals

6. Time Period

10. Prudence

3. Matching

7. Historical Cost

11. Substance Over Form

4. Entity

8. Money Measurement

12. Consistency

Duality

13. Separate Determination

Figure 1.1 Important accounting concepts

In order to understand each of the above 13 concepts, read Unit 1 (pg. 26 to 30) Business Accounting 1 of WOU course materials.

BBM205/03 Basic Accounting

Learning Activity 1.1 The following video will explain each of the 13 Accounting Concepts. Duration: 3.18 minutes

Source: https://youtu.be/XYxTnVWDBDM

Self-Check 1.1 When you are ready, attempt Self-test 1.1 in Business Accounting I of WOU course materials to see if you have understood some of the important accounting concepts.

BBM205/03 Basic Accounting

1.2 OBJECTIVES AND USERS OF FINANCIAL STATEMENTS In Section 1.1, you have learnt about the Accounting important concepts . According to the Framework of the Preparation and Presentation of Financial Statements (MFRS 101), the Objective of Financial Statements is to provide information about the financial position, performance, and changes in Financial Position of an entity. A Financial Statement is useful to a wide range of users for making economic decisions. In this section, you will identify the users and the user group of accounting information. Users of Annual Reports can be categorised into two (2) groups: Internal Users and External Users. Internal Users are those who are involved directly with the resources of the company. External Users are the people who do not have direct control on the resources of the company (see Figure 1.2). Users of Annual Reports

Internal Users

• Management • Employees

External Users

• Investors & Potential Investors • Lenders • Suppliers & other Creditors • Customers

Figure 1.2 Internal and external users of annual reports

Learning Activity 1.2 Please read Unit 1 (pg. 17 to 19) Business Accounting 1 of WOU course materials. You will learn about investors and potential investors and implications on various stakeholders (management, employees, lenders, suppliers and other creditors, customers, public, government, analyst advisor group as well as competitors and takeover bidders).

Self-Check 1.2 When you are ready, attempt Self-test 1.2 in Business Accounting 1 of WOU course materials to determine how well you understand the group of users.

BBM205/03 Basic Accounting

1.3 DEMONSTRATE AND JUSTIFY THE ACCOUNTING EQUATION Before you can prepare the basic financial statements, you should understand the components of the accounting equation like asset, liability and equity. In this section, you will be introduced to these accounting terms which are the basic of financial statements. You will then learn the way to prepare the basic financial statements. Note that, knowing and understanding the accounting equation is the key to understand the Double Entry Bookkeeping System. Now, let us get down to business. Let us set up a burger stall at a shopping mall selling burgers and hot dogs. A business definitely needs resources. This business needs a stall, kitchenware, food supply and of course someone to cook and serve. All of these resources do not fall from the sky. Someone certainly needs to provide those resources. Who else will that be but the Business Owner! Here is your very first Accounting Equation:

Resources Supplied by the Owner = Resources in the Business [ Equity or Capital ] [ Assets ]

The resource supplied by the owner is the capital of the business. It is also known as the ownerâ&#x20AC;&#x2122;s equity or capital. The resources in the business are called the assets of the business. To simplify the above equation, let us rewrite the Accounting Equation. Capital = Assets There are times when other people rather than the owner provide resources to the business. The amount owed to those people who provide the resource is referred to as a liability. The Accounting Equation will now looks like this: Capital = Assets - Liabilities The assets of the business are either provided by the owner or other people. So, a better way to understand it is to rearrange the Accounting Equation as below: Assets = Capital + Liabilities

BBM205/03 Basic Accounting

The total amount of the assets is always equal to the total amount of capital plus liabilities. Now you can clearly see that the assets are funded by both the owner’s capital and liabilities. Always remember that both sides should equal to each other. The duality concept keeps the accounting equation in balance. The Accounting Equation is important because it forms the basis for the whole Accounting Process. It is the foundation for the preparation of the Statement of Financial Position. For now, let us learn the three (3) main components in the Accounting Equation:

Assets

Liabilities

Equity

Assets are resources held by an entity that will help the entity to generate income in the future (Thomas & Ward, 2016). Examples of assets are land, buildings, motor vehicles, inventories, accounts receivable and cash.

Liabilities are the present obligations of the entity that it has to meet in the future. Examples of liabilities are loans from the bank and accounts payable.

Equity or owner’s equity or capital, they all mean the same thing. Equity is the owner’s claims against the business entity. It is the net worth of the organisation to the owners.

The Statement of Financial Position lists out the Assets, Liabilities and Capital of the Business at the end of a given Accounting Period. It basically shows the financial position of the entity at a specific time. The Statement of Financial Position reflects the Accounting Equation and it shows us the Resources and Debts of the Entity.

BBM205/03 Basic Accounting

Learning Activity 1.3 To further understand all the above, let us now walk through a series of transactions to illustrate the Accounting Equation. Read Unit 1 (pg. 35 to 44) Business Accounting 1 of WOU course materials.

Next, watch the video on additional explanations of the Accounting Equation. Duration: 4.15 minutes

Source: https://youtu.be/lgqcuGLTkrg

Self-Check 1.3 Next, please attempt Self-test 1.4, (pg. 47) in Business Accounting I of WOU course materials to check your understanding of assets, liabilities, and ownerâ&#x20AC;&#x2122;s equity.

BBM205/03 Basic Accounting

1.4 EXPLAIN AND PREPARE THE BASIC FINANCIAL STATEMENTS The end product of the entire accounting process is the Financial Statements. Practically, there are five ( 5 ) components in a complete set of Financial Statements ( see Figure 1.3 ).

Components of the Financial Statement

Statement of Comprehensive Income (Income Statement or Profit and Loss Accounts).

Statement of Changes in Equity.

Statement of Financial Position (Balance Sheet).

Statement of Cash Flows.

Notes to the Financial Statements.

Figure 1.3 Five components of a complete set of financial statements All Business Entities in Malaysia except Private Entities are required to comply with the Malaysian Financial Reporting Standards (MFRS) 101 â&#x20AC;&#x201C; Presentation of Financial Statements. All entities should prepare a complete set of Financial Statements, which include:

Financial Statements 1.

Statement of comprehensive income (or an income statement and a statement of comprehensive income).

Statement of changes in equity.

Statement of financial position.

Statement of cash flows.

Notes, comprising a summary of significant Accounting Policies and other explanatory information.

Statement of financial position at the beginning of the earliest period when an entity applies an accounting policy retrospectively or a retrospective restatement of items in its financial statements, or when reclassifies items in its Financial Statements.

BBM205/03 Basic Accounting

The MFRS 101 applies to Annual Accounting Periods commencing on or after January 1, 2010, with early application permitted.There is a relationship between (1) the Statement of Financial Position, and (2) the Statement of Comprehensive Income, and (3) the Statement of Changes in Equity (see Figure 1.4).

STATEMENT OF FINANCIAL BEGINNING POSITION Assets - Liabilities = Owner’s Equity

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF CHANGES IN EQUITY Beginning Owner’s Equity

Revenue - Expenses = Net Profit

END OF YEAR STATEMENT OF FINANCIAL

Figure 1.4 The relationship between the statement of financial position, the statement of comprehensive income, the statement of changes in equity The statement of financial position can be presented in two (2) formats: 1.

Horizontal Format.

Vertical Format.

In the Horizontal Format, the assets will be listed on the left side while the Liabilities and Owner’s Equity will be listed on the right side. The Horizontal Format is basically presented in a T-Format. An example of statement of financial position prepared in a horizontal format is presented in Figure 1.5. Please note that the company and the figures illustrated here are fictional.

BBM205/03 Basic Accounting

Figure 1.5 The statement of financial position in the horizontal format In the vertical format, the assets, liabilities, and ownerâ&#x20AC;&#x2122;s equity are listed vertically. This is the more common format that you will see in practice. The statement of financial position is presented as an example in a vertical format in MFRS 101. An example of statement of financial position prepared in a horizontal format is presented in Figure 1.6.

Figure 1.6 The statement of financial position in the vertical format

BBM205/03 Basic Accounting

Learning Activity 1.4 By now, you should be able to read and understand the financial statements. Let us see if you can apply your knowledge of Financial Statements .Browse through the Annual Reports of some local listed companies you know of. Visit the website of your chosen local listed company and go to the Investor Relations Section of the website to view their Annual Report. Make a list of the Financial Statements that you have seen in the Annual Reports. Next, study the figures carefully and look at the relationship between the Financial Statements. For example, trace the Total Comprehensive Income from the Statement of Comprehensive Income to the Statement of Changes in Equity. Also, you can trace the total retained earnings from the Statement of Changes in Equity to the Statement of Financial Position. To further strengthen your skill in reading Financial Statements, look for other Financial Statements and do the same. Additionally, ask yourself a few questions as you read the financial statements. Some of the questions you may ask yourself include: 1.

How much revenue is the company making?

Is the company making a profit or a loss?

What assets does the company own?

How much do they owe to outsiders?

Is the company having a lot of cash in its business?

Does the company issue any shares for the year?

Self-Check 1.4 Please attempt Activity 1.7 (pg. 59) in Business Accounting I of WOU course materials to reinforce your understanding of financial statements.

BBM205/03 Basic Accounting

1.5 SUMMARY Now that you have completed Unit 1, you should be able to: 1.

Describe what accounting is and illustrate the uses of accounting for different categories of

users. 2.

Examine and apply the accounting concepts.

Demonstrate and justify the accounting equation.

Explain the basic financial statements and prepare the basic financial statements.

1.6 REFERENCES FutureLearn. (2019, Oct 14). Introduction to financial accounting [Video file]. Retrieved from https://www.futurelearn.com/courses/introduction-to-financialaccounting-organizations-decisions-through-numbers Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education. WOU EduChannel. (2019, Feb 20). Accounting concepts [Video file]. Retrieved from https://youtu.be/XYxTnVWDBDM WOU EduChannel. (2019, May 23). Accounting equation [Video file]. Retrieved from https://youtu.be/lgqcuGLTkrg

BBM205/03 Basic Accounting

http://www.wou.edu.my/

COURSE MODULE

DOUBLE ENTRY BOOKKEEPING

UNIT STRUCTURE 2.1

Books of Prime Entry & Journals Learning Activity 2.1 Self-Check 2.1

2.2

Double Entry Recording Learning Activity 2.2 Self-Check 2.2

2.3

General Ledger Learning Activity 2.3 Self-Check 2.3

2.4

Trial Balance Learning Activity 2.4 Self-Check 2.4

2.5

Summary

2.6

References

BBM205/03 Basic Accounting

DOUBLE ENTRY BOOKKEEPING

INTRODUCTION Are you ready to get down to business? In this unit, we will learn how to record business transactions in the double-entry system by preparing general journals and general ledgers . Besides that, we will also learn how to balance the general ledger accounts and prepare the trial balance, before we can actually prepare the financial statements for the use of internal and external parties. We will start with the basic business documents which include delivery notes, invoices, credit notes, debit notes, statement of accounts, cheques, cheque butts, payment vouchers, and receipts. You will also be given an introduction to the various books of prime entry, such as purchases journals, sales journals, purchases returns journals, sales returns journals and cash books. The important part is the general journal as you will learn how to prepare it in this unit. This unit also shows the flow of recording process starting from the basic business documents and ending with the trial balance.

Please read Unit 2 (pg. 3 to 13) Business Accounting I of WOU course materials for the understanding of basic business documents.

UNIT LEARNING OUTCOMES By the end of this Unit 2, you should be able to: 1. Analyse and record transactions in the general journals, the general ledger and trial balance by using the accounting equation. 2. Explain the journals, T-accounts, general ledgers, trial balances, debits and credits as useful tools in the accounting process. 3. Describe and perform the closing process of the temporary accounts.

BBM205/03 Basic Accounting

2.1 BOOKS OF PRIME ENTRY AND JOURNALS Based on the source documents mentioned earlier, a transaction will first be recorded in the books of prime entry before posting it to the ledgers. The books of prime entry enable a transaction to be recorded with more details. The diagram below depicts the flow of transactions from the source documents to the financial statements (see Figure 1.1):

Cash & Bank Transactions

Credit Sales

Credit Purchases

Sales Returns

Purchases Returns

Sales Journal

Purchases Journal

Sales Returns Journal

Purchases Returns Journal

Cash Book

General Journal

Other Transactions

General Ledger v

Trial Balance v

Financial Statements Figure 1.1 Flow of transactions from the source documents to the financial statements

BBM205/03 Basic Accounting

Another way to look into the process of recording transactions is shown below (see Figure 1.2):

Steps in recording: STEP 1

Analyse each transaction from the source documents.

STEP 2

Record the transactions into the specialised journals, cash book or general journal.

STEP 3

Post the journal entries into the general ledger.

STEP 4

Transfer balances from the general ledger into the trial balance.

STEP 5

Prepare financial statements. Figure 1.2 Process of recording transactions

From the diagram above, we can see that information from the business documents are first recorded into journals. There are two (2) types of journals, namely specialised journals and general journals.

Specialised Journal Specialised journals are used to record specific transactions only. There are four (4) specialised journals as shown below: Purchases

Sales Journal

Journal

Sales Returns Journal

Purchases Returns Journal

The format of a Sales Journal is shown below (see Table 1.1): Date

Particulars

Invoice No.

xxxx

Name of credit customer

xxxx

Name of credit customer

xxxx

Name of credit customer

xxxx

Name of credit customer Sales Account

1234 1235 1236 1237

RM xxx xxx xxx xxx xxx

Table 1.1 Format of sales journal BBM205/03 Basic Accounting

General Journal The general journal is one of the books of prime entry and transactions are entered daily into the general journal based on the information from the source documents. The format of the general journal is shown below (see Table 1.2): Date

Particulars

Folio

Table 1.2 Format of general journal We record the following transactions in the general journal (see Figure 1.3): The general journal is normally used to record the following transactions:

Opening Entries - entries that are made when opening a new set of books or a new financial period

Introduction of additional capital other than cash

Closing Entries

Purchase or Sales of Fixed Assets on Credit

Any other transactions that are not recorded in other books of Prime Entry

Figure 1.3 General journal transactions Learning Activity 2.1 Please read Unit 2 (pg.15 to 24) Business Accounting I of WOU course materials for the understanding of journals.

Self-Check 2.1 Please attempt Self-test 2.1 (pg. 21), Activity 2.4 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of journals.

BBM205/03 Basic Accounting

2.2 DOUBLE ENTRY RECORDING The double-entry system is the recording of the dual effect of each transaction in appropriate account. For every transaction, there must be at least a debit entry and a credit entry. The total of the debit and credit entries must be tallied to meet the rule of the accounting equation. Figure 1.4 below depicts the combination of the double entry system and the accounting equation (Clarke, 2009): Relationship of Debit and Credit in Accounting Equation Increase

Debit

Decrease

Credit

Debit

Credit

Assets

Liabilities +

Revenue

Capital

Liabilities

Capital

Revenue

Expenses

Figure 1.4 Relationship of debit and credit in accounting equation A debit entry to an asset or an expense will see an increase in the amount of the asset or expenses. Meanwhile, a credit entry to an asset or an expense will see a decrease in the amount of the asset or expenses, as illustrated in Figure 1.4 above. A credit entry to a liability, capital, or revenue will see an increase in the amount of the liability, capital or revenue. A debit entry to a liability, capital or revenue will see a decrease in the amount of the liability, capital or revenue, as illustrated in Figure 1.4 above.

BBM205/03 Basic Accounting

Learning Activity 2.2 Please watch the following video below to know more about double entry recording. Duration: 3.18 minutes

Source: https://youtu.be/Gk_VNstFC5E

Self-Check 2.2 Please attempt Activity 2.5 (pg. 31) in Business Accounting I of WOU course materials to gauge your understanding of double entry recording.

BBM205/03 Basic Accounting

2.3 GENERAL LEDGER General Ledger is a book which contains all accounts affected by various transactions in a business. Therefore, it can be termed as a classified and summarised record of business transactions relating to all personal, real and nominal accounts. It is a book where all accounts are maintained and into which all journal entries are posted. It is a permanent, ultimate and up-to date record of all transactions which provides a means of easy and ready reference for the users. The general ledger comprises several T-accounts. The name of T-account comes from its shape as it resembles the letter T which is shown in the Table 1.3 below: Date

Particulars

Folio

Date

Particulars

Folio

Table 1.3 Format of the T-Account general ledger

Please read Unit 2 (pg. 34-37) Business Accounting I of WOU course materials for the understanding of general ledger.

At the end of the month, we may want to know the balance remaining in the T-accounts. If you own a business, you would want to know what balances are remaining in your Bank account, Motor Vehicle account, or Capital account. This needs to be done so that the balance for a specific T-account can be easily read, seen, and understood. When it comes to balancing and closing the accounts, one should know the differences between a permanent account and a temporary account as summarised in Figure 1.5 below: Permanent Account Permanent accounts are the assets, liabilities, and capital accounts. Examples include bank, motor vehicles, inventory, accounts receivable control, accounts payable control, loan from bank, and capital. All of these accounts belong to the statement of financial position. Balances remaining in these accounts at the end of the period will be reflected in the statement of financial position.

Temporary Account Temporary accounts are the revenue, expenses, gains, and losses accounts. Examples include sales, commissions income, purchases, electricity, and wages. All of these accounts belong to the income statement/statement of comprehensive income. Balances remaining in these accounts at the end of the period are transferred to the income statement or statement of comprehensive income.

Figure 1.5 Difference between a permanent account and a temporary account BBM205/03 Basic Accounting

Please read Unit 2 (pg. 38 to 45) Business Accounting I of WOU course materials for the understanding of permanent and temporary account.

Learning Activity 2.3 Please watch the following video to learn more about general ledger. Duration: 5.25 minutes

Source: https://youtu.be/j2678WLaziw

Self-Check 2.3 Please attempt Activity 2.6 (pg. 37) in Business Accounting I of WOU course materials to find out how much you have learned about general ledger.

BBM205/03 Basic Accounting

2.4 TRIAL BALANCE After balancing all of the individual T-accounts, it is only natural that we need to check whether all the T-accounts truly balance or not! A trial balance lists down all the balances of the T-accounts in the general ledger as at a particular date at the end of a specific period. It is a test or a trail to make sure that the accounting equation is in balance. A trial balance that is in balance shows that the debits equal the credits. Please also take note that the specific period could be one week, one month or one year depending on the need of the business. The proper heading of a trial balance will have at least two lines: the name of the company and the specific date the trial balance represents as shown below: v

Line 1

Mike Stationery Trial balance as at 31st October 2019

Line 2

An example of the trial balance of Mike Stationery is shown below. Mike Stationery Trial balance as at 31st October 2019 Cash Bank Capital Motor Vehicle Furniture Beng Co Purchases Sample Sales Wages Rental Sales Returns Success Supply Smooth Enterprise Bright Venture Discount Received

RM 1,200 1,850 35,000 1,000 9,880 120 300 1,200 220

1,080

40,000

500

4,800

2,800 3,400 350

51,850

BBM205/03 Basic Accounting

51,850

Learning Activity 2.3 Please watch the following video to learn more about trial balance. Duration: 1.57 minutes

Source: https://youtu.be/iy0IB0Aom-A

Self-Check 2.4 Please attempt Self-test 2.2 (pg. 49) in Business Accounting I of WOU course materials to see how much you have understood about trial balance.

BBM205/03 Basic Accounting

2.5 SUMMARY Now that you have completed Unit 2, you should be able to: 1.

Analyse business transactions using the accounting equation.

Explain the usage of various business documents.

Examine the steps in analysing and recording of transactions.

Analyse and record transactions in the general journals.

Analyse and record transactions in the general ledger and trial balance.

Explain the journal, T-account, general ledger, trial balance, debits and credits as useful tools in the accounting process.

7. Describe and perform the closing process of the temporary accounts.

2.6 REFERENCES Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education. WOU EduChannel. (2019, Feb 20) Double entry recording [Video file].Retrieved from https://youtu.be/Gk_VNstFC5E WOU EduChannel. (2019, Feb 20) General ledger [Video file]. Retrieved from https://youtu.be/j2678WLaziw WOU EduChannel. (2019, Feb 20) Trial balance [Video file]. Retrieved from https://youtu.be/iy0IB0Aom-A

BBM205/03 Basic Accounting

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COURSE MODULE

PERFORMING ADVANCED TRANSACTIONS

UNIT STRUCTURE 3.1

Accruals and Prepayments Learning Activity 3.1 Self-Check 3.1

3.2

Bad Debts and Provision for Doubtful Debts Learning Activity 3.2 Self-Check 3.2

3.3

Depreciation on Fixed Assets Learning Activity 3.3 Self-Check 3.3

3.4

Preparing Control Accounts and Subsidiary Ledgers Learning Activity 3.4 Self-Check 3.4

3.5

Inventory Valuation Learning Activity 3.5 Self-Check 3.5

3.6

Perpetual Inventory System and Periodic Inventory System Learning Activity 3.6 Self-Check 3.6

3.7

Summary

3.8

References

BBM205/03 Basic Accounting

PERFORMING ADVANCED TRANSACTIONS

INTRODUCTION In this unit, we will learn various types of balance day adjustments, control accounts and inventory systems. In order to prepare a financial statement, adjustments need to be made based on various accounting concepts. The matching concept dictates that revenue and expenses should be recognised in the accounting period as they are incurred. Hence, accruals and prepayments arise due to the matching concept.

Can you still remember the prudence concept?

The prudence concept is the cornerstone to the creation of the provision for doubtful debts. Bad debts and doubtful debts are expenses to the business entity while the provision for doubtful debts is a reduction from the trade receivables. This reduction is necessary for the uncertainty in business.

What do you know about depreciation?

Depreciation is an expense to the business entity. It arises under the matching concept. Under the matching concept, the cost of the assets consumed in an accounting period has to be captured under the Income Statement, hence the expenses are called depreciation.

Why do we need to have control accounts?

Control Accounts are the summary of all debtors and creditors accounts in the subsidiary ledgers. They are included in the general ledger to facilitate the preparation of trial balance. The Control Accounts also serve as checking tool for the accuracy of the subsidiary ledgers. This is because the total debtors and creditors balances in the subsidiary ledgers have to agree with the balances in the Control Accounts.

BBM205/03 Basic Accounting

Have you heard about the term FIFO and LIFO?

These are the different methods involved in recording the purchase and sale of inventory. By now, you should have known that inventory is an asset. Inventory is an important item to many businesses. There are two inventory systems which are known as the perpetual inventory system and periodic inventory system.

UNIT LEARNING OUTCOMES By the end of this Unit 3, you should be able to: 1.

Analyse and record transactions for prepayments/accruals, bad debts/doubtful debts and depreciation on fixed assets.

Prepare control accounts and subsidiary ledgers for both accounts receivables and accounts payables.

Analyse and record transactions for merchandise purchases for both perpetual and periodic inventory systems.

BBM205/03 Basic Accounting

3.1 ACCRUALS AND PREPAYMENTS Accruals and prepayments come about as a result of the matching and accruals concept. The matching concept is based on the understanding that the expenses incurred to generate revenue must be recognised for that period in order to measure the profit or loss of the entity. Matching concept is related to the accrual concept. The accrual concept is based on the premise that effects of transactions and business events are recognised in the financial statements when they occur. This is not to be confused with cash or its equivalent which is received or paid. Revenue is recognised when it becomes receivable and an expense is recognised when it becomes due and payable regardless of whether cash has been received or paid. In this section, you will learn how to make adjustments for various scenarios. You will learn accrued expenses, prepaid expenses, accrued revenue, and revenue received in advance. The adjustments are called balance day adjustments.

Please read Unit 3 (pg. 4-14) Business Accounting I of WOU course materials for the understanding of accruals and prepayments.

Learning Activity 3.1a Please watch the following video to learn more about expense accrued. Duration: 2.53 minutes

Source: https://youtu.be/Gp0xghc0_Ro BBM205/03 Basic Accounting

Learning Activity 3.1b Please watch the following video for a better understanding of reversal of expense accrued. Duration: 1.11 minutes

Source: https://youtu.be/zK1nWqAb6GQ Learning Activity 3.1c Please watch the following video for further details about revenue accrued. Duration: 3.13 minutes

Source: https://youtu.be/Rcs_XD0e7JE BBM205/03 Basic Accounting

Learning Activity 3.1d Please watch the following video for more information about reversal of revenue accrued. Duration: 1.11 minutes

Source: https://youtu.be/SiA_T0xcqu0

Self-Check 3.1 Please attempt Activity 3.1 (pg. 6), Activity 3.2 (pg. 9), Activity 3.3 (pg.) and Activity 3.4 (pg. 15) in Business Accounting 1of WOU course materials to see how much you have understood about reversal of revenue accrued.

BBM205/03 Basic Accounting

3.2 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS Credit transactions are a norm in the business world. A business which sells its goods on credit to another entity may only receive payment a few months later. Sometimes, the business may not receive any payment at all. Attempts may be made to call up the debtor to recover the debt (accounts receivable). However, such attempts are futile when the business owner finds out that the customer has gone bankrupt or is facing problems of cash flow. This is a sign that bad debts have occurred.What is the difference between a bad debt and a doubtful debt? Read on to find out more (Table 1.1):

Doubtful Debts

Bad Debts A bad debt is a norm in the business world and is considered as a normal business expense. When you know that the debt is irrecoverable (meaning that you are unable to recover the debt to be paid), you have to make some accounting entries to reflect that the debt is irrecoverable. So, when the debt has gone bad, it is an expense to you.

A doubtful debt is created when it is uncertain or doubtful that a debtor or a group of debtors are unable to pay up their debt. A doubtful debt is also an expense to the business entity. It is created to meet the prudence concept. The business entity should be prudent and cautious to set aside a specific amount of money in the event that those doubtful debtors are unable to pay up their debt.

Table 1.1 Bad debts and doubtful debts An increase to the provision for doubtful debts is an expense while a decrease to the provision for doubtful debt is an income to the business entity. A debt may eventually be recovered although it has been written off as a bad debt. When this happens, this is called a bad debt recovered. Again, you will have to make some accounting entries to reflect that the debt has been recovered. When an entity recovers its debts, it is treated as an income.

Learning Activity 3.2 Please read Unit 3 (pg. 21-30) Business Accounting I of WOU course materials for the understanding of bad debts and provision for doubtful debts.

Self-Check 3.2 Please attempt Activity 3.7 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of bad debts and provision for doubtful debts.

BBM205/03 Basic Accounting

3.3 DEPRECIATION ON FIXED ASSETS Do you know the difference between business expenditure, capital expenditure and revenue expenditure? Business expenditure is categorised into capital or revenue expenditure. Capital expenditure refers to amount spent on fixed assets or value-added to a fixed asset. Revenue expenditure refers to the cost of running the daily operation of a business. Examples of capital and revenue expenditure are listed in Table 1.2 below:

Capital Expenditure

Revenue Expenditure

>> Purchase of furniture >> Extension of existing factory >> Payment of legal fees for purchases

>> Purchase of stationery >> Repair of building leakage >> Payment of salary and wages

Table 1.2 Capital expenditure and revenue expenditure

What is depreciation? Depreciation is charged to the Income Statement as an expense. Depreciation is a method of allocating the cost of an asset over its useful life.

There are two (2) main reasons for depreciation: 1.

Physical deterioration. This is caused mainly by wear and tear when the asset is in use. For example, when a machine is no longer running at its optimum capacity after a few years.

Obsolescence. This means the process of becoming obsolete or out of date. We can find a few good examples around us. One of them is the machines that produce cassette players.

BBM205/03 Basic Accounting

There are two main methods in use for calculating depreciation: 1.

Straight line method. The calculation of depreciation will be: Original Cost â&#x20AC;&#x201C; Estimated Scrap Value Number of years of useful life

Reducing balance method. The formula for calculation is as below: Depreciation Charges = Rate of Depreciation x Net book value of asset at the beginning of accounting period

Learning Activity 3.3a Please read Unit 3 (pg. 38-41) Business Accounting I of WOU course materials for the understanding of depreciation on fixed asset.

Learning Activity 3.3b Please watch the following video to learn more about depreciation. Duration: 1.26 minutes

Source: https://youtu.be/RhukVW-XlTA BBM205/03 Basic Accounting

Learning Activity 3.3c Please watch the following video to find out more about methods of calculating depreciation. Duration: 3.38 minutes

Source: https://youtu.be/SkFle2JlZ2o

Self-Check 3.3 Please attempt Activity 3.7 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of methods of calculating depreciation.

BBM205/03 Basic Accounting

3.4 PREPARING CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS The details of trade receivables and trade payables are recorded in the subsidiary ledgers which are separated from the general ledger. Therefore, control accounts are drawn up in the general ledger to enable the preparation of trial balance and also for checking purposes. As mentioned in Unit 2, all business transactions will be entered in the book of prime entry before being posted to the general ledger. However, as business grows, we need more than one ledger to ease the process of recording. The ledger is then subdivided into general ledger and subsidiary ledgers. From Figure 1.1 below, we can see that all the debtor accounts are kept in the sales ledger and all the creditor accounts are kept in the purchases ledger. With this, we are not able to prepare a trial balance from the general ledger as the debtors and creditors are not shown. Therefore, control accounts for both debtors and creditors are set up in the general ledger to enable the preparation of trial balance.

Ledger

General Ledger

Subsidiary Ledgers

All other accounts

Sales Ledgers

Purchases Ledgers

Debtors Accounts

Creditors Accounts

Figure 1.1 Control accounts and subsidiary ledgers

Learning Activity 3.4 Please read Unit 3 (pg. 46-48) Business Accounting I of WOU course materials for the understanding of Control Accounts and Subsidiary Ledgers.

BBM205/03 Basic Accounting

Self-Check 3.4 Please attempt Activity 3.13, pg. 41, in Business Accounting I of WOU course materials to gauge your undertanding of control accounts and subsidiary ledgers.

3.5 INVENTORY VALUATION A business needs to value its stock in order to know the cost of goods sold. It also needs to know the value of the closing stocks at the end of an accounting period. Any inaccuracy or miscalculation will affect the gross profit of the business and hence causing misstatement in the value of current assets. As purchases are made at different interval and at different prices in a financial period, the valuation of inventory issued and balance quantity in hand is rather complicated. The commonly used methods are illustrated in Figure 1.2 below:

2 Last-in, First-Out (LIFO)

1 First-in, First-Out (FIFO)

3 Weighted Average.

Figure 1.2 Inventory valuation methods

BBM205/03 Basic Accounting

3.6 PERPETUAL INVENTORY SYSTEM AND PERIODIC INVENTORY SYSTEM Beside the valuation, there are two inventory systems which are known as perpetual inventory system and periodic inventory system. The differences between a perpetual and periodic inventory system is shown in Table 1.3 below:

Perpetual Inventory System Receipts and issues are recorded in the inventory accounts. Cost of goods sold is recorded whenever inventory is sold, hence no separate calculation is required.

Periodic Inventory System Records all receipts in the Purchases Account. Adjustments on quantity issued are made when annual inventory count is conducted. Need to calculate the cost of goods sold at the end of the financial period as the record is not updated promptly. Table 1.3 Differences between a perpetual inventory system amd a periodic inventory system

Learning Activity 3.6 Please read Unit 3 (pg. 51-53) and (pg. 57-58), Business Accounting I of WOU course materials for the understanding of inventory valuation and the two systems.

Self-Check 3.6 Please attempt Self-test 3.1 (pg. 59) in Business Accounting I of WOU course materials to check your understanding of perpetual and periodic inventory system.

BBM205/03 Basic Accounting

3.7 SUMMARY Now that you have completed Unit 3, you should be able to: 1.

Analyse and record transactions for prepayments and accruals.

Analyse and record transactions for bad debts and doubtful debts.

Analyse and record transactions for depreciation on fixed assets.

Prepare control accounts and subsidiary ledgers for both accounts receivables and accounts payables.

Analyse and record transactions for merchandise purchases for both perpetual and periodic inventory systems.

Distinguish perpetual and periodic inventory systems.

3.8 REFERENCES Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education. WOU EduChannel. (2019, Feb 20). Expense accured [Video file]. Retrieved from https://youtu.be/Gp0xghc0_Ro WOU EduChannel. (2019, Feb 20). Reversal of expense accrued [Video file]. Retrieved from https://youtu.be/zK1nWqAb6GQ WOU EduChannel. (2019, Feb 20). Revenue accrued [Video file]. Retrieved from https://youtu.be/Rcs_XD0e7JE WOU EduChannel. (2019, Feb 20). Depreciation [Video file]. Retrieved from https://youtu.be/RhukVW-XlTA WOU EduChannel. (2019, Feb 20). Methods of calculating depreciation [Video file]. Retrieved from https://youtu.be/SkFle2JlZ2o

BBM205/03 Basic Accounting

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COURSE MODULE

INTERNAL CONTROL FOR CASH AND CORRECTION OF ERRORS UN

INTERNAL CONTROL FOR CASH & CORRECTION OF ERRORS

UNIT STRUCTURE 4.1

Internal Control for Cash Learning Activity 4.1 Self-Check 4.1

4.2

Preparing Petty Cash Accounts Learning Activity 4.2 Self-Check 4.2

4.3

Performing Bank Reconcilation Learning Activity 4.3 Self-Check 4.3

4.4

Suspense Accounts and Correction of Errors Learning Activity 4.4 Self-Check 4.4

4.5

Summary

4.6

References

BBM205/03 Basic Accounting

INTERNAL CONTROL FOR CASH AND CORRECTION OF ERRORS

INTRODUCTION Cash and its equivalent is an important asset of a business. Management of cash and its equivalent is a very important area in any organisation. Emphasis is always placed on how to improve the handling of cash and its equivalent. This is to optimise the benefit from efficient cash management, to minimise the fraud and negligence in cash handling and to safeguard the companyâ&#x20AC;&#x2122;s asset effectively. Thus, proper internal control procedures have to be in place to ensure the above objectives are achieved. In this unit, we shall learn how to control the petty cash of a company, how to minimise the risk of fraud in cash handling with the imprest system and how to enhance the accuracy of recording. We shall also learn how to compare the bank account and bank statement, find out the cause for the discrepancies, make the necessary updates in the cash book and prepare a bank reconciliation statement at a fixed interval. Lastly, we shall learn how to rectify the errors in recording the transactions, eliminate the suspense account and prepare the adjusted trial balance.

UNIT LEARNING OUTCOMES By the end of this Unit 4, you should be able to: 1.

Identify the importance of internal control.

Set up a petty cash account and describe how the imprest system works.

Perform the bank reconciliation and prepare a bank reconciliation statement.

Solve the discrepancies in trial balance and make corrective entries to rectify errors.

BBM205/03 Basic Accounting

4.1 INTERNAL CONTROL FOR CASH As the business grows, a proper procedure is needed to control and safeguard the companyâ&#x20AC;&#x2122;s asset. Cash as one of the most important asset of the company, requires an effective control procedure to monitor and handle it to minimise the risk of loss and unauthorised use. The internal control procedures will help to:

Prevent and detect errors and irregularities in handling of cash.

Safeguard cash from theft and unauthorised use.

Enhance the accuracy of recording.

The basic principles involved in the internal control for cash are as follows: 1. Establishment of responsibilities

2. Segregation of duties

The staff is assigned by a clearly defined area of responsibilities to effectively carry out his duties.

Related duties like physical custody and record keeping are assigned to different staff.

3. Documentation of procedures

4. Independent checking

A pre-numbered document system

The work of the staff handling cash will be checked by an independent personnel regularly.

should be in place to account for completeness of records.

Self-Check 4.1 Please attempt Activity 4.1 (pg. 5) in Business Accounting I of WOU course materials to gauge your understanding of internal control for cash.

BBM205/03 Basic Accounting

4.2 PREPARING PETTY CASH ACCOUNTS A business entity usually keeps a small sum of cash in the office to meet the operational requirements. This small sum of cash is also known as petty cash. Petty cash refers to the fund that a business keeps in the office to make payment for minor expenses. A staff will be assigned to handle and record the movement of the cash. A separate book will be used to record the petty cash transactions. It is called the Petty Cash Book. The Imprest System is a system used to control and monitor the flow of the petty cash float. Under this system, the staff in-charge of the petty cash will be given a fixed amount of money to set up the float. He will make cash payment from this float and reimburse the amount spent at the end of a predetermined period.

Learning Activity 4.2 Please read Unit 4 (pg.8-10), Business Accounting I of WOU course materials for the understanding of petty cash accounts.

Self-Check 4.2 Please attempt Activity 4.2 and 4.3 (pg. 10) in Business Accounting I of WOU course materials to check your understanding of petty cash accounts.

4.3 PERFORMING BANK RECONCILIATION A business entity will normally operate a current account with the bank. At a fixed interval, we shall receive a bank statement from the bank showing all the transactions during the period in the record of the bank. When we receive the bank statement, we will compare the transactions shown in the bank statement with the records in our cash book to ensure the correctness and completeness of records.

BBM205/03 Basic Accounting

More often than not, there will be discrepancies between the balances shown in the bank statement and the cash book. This could be due to the following reasons: 1.

Timing differences.

The following circumstances are discrepancies arisen from the timing differences:

b. Un-credited cheques a. Un-presented cheques

Omission in recording.

The following circumstances give rise to discrepancies as a result of omission in recording:

a. Return/dishonoured cheques.

b. Notice for collectible /uncollectible items and interest.

c. Any possible errors from both the bank and the depositor.

Learning Activity 4.3 Please read Unit 4 (pg.16-21), Business Accounting I of WOU course materials for the understanding of performing bank reconciliation.

Self-Check 4.3 Please attempt Activity 4.5 (pg. 21) in Business Accounting I of WOU course materials to check how much you have understood about performing bank reconciliation.

BBM205/03 Basic Accounting

4.4 SUSPENSE ACCOUNTS AND CORRECTION OF ERRORS Trial Balance is drawn up to check the correctness of the accounts prepared. If the trial balance cannot be tallied, it indicates that there are mistakes somewhere. If the errors which caused the imbalance in the trial balance affect only one side of an account, the correction of these errors will need only be on one side of the affected account. Therefore, the Suspense Account is created to make way for the corresponding entries. A summary of the list of errors revealed by the trial balance is shown below:

1. Omission of one entry Only record one side of the double entry. Example: Cash sale of RM500 was credited to the Sales Account only. The debit entry in the cash book was omitted.

2. Error in calculation Miscalculation in the book. Example: The total in the Sales Journal was overcast by RM100. The wrong total was then posted to the Sales Account.

3. Error in amount The amount entered on the debit account was different from the amount entered on the credit account. Example: Rent Account was debited with RM3,000 while the corresponding credit entry in the cash book was recorded as RM300.

4. Posting to the wrong side of an account A transaction was recorded twice on the same side of the accounts. Example: Discount Allowed RM100 to Fatimah was credited to both her account and also the Discount Allowed Account.

BBM205/03 Basic Accounting

However, not all the errors will affect the agreement of a trial balance. Some errors cannot be detected by the preparation of trial balance. These errors are:

1. Errors of omission A transaction was completely omitted from the books.

2. Errors of commission A transaction was posted to the wrong account in the same category.

3. Errors of principle A transaction was posted to the wrong account in a different category.

4. Errors of original entry Wrong amount was recorded in the book of prime entry and subsequently posted to the ledger.

5. Compensating errors An error on the debit side was compensated by an error of the same amount on the credit side.

Learning Activity 4.4 Please read Unit 4 (pg.29-30), Business Accounting I of WOU course materials on suspense accounts and correction of errors.

Self-Check 4.4 Please attempt Self-test 4.1 (pg. 32) in Business Accounting I of WOU course materials to check your understanding of suspense accounts and correction of errors.

BBM205/03 Basic Accounting

4.5 SUMMARY Now that you have completed Unit 4, you should be able to: 1.

Describe the nature and purpose of internal control.

Explain and apply various internal control techniques to safeguard the cash as an important asset to an organisation.

Set up a petty cash account and describe how the imprest system works.

Perform the bank reconciliation.

Prepare a bank reconciliation statement.

4.6 REFERENCES Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education.

BBM205/03 Basic Accounting

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COURSE MODULE

PREPARING BASIC FINANCIAL STATEMENTS AND CASH BUDGETS UN

PREPARING BASIC FINANCIAL STATEMENTS & CASH BUDGETS

UNIT STRUCTURE 5.1

Performing Closing Entries Learning Activity 5.1 Self-Check 5.1

5.2

Preparing the Ten-column Worksheet Learning Activity 5.2 Self-Check 5.2

5.3

Preparing Basic Financial Statements Learning Activity 5.3 Self-Check 5.3

5.4

Preparing Cash Budgets Learning Activity 5.4 Self-Check 5.4

5.5

Summary

5.6

References

BBM205/03 Basic Accounting

PREPARING BASIC FINANCIAL STATEMENTS & CASH BUDGETS

INTRODUCTION We have learnt about the balance day adjustments, that is the adjustments for prepaid and accrued expenses as well as income, depreciation for fixed assets and provision for doubtful debts. We have also learnt that the accounts are closed on a periodic basis in order to prepare the financial statements and bring the balance to the next accounting period. In this unit, we will learn about the closing entries for nominal accounts and how the balance day adjustments affect the gross and net profit of a business entity. We will also learn about the ten-column worksheet and the use of a post-closing trial balance. Lastly, we will learn about the preparation of basic financial statements and how to draw up a cash budget.

UNIT LEARNING OUTCOMES By the end of this Unit 5, you should be able to: 1.

Record the closing entries, including accounting procedures and the use of a post-closing trial balance.

Prepare a ten-column worksheet.

Prepare a statement of comprehensive income and financial position.

Prepare a cash budget.

BBM205/03 Basic Accounting

5.1 PERFORMING CLOSING ENTRIES Under the â&#x20AC;&#x153;going concernâ&#x20AC;? concept, a business entity is assumed to be in operation for an indefinite period of time. If the accounts were to be closed at the point when all the business transactions are recorded, no one will ever be able to wait that long to see the performance of the business. Thus, financial statements are prepared on a fixed interval of time, which we learnt under the concept of accounting period. We have learnt about the temporary accounts and permanent accounts in Unit 2. Temporary accounts refer to all the revenue and expenditure accounts. They are transferred to the income statement at the end of an accounting period. Permanent accounts refer to assets, liability and equity accounts. These accounts will be closed for the pre-determined period to ascertain the balances. Subsequently, the balances will be brought down to the next accounting period.

Learning Activity 5.1 Please read Unit 5 (pg. 3-6), Business Accounting I of WOU course materials for a better understanding of performing closing entries.

Self-Check 5.1 Please attempt Self-test 5.1 (pg. 27) in Business Accounting I of WOU course materials after you have completed reading section 5.3.

BBM205/03 Basic Accounting

5.2 PREPARING THE TEN-COLUMN WORKSHEET As we have learnt in the earlier units, a trial balance is drawn up to check the correctness of the double entries. At the end of the accounting period, all the T-accounts will be closed and a trial balance is drawn up based on the balances. We are also aware that there are adjustments need to be made before we can actually prepare the financial statements. Accrued and prepaid expenses need to be considered. It is also the same for accrued and prepaid revenue; not to forget about the provision for depreciation and doubtful debts. A ten-column worksheet as shown in Table 1.1 below is prepared to facilitate the preparation of financial statements:

Table 1.1 The ten-column worksheet The following steps are observed when preparing the ten-column worksheet:

The Trial Balance in the ten-column worksheet refers to the first draft of trial balance, which is the extraction of balances from the general ledger.

Adjustments column is for the balance day adjustments.

3 The Adjusted Trial Balance is the extended trial balance, showing the new balances of accounts after adjustments.

We then classify the accounts into either the Statement Comprehensive Income or Statement of Financial Position.

BBM205/03 Basic Accounting

Learning Activity 5.2 Please read Unit 5 (pg.10-11), Business Accounting I of WOU course materials for further details about the ten-column worksheet.

Self-Check 5.2 Please attempt Activity 5.2 (pg. 13) in Business Accounting I of WOU course materials to check your understanding of the ten-column worksheet.

5.3 PREPARING BASIC FINANCIAL STATEMENTS The Basic Financial Statements that we are going to study are the Statement of Comprehensive Income and Statement of Financial Position. A Statement of Comprehensive Income is drawn up to calculate the Gross and Net Profit of an Accounting Period. All the balances of the Temporary Accounts will be transferred to the Comprehensive Income Statement to compute the business Profit or Loss. On the other hand, a Statement of Financial Position shows the Assets, Liabilities and Ownerâ&#x20AC;&#x2122;s Equity on the closing date of the Accounting Period. In other words, it shows the Financial Status of a Business Entity on a specific date. Overleaf, you will find the general format of a Statement of Comprehensive Income and a Statement of Financial Position:

BBM205/03 Basic Accounting

The general format of a Statement of Comprehensive Income:

BBM205/03 Basic Accounting

The general format of a Statement of Financial Position:

Learning Activity 5.3 Please read Unit 5 (pg. 19-20) and (pg. 24-25), Business Accounting I of WOU course materials for a better understanding of preparing basic financial statements.

BBM205/03 Basic Accounting

Self-Check 5.3 Please attempt Self-test 5.1, page 27, in Business Accounting I of WOU course materials to check how much you have understood about preparing basic financial statements.

5.4 PREPARING CASH BUDGETS Budget is a management control tool. The management team of a business entity will discuss and set the goal for the next financial period, and in line with the goal achievement, the team will also set the cost for it. The management team, while executing the plan to achieve the objectives set, must also be very careful on the expenditure. This is because the management team has to ensure that the team are not overspending. In summary, the budgeting process involves planning, execution and monitoring. Cash Budget is a planning tool that shows estimated cash and bank balances at a desired period. It involves only the cash and bank transactions. It helps the management to plan the utilisation of fund wisely, in the event of shortage, the team has to source the means to generate fund. On the other hand, in the event of surplus, the team has to think of how to make short-term investment with the surplus fund.

Learning Activity 5.4 Please read Unit 5 (pg. 33-37), Business Accounting I of WOU course materials for a better understanding of preparing cash budgets.

Self-Check 5.4 Please attempt Activity 5.8 (pg. 38) in Business Accounting I of WOU course materials after you have completed reading section 5.3 to check your understanding in preparing the cash budgets.

BBM205/03 Basic Accounting

5.5 SUMMARY Now that you have completed Unit 5, you should be able to: 1. 2. 3. 4. 5. 6.

Describe the closing process, including accounting procedures and the use of a post-closing trial balance. Record the closing entries. Prepare a ten-column worksheet. Prepare a statement of comprehensive income. Prepare a satement of financial position. Prepare a cash budget.

5.6 REFERENCES Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education.

BBM205/03 Basic Accounting

PART 4 REFERENCES Sangster, A. & Wood, F. (2018). Business accounting 1, (14th ed.) Harlow, UK: Pearson. Sangster, A. & Wood, F. (2018). Business accounting 2, (14th ed.) Harlow, UK: Pearson. Wawasan Open University. (2007). BBM205/05 Business Accounting 1: Accounting in business. Penang: Wawasan Open University. Wild, J.J., [et.al] (2016). Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education WOU EduChannel. (2019, Feb 20). Accounting concepts [Video file]. Retrieved from https://youtu.be/XYxTnVWDBDM WOU EduChannel. (2019, May 23). Accounting equation [Video file]. Retrieved from https://youtu.be/lgqcuGLTkrg. WOU EduChannel. (2019, Feb 20) Double entry recording [Video file].Retrieved from https://youtu.be/Gk_VNstFC5E WOU EduChannel. (2019, Feb 20) General ledger [Video file]. Retrieved from https://youtu.be/j2678WLaziw WOU EduChannel. (2019, Feb 20) Trial balance [Video file]. Retrieved from https://youtu.be/iy0IB0Aom-A WOU EduChannel. (2019, Feb 20). Expense accured [Video file]. Retrieved from https://youtu.be/Gp0xghc0_Ro WOU EduChannel. (2019, Feb 20). Reversal of expense accrued [Video file]. Retrieved from https://youtu.be/zK1nWqAb6GQ WOU EduChannel. (2019, Feb 20). Revenue accrued [Video file]. Retrieved from https://youtu.be/Rcs_XD0e7JE WOU EduChannel. (2019, Feb 20). Depreciation [Video file]. Retrieved from https://youtu.be/RhukVW-XlTA WOU EduChannel. (2019, Feb 20). Methods of calculating depreciation [Video file]. Retrieved from https://youtu.be/SkFle2JlZ2o

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