Copyright Notice: Originating Author: Revised August 2010: Publishers: ISBN Establish and maintain an accrual accounting system

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1 A Step by Step Approach to Cash and Accrual Accounting using MYOB AccountRight Plus v19 Copyright Notice: Copyright 2010 Software Publications Pty Ltd. All rights reserved. No part of this material may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying or by information retrieval systems) without permission in writing from Marian Brown. Originating Author: Marian Brown Dip T [Commerce], MICB BAS Agent Cert IV Workplace Training and Assessment, Cert IV in Financial Services [Bookkeeping] MYOB Certified Consultant for 15 years, BAS Agent MYOB Accredited Author, MYOB Publisher, MYOB Accredited Trainer MBS Training Services Pty Ltd sales@mbsts.com.au Revised August 2010: Cindy Drew, Dip Teach, B Ed., MICB BAS Agent Cert IV in Financial Services [Bookkeeping] MYOB Certified Consultant 10 years MYOB Accredited Trainer MYOB Developer Training and Business Services Pty Ltd Publishers: Software Publications Pty Ltd [ABN ] Head Office Sydney Unit 10, 171 Gibbes Street Chatswood NSW 2067 Phone: Web address: ISBN FNSBKPG402A FNSBKPG403A Establish and maintain a cash accounting system Establish and maintain an accrual accounting system Software Publications Pty Ltd 2010 FNSBKPG402A/403A CASH & ACCRUAL ACCOUNTING v19 Table of Contents

2 Copyright/Trademark Information: MYOB, MYOB AccountEdge, MYOB AccountRight Standard, MYOB AccountRight Plus, MYOB BusinessBasics, MYOB FirstEdge, MYOB M-Powered, MYOB M-Powered Services, MYOB M-Powered Bank Statements, MYOB M-Powered Invoices, MYOB M-Powered MoneyController, MYOB M-Powered Payments, MYOB ODBC Direct, MYOB PowerPay, MYOB AccountRight Premier and MYOB AccountRight Enterprise are registered trademarks or trademarks of MYOB Technology Pty Ltd and their use is prohibited without prior consent. Ceedata, Solution 6 MAS and Xlon are registered trademarks or trademarks of Solution 6 Holdings Limited, a member of the MYOB group. Bpay is a registered trademark of Bpay Pty Ltd, ABN MasterCard is a registered trademark of MasterCard International Inc. Microsoft, Access, Excel, Internet Explorer, Office, Outlook, Smart Tags, Windows and Word are registered trademarks or trademarks of Microsoft Corporation in the United States or other countries. VISA is a registered trademark of Visa International Service Association. Other products mentioned may be service marks, trademarks or registered trademarks of their respective owners. Screen captures from MYOB AccountRight Plus v19 reproduced with permission. Limitations of Liability: This material is designed to provide basic information on how to use MYOB AccountRight Standard/AccountRight Plus v19. Because business circumstances can vary greatly, the material is not designed to provide specific GST or business advice for particular circumstances. Also, because aspects of the GST are complex and detailed, the material is not designed to comprehensively cover all aspects of the GST. Further, the laws implementing GST and rulings and decisions under those laws may change. Before you rely on this material for any important matter for your business, you should make your own enquiries about whether the material is relevant and still current, and whether it deals accurately and completely with that particular matter; and as appropriate, seek your own professional advice relevant to that particular matter. This information is for the general information of MYOB clients and is not to be taken as a substitute for specific advice. Consequently Software Publications Pty Ltd will accept no responsibility to any person who acts on information herein without consultation with Software Publications Pty Ltd. The information in this book is relevant to MYOB AccountRight Plus v19. Earlier or later versions of MYOB software could change the instructions in this workbook. Please note: The information in this workbook is accurate at the time of revision [August 2010] only. Because legislation and associated websites are constantly changing, url s and screen dumps of websites in this workbook may have changed. CASH & ACCRUAL ACCOUNTING using MYOB v19 Software Publications Pty Ltd 2010

3 Transactions are merely the events that occur within a business. If you were to examine the events that occur in your own daily dealings, you would find that you could: Sell items or services Purchase items or services Pay for items or services Receive payment for items or services The transactions that occur in a business are exactly the same. The Bookkeeping Entity principle states that the records of the business are always kept from the business point of view. So in a business we can say that transactions can be grouped into four types: Sales Purchases Payments Receipts The business records the transactions relating to a particular person or item into an account. Remember, an account is simply the name of a particular person or item eg Sales A/c and Telephone A/c, A/c being an abbreviated form of Account. The accounts used by a business are classified into five groups. An account group classifies common types of accounts. There are five account groups used in a business. Let s examine the first three groups. The first three Account Groups are: Asset Accounts Liability Accounts Equity [or Proprietorship]Accounts 1. Asset Accounts Assets are items of value owned by the business. An example of an asset account is the Bank Account. Another example of an asset is the Debtors Account. This is a less obvious example, but it is expected that the debt owed by customers will be honoured, and is therefore an asset to the business. Another example of an asset is Motor Vehicles Account. 126 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping Software Publications Pty Ltd 2010

4 2. Liability Accounts Liabilities are items of value owed by the business. An example of a liability account is a Loan from the bank. Another example of a liability account is the Creditors Account. As with debtors, it is expected that the business will honour the debt owed to suppliers, and is therefore a liability to the business. 3. Equity (or Proprietorship) Accounts As the name implies, this account group deals with the owner/s of the business. It shows all the money or items of value invested into the business (called Capital), all withdrawals of cash or goods from the business (called Drawings) [sole trader and partnerships only], and any profits made or losses incurred in the accounting period. Proprietorship is the Equity that the owners have in the business. Equity is similar to a liability but is regarded as a "Special Liability" as the business owes the owner for all money or items of value he/she has invested. Classify the following as an asset, liability or equity account: Computer: PAYG owing to the ATO: Amount invested by the owner: Credit Card debt: Toyota Landcruiser: $25,000 still owing on the Toyota Landcruiser:. Petty Cash on hand: Tyres [stock for resale] on hand: Drawings:. Suppliers to whom the business owes money: [Solution can be found in the Appendix.] Software Publications Pty Ltd 2010 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping 127

5 Asset, Liability and Equity Account Groups are related to each other. They represent what the business owns and what the business owes. In bookkeeping, a business report that lists what is owned (assets), and what is owed (liabilities +equity), is called a Balance Sheet. A Balance Sheet is also known as a Statement of Financial Position. The bookkeeping entity states that the business and the owner must always be regarded as separate. Even though Equity is considered a special liability, the account group Equity is listed separately to the account group Liability. This supports the bookkeeping entity rule which states that the business and the owner are regarded as separate bodies. ASSETS BALANCE SHEET OF JOHN BROWN AS AT 31 JULY xxxx LIABILITIES Cash 1,500 Bank Loan 20,000 Computer Equipment 10,000 Creditors 1,500 Office Furniture 10,000 Delivery Vehicle 25,000 EQUITY Capital 25,000 $46,500 $46,500 This form of Balance Sheet is known as "T" form. In a T form Balance Sheet you will notice that Assets = Liabilities +Equity. This formula can be shortened to: A = L + E and is known as the Accounting Equation. Accounting Equation: A = L + E The Accounting Equation is an important mathematical concept. The whole bookkeeping process is based on this equation. It will always show you the relationship between Asset, Liability and Equity account groups. 128 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping Software Publications Pty Ltd 2010

6 A Balance Sheet in MYOB AccountRight looks like this: [Refer to Printout 10.] BALANCE SHEET OF JOHN BROWN AS AT 31 JULY xxxx ASSETS Cash 1,500 Computer Equipment Office Furniture 10,000 Delivery Vehicle 25,000 Total Assets 46,500 Less LIABILITIES Loan from Bank 20,000 Creditors 1,500 Total Liabilities 21,500 Net Assets $25,000 EQUITY Capital $25,000 This form of Balance Sheet is known as the "Narrative" form. Note that the Accounting Equation is now: Assets Liabilities = Equity or A L = E. There is no difference between the T form and the Narrative form of Balance Sheet. It is simply another way of presenting the same information. The above Balance Sheet and Balance Sheet on the previous page tells the following story about the business owned by John Brown. On the 31 st July, the business owned by John Brown had $1,500 in the bank, owned Computer Equipment valued at $10,000, Office Furniture valued at $10,000 and a Delivery Vehicle valued at $25,000. The business had a Bank Loan of $20,000 (used to buy the Delivery Vehicle), and owed $1,500 to creditors (for the Computer). This business is worth $25,000 to the owners. Software Publications Pty Ltd 2010 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping 129

7 Balance Sheet Exercise: The following is a list of assets, liabilities and equity items of B Mercer, Plumber at the end of the current month. Prepare a Balance Sheet from the following list as at the end of the current month. Cash at Bank $20,000 Motor Vehicle $35,000 Plant and Equipment $15,000 Stock of Taps $4,500 Bank Loan $22,000 Visa Credit Card $2,100 Shed $8,500 Debtors $14,000 Creditors $3,600 Capital $69,300 ASSETS Less LIABILITIES EQUITY Capital Note: If you make an error, you MUST NOT use liquid paper or correction tape or write over the top of figures to correct. You MUST cross out, and write the correct amount above and initial. [Answer can be found in the Appendix.] 130 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping Software Publications Pty Ltd 2010

8 It is important that you know how to interpret a Balance Sheet. Reading and comparing a business s Balance Sheet can help you to evaluate what has happened to a business s operations over a period of time. 1 Look at the following Balance Sheet: ASSETS BALANCE SHEET OF JOHN BROWN AS AT 31 AUGUST xxxx LIABILITIES Cash 7,500 Loan from Bank 20,000 Computer Equipment 4,000 Creditors 1,500 Office Furniture 10,000 Delivery Vehicle 25,000 EQUITY Capital 25,000 $46,500 $46,500 2 Now compare the above Balance Sheet with the Balance Sheet on Page 128. What values have changed? Cash has increased by Computer Equipment has decreased by What transaction do you think has happened to change the asset values?.. 3 Look at the following Balance Sheet: ASSETS BALANCE SHEET OF JOHN BROWN AS AT 30 SEPTEMBER xxxx LIABILITIES Cash 3,500 Loan from Bank 20,000 Computer Equipment 4,000 Creditors 1,500 Office Furniture 14,000 Delivery Vehicle EQUITY Capital 25,000 $46,500 $46,500 What values have changed from the above Balance Sheet of 31 August?... What transaction do you think has happened to change the asset values? Software Publications Pty Ltd 2010 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping 131

9 A Balance Sheet changes as a result of transactions affecting Assets, Liabilities and Equity values. A business also has other transactions. These transactions involve costs incurred by the business (called expenses) and money earned by the operation of the business (called revenue also known as income). 4. Expense Account Group An expense refers to any cost the business outlays to keep the business in operation so that it can provide goods and services to its customers. Examples of expense accounts are: Electricity Telephone Purchase of stock items to sell at a profit [Purchases] The business has to pay for these services and buy stock in order to run the business. Another example of an expense account is Wages. The business has to pay its employees wages for the services they provide on behalf of the business. Write here a list of other expenses [overheads] a business could incur: Office Supplies. 132 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping Software Publications Pty Ltd 2010

10 5. Revenue (also known as Income) Account Group Revenue is any incoming money the business receives from the sale of the goods or services it provides. An example of a Revenue account is Sales. The Sales Account records the value of all the goods or services that the business sells. Another example of a Revenue account is Delivery Charges Collected. When a business sells its products to a customer it may be required to deliver these products for a fee. This fee is considered income earned for providing a service, but it is not sales. Write here a list of other revenue [income] a business could receive: Complete the exercise below to revise the account group definitions: Write in the definition of the Account Group in the box provided and then give 2 accounts in this Account Group. I have completed the first line as an example.. Summary of Account Definitions TYPE OF ACCOUNT GROUP DEFINITION OF THE ACCOUNT GROUP EXAMPLES OF ACCOUNTS IN THIS GROUP Equity The Owners investment in the business. Capital Asset Drawings Liability Expense Revenue [A suggested answer can be found in the Appendix.] Software Publications Pty Ltd 2010 CASH & ACCRUAL ACCOUNTING using MYOB v19 Unit 9: Double Entry Bookkeeping 133