Rule of Double Entry Assets Liability Capital Expense Income DEBIT CREDIT Increase Decrease Accounting Equation Asset = Capital + Liability Capital = Asset Liability = NET ASSETS Business Equation Profit (P) = Increase or Decrease in Net Assets (I) + Drawings (D) Capital (C) Statement of Comprehensive Income Income Expense Income Expense = Profit / (Loss) Statement of Financial Position Asset Liability Capital Asset = Liability Capital C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 1
Statement of Financial Position $ $ $ Non Current Asset Property Plant & Equipment x less: Accumulated depreciation (x) x Land and Building x less: Accumulated depreciation (x) x Current Asset Closing Inventory x A/c Receivable x less: Allowance for Rece. (x) Cash / Bank x Accrued Income x Advance Expense x x x less: Non Current Liabilities Bank Loan (x) less: Current Liabilities Bank Overdraft x A/c Payable x Accrued Expense x Advance Income x (x) **Capital employed / Net Asset / Closing Capital x Capital & Equity Opening Capital x Add: Net Profit x Additional Investment x x less: Drawings (x) ** Same x C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 2
Statement of Comprehensive Income $ $ $ Sales less: Sales Return (x) x less: COGS Opening Inventory Purchases Carriage Inwards less: Purchase Discount () x less: Closing Inventory (x) (x) x GROSS PROFIT x Add: Discount / Rent Received Add: Gain on Sale of NCA Decrease in Allowance for Rece. x x less: Expense Carriage Outwards Sales Discount Bad Debt Increase in Allowance for Rece. Provision for Depreciation of NCA Loss on Sale of NCA Heating and Lighting Rent and Insurance (x) NET PROFIT x C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 3
Sales Tax Output Tax on Sales Input Tax on Purchases Net Amount + Sales Tax = Gross Amount 100% + 17.5% = 117.5% Control Account (T) Receivable Ledger Control A/C Bal b/f Sales Return Cr. Sales Discount Allowed Refund Cash Received Interest dues from customers Bad Debts Contra Set off Bal c/d Bal b/d Payable Ledger Control A/C Discount Recevied Bal B/d Cash Paid Cr. Purchases Purchase Return Contra Set off Bal c/d Bal b/d C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 4
Trail Balance Debit = Credit ASSET EXPENSE LIABILITY INCOME CAPITAL Errors Error of Principle Error of Commission Error of Transposition Error of Omission Compensation Errors Errors Revealed by the Trail Balance Error of partial omission (single entry) Error of Transposition Both entries posted to either Dr. or Cr. Wrong amount on one entry Accounting Concepts Going Concern Consistency Accruals Prudence Materiality Historical Cost C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 5
Accruals & Prepayments Bank Reconciliation Statement Bal b/f Bank Charges Standing Order Paid / Received Interest Received / Paid Direct Debit Dishounred Cheques Credit Transfer by Us Dividends Paid / Received Direct Deposit Unpresented Cheques / Outstanding Cheques Uncredited Deposits / Outstanding Lodgements / Uncleared Cheques Bank Errors Cash Book x / (x) x (x) / x x / (x) x (x) (x) (x) / x x Bank Statement x / (x) (x) x x / (x) Adjusted Balance x x C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 6
Cost of Goods Sold Op. Inventory Value Purchases less: Closing Inventory COGS $ Inventory Opening Inventory is inversely proportional to Profit. Opening Inventory Closing Inventory is directly proportional to Profit Closing Inventory Profit Profit Inventory should be recorded at lower of cost on NRV IAS 2 Net Realizable Value (NRV) = Expected Selling Price Expected Selling Expense Inventory Costing FIFO (first in first out) Weighted Average Expected Trial Balance An extended trial balance is used to adjust trial balance figures for: Error Accruals and Prepayments Depreciation Bad Debts Adjustments to receivables allowance Closing Inventory Valuation C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 7
Depreciation WHAT: The loss in the value of Non Current Asset. WHY: To allocate the cost of Non Current Asset over its useful life. WHEN: Every year end when SOFP are prepared or during the year it asset is disposed Depreciation of the year Accumulated Depreciation Statement of Comprehensive Statement Statement of Financial Position Methods of Depreciation Straight Line Method (SLM) Reducing Balance Method (RDM) SLM = Cost Scrap Value / Useful Life of the Asset RDM = Net Book Value x Depreciation % C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 8
Sole Trader A sole proprietorship also known as a sole trader or simply proprietorship is a type of entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the owner (subject to taxation). All assets of the business are owned by the proprietor and all debts of the business are their debts and they must pay them from their personal resources. This means that the owner has unlimited liability. It is a "sole" proprietorship in the sense that the owner has no partners. Partnership When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership. Profit / (Loss) sharing Partnership agreement Appropriation A/C Partner's Current A/C Bal b/f Bal b/f Drawings Interest on Capital Interest on Drawings Salary Share of Profit Bal c/d Bal c/d Partner's Capital A/C Withdrawal of Capital Bal b/f Drawings Interest on Capital Interest on Drawings Salary Share of Profit Bal c/d Additional Investment Bal c/d C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 9
Profit and Loss Appropriation Account Net Loss as per P & L a/c Net Profit as per P & L a/c Interest on Capital Interest on Drawings A A B B Partner's Salary Share of Loss Share of Profit A A B B C A T P a p e r 3 M a i n t a i n i n g F i n a n c i a l R e c o r d s Page 10