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Various Types of Transactions - Part 6, Refund of Deposits Placed Earlier W
2008-02-11 13:20:00 I have discussed in detail the relevant double entries for the recording of rental income and the rental deposits and utility deposits in the books of the landlord, ABC Co. Ltd., in my post:Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income).The recording of all these transactions in the books of the tenant, XYZ Co. Ltd., are the opposite of those of the landlord. If XYZ Co. Ltd. records its transactions on cash basis, the double entry used to record the transactions when XYZ Co. Ltd. pays the monthly rentals is: - Balance SheetIncome Statement DRCRDRCR Rental expense xxxx Cash at bank xxxx 1. The double entry for the recording of the security deposits is: - Balance SheetIncome Statement DRCRDRCR Refundable deposits (current assets): - Rentals3,000 - Utility500 Cash at bank 3,500 2. The double entry for the recording of the 8 months rental (March 2006 to October 2006) is: - Balanc...
Various Types of Transactions – Part 5, Disbursement or Release of Princi
2008-01-27 18:07:00 Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the principal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay the price for this – interest). Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers.The double entry involved in the recording of the realease of the loan is as follows:- Balance SheetIncome StatementDRCRDRCRCash at bank24,000Loan from XXX Bank24,000A decision need to be made as to whether the loan should be classified as current liability or non-current liability. This involves "splitting" the loan into the current portion and non-current portion in accordance with the repayment terms. Some... More About: Transactions , Release , Part , Types
Various Types of Transactions – Part 4, Collection from Other Source of R
2008-01-18 15:16:00 As mentioned in my post: Various Types of Transactions - Part 1, Introduction, there were 5 examples of other source of revenue or income highlighted – interest income, dividend income, rental income, proceeds from disposal of assets and compensation received for loss of assets. Please take note that this is not an exhaustive list as there are more types of other source of revenue and income not mentioned. For the purpose of easy understanding and simplicity, I will only discuss these 5 different other source of revenue and income in the following posts:-Various Types of Transactions – Part 4a, Collection from Other Source of Revenue and Income (Interest Income)Various Types of Transactions – Part 4b, Collection from Other Source of Revenue and Income (Dividend Income)Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income)Various Types of Transactions – Part 4d, Collection from Other Source of Revenue and Income (Proceeds...
Various Types of Transactions – Part 4c, Collection from Other Source of
2008-01-18 12:49:00 Rental income is earned by business entities for allowing another party to "use" the resources (assets) of the business entities. For example, letting of property, machinery, equipment & etc.An agreement is usually drafted and agreed by both parties. The terms agreed upon usually include the details or specifications of the assets, date of agreement, period, amount of rental e.g. per month.Many small businesses record rental income on cash basis, i.e. upon receipt. The double entry for recording rental income on cash basis is:- Balance SheetIncome Statement DRCRDRCR Cash at bankXXXX Rental income XXXXExampleThe financial period of ABC Co. Ltd. is from 1 January to 31 December. On 10 January 2006, XYZ Co. Ltd. agreed to rent Level 1 of a 3 levels shop owned by ABC Co. Ltd for 3 years commencing 1 March 2006 at $1,500 per month. 2 months rental and $500 utility deposit are collected by ABC Co. Ltd as security deposits. The following schedule shows the details of the money... More About: Transactions , Source , Part , Types
Dividend Imputation
2008-01-18 01:56:00 In some countries, dividends are distributed to shareholders under dividend imputation system. The purpose of this system is to avoid imposing tax "2 times" on the same income is first generated by companies (taxed the first time when the income is reported by companies), which is then distributed to shareholders as dividends (taxed the second time when the dividend income is reported by individual shareholders).ExampleCompany A has 2 shareholders – Mr Big and Mr Small, each holding 50% of the shares in Company A. The details of the share capital of Company A are shown below: -$Authorised Share Capital:100,000 ordinary shares or $1.00 each100,000Issued and Fully Paid-up Share Capital:100,000 ordinary shares or $1.00 each100,000For the financial year ended 31 December 2007, Company A made $25,000 profit before taxation and declared and paid a dividend of 25 cents per share to its shareholders.Based on the profit of $25,000, assume a corporate income tax rate of 20%, and there are n... More About: Dividend
Various Types of Transactions – Part 4e, Collection from Other Source of
2008-01-17 13:41:00 Business entities may encounter some unfortunate events such as fire, flood or others that cause damage to their assets. After assessment of the damages caused, the insurance companies will then pay the relevant compensation to these business entities. If the assets damaged are fixed assets, the relevant double entries involved in the recording of the loss of the assets have been illustrated in my post: Various Types of Transactions – Pat 4d, Collection from Other Source of Revenue and Income (Proceeds from Disposal of Assets) However, if the damaged assets are inventories or stocks, the carrying value of the inventories or stock should be deducted against the compensation received to determine the net loss:- $Compensation receivedXXXXCarrying value of inventories(XXXX)Loss on damaged inventories(XXXX)**Loss is shown here because the amount of compensation paid by the insurance company would normally not exceed the carrying value of the inventories.The double entries involved in t... More About: Part
Various Types of Transactions – Part 4d, Collection from Other Source of
2008-01-17 13:39:00 When a business entity dispose of its fixed assets or more commonly now referred to as property, plant and equipment, the carrying amount or the net book value of the assets concerned is deducted from the proceeds received at the date of disposal to determine the gain or loss on disposal:-$Proceeds from disposalXXXXCarrying amount or net book value of fixed assets(XXXX)Gain/(Loss) on disposalXXXX/(XXXX)ExampleThe financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 February 2006, ABC Co. Ltd paid cash to purchase a motor vehicle costing $24,000. The depreciation rate applied to this motor vehicle is 20% per annum (I will have a detailed discussion on depreciation in my future post). On 1 February 2007, ABC Co. Ltd decided to dispose this motor vehicle and sold it for $16,000.The depreciation of this motor vehicle is calculated as follows:-Cost of motor vehicle=$24,000 Depreciation rate=20%Depreciation charge per month= $24,000 X 20% X 1/12= $400Financial Year Ende... More About: Transactions , Source , Part , Types
Various Types of Transactions – Part 4b, Collection from Other Source of
2008-01-17 13:32:00 For those business entities who have invested in shares of another company, dividends may be received by these business entities as a way of distributing the earnings or profits made by the investee companies to the shareholders. Dividends could take the form of cash or non-cash (e.g. bonus shares, property etc.). I will only discuss the recording of cash dividend income in this post.Whenever dividends are distributed to the shareholders, enclosed together with the cheques to the shareholders are dividend warrants or vouchers. The dividend warrants or vouchers show the details of the dividends payments.Dividends are classified into two types: 1. Interim dividends, and; 2. Final dividends. It should be noted that it is the Board of Directors of companies that has the power to determine how frequent to declare and how much to declare interim dividends, NOT the shareholders. However, when interim dividends are paid during the financial year, there is a general expectation that final di... More About: Transactions , Source , Part , Types
Various Types of Transactions – Part 4a, Collection from Other Source of
2008-01-17 13:30:00 Interest income is earned usually through deposits placements with financial institutions. Sometimes, it is also earned through lending of money to third parties (some countries have strict laws governing money lending activities). Interest is the price that borrowers pay for enjoying the resources (money) borrowed from the lenders. Usually, the interest rates are made known to the depositors by financial institutions at the time of deposits placement.A very common practice by small businesses when comes to the timing of recording interest income the accounts is upon receiving the interest income. This is an example of cash basis of recording transactions instead of accrual basis of accounting. Please refer to my post: Cash Vs Accrual Basis of Accounting for further illustrations on this topicThe double entry for recording interest income on cash basis is as follows:-Balance SheetIncome StatementDRCRDRCRCash at bank*XXXXDividend incomeXXXX*Business entities usually receive interest ... More About: Transactions , Source , Part , Types
Cash Basis Vs Accrual Basis of Accounting
2008-01-09 08:20:00 Many small businesses use cash basis of accounting to record transactions, especially those who prepare the accounts once a year. Please refer to my post: Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To Avoid for further illustrations.Indications that cash basis of accounting is used includes the following:-No books of original entry such as sales day book and purchases day book used to record sales and purchases.No debtors ledger or creditors ledger maintained.All receipts and payments are recorded directly in cash book.Cash basis of recording transactions and presenting the financial statements produced has long been deemed an inappropriate basis to use. Accrual basis of accounting is the accepted basis and this is stated in International Accounting Standard (IAS) 1: Presentation of Financial Statements.It is good if a business entity is aware of the difference between cash basis and accrual basis of accounting and records its transactions using accrual b...
Effective Interest? Simple Interest? Compound Interest? Nominal Interest?
2008-01-06 14:23:00 Simple interest is usually discussed and compared with compound interest. Simple interest is named as such because the interest calculated is not compounded.In contrast, when compound interest is calculated, nominal interest rate and effective interest rate would be the relevant interest rates involved in the calculations or discussions.ExampleSimple Interest ABC Co Ltd. placed $100,000 deposit with Bank A for 1 year with interest of 3.5% per annum and calculated on simple interest method.Interest earned at the end of the one year period is therefore calculated as follows: -$100,000 x 3.5%= $3,500Compound InterestIn the context of compound interest calculation, you need to specify the following: -The total length of the placement of deposit. In this example, one year.The frequency of compound interest calculation. E.g. daily, monthly, quarterly & etc.The nominal annual rate of interest used.Assume monthly compounding of interest is adopted, with 3.5% nominal annual rate of intere... More About: Simple , Effective , Nominal
Various Types of Transactions – Part 3, Collection from Sales or Services
2008-01-01 08:42:00 For profit orientated entities, revenue is the "bloodline" of the businesses. The cash collected from invoicing or billing is vital in keeping the businesses up and running – meeting all sorts of daily expenses. Depending on the nature of the businesses, the sales invoices or bills issued to customers are for the sale of goods or services rendered. Generally the invoices or bills issued could be on cash term (pay on delivery of goods or services performed) or on credit term (e.g. 30 days, 60 days, 90 days etc). I have discussed in length the day book used in recording sales, the sales ledger and posting to the relevant accounts in the general ledger in my post:General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Trial Balance . The double entry for recording both the cash sales and credit sales are shown below:Cash Sales Balance SheetIncome Statement DRCRDRCR Petty cash/cash at bankXXXX Sales XXXX Credit SalesUpon Recognition of Revenue Balance SheetInco... More About: Services , Transactions , Part , Part 3
Various Types of Transactions – Part 2, Contribution of Capital from Owne
2007-12-24 07:27:00 When owners inject cash into businesses as capital, the double entry to record this type of transactions is: - Balance SheetIncome Statement DRCRDRCR Petty cash/cash at bankXXXX Capital XXXX Cash injections could be done by way of contributing "hard cash". If this is the case, the asset account debited is the Petty Cash account. Cash injections could also be done by way of the owners issue cheques. If this is the case, the asset account debited is the Cash at Bank account. Usually, if the amount involved is huge, cheques are issued instead of hard cash.Following the rule of double entry recording system, whenever there is a debit entry made to an account (the Petty Cash of Cash at Bank account in this illustration), there must also be a credit entry made to an account (the Capital account in this illustration).Please refer to Debits And Credits and The Accounting Equation if you need further explanations on double entry recording system and the accounting equa... More About: Transactions , Part , Contribution , Types
Three Most Common Types of Small Businesses – Sole Proprietorship, Partne
2007-12-22 19:50:00 Sole ProprietorshipThis is the type of business which legally the business entity is not separated from the owner. However, do not get yourself confused with the Separate Entity Concept in accounting. Usually the business is registered with government under a trade name (either with some association with the name of the owner or a different name altogether) and this trade name will represent the business entity in the conduct of its business activities.PartnershipThis is the type of business with more than one owner. All the owners are called partners. In general all the partners contribute capital to the business and share common objectives of making the business successful and share the profits generated. Generally in law, the partners may have joint liability or joint and several liabilities. However, some countries may allow partnerships in which the liabilities of partners are limited. A partnership agreement could be used to set the terms and conditions among the partners.Priv... More About: Small , Common , Types , Small Businesses , Businesses
Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To A
2007-12-16 06:50:00 Many small business owners started the businesses on their own or with minimal staff strength. Usually, the major focus of the businesses is on revenue generation and leaves the function of transactions record keeping and accounting to inexperience staff. Many business owners leave it aside until the end of the financial year or when the deadline of accounts submission to the authorities coming close. The accounts and financial statements of the business entities are prepared once a year. Please take note that this practice of recording transactions once a year is definitely not encouraged and may even contravene the law imposed on businesses in some countries with the owners unaware of this. Depending on how the accounting documents are filed and kept, the accounting personnel assigned the task of preparing the accounts and the financial statements once a year may face the following three scenarios: -First Scenario – The worst case scenarioThe owners have little or no knowledge o... More About: Tips , Small , Small Businesses , Year , Businesses
Separate Entity Concept
2007-12-15 13:22:00 In accounting, a business entity is treated as a separate entity from the owner(s). Therefore, any capital injections made by the owner(s) are recorded as capital contribution from owners in the books of the business entity. The owner(s)’ private expenditure/spending are not recorded in the books of the business entity. There are many instances whereby the owner(s) withdrew money from the business for their personal use. This is actually a lending of money from the business to the owner(s) and should be recorded as such in the books of the business entity. On the other hand, when the owner(s) inject cash into the business to help easing tight cash flow situation faced by the business entity, it is a lending of money from the owner(s) to the business and should also be recorded as such in the books of the business entity. Many owner(s) of small businesses (Three Most Common Types of Small Businesses) fail to see this “line” drawn between the business and the owner(s). The direc... More About: Concept
Various Types of Transactions - Part 1, Introduction
2007-12-13 14:49:00 It is easier to understand the basic principles and concepts of accounting once you are familiar with the types of transactions that a typical business entity has to deal with. There is no better place to start with knowing what kind of receipts a typical business receives and also the type of payments made. Even though numerous transactions nowadays are done on credit, eventually the amount owned is expected to be settled or paid.ReceiptsGenerally, the receipt transactions of a typical business include the following:-·Contribution of capital from owners (Please refer to: Various Types of Transactions – Part 2, Contribution of Capital from Owners)·Collection from sales or services rendered (cash sales or payments received from trade debtors). This is usually the major source of revenue or income of the business entity (Please refer to: Various Types of Transactions – Part 3, Collection from Sales or Services Rendered)· Collection from other source of revenue or income:- o Int... More About: Introduction
Inventories or Stocks - Part 3, Cost Formulas
2007-12-06 02:12:00 In Example 1 of my previous post, Inventories or Stocks – Part 2, Methods of Recording in General Ledger, the cost of purchasing inventories had been fixed in order to show the effect of two different methods of recording in General Ledger clearly. In reality, cost of inventory purchases fluctuates from time to time. Let’s explore the common ways of calculating the cost of inventories when purchase price fluctuates from time to time – This is called the Cost Formula of inventories. There are three common Cost Formulas for inventories: -1. FIFO (First-in-first-out)2. Weighted Average3. LIFO (Last-in-last-out)Please take note of the difference between Cost Formulas (FIFO, Weighted Average or LIFO) and the methods of recording inventories in General Ledger (Periodic Method or Perpetual Method). A business entity could choose a combination of the following in recording its inventories: - Methods of recording in General LedgerCost FormulaCombination 1PeriodicFIFOCom... More About: Part 3
Inventories or Stocks - Part 2, Methods of Recording in General Ledger
2007-11-30 15:28:00 There are two common methods of recording inventories or stocks in the General Ledger of business entities:-1. The Periodic Method2. The Perpetual MethodThe choice of the method used will directly determine the double entries for the recording of inventories or stocks of the entity concerned.1. The Periodic MethodUnder this method, the inventories or stocks account in the General Ledger would not be updated regularly with the movement of inventories or stocks throughout the whole financial period until the last closing day of the financial period in which the new inventories balance would be determined and adjusted accordingly. The balance of the inventories or stocks account remained at the amount brought forward from the previous financial period i.e. the opening inventories or stocks for the current financial period (this is also the closing balance of inventories or stocks for the previous financial period). At the end of the current financial period, an inventori... More About: Stocks , Recording , Part , Methods
Inventories or Stocks – Part 1, Introduction
2007-11-28 13:08:00 Inventories or stocks are one type of assets to many business entities. Inventories or stocks could be in the form of trading goods/merchandise for those business entities principally engaged in purchasing the goods from suppliers and resell those goods to the customers. For a typical manufacturer, inventories or stocks could be in the form of raw materials used in the manufacturing process. Other than raw materials, inventories or stocks could also be in the form of unfinished products called work-in-progress or they could also be in the form of finished goods/products that are ready for sale to the customers. For many business entities that engaged mainly in providing services, all the tangible inventories mentioned earlier simply are not applicable because these businesses provide services to the customers as major source of revenue or income. However, for some business entities engaged in development of houses, land held for subsequent development into houses are another type of... More About: Stocks , Introduction , Part
More On Books of Original Entry - Cash Book
2007-11-23 08:47:00 Cash Book is used to record cash transactions. However, due to the fact that there is a difference between cheques and the “hard cash”, normally these two types of transactions are recorded in two separate Books of Original Entry – Cheques transactions in Cash or Bank Book (I just refer to it as Cash Book) and “hard cash” transactions in Petty Cash Book. For small businesses, a common format of Cash Book adopted is to present the “T” account and in multi-columns manner. For receipts, the transactions are recorded on the debit side of the Cash Book and for payments, on the credit side of the Cash Book. The total of each column at the end of each month would then be posted to the respective accounts in the General Ledger. The month end balance of each account would then be used to construct the Trial Balance before the Balance Sheet and the Income Statement are prepared (Method 1). However, when the daily collection from customers (it could be cash sales, collections fro... More About: Cash
General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Tria
2007-11-23 08:43:00 Not sure about these? In my previous post on " Accounting Documents & Accounting Cycles ", I have discussed the commonly used accounting documents (function is record occurrence of transactions) and also examples of accounting cycles (Sales, Purchases, Cash Receipts Payments).In order to record the occurrence of transactions in a systematic manner, some form of record keeping must be adopted. The accounting documents such as official receipts, sales invoices, bills etc. are the "Source Documents" in which these documents serve as the evidence of the occurrence of transactions and are based upon to record the transactions as the first entry point of an accounting recording system – "Books of Original Entry". Examples of books of original entry are the following: - Sales Journal or Sales Day Book – The function is to record sales transactions. Purchases Journal or Purchases Day Book – The function is to record purchases transactions. Cash Book or Bank Book – The function is t... More About: General , Tria , Journals , Creditors
The Income Statement
2007-11-23 08:42:00 Remember in my previous post on the Balance Sheet? The Balance Sheet shows the “position” of an entity at a certain point in time. However, the Income Statement shows a different picture than the Balance Sheet - Income Statement or Profit and Loss Accounts is used to match the income/revenue generated by an entity with all the expenses/costs/losses the entity incurred over a specific period of time, normally this is done yearly to arrive at the final outcome, i.e. the Profit for the year/period. Examples of transactions that have an effect on the Income Statement are as follows:- 3. Purchase from trade creditorAssume ABC Co. Ltd purchase goods worth $2,500 from its supplier, Top Goods Co. Ltd on credit term of 30 days. The double entry to record this transaction is as follows: -Balance SheetIncome Statement DrCrDrCrDr Purchases $2,500 Cr Trade Creditor $2,500 Assuming the Balance Sheet of ABC Co. Ltd. BEFORE this transaction is as per Example 2 of my post, “the Balance Sheet...
Accounting Documents & Accounting Cycles
2007-11-23 08:42:00 It is important that you know the type of documents commonly used to record the occurrence of transactions (Can you think of any examples?). Some of them are: -Official receipts Normally you will get these when you make payment over the counter to the cashierCash bills You seldom get these nowadays. However, if you made purchase of goods from a shop that has no cash register, normally you will get these as proof of payments.Bills Electricity, water, quit rent & assessment, services. Normally you received these and asked to pay by a specified date.Invoices Normally you receive these when you purchase physical goods. Same function as bills, invoices ask the recipients to pay by a specified date.Delivery Orders You get these when you receive the goods that you have ordered previously. However, delivery order is different from invoice, its function is to record the descriptions and quantity of the goods concern, whereas, invoice will state the unit price and also the terms of paymen... More About: Accounting , Cycles , Documents
The Balance Sheet
2007-11-23 08:41:00 As discussed in my earlier posts, the balance sheet shows the financial position of an entity. In addition to the example introduced earlier whereby the owner contributed $10,000 cash at bank as capital (please refer to my post titled Debits and Credits), there are many more examples of transactions that have an impact on the balance sheet, i.e. they would change the items and figures relected in the balance sheet. Some of the examples are as follows:-1. Purchase of asset using cash at bank (by way of issuing cheque)Using the example of ABC Limited in which the owner have contributed $10,000 cash at bank as capital, assume the owner decided to use part of the money to purchase an asset e.g. a computer desk costing $500, the double entry would be as follow:-Dr. Computer desk $500Cr. Cash at bank $500After the transaction has been effected, the balance sheet of ABC Co. Limited would show:-ABC Co. Lim... More About: Sheet , Balance Sheet , Balance
Debits and Credits
2007-11-23 08:39:00 These two words are typical to the world of accounting and they relate to the Accounting Equation discussed yesterday: -Assets = Liabilities + Owners’ EquityUnder what we called double entry system in accounting, each transaction must be recorded TWO times. For example, when you as an owner of an entity you contribute capital to the business by opening a bank account lets say $10,000, the following entry is made: -Dr. Cash at bank $10,000 (Asset)Cr. Paid-up share capital $10,000 (Owners’ Equity)Note: Dr. represents “debit” and Cr. represents “credit”Points to note: -1. All assets item when recorded initially, you must follow the convention of “debiting” the account relating to that particular asset.2. All liabilities item and Owners’ Equity item on the other hand you must “credit” the relevant accounts relating to that item when you first recognise them.Refering the above example, if right after you have contributed the capital to the business and there are no ... More About: Credits |
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