Recap on Adjusted Financial Statements

PREPARATION OF ADJUSTED FINANCIAL STATEMENTS

ACC466
CHAPTER 5

Poll

Do you still remember what you have learned in your accounting courses during Diploma?

• Strongly Disagree

• Disagree

• Neutral

• Agree

• Strongly Agree

Poll

Do you still remember what you have learned in Adjustment of Financial Statements?

• Strongly Disagree

• Disagree

• Neutral

• Agree

• Strongly Agree

TO RECAP

• Source document for a transaction

• Accounting equation: Basic and Extended

• Definition of assets, liabilities and owner's equity

• Journalising - types of journal

• Posting to T-accounts - Rules of Double Entry

• Trial balance - definition and its purpose

• Revenue recognition principle and accrual concepts

• Adjusting entries for each accruals and prepayments

• Financial statements: SOPL and SOFP

Open Ended

What grade do you get for your ACC100/111/114 (during your diploma)

Word Cloud

Out of the lists mentioned, which one do you most remembered? Why.

Multiple Choice

All of the followings are considered as business transactions and will be recorded in the business's accounts, EXCEPT ..............

• Family transactions
• Non-business transactions
• Personal transactions
• Social transactions

SOURCE OF DOCUMENTS

Source of documents are the evidence that identify and describe economic events and transactions that have taken place in a business.

Documents

•Function

Cheque

•It shows details of payments made

Sales invoice

•A document issued by the supplier/seller of trading goods, indicating credit terms of the transaction such as date, quantities, prices, customer’s name etc.

Purchase invoice

•An invoice received by the buyer of trading goods, which in fact is the seller’s sales invoice.

Credit Note
(Return Inwards)

•A document issued by the seller, upon receipt of goods returned by a dissatisfied customer, to notify the customer of a reduction in the amount owed by the customer.

Debit note
(Return Outwards)

•A document issued by the business (as a customer), upon return of goods to the seller, to notify the seller of a reduction in the amount owing to the seller.

Receipts

•A document issued by the seller as acknowledgement of cash received.

ACCOUNTING EQUATION

ASSET ACCOUNTS

Furniture

Bank

Multiple Choice

Assets can be classified as tangible asset and intangible asset. How do they differentiated?

• Tangible assets are physical, while intangible assets are non-physical.
• Tangible assets are financial, while intangible assets are physical.
• Tangible assets are non-physical, while intangible assets are physical.
• Tangible assets are intangible, while intangible assets are tangible.

Multiple Choice

Examples of intangible assets are ..............

• cash, accounts receivable, inventory
• inventory, equipment, buildings
• patents, trademarks, copyrights, goodwill, brand recognition
• machinery, vehicles, land

LIABILITY ACCOUNT

Bank overdraft

Loan

Multiple Choice

Liability is ..................

• a type of insurance policy
• a form of currency
• a legal document
• legal responsibility for something, such as a debt or obligation

Multiple Choice

Examples of liability are ...................

• credit cards
• stocks
• bonds
• loans, mortgages, accounts payable, accrued expenses

EQUITY ACCOUNTS

-

Drawings

Multiple Choice

Equity refers to ..............

• Employee benefits in a company
• Ownership interest in a company
• Profit sharing in a company
• Debt interest in a company

Multiple Choice

Equity of the owner will increase when ..............

• the owner invests more money into the business or the business generates more profit
• the owner spends all profits on personal expenses
• the business incurs significant losses
• the owner gives away ownership shares

Multiple Choice

A decrease in owner's equity is caused by .............

• revenues exceeding expenses
• owner's investment in the business
• profits earned by the business
• expenses exceeding revenues, withdrawals by the owner, or losses incurred by the business

Debits and Credits

A T-account represents a ledger account and is used
to show the effects of one or more transactions.

Multiple Choice

Debit and credit are ...............

• types of entries in accounting
• types of animals
• colors of the rainbow
• shapes in geometry

Double-Entry Accounting

Assets = Liabilities + Equity

Multiple Choice

In a double entry system, a credit is used to record ...................

• decrease in assets, expenses, or equity accounts
• increase in assets, expenses, or liabilities accounts
• decrease in liabilities, revenues, or equity accounts
• increase in liabilities, revenues, or equity accounts

Double-Entry Accounting: Expanded
Accounting Equation

ASSET = LIABILITY + EQUITY + REVENUES – EXPENSE

Revenue

Expense

Commission

received

Discount
received

Salary

Rent

expense

Purchase

Rent

received

Insurance

Examples of revenue/income and expense

Sales

Water and

electricity bill

Open Ended

List five (5) examples of revenue

Open Ended

List five (5) examples of expenses.

Journalizing and Posting Transactions

JOURNAL

• A journal also called a book of

prime entry or book of original
entry, is where all business
transactions are initially
recorded in chronological order.

• The journals contain information

relating to a transaction, such as the date and details of the
transaction, folio column and
monetary amount.

Special Journal

General journal

• Sales journal
• Sales return/return

inwards journal

• Purchase journal
• Purchase return/return

outwards journal

• Cash receipt journal
• Cash payment/disbursement
journal

• Other than special

journal.

• to record transactions

NOT relating to sales,
purchases, returns of
goods and cash
transactions.

• It records opening,

adjusting, closing and
correcting entries.

Multiple Choice

Purchase of non-current assets on credit should be recorded in ....... journal.

• Purchase Journal
• General Journal
• Cash Journal
• Sales Journal

Multiple Choice

Sales journal is used to record .......................

• employee salaries
• sales transactions
• purchase transactions
• inventory levels

JOURNAL AND LEDGER ENTRY

Purchased a vehicle amounting RM80,000 in cash on 12th July 2020

Journal entries

Ledger entries

EXAMPLES OF DOUBLE ENTRY RECORD

• Jan 1 – Bought equipment worth RM3,500 by cheque

Both equipment and bank are assets. So, when equipment is debited, and bank is credited, the account is balance, where there is no balance at credit side.

• Jan 2 – Bought an equipment amounting RM1,000 on credit from

Jati Mas Sdn Bhd.

Equipment is an asset, so it must be recorded at the debit side when it increases.

While account payable is liability, so it must be recorded at the credit side when increase.

Multiple Choice

Bought equipment for cash. What is the double entry?

• Debit Cash, Credit Equipment
• Debit Equipment, Credit Accounts Payable
• Debit Cash, Credit Accounts Receivable
• Debit Equipment, Credit Cash

ACCOUNTING CYCLE

Ledgers Entries (Double Entry Accounts)

Trial Balance

Adjustments for Accrual, prepayments, bad debts, depreciation, etc.

Financial Statements

Journal Entries (Books Of Prime Entry)

Source Documents

Multiple Choice

Revenue recognition principle ................................

• Revenue should be recognized when it is earned, regardless of when the cash is received.
• Revenue should be recognized at the end of the accounting period.
• Revenue should be recognized only when the cash is received.
• Revenue should be recognized when it is earned, regardless of when the cash is paid.

Multiple Choice

Accrual concepts refer to ...................

• Recognition of revenues and expenses when they are approved
• Recognition of revenues and expenses when they are budgeted
• Recognition of revenues and expenses when they are earned or incurred
• Recognition of assets and liabilities when they are paid

ADJUSTMENT FOR ACCRUALS AND
PREPAYMENTS

ACCRUALS

ACCRUED REVENUE

•Revenue earned for the period
but not yet recorded or received.

•Example:
services (performed on account)

•Shown in the CURRENT ASSETS in the SOFP

Dr Accrued Revenue

Cr Revenue

•Expenses

incurred

during

the

accounting period but not yet paid.

•Example:
salaries, interest, taxes

•Shown in the CURRENT LIABILITIES
in the SOFP

Dr Expenses

Cr Accrued Expenses

ACCRUED EXPENSES

PREPAYMENT

PREPAID
REVENUE

PREPAID
EXPENSES

•Revenue received in advance during the current year for the goods or services which yet to be sold or rendered.

•Example:
subscriptions, rent (landlord)

Dr Revenue

Cr Prepaid revenue

•Expenses

for

the

following

accounting period paid in advance in the current period.

•Example:
supplies, insurance, rent (tenant)

•Shown in the CURRENT ASSETS in the SOFP.

Dr Prepaid Expenses

Cr Expenses

•Shown in the CURRENT LIABILITIES in the SOFP.

TREATMENT IN SOFP

ACCRUALS

PREPAYMENT

REVENUE

Current Asset

Current Liability

EXPENSES

Current Liability

Current Asset

TREATMENT IN SOPL

ACCRUALS

PREPAYMENT

REVENUE

(+)

(-)

EXPENSES

(+)

(-)

Multiple Choice

Accrued expenses is .......................

• Expenses that are not recorded in the accounting system
• Expenses that have been paid but not recognized in the accounting records
• Expenses that are paid in advance
• Expenses that have been recognized in the accounting records but have not yet been paid.

Multiple Choice

The double entry for accrued expenses is .....................

• Debit expense account, credit accrued liability account
• Debit liability account, credit expense account
• Credit asset account, debit accrued liability account
• Credit expense account, debit accrued liability account

Multiple Choice

Accrued expenses increase .................

• assets on the balance sheet
• equity on the balance sheet
• revenue on the income statement
• liabilities on the balance sheet

Multiple Choice

Accrued revenue is a ...................

• revenue that has been paid in advance
• revenue that has not been earned
• revenue that has been earned but not yet received
• revenue that is not taxable

ACCOUNTING FOR INVENTORY

• Inventories are goods bought for resale.
• For example:
The electrical shops bought washing machine. The washing machine will then consider as the stock/inventories.

• The inventories bought will be referred as "Purchases"

• If the electrical shop bought motor vehicles, the motor vehicles will not consider as purchases but as non-current assets

• Purchases refers as purchase of goods bought

Increase Stock

Purchases

Cash/Cheque

Dr Purchases

Cr Bank/Cash

On credit

Dr Purchases

Cr Creditors

Return
Inwards

Dr Return Inwards

Cr Debtors

Effect:
SOFP → (-) cash/bank
SOPL → (+) purchase

Effect:
SOFP → (+) Account payable
SOPL → (+) purchase

Effect:
SOFP → (-) Account receivable
SOPL → (-) Sales by recording return
inwards

• Sales refers as sale of goods bought and return on

purchases

Decrease Stock

Sales

On credit

Dr Cash/Bank

Cr Sales

Cash/Cheque

Dr Debtors

Cr Sales

Return
Outward

Dr Creditors

Cr Return Outwards

Effect:
SOFP → (+) cash/bank
SOPL → (+) sales

Effect:
SOFP → (+) account receivable
SOPL → (+) sales

Effect:
SOFP → (-) account payable
SOPL → (-) purchase by
recording return outwards

Multiple Choice

Azlan, who is in business selling cars, sold a brand new car to his son, Aniq, costing RM98,000 on credit. This should be recorded as ....................

• Trade-in sale
• Credit sale
• Cash sale
• Debit sale

Multiple Choice

Accounts receivable is .................

• equipment depreciation
• money owed by customers
• inventory on hand
• money owed by suppliers

Multiple Choice

Accounts payable is .................

• The company's total assets.
• The company's net income.
• Amounts owed by a company to its customers.
• Amounts owed by a company to its suppliers or vendors.

ACCOUNTING FOR ACCOUNT RECEIVABLE

• BAD DEBTS

• Debts that are uncollectible from the debtors

Death

Financial
Difficulty/
Bankruptcy

Purposely

do not

want to pay

Migrate to

other
country

Some receivables will become uncollectible. Why?

Multiple Choice

Bad debts is ......................

• Investments made by the company
• Recovered amounts owed by customers
• Salaries paid to employees
• Unrecoverable amounts owed by customers or other debtors.

Multiple Choice

Bad debts is recorded in the account as .........................

• a liability
• an asset
• an expense
• revenue

2 methods are used in accounting for uncollectible accounts

The direct
write-off
method

The allowance
method

• Effect of bad debt in SOFP:

• Reduction in account receivables (because bad debt should be deducted from

the AR in order to get net account receivable)

• Effect of bad debt in SOPL

• When bad debt incurred, it affects allowance for doubtful debt (AFDD)
• Thus, there will be changes in ending of AFDD
• Bad debt should be added with ending AFDD and minus beginning AFDD in order to know whether AFDD increase or decrease.

• Increase / decrease in AFDD = Ending AFDD + Bad debt – Beginning AFDD
• Using the formula above, the positive answer indicates increase in AFDD.

It has to be recorded under expense.

• While negative answer means decrease in AFDD, should be recorded

under other revenue.

DEPRECIATION

• The allocation of the original cost of the fixed asset over its

expected useful or economic life.

• Criteria of depreciable non current assets:

a)

Long life (more than 1 accounting period)

b)

To be used in the business to earn profit

c)

Not purchased for resale

d)

Have limited useful life

• Depreciation is charged as an expense in the SOPL.

Multiple Choice

Depreciation is ...........................

• the allocation of the cost of an asset over its useful life
• the cost of maintaining an asset
• the process of selling an asset at a profit
• the increase in value of an asset over time

Multiple Choice

Which of the following assets is not to be depreciated?

• Land
• Buildings
• Machinery
• Vehicles

CAUSES OF DEPRECIATION

Causes of
depreciation

Natural
disaster

Obsolescence

Reduction in
market value
Wear & Tear

Depletion

Multiple Choice

All of the followings are causes of depreciation, EXCEPT .....................

• appreciation
• deflation
• inflation
• market demand

METHODS OF DEPRECIATION

• There are TWO methods of depreciation:

1)

Straight-line method
- To calculate depreciation based on “COST”
- Equal/constant amount of depreciation expenses every year

Percentage:

Formula:

Depreciation = Original cost X %

Depreciation = Cost – Salvage value

Expected no. Of useful life

Example:

Debit

Credit

Office Equipment at Cost

RM9,000

Accumulated Depreciation as at 1 Jan 2015

RM1,800

Trial Balance as at 31 Dec 2015

Office Equipment is depreciated at 10% per annum by using straight line method.

Calculation:

Depreciation= RM9,000 x 10%

= RM900

Debit

Credit

Depreciation- SOPL

900

Accumulated Depreciation-SOFP

900

2)

Reducing Balance Method

- To calculate:

1st Year = % x Cost
2nd year and above = % x NBV

NBV = Cost – Accumulated Depreciation

- Depreciation is calculated based on the “NET BOOK VALUE” of non-current
assets (NCA).
- For the 1st year of NCA, depreciation will be calculated using the original cost, then the year after will be calculated using the net book value of NCA.

Example:

Debit

Credit

Motor Vehicles at Cost

RM80,000

Accumulated Depreciation as at 1 Jan 2015

RM28,800

Trial Balance as at 31 Dec 2015

Motor Vehicles is depreciated at 20% per annum by using reducing balance method

Calculation:

Depreciation = (RM80,000-RM28,800) x 20%

= RM10,240

Debit

Credit

Depreciation- SOPL

10,240

Accumulated Depreciation-SOFP

10,240

Multiple Choice

The double entry to record for depreciation is ......................

• Credit Depreciation Expense, Debit Accumulated Depreciation
• Debit Depreciation Expense, Credit Depreciation Reserve
• Debit Depreciation Expense, Credit Equipment
• Debit Depreciation Expense, Credit Accumulated Depreciation

Multiple Choice

Which of the following accounting cycle is CORRECT?

• Journalize transactions, post to ledger, prepare trial balance, adjust entries, prepare financial statements, close the accounts
• Analyze transactions, journalize transactions, post to ledger, prepare trial balance, adjust entries, prepare financial statements, open the accounts
• Analyze transactions, post to ledger, prepare trial balance, adjust entries, prepare financial statements, close the accounts
• Analyze transactions, journalize transactions, post to ledger, prepare trial balance, adjust entries, prepare financial statements, close the accounts

Multiple Choice

The accumulated depreciation will be shown in the Statement of Financial Position as .........

• Displayed separately as an expense
• Subtraction from the liabilities
• Addition to the related asset account
• Deduction from the related asset account

Multiple Choice

Statement of Profit or Loss is ........................

• a document that summarizes a company's revenues and expenses for a specific period, resulting in the company's net profit or loss
• a financial statement that shows a company's assets and liabilities during a specific period of time, resulting in the company's net profit or loss
• a report that details a company's cash flow activities during a specific period, resulting in the company's net profit or loss
• a financial statement that shows a company's revenues and expenses during a specific period of time, resulting in the company's net profit or loss

Multiple Choice

One of the following is the effect of a decrease in the allowance of doubtful debt.

• Increased cash flow from operating activities
• Decreased reported profits on the income statement
• Lower return on investment
• Higher reported profits on the income statement

Multiple Choice

Allowance for doubtful debts refer to ...................

• The amount of cash reserved for debt repayment
• A fixed amount set aside for future expenses
• The total amount of debts owed by customers
• An estimate of the amount of receivables that may not be collected

Multiple Choice

Bad debts recovered is ...................

• Amount of debts pending collection
• Amount of previously written-off debts that have been collected or recovered by the company.
• Total debts written off by the company
• Amount of new debts that have not been collected

Multiple Choice

Bad debts recovered is classified as .............

• Assets
• Equity
• Income
• Liabilities

Multiple Choice

The double entry for bad debts recovered is ..................

• Credit cash, debit bad debts recovered
• Debit bad debts, credit cash
• Credit bad debts, debit cash
• Debit cash, credit bad debts recovered

Multiple Choice

The Statement of Financial Position is prepared for ..............................

• evaluating employee performance
• forecasting future sales
• preparing tax returns
• showing the financial position of a company

Multiple Choice

Net book value is .................

• Value of an asset on the income statement after deducting accumulated depreciation
• Value of an asset on the balance sheet before deducting accumulated depreciation
• Value of an asset on the balance sheet after adding accumulated depreciation
• Value of an asset on the balance sheet after deducting accumulated depreciation

Poll

Do you still have any doubt?

• Yes

• Not Sure

• No

Word Cloud

Which topic do you need more attention?

​See you next class. Bring along your answers for two (2) questions shared in the u-future