Frank Wood’sPrinciples of Accounts

forHong Kong

Volume One

5th Edition

OVERHEAD

TRANSPARENCIES

Contents1 Types of Business (Chapter 1)

2 The Accounting Equation (Chapter 2)

3 Answer to Exercise 2.17X on page 17 (Chapter 2)

4 Basic Principles of Double Entry (Chapters 3, 4 and 5)

5 Procedures for Balancing Accounts (Chapter 6)

6 Answer to Exercise 7.7X on page 70 (Chapter 7)

7 Answer to Exercise 7.7X (Cont) (Chapter 7)

8 Trial Balance (Chapter 7)

9 Cost of Goods Sold (Chapter 8)

10 Assets Classification (Chapter 9)

11 Final Accounts (Chapters 8, 9 and 10)

12 Opening Stock and Closing Stock (Chapter 10)

13 Division of the Ledgers (Chapter 11)

14 Classification of Ledger Accounts (Chapter 11)

15 Standing Order (S/O or STO) (Chapter 12)

16 Direct Debit (DD or D/D) (Chapter 12)

17 Credit Transfer (CT or C/T) (Chapter 12)

18 Two-column Cash Book (Chapter 13)

19 Three-column Cash Book (Chapter 14)

20 Petty Cash Book (Chapter 15)

21 Books of Original Entry (Chapters 15, 16 and 17)

22 Accounting Entry Flow Chart (1) (Chapters 7, 8, 9, 11, 16, 17 and 18)

23 The Accounting Cycle for a Profit-making Organisation (Chapter 19)

24 Joint Expenditure (Chapter 21)

25 Incorrect Treatment of Expenditure (Chapter 21)

26 Difference between Capital and Revenue Expenditure (Chapter 21)

27 Accounting Entries for the Disposal of an Asset (Chapter 22)

28 Posting for Provision for Bad Debts (Chapter 23)

29 Different Types of Assets (Chapter 24)

30 Horizontal and Vertical Forms of Trading and Profit and Loss Accounts (Chapters 10 and 24)

31 Horizontal and Vertical Forms of Balance Sheets (Chapters 10 and 24)

32 Writing up a Bank Reconciliation Statement (Chapter 25)

33 Bank Reconciliation — Exercise 25.3 on page 262 (Chapter 25)

34 Sales Ledger Control Accounts — Source of Data (Chapter 29)

35 Purchases Ledger Control Accounts — Source of Data (Chapter 29)

36 Mark-up and Margin (Chapter 32)

37 Incomplete Records : Analysis Method (Chapter 33)

38 Accounting Entry Flow Chart (2) (Chapter 33)

39 Comparison between Trading and Non-trading Firms (Chapter 34)

40 Model Layout of Manufacturing Accounts (Chapter 35)

Sole proprietorships

* Owned by one person, i.e. thesole proprietor

Responsibilities:

• Provides capital for thebusiness

• Manages the business

• Takes all the risks of thebusiness

• Be responsible for the successand failure of the business

Types of Business

Partnerships

* Owned by two or morepeople, i.e. the partners

* Important to draw up aPartnership Agreement

Responsibilities:

• Provide capital for thebusiness

• Share the risks

• Be responsible for the successand failure of the business

Limited companies

* Owned by shareholders

* A separate ‘legal entity’

Responsibilities:

• Invest money, but theirliabilities are limited to theamount of their investment

• May employ other people torun the business

• Take care to ensure thebusiness is properly run

1

Assets = Capital + L iabilities

$500 + $8,000 + $10,000 = $12,000 + $6,500

The Accounting Equation

Stock

2

Debt

$500 $8,000 $10,000 $12,000 $6,500

Assets Capital Liabilities

(a) + Motor van + Creditors

(b) – Cash – Loan from Y. Tam

(c) + Stock– Bank

(d) + Cash + Capital

(e) + Stock– Debtors

(f) + Stock + Creditors

(g) – Cash – Capital

(h) – Bank – Creditors

Answer to Exercise 2.17X on page 173

4

Basic Principles ofDouble Entry

This simply means everything is entered twice — i.e. DOUBLE.

Simple Rules

1. Every item must be entered TWICE:–• ONCE on the DEBIT SIDE• ONCE on the CREDIT SIDE

2. A DEBIT entry is an ASSET or an EXPENSE

3. A CREDIT entry is a LIABILITY, CAPITAL or INCOME

These items are entered in LEDGER ACCOUNTS which tell us the HISTORY of aparticular item, e.g. General Ledger Account

Dr NAME OF ACCOUNT Cr

$ $

“IN” “OUT”DEBIT SIDE CREDIT SIDE

Procedures for Balancing Accounts5

Step 1: Add both sides to find out their totals.

Step 2: Deduct the smaller total from the larger total to find the balance.

Step 3: Enter the balance on the side with the smaller total.

D. Hip

2006 $ 2006 $Aug 1 Sales 158 Aug 28 Bank 158 ’’ 15 Sales 206 ’’ 31 Balance c/d 324 ’’ 30 Sales 118

–––– ––––482 482

–––– –––––––– ––––

Sep 1 Balance b/d 324

Step 5: Step 4:

Finally enter balance to start off Now enter totals level withentries for the following month. each other.

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➤

➤

Motor Van

Nov 21 U.Z. Motors 500 Nov 30 Balance c/d 1,200" 25 Bank 700

1,200 1,200

Wages

Nov 17 Cash 40 Nov 30 Balance c/d 40

Loan: A. Wong

Nov 30 Balance c/d 400 Nov 26 Cash 400

U.Z. Motors

Nov 30 Balance c/d 500 Nov 21 Motor van 500

T. Hip

Nov 18 Returns outwards 14 Nov 3 Purchases 160" 23 Bank 146

160 160

K. Sun

Nov 23 Bank 230 Nov 3 Purchases 230

T. Po

Nov 18 Returns outwards 20 Nov 3 Purchases 310" 30 Balance c/d 370 " 19 Purchases 80

390 390

R.A.B. Ltd.

Nov 23 Bank 300 Nov 3 Purchases 400" 30 Balance c/d 370 " 19 Purchases 270

670 670

(Years and dollar signs omitted)

Bank

Nov 10 Capital 5,000 Nov 6 Rent 20" 28 L. Mee 44 " 7 Rates 190" 28 K. Au 30 " 23 T. Hip 146" 30 Capital 300 " 23 K. Sun 230

" 23 R.A.B. Ltd. 300" 25 Motor van 700" 30 Balance c/d 3,788

5,374 5,374

CashNov 5 Sales 240 Nov 17 Wages 40

" 26 Loan: " 30 Balance c/d 600A. Wong 400

640 640

PurchasesNov 3 T. Hip 160 Nov 30 Balance c/d 1,580

" 3 K. Sun 230" 3 T. Po 310" 3 R.A.B. Ltd. 400" 19 T. Po 80" 19 R.A.B. Ltd. 270" 19 D. Chen 130

1,580 1,580

SalesNov 30 Balance c/d 1,490 Nov 5 Cash 240

" 11 L. Mee 48" 11 K. Au 32" 11 R. Hung 1,170

1,490 1,490

Returns Outwards

Nov 30 Balance c/d 34 Nov 18 T. Hip 14" 18 T. Po 20

34 34

Answer to Exercise 7.7X on page 706

Answer to Exercise 7.7X (Cont)7

Returns Inwards

Nov 20 K. Au 2 Nov 30 Balance c/d 6" 20 L. Mee 4

6 6

Capital

Nov 30 Balance c/d 5,300 Nov 1 Bank 5,000" 30 Bank 300

5,300 5,300

RentNov 6 Bank 20 Nov 30 Balance c/d 20

Rates

Nov 7 Bank 190 Nov 30 Balance c/d 190

Trial Balance as at 30 November 2003

Dr. Cr.Bank 3,788Cash 600Purchases 1,580Sales 1,490Returns outwards 34Returns inwards 6Capital 5,300Rent 20Rates 190Motor vans 1,200Wages 40Loan: A. Wong 400U.Z. Motors 500T. Po 370R.A.B. Ltd. 370D. Chen 130R. Hung 1,170

8,594 8,594

L. Mee

Nov 11 Sales 48 Nov 20 Returns inwards 4" 28 Bank 44

48 48

K. Au

Nov 11 Sales 32 Nov 20 Returns inwards 2" 28 Bank 30

32 32

R. Hung

Nov 11 Sales 1,170 Nov 30 Balance c/d 1,170

D. Chen

Nov 30 Balance c/d 130 Nov 19 Purchases 130

8

P (Purchases)

$Balance b/d X

E (Expenses)$

Balance b/d X

A (Assets)$

Balance b/d X

R (Revenue)

$Balance b/d X

L (Liabilities)

$Balance b/d X

S (Sales)

$Balance b/d X

C (Capital)

$Balance b/d X

Trial Balance as at ……

Dr Cr

$ $

P X

E X

A X

R X

L X

S X

C X

X X

Trial Balance

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Opening stock

$300

Add Purchases

$400

Goodsavailablefor sale

$700

Less Closing stock

$200

Cost of goods sold

$500

Cost of Goods Sold9

FIXED ASSETS

• Can be used for more than one year

10

Assets Classification

CURRENT ASSETS

• Can be used up or turned into cash withinone year

Invoice

for

goods supplied

YOU OWE ME!CX 1234

Stock

For most business organisations, the basic financial statements that are producedat the end of each year’s trading include:

Abbreviated

TRADING ACCOUNT T A/C

PROFIT & LOSS ACCOUNT P & L A/C

BALANCE SHEET B/S

Each of the above can be produced more often than once a year in order to giveinformation to the owner(s) on how the business is progressing.

However, it is customary to produce annual accounts for the benefit of the taxauthorities, the bank manager and other interested parties.

Limited companies also have a legal responsibility to report to their shareholdersabout their business each year.

Final Accounts11

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Let us first of all calculate the cost of goods sold for 2006:

$

Stock of goods at the start of the year 300

Add Purchases 4,260–––––

Total goods available for sale 4,560

Less What remains at the end of the year(i.e. stock of goods at close) 550

–––––Therefore cost of goods that have been sold 4,010

––––––––––

We can look at a diagram to illustrate this:

Opening Stock and Closing Stock12

Stock-in-hand1.1.2006 $300

Goods bought inthe year 2006

$4,260

Stock during the year

Cost ofgoods sold

$4,010

Remaining stock-in-hand 31.12.2006

$550

Stock at the year end

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Diagram of Books used

All business transactions

Classify – put same types of transactions together

Credit Credit Returns Returns Cashreceipts and Other typessales purchases inwards outwards payments

Enter in Enter inEnter in Enter in

Enter in Enter insales purchases returns returns cash general

journal journal inwards outwards book journaljournal journal

Enter in double entry accounts in the various ledgers• Sales ledger• Purchases ledger• General ledger

Division of the Ledgers13

14

Classification of Ledger Accounts

Accounts

Personal ImpersonalAccounts Accounts

Real NominalAccounts Accounts

Debtors’ Creditors’ Assets other Expenses, RevenueAccounts Accounts than Debtors and Capital

(2) The bank makes payments via thecomputerised banking system.

Standing Order (S/O or STO)15

• It is an instruction to a bank to make regular payments of a fixed amount to a payee.

(1) The payer instructs the bank in writing topay a certain amount, on a particular day,to a specific person or organisation.

CustomerService

Payments to

Mr. Wong

Y. K. Ltd.

Beauty Co.

ABC Bank

Water

Authority

GasCompany

Electricity

Company

Mandate

16

(3) The payee sends the mandate to the payer’s bankwhich will arrange to send the money to the payee’sbank via the computerised banking system.

Direct Debit (DD or D/D)

• It is an instruction to a bank to make variable payments to a payee when the payee requests them.

(1) The payee sends a mandate tothe payer.

(2) The payer completes the mandate and returns itto the payee.

Mandate

Payee(Person receiving money)

Payer(Person paying money)

Bills from

17

(3) Payments are automatically credited to thevarious bank accounts via the banking system.

Credit Transfer (CT or C/T)

• It is a means of paying through the banking system without sending a cheque.

(1) The payer prepares a list andbank credit slips with payees’details.

(2) The list and the slips are then sent to the bankwith a form of authorisation.

C. Y. Wong

Form

of

Authorisation

ABC Co.

Account no. xxx

Bank xxx

Payment $xxxLtd.

Ltd.

Payments toABC Co.

Sporty Ltd.

18

Two-column Cash Book

Worked example on page 124

2005 $

Sep 1 Proprietor put capital into a bank account for the business. 940

" 2 Received a cheque from M. Bo. 115

" 4 Cash sales. 102

" 6 Paid rent by cash. 35

" 7 Banked $50 of the cash held by the firm. 50

" 15 Cash sales paid direct into the bank. 40

" 23 Paid a cheque to S. Wing. 277

" 29 Withdrew cash from bank for business use. 120

" 30 Paid wages in cash. 118

Cash Book (page 37)

Folio Cash Bank Folio Cash Bank

2005 $ $ 2005 $ $Sep 1 Capital GL1 940 Sep 6 Rent GL65 35

" 2 M. Bo SL98 115 " 7 Bank C 50" 4 Sales GL87 102 " 23 S. Wing PL23 277" 7 Cash C 50 " 29 Cash C 120" 15 Sales GL87 40 " 30 Wages GL39 118" 29 Bank C 120 " 30 Balances

c/d 19 748

222 1,145 222 1,145

Oct 1 Balancesb/d 19 748

19

Three-column Cash Book

Worked example on page 133

20

Petty Cash Book

Receipts Date Details Voucher Total Payment Postage Cleaning Transport Ledger Folio LedgerNo Accounts

$ $ $ $ $ $ $

Source Documents forTransactions

Sales Invoices forCredit Sales

Purchases Invoices forCredit Purchases

Credit Notes forReturns Journal

– Inwards

– Outwards

SalesJournal

PurchasesJournal

ReturnsInwardsJournal

ReturnsOutwards

Journal

Debtor Sales

IN OUT IN OUT

Sales X Debtor X

Creditor Purchases

IN OUT IN OUT

Purchases X Creditor X

Debtor Returns Inwards

IN OUT IN OUT

R. I. X Debtor X

Creditor Returns Outwards

IN OUT IN OUT

R.O. X Creditor X

Books of Original Entry21

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➤

(For firms with a set ofcomplete records)

Double entry

Documents forTransactions

Books ofOriginal

Entry

LedgerAccounts Trial Balance

Balancingoff a/c

Tradingand

Profit andLoss

Accounts

BalanceSheet

+

* : Adjustments and error correction

22

Accounting Entry Flow Chart (1)

➤ ➤ ➤

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➤ ➤

**

23

The Accounting Cycle for a

Profit-making Organisation

24

Sometimes one item of expenditure will need dividing between capital andrevenue expenditure, e.g.

Purchase of a computer and computer disks

CAPITAL REVENUE

CAPITAL EXPENDITURE is the money spent by a firm on buying or adding valueto a fixed asset.

REVENUE EXPENDITURE is expenses needed for the day-to-day running of thebusiness.

Joint Expenditure

25

Careful distinction between Capital and Revenue Expenditure is essential to

ascertain a correct figure of Net Profit and also the true value of assets on the

Balance Sheet.

e.g. If a Motor Vehicle was posted to Motor Expenses Account instead of

Motor Vehicle Account then –

Net Profit would be understated

and

Balance Sheet values would not

include the value of the asset.

Incorrect Treatment of Expenditure

26

Capital Revenue

Premises purchased Rent of premises

Legal charges for conveyancing Legal charges for debt collection

New machinery Repairs to machinery

Installations of machinery Electricity costs of usingmachinery

Additions to assets Maintenance of assets

Motor vehicles Current Road Fund Tax

Delivery charges on new assets Carriage on purchases and sales

Extension costs of new offices Redecorating existing offices

Cost of adding air-conditioning Interest on a loan to purchaseto a room the air-conditioners

Difference between Capital andRevenue Expenditure

27

Accounting Entries for theDisposal of an Asset

28

Posting for Provision for Bad Debts

29

Different Types of Assets

Identifiable Assets Intangible Assets

Goodwill

Wong’s Company

Stock

Mr Wong

30

Horizontal and Vertical Forms ofTrading and Profit and Loss Accounts

31

Horizontal and Vertical Forms ofBalance Sheets

32

Balances Overdrafts

Balance/Overdraft as per cash book xxxx xxxx

Adjustments

Unpresented cheque plus lessBanking not entered less plus

Balance/Overdraft as per bank statement xxxx xxxx

Writing up a Bank Reconciliation Statement

33

Bank Reconciliation – Exercise 25.3on page 262

34

Sales Ledger Control Accounts –Source of Data

35

Purchases Ledger Control Accounts –Source of Data

36

Mark-up = x 100% = x 100% = 25%

Margin = x 100% = x 100% = 20%

Profit

Cost Price

$1

$4

Profit

Selling Price

$1

$5

Mark-up and Margin

Cost Price $4 Profit $1 Selling Price $5

$5 for each+ =

37

Dr Trading Account Cr

$ $

Opening stock X Sales X

Purchases X

X

Less Closing stock X

X

Gross profit X

X X— —— —

Dr Creditors (imaginary) Cr

$ $

Discounts X Balance b/f X

Payments XBalance c/f X Purchases X— —

X X— —— —

Dr Debtors (imaginary) Cr

$ $

Balance b/f X Discounts X

Bad debts XSales X Receipts X

Balance c/f X— —X X— —— —

Incomplete Records: Analysis Method

Missingfigure

FromStock-taking

Missingfigure

➤

➤

—

➤

➤

38

(For firms with a set of incomplete records)

* Adjustments and error correction

Accounting Entry Flow Chart (2)

Documents forTransactions

IncompleteRecords

Singleentry

➤

➤

Tradingand

Profit and LossAccounts

BalanceSheet

+*

➤

➤

➤

39

TRADING

1. Cash Book

2. Trading andProfit and LossAccount

( a ) Profit( b ) Loss

3. Balance Sheet– Capital

NON-TRADING

1. Receipts andPayments Account

2. Income andExpenditureAccount

( a ) Surplus( b ) Deficit

3. Balance Sheet– Accumulated

Fund

Comparison betweenTrading and Non-trading Firms

➤

equal to(in function)

40

Model Layout of Manufacturing Accounts

Manufacturing Account

$

Opening stock of raw materials xx

Add Purchases xx–––xxx

Less Closing stock of raw materials xx–––Cost of raw materials consumed xxx

Direct labour xx

Direct expenses xx–––Prime cost xxx

Factory overhead expenses xx–––xxx

Add Opening work-in-progress xx–––xxx

Less Closing work-in-progress xx–––

Production cost of goods completed c/d xxx––––––(to be transferred to the trading account)