HAC 1001 NOTES

Basic Hotel Accounting

TOPIC 1: THE PRINCIPLES OF ACCOUNTING THE ACCOUNTING EQUATION AND THE BALANCE SHEET 1.

Accountin Accounting g equation equation • Firms that set up and start trading need resources. • In the first place the owner of the business will supply all of the resources. • Thus the equation is; Resources in the business = Resources supplied by the owner • • •

CAPITAL is the amount of the resources supplied by the owner. ASSET is the actual resources that are in the business. Thus the equation is;

ASSET = CAPITAL • • •

Usually, however someone other than the owner has supplied some of the asset. LIABILITIES LIABILITIES are the name given to the amount owing to this person for these assets. Thus the equation is;

ASSET = CAPITAL + LIABILITIES •

It can be seen that the two sides of the equation will have the same totals.

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This is because we are dealing with the same thing from two different points of view. Thus the equation is;

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Resources: What they are = Resources: Who supplied them ( Assets) (Capital +Liabilities) +Liabilities)

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•

• •

2.

It is a fact that the totals of each side will always equal one another and that this will always be true no matter how many transactions there may be. Asset consist of property of all kinds such as buildings, machinery, stock of goods and motors vehicles, debts owes by customer and amount of money in the bank. Liabilities consist of money owing for goods supplied to the firm and for expenses. Capital is often called the owner equity or net worth.

The balance balance sheet and the the effects effects of business business transaction. • •

Accounting equation is expressed in a financial statement called the balances sheet. Example of business transaction and the effect to the balance sheet;

a. The introduction of capital On 1 May 2007, B Blake started in business and put RM 5,000 into a bank account for the business, the balance sheet would appear:

Asset: Cash at bank

5,000

Capital

5,000

B.Blake balance sheet as at 1 May 2007

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b. The purchase of an asset by Cheque On 3 May 2007 Blake buys furniture for RM3, 000.The effect of this transaction is that the cash at the bank is reduced and a new asset, called fixtures appears. B.Blake balance sheet as at 3 May 2007 Asset Furniture 3,000 Capital 5,000 Cash at bank 2,000 5,000 5,000 c. The purchased of an asset and the incurring of a liability. On 6 may 2007, Blake buys some goods for RM500 from D Smith and agrees to pay for them some times within the next two weeks. There is now a new asset, stock of goods and there is also a new liability because Blake owes money to D Smith for the goods. A person to whom money is owed for goods is known as creditors.

Asset Furniture Cash at bank Stock of goods

B.Blake balance sheet as at 6 May 2007 Capital and liabilities 3,000 Capital 2,000 Creditor 500 5,500

5,000 500 5,500

d. Sales of an asset on credit On 10 May 2007, good that has cost RM 100 were sold to J.Brown for the same amount, the money to be paid later. These mean a reduction in the stock of goods and there will now be a new asset. A person who owes money to a firm is known as debtor. The balance sheet now appears as:

Asset Furniture Cash at bank Stock of goods Debtor

B.Blake balance sheet as at 10 May 2007 Capital and liabilities 3,000 Capital 2,000 Creditor 400 100 5,500

5,000 500

5,500

e. Sale of an asset for immediate payment On 13 May 2007 goods that have cost RM 50 were sold to D.Daley for the same amount, Daley paying for them immediately by cheque. Here one asset, stock of goods, is reduced, while another asset, cash at bank, is increased. The balance sheet now appears thus: B.Blake balance sheet as at 13 May 2007 Asset Capital and liabilities Furniture 3,000 Capital 5,000 Cash at bank 2,050 Creditor 500 Stock of goods 350 Debtor 100 5,500 5,500 d. The payment of the liabilities. On 15 may 2007, Blake pays a cheque for RM 200 to D.Smith in part payment of the amount owing. The asset of cash at bank is therefore reduced, and the liability to the creditor is also reduced. The balance sheet now appears thus:

Asset Furniture Cash at bank Stock of goods

B.Blake balance sheet as at 15 May 2007 Capital and liabilities 3,000 Capital 1,850 Creditor 350

5,000 300

2


Debtor

100 5,300

5,300

e. Collection of an asset On 31 May 2007, J.Brown, who owes Blakes RM 100, makes a part payment of RM 75 by cheque. The effect is to reduce one asset, debtors, and to increase another asset, cash at bank. This results in a balance sheet as followed;

Asset Furniture Cash at bank Stock of goods Debtor

3.

B.Blake balance sheet as at 31 May 2007 Capital and liabilities 3,000 Capital 1,925 Creditor 350 25 5,300

5,000 300

5,300

Equality Equality of the the accoun accounting ting equation equation It can be seen that every transaction has affected two items. Sometimes it has changed two assets by reducing one and increasing the other. •

Example of transaction 1. Buy goods on credit 2. Buy good by cheque 3. Pay creditor by cheque 4. Owner pay more capital into the bank 5.Owner take money out of business bank account for his own use 6. Owner pay creditor from private money outside the firm 4.

Increase asset (Stock of good) Increase asset (Stock of good) Decrease asset (Bank)

Effect Increase liability ( Creditor) Decrease asset (Bank) Decrease liability (Creditors)

Increase asset ( Bank)

Increased capital

the Decrease asset (Bank)

Decreased Capital

Decr ecrease eased d liab liabiilit lity (Credi redittor) or)

Incr ncrease ase capi apital tal

Alternative form of balance sheet presentation Horizontal format Asset Furniture Cash at bank Stock of goods Debtor

B.Blake balance sheet as at _________ Capital and liabilities XXX Capital XXX Creditor XXX XXX XXXX

XXX XXX

XXXX

Vertical format B.Blake balance sheet as at _________ RM RM Fixed asset Fixtures Current assets Stock Debtors Cash at bank Less: Current liabilities Creditor Net current assets

RM 3,000

350 25 1,925

2,300

300

300 2,000 5,000

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Financed by: Capital

5,000

Exercises 1.1. Examine the following following table and and complete the gaps: Assets Liabilities RM RM (a) 34,282 7,909 (b) 276,303 ? (c) ? 6,181 (d) ? 109,625 (e) 88,489 ? (f) 456,066 51,163

Capital RM ? 213,817 70,919 877,138 78,224 ?

1.2. Examine the following following table and and complete the gaps: Assets Liabilities RM RM (a) ? 59,997 (b) 346,512 ? (c) 47,707 ? (d) 108,129 11,151 (e) 515,164 77,352 (f) ? 19,928

Capital RM 604,337 293,555 42,438 ? ? 179,352

1.3. Determine which which are asset and which are liabilities liabilities from the following following list: (a) (b) (c) (d) (e) (f)

Computer equipment Stock Stock of goods Loan from H.Barlow. Motor vehicles vehicles What we we owes for advertising advertising materials materials Bank balance balance

1.4. Which of the following are assets and which are are liabilities? liabilities? (a) (b) (c) (d) (e) (f) (g) (h)

Premises Premises Debtors Debtors Cash in hand Creditor Creditor Loan from finance company Owing Owing to bank Machiner Machinery y Motor Vehicles Vehicles

1.5. State which of the following following are shown under the wrong wrong heading for Murphy’s business: business: Assets Cash in hand Creditors Premises Motors Vehicles Loan from C.Shaw

Liabilities Money owing to bank Debtors Stock of goods

1.6. Which of the following are shown under the wrong wrong heading? Assets Cash in hand Computer equipment

Liabilities Machinery Motor vehicles

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Creditors Capital Stock of goods

Loan from W.Barlow

1.7. Ann Wood decides to open a retail shop selling greeting card and gifts. Her uncle lends her RM 30,000 to help her with financial the venture. Ann buys shop premises costing RM 50,000, a motor vehicles for RM 10,000 and stock of goods for RM 5,000. Ann did not pay for her stock of goods in full and stills owes RM 2, 100 to her supplier in respect of them. After the event described above and before she starts trading, Ann has RM 100 cash in hand and RM 7,000 cash at the bank. You are required to calculate the amount of capital that Ann invested in her business.

1.8. T. Charles starts a business. Before he actually starts to sell anything, he buys fixtures costing RM2, 000, a motor vehicles for RM 5,000 and stock of goods for RM3, 500. Although he has paid in full for the fixtures and the motor vehicles, he still owes RM1, 400 for some of the goods. J. Preston has lent him RM3, 000. Charles, after the above, has RM2, 800 in the business bank account and RM100 cash in hand. You are required to calculate his capital.

1.9. Draw up T Lymer’s balance sheet, using the vertical presentation method from the following information as at 31 December 2007:

Capital Delivery van Debtors Office furniture Stock of goods Cash at bank Creditors

RM 34,823 12,000 10,892 8,640 4,220 11,722 12,651

1.10.Draw 1.10. Draw up A .Pennington’s balance sheet as at 31 march 2008 from the following information: information:

Premises Plant and machinery Debtors Creditor Bank overdraft Stock Cash in hand Capital

RM 50,000 26,500 28,790 32,320 3,625 21,000 35 90,380

THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL 1.

Natu Nature re of tran transa sact ctio ion n Various events changed two items in the balance sheet. Event which result in such changes are known as transactions. • This mean that if the proprietor of a business asks the price of some goods but does not buy them, then there is no transaction since no balance sheet item will have changed. •

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2. The The doub double le entr entry y syst system em Every transaction effect two items. • For each transaction, a book-keeping entry will have to be made to show an increase of that item, and another entry to show the increase or decrease of the other item. Transactions that have occurred are entered in a set of accounts. An account is a place in our books where all the information referring to a particular asset, liability or the capital, is entered.

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Account for double entry. •

Each account should be shown on a separate page. The left-hand side of each page is called the debit side while the righthand side is called the credit side.

Date

Details

Title of account written here RM Date Details

Left-hand side of the page This is the debit sides

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• • •

Right hand side of the page credit This isside the

4. Rules for double entry Double entry mean that every transaction affects two things and should therefore, be entered twice: Debit side and once on the credit side. The order in which items are entered does not matter, first using the “IN” and “OUT” principle. A debit entry is always an asset and expenses. A credit entry is a liability, capital or income. To increase or decrease assets, liabilities or capital the double entry rules are as follow: Account Asset Liabilities Capital

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RM

To record An increase A decrease An increase A decrease An increase A decrease

Entry in the account Debit Credit Credit Debit Credit Debit

5. T account. The types of account that are going to be demonstrated are known as T account. This is because the accounts are in the shape of a T. Accounts title is here Debit side Credit side

Exercises 2.1. Complete the following table showing which accounts are to be credited and which to be debited. Account to be debited (a) Bought motor van for cash (b) Bought office machinery on credit from J. Grant & Son (C) Introduced capital in cash (d) A debtor, J. Beach, Pays us by cheque ( e) Paid a creditor, A. Barrett, in cash 2.2. Complete the following table showing which accounts are to be credited and which to be debited. Account to be debited

Account to be credited


(a) Bought motor lorry for cash (b) Paid creditor, T.Lake, by cheque (C) Repaid P.Lagan’s loan by cash (d) Sold lorry for cash

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( e) Bought office machinery on credit from Ultra LTD (f) A debtor, A Hill, Pays us by Cash (g) A debtor, J. Cross, pays us by cheque (h) Proprietor puts a further amount into the business by cheque (i) A loan of RM200 in cash is received from L.Lowe (j) Paid a creditor, D.Lord, by cash 2.3. Write up the asset and liability and capital accounts to record the following transactions in the records of G.Powell. 2008 July 1 July 2 July 3 July 5 July 8 July 15 July 23 July 31

Started business with RM 2,500 in the bank. Bought office furniture by cheque, RM 150. Bought machinery RM 750 on credit from Planers Ltd. Bought a second-hand van paying by cheque , RM 600. Sold some of the office furniture- not suitable for the firm-for RM 60 on credit to J.Walker & Son. Paid the amount owing to Planers Ltd, RM 750, by cheque. Received the amount due from J.Walker, RM 60, in cash. Bought more machinery by cheque, RM 280.

2.4. You are required to open the asset, liabilities and capital accounts and record the following transaction for June 2008 in the records of C.Williams. 2008 June 1 June 2 June 5 June 8 June 12 June 18 June 25 June 26 June 28 June 30

Started business with RM 2,000 in cash Paid RM 1,800 of the opening cash into a bank account for the business Bought office furniture on credit from Betta-Built Ltd for RM120 Bought a motor van paying by cheque RM950 Bought works machinery from Evan & Son on credit RM560 Returned faulty office furniture costing RM 62 to Betta-Built Ltd Sold some of the works machinery for RM75 cash Paid amount owing to Betta-Built Ltd, RM58 by cheque Took RM100 out of the bank and put it in the cash till J.Smith lent us RM500-giving us the money by cheque

2.5. Write up the asset, capital and liability accounts in the books of C.Walsh to record the following transactions. 2007 June 1 June 2 June 5 June 8 June 12 June 15 June 19 June 21 June 25 June 30

Started a business with RM5,000 in the bank Bought a motor van , paying by cheque RM1,200 Bought office fixtures RM 400 on credit from Young Ltd Bought motor van on credit from Super Motors RM800 Took RM100 out of the bank and put it into the cash till Bought office fixtures paying by cash RM 60 Paid super Motors a cheque for RM800 A loan of RM1,000 cash in received from J.Jarvis Paid RM800of the cash in hand into the bank account Bought more office fixtures, paying by cheque RM300

THE DOUBLE ENTRY SYSTEM FOR THE ASSET OF STOCK 1.

Stock movement • A business, on any particular date, will normally have goods which have been bought previously and have not yet been sold. These unsold goods are known as the business “stock” of goods. The stock of goods in a business is therefore constantly changing because some of it is bought, some of it is sold, and some is returned to the supplier and some of it returned by the firm’s customers. • To keep a check on the movement of stock, an account is opened for each type of dealing in goods. Thus we will have the following account. •

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Account Purchases account Sales account Returns Inwards account Returns Outwards Account

Reason For the purchased of goods For the sales of goods For goods returned to the firm by it customers For goods returned by the firm to it customers

As stock is an asset, and these four accounts are all connected with these assets, the double entry rules are those used for asset. •

Example of entry;

a. Purchase of stock on credit. On 1 August 2004, goods costing RM165 are bought on credit from D.Henry. Thus effect of the transaction: (i) The asset of stock is increased. An increased in an asset needs a debit entry in an account. In this case it is the purchases movement, so that the account must be the purchase account. (ii) There is an increase in a liability. This is the liability of the firm to D.Henry because the goods supplied have not yet been paid for. An increase in a liability needs a credit entry, and so in order to enter this part of the transaction credit entry is made in D.Henry’s account.

Dr 2004 Aug 1

D Henry

Dr 2004

Purchase Account Rm 2004 165

Cr Rm

D.Henry Account Rm 2004 Aug 1

Cr Rm 165

Purchases

b. Purchases of stock for cash On 2 August 204, goods costing RM220 were bought, cash being paid for them immediately. (i) The asset of stock is increase. Thus debit entry wills be needed. The movement of stock is that of a purchase, so that it is the purchase account which needs debiting. (ii) The asset of cash is decreased. To reduce an asset a credit entry is called for, and the asset is that of cash so that the Cash Account needs crediting. Purchase Account Dr 2004 Aug 2

Cash

Rm 220

Cr Rm

2004

Cash Account Dr 2004

Rm

2004 Aug 2

Purchases

Cr Rm 220

c. Sales of stock on credit On 2 August 2004, a business sold goods on credit for RM250 to K.Leach. (i) An asset account is increased. This is the account showing that K.Leach is a debtor for the goods. The increase in the asset of debtors requires a debit and the debtor is K.Leach, so that the account concerned is that of K.Leach. (ii) The asset of stock is decrease. A credit entry to reduce an asset is needed. The movement of stock is that of ‘sale” and so the account credited is the sales account.

Dr

K.Leach Account

Cr

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2004 Aug 3

Sales

Dr 2004

Rm 250

2004

Rm

Sales Account Rm 2004 Aug 3

Cr Rm 250

Cash Account Rm 2004 55

Cr Rm

Sales Account Rm 2004 Aug 3

Cr Rm 55

K.Leach d. Sales of stock on cash On 4 August 2004, goods are sold for RM55, the cash for them being paid immediately. (i) The asset of cash is increase. A debit in the cash account is needed to show this. (ii) The asset of stock is reduced. The reduction of an asset required a credit and he movement of stock is represented by ‘Sales. So the entry needed is a credit in the Sales Account.

Dr 2004 Aug 4

Sales

Dr 2004

Cash

2. Returns inwards • Represent goods sold which have subsequently been returned by a customer. • Reason ; i. The good sent to the customer are of the incorrect size, colour or model. ii. The goods have been damaged in transit. iii. The goods are of poor quality. Example illustration: On 5 August 2004, goods which had previously been sold to F.Lowe for RM29 have been returned by him. (i) The asset of stock was increased by the goods returned. A debit representing an increase of an asset is needed, and this time the movement of stock is that of ‘Returns inwards’. The entry required therefore is a debit in the return inwards account. (ii) An asset is decreased. The debt of F.Lowe to the firm is now reducing, and to record this credit is required in F.Lowe’s account. •

Dr 2004 Aug 5

Dr 2004

F.Lowe

Return inwards Account Rm 2004 29

F.Lowe Account Rm 2004 Aug 5

Cr Rm

Return inwards

Cr Rm 29

3. Returns outwards • Represent goods which were purchased, and are now being returned to the supplier. • Example illustration; On 6 August 2004, goods previously bought for RM96 are returned by the firm to K.Howe. (i) The liability of the firm to K.Howe is decrease by the value of the goods return to him. The decreased in a liability needs a debit, this time in the K.Howe Account. (ii) The asset of stock is decreased by the goods sent out. A credit representing a reduction in an asset is needed, and the movement of stock is that of ‘Returns Outwards’, so that the entry will be a credit in the returns outwards account.

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Dr 2004 Aug 6

K.Howe Account Rm 2004 96

Returns outwards

Dr 2004

Return Outwards Account Rm 2004 Aug 6 K.Howe

Cr Rm

Cr Rm 96

Exercises 3.1. You are to write up the following in the books of account: 2004 July 1 July 3 July 7 July 10 July 14 July 18 July 21 July 24 July 25 July 31

Started a business with Rm500 cash Bought good for cash Rm85 Bought goods on credit for Rm116 from E. Morgan Sold good for cash Rm42 Returned goods to E.Morgan Rm28 Bought goods on credit Rm98 from A.Moses Return good to A.Moses Rm19 Sold to A.knight Rm55 on credit Paid E.Morgan’s account by cash Rm88 A.knight paid us his account in cash Rm55

3.2. You are to enter the following in the account needed: 2006 Aug 1 Aug 2 Aug 4 Aug 5 Aug 7 Aug 10 Aug 12 Aug 19 Aug 22 Aug 24 Aug 29 Aug 31

Started a business with Rm1,000 cash Paid Rm900 of the opening cash into the bank Bought goods on credit for Rm78 from S.Holmes Bought a motor van by cheque Rm500 Bought goods for cash Rm55 Sold goods on credit Rm98 to D. More Return goods to S. Holmes , Rm18 Sold goods for cash, Rm28 Bought fixtures on credit from Kingston equipment Co. Rm150 D.Watson lent us Rm100, paying us the money by cheque We paid S.Holmes his account by cheque, Rm60 We paid Kingston Equipment Co. by cheque, Rm150

THE DOUBLE ENTRY SYSTEM FOR EXPENSES AND REVENUES 1. The nature of profit and loss • Profit means the amount by which revenues are greater than expenses for a set of transactions. • Revenues mean the sales value of goods and services that have been supplied to customers. • Expenses mean the values of all the assets that have been used up to obtain those revenues. •

It could also be possible that our expenses may exceed our revenues for a set of transaction. In this case the result is a loss.

2. The effect of profit and loss on capital • Profit will increased capital, in the other hand loss will decrease capital. • Formula Assets – Liabilities = Capital

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Example; On 1 January the asset and liabilities of a firm are:

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Asset: Fixtures Rm10, 000, stock Rm7, 000, Cash at the bank Rm3, 000. Liabilities: Creditors Rm2, 000. Capital = [10,000 + 7,000 + 3,000] – 2,000 = 18,000 During January the whole of the Rm7, 000 is sold for Rm11, 000 cash. On 31 January the assets and liabilities have becomes: Asset: Fixtures Rm10, 000, stock Nil, Cash at the bank Rm14, 000. Liabilities: Creditors Rm2, 000. Old Capital + Profit = New capital 18,000 + 4,000 = 22,000 •

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It can be seen that capital has increased from Rm18, 000 to Rm22, 000 = Rm4, 000 increase because the Rm7, 000 stocks was sold for Rm11, 000, a profit of Rm4, 000. Profit will be made when goods are sold at more than cost price, while the opposite will mean a loss.

3. Profit or loss and………... Expenses • Other than the cost of goods, a firm also incurs other expenses such as rent, salaries, wages, telephone cost, and motor expenses and so on. •

Separate accounts are opened for each type of expenses.

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Expenses involve expenditure by the firm and therefore should be debit entries. Effect of transaction;

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a. A rent of Rm20 is paid in cash. The total of the expenses of rent is increase. As expense entries are shown as debits, and the expenses is rent, so the action required is the debiting of the Rent Account • The asset of cash is decreased. This means crediting the Cash Account to show the decreased of the asset. Sometimes the owner of the business will want to take cash out of the business for his or her private use and this known as drawings. Any money taken out as drawing will reduce capital. •

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b. On 25 August 2006 a proprietor takes Rm50 cash out of her business for her own use.

Dr 2006

Dr 2006 Aug 25

Cash Account Rm 2006 Aug 25

Cash

Cr Drawing

Drawing account Rm 2006 50

Rm 50

Cr Rm

Revenues • Separate accounts also opened for each type of revenues. • Example of revenues are rent received, commission received, bank interest and so on. • Effect of transaction; a. On 5 June 2006 it is decided that part of the firm’s premises are not need at the moment. The firm lets someone else use the space over and receives rent of Rm140 by cheque. • The asset of the bank is increased. This means debiting the bank account to show the increase of the asset. •

The total of the revenue of rent received is increased. The action required is the crediting of the rent received account.

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Exercises 4.1. Complete the following table: Account to be debited


(a) Paid rent by cash (b) Paid for goods by cash (C) Received by cheque a refund of rates already paid (d) Paid general expenses by cheque ( e) Received commission in cash (f) Goods returns by us to T.Jones (g) Goods sold for cash (h) Bought office fixtures by cash (i) Paid wages by cash (j) Took cash out of business for private use. 4.2. You are required to enter the following transactions in the double entry accounts of B.Cartwright. 2005 Jan 1 Jan 3 Jan 4 Jan 4 Jan 5 Jan 10 Jan 12 Jan 17 Jan 19 Jan 25 Jan 31

Started business with Rm20, 000 capitals, which were deposited in the bank. Paid rent for premises by cheque, Rm1,000 Bought goods on credit from M.Parkin for Rm580 Purchased motor van for Rm5,000, paying by cheque Cash sales of Rm1, 005. Paid motor expenses in cash, Rm75. Paid wages in cash, Rm120. Bought goods on credit from M.Parkin, Rm670 Paid insurance by cheque, Rm220 Sold goods for Rm800, payment being received as a cheque, which was banked immediately Paid wages in cash, Rm135, and electricity by cheque, Rm78

4.3. You are required to enter the following transactions, completing the double entry in the records of K.Walsh for the month of July 2006.

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2006 July 1 July 2 July 3 July 5 July 6 July 7 July 11 July 13 July 15 July 18 July 21 July 25 July 30 July 31

Started in business with Rm8,000 in the bank Paid rent for premises by cheque, Rm375 Bought shop fitting for Rm800 paid by cheque Bought goods on credit from A Jackson, Rm450; D.Hill Rm675; and E.Frudd, Rm1,490 Paid insurance by cheque Rm130 Bought motor van for Rm5,000 on credit from High Lane Motors Cash sales of Rm1,500 Paid for printing and stationery by cheque, Rm120 Paid wages in cash Rm200 Bought goods from A.Jackson, Rm890, on credit Cash sales Rm780 Paid motors expenses Rm89 by cash Paid High Lane Motors, Rm5,000 Paid wages in cash Rm300, and stationery, Rm45 in cash.

TOPIC 2: BALANCING OF ACCOUNT 1. Account for debtors. a. Where debtor have paid their account. •

We have record the transactions in the books by mean of debit and credit entries. T the end of each period, we will have to look at each account to see what is shown by the entries.

•

This is because we want to know how many our customers us for goods we have sold to them.

Example; Dr 2005 Aug 1 Aug 19

Sales Sales

• •

Dr 2005 Aug 1 Aug 19

K Tandy Account Rm 2005 144 Aug 22 300 Aug 28

Bank Bank

Cr Rm 144 300

During the month of August we sold a total of Rm444 in goods to Tandy and have been paid a total of Rm444 by him. At the close of business at the end of August he therefore owes us nothing: his account can be closed off on 31 August 2005 by inserting the total of each side, as follow;

Sales Sales

K Tandy Account Rm 2005 144 Aug 22 300 Aug 28 444

Bank Bank

Cr Rm 144 300 444

b. Where debtors still owes for goods. •

Some of our customers are likely still to owe us something at the end of a month. In this cases, the totals each side would not equal each other.

Example;

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Dr 2005 Aug 1 Aug 15 Aug 30

D Knight Account Rm 2005 158 Aug 28 206 118

Sales Sales Sales

Bank

Cr Rm 158

•

If you add the figures, you will see that the debit side up to Rm482 and the credit side add up to Rm158. Thus the different is Rm324.

•

We want to close off the account for August, but showing that Knight owes us Rm324. If he owes Rm324 at closed off business on 31 August 2005, then he will still owe us that same figures when the business open on 1 September 2005.

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Thus we should balance the account.

D Knight Account Dr 2005 Aug 1 Aug 15 Aug 30 Sep 1

Sales Sales Sales Balance brought down (b/d)

Rm 158 206 118 482 324

2005 Aug 28 Aug 31

Bank Balance carries down (c/d)

2. Account for creditors. • The same principles apply when the balances are carried down to the credit side. Example; E William Account Dr 2005 Rm 2005 Aug 21 Bank 100 Aug 2 Purchases Aug 31 Balance c/d 264 Aug 18 Purchases 364 Sep 1 Balance b/d

Cr Rm 158 324 482

Cr Rm 248 116 364 264

Exercises 5.1 Enter the following items in the necessary debtors and creditors accounts only; do not write up other accounts. Then balance down each personal account at the end of the month. 2008 May 1 May 4 May 10 May 18 May 20 May 24 May 31

Sales on credit to H Harvey Rm690, N Morgan Rm153, J Lindo Rm420 Sales on credit to L.Master Rm418, H Harvey Rm66 Return inward from H Harvey m40, J Lindo Rm20 N Morgan paid us by cheque Rm153 J Lindo paid us Rm400 by cheque H Harvey paid us Rm300 by cash Sales on credit to L Masters Rm203

5.2 Enter the following in the personal accounts only; do not write up the other accounts. Then balance down each personal account at the end of the month.

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2008 June 1 June 3 June 10 June 15 June 19 June 28 June 30

Purchase on credit from J Young Rm458, L Williams Rm120, G Norman Rm708 Purchase on credit from L Williams Rm77, T Harris Rm880 We return goods to G Norman Rm22, J Young Rm55 Purchases on credit from J Young Rm80 We paid T Harris by cheque Rm880 We paid J Young by cash Rm250 We return goods to L William Rm17

THE TRIAL BALANCE 1. Total debit balance =Total credit balance • All the items recoded in all the account on the debit side should equal in total all the items recorded on the credit side of the books. • To see whether the two total equal , usually known as seeing whether the two side of the book is ‘balance’, a trial balance may be drawn up at the end of a period. • Form of trial balance could be drawn up by listing all the accounts and adding together all the debit entries, at the same time adding together all the credit entries. Trial balance as on 31 may 2004

Purchases Sales Return inward Return outward A Lyon & Son M Spencer Cash

Dr Rm 309

Cr Rm 255

16 15 141 29 57 411

411

2. The uses of the trial balance. • •

To check that the books ‘balance’, that every debit entry has been accompanied by a credit entry. To ascertain the amount of the errors, should one or more have been made, and make necessary corrections.

As a basis from which the final account of a business are prepared, i.e. the trading account, the profit and loss account and the balance sheet. •

3. Trial balance and errors With some errors, the trial balance will still balance. For example, a credit sale of Rm87nwhich has been incorrectly entered in both the sales account and the debtor’s account as Rm78. Since both the debit entry and the credit entry are of the same amount, then this will not effect the agreement of the total in the trial balance. •

Some errors, however, mean that the totals in the trial balance will not agree. An instance could be where a payment of rent of Rm200 by cheque has been entered on the credit side of the bank account, but has been completely omitted from the rent account. Here a credit entry was not accompanied by a debit entry for this transaction and thus the trial balance will not agree. •

Exercises 6.1 You are required to enter the following details for the month of May 2004, balance the account off and extract a trial balance as at 31 May 2004.

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2004 May 1 May 2 May 4 May 6 May 8 May 9 May10 May 12 May 15 May 18 May 19 May 25 May 31

Started in business with capital of Rm2,500, which was paid into the bank Bought goods on credit from the following: D Ellis Rm540; C Mendez Rm87; K Gibson Rm76 Sold goods on credit to ; C Bailey Rm430; B Hughes Rm62; H Spencer Rm176 Paid rent by cash Rm120 Sold goods for cash Rm500 C Bailey paid us Rm250 by cheque on account H Spencer paid us Rm150 on account by cheque We paid the following by cheque ; K Gibson Rm76, D Ellis Rm370 on account Bought stationery for cash Rm60 Bought goods on credit from; D Ellis Rm145; C Mendez Rm234 Paid rent by cash Rm120 Sold goods on credit to : C Bailey Rm90; B Hughes Rm110 ; H Spencer Rm128 Paid C Mendez Rm87 by cheque

6.2 Correct and balance the following trial balance. Trial balance of P.Brown as at 31 May 2006 Dr Rm Capital Drawings General expenses Sales Purchases Debtors Creditors Bank balance (Dr) Cash Plant and equipment Heating and lighting Rent

Cr Rm 20,000

7,000 500 38,500 29,000 6,800 9,000 15,100 200 5,000 1,500 2,400

6.3 Reconstruct the trial balance after making the necessary corrections. Trial balance of S Hingston as at 30 June 2005 Dr Cr Rm Rm Capital 19,956 Sales 119,439 Stationery 1,200 General expenses 2,745 Motor expenses 4,476 Cash at bank 1,950 Stock 1 July 2004 7,668 Wages and salaries 9,492 Rent and rates 10,500 Office equipment 6,000 Purchases 81,753 Heating and lighting 2,208 Rent received 2,139 Debtors 10,353 Drawings 4,200

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Creditors Motor vehicles Interest received Insurance

10,230 7,500 1,725 3,444 153,489

153,489

6.4 From the following list of balances, prepare a trial balance as at 31 December 2004 for Miss Anita Hall.

Plant and Machinery Motor Vehicles Premises Wages Purchases Sales Rent received Telephone, printing and stationery Creditors Debtors Bank overdraft Capital Drawings General expenses Lighting and heating Motor expenses

Dr Rm 21,450 26,000 80,000 42,840 119,856 179,744 3,360 3,600 27,200 30,440 2,216 131,250 10,680 3,584 2,960 2,360

AN INTRODUCTION TO THE TRADING AND PROFIT AND LOSS ACCOUNT 1. Purposes of the trading and profit and loss account. •

•

The main reason why people set up a business is to make profits of course; if they are not successful they will incur losses. To calculate how much profit or loss has been made over a period of time, a trading and profit and loss account is prepared. The main purpose of a trading and profit and loss account is for the owners to see how profitably the business is being run.

2. Uses of the trading and profit and loss account • The comparison of the result achieved with those of past periods. • Trading and profit and loss account can be presented in vertical or horizontal format.

3. Preparation of a trading and profit and loss account. • Before drawing up a trading and profit and loss account, the trial balance should be first obtain because it contain all the information needed. • Example of trading profit and loss account. B.Swift trading and profit and loss account for the year ended 31 December 2005 Rm Sales Less; Cost of good sold Opening stock Purchases Closing stock Gross profit Lees: Expenses Rent Lighting General expenses Net profit

Rm XXXX Trading Account

XXX XXX XXXX XXX XXXX XXXX XXX XXX XXX XXXX

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Profit and Loss Account a. To calculate gross profit Sales – Cost of goods Sold = Gross profit

b. To calculate net profit Gross profit – Expenses = Net profit Exercises 7.1 From the following trial balance of W.Worth, who has been trading for one year, you are required to draw up a trading and profit and loss account for the year ended 30 June 2004. Trial balance as at 30 June 2004 Dr Rm Sales Purchases Rent and rates Lighting expenses Salaries and wages Insurance Shop building Shop fixtures Debtors Trade expenses Creditors Cash at bank Drawings Motors Vans Motors running expenses Capitals

Cr Rm 28,794

23,803 854 422 3,164 105 50,000 1,000 3,166 506 1,206 3,847 2,400 5,500 1,133 95,900

65,900 95,900

Stock at 30 June 2004 was Rm4, 166 7.2 From the following trial balance of F Chaplin, draw up a trading and profit and loss account for the year ended 31 December 2008. She has been in business for one year only.

Trial balance as at 31 December 2008 Dr Rm General expenses 210 Rent and rates 400 Motor expenses 735 Salaries 3,560 Insurance 392 Purchases 18,385 Sales Motor vehicles 2,800 Creditors Debtors 4,090 Premises 20,000

Cr Rm

26,815 5,160

18


Cash at bank Cash in hand Capital Drawings

1,375 25 24,347 4,350 56,322

56,322

Stock at 31 December 2008 was Rm4, 960. THE BALANCE SHEET 1. Contents of the balance sheet • Balance sheet contents details of assets, capital and liabilities. 2. Drawing up a balance sheet. B. Swift Balance sheet as at 31 December 2005 Rm Fixed asset Fixtures and fitting Current asset Stock XXX Debtors XXX Cash at bank XXX Cash in hand XXX Less: Current liabilities Creditors Net current asset Long term liabilities Long term loan Net asset Finance by: Capital Net profit

Rm XXXXX

XXXXX

XXXX XXXXX XXX XXXXX

XXXXX XXXXX XXXXX XXXXX XXXXX

Drawing

These two sides must be balance/equal

3. No double entry in balance sheets • A balance sheet is not part of the double entry.

4. Balance sheet layout

a. Assets • •

• •

b.

The first section is assets; assets are shown under two heading, namely fixed asset and current assets. Asset are called fixed assets when they: - are of long life are to be used in the business Were not bought only for the purposes of resale. Example; building, machinery, motors vehicles, fixtures and fittings, etc. Current assets are cash in hand, cash at bank, items held for resale at a profit, or items that have a short life.

Liabilities • Liabilities are categories under two heading; i. Current liabilities. - Liabilities due for repayment in the short term. Examples of current liabilities are; bank overdraft, trade creditors, and sundry creditors. - Current liabilities are deducted from current asset.

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ii.Long term liabilities. - Liabilities not due for repayment in the short term. Examples of long term liabilities loan and mortgages. - Long term liabilities deducted after the net current assets. c.

Capital account. • This is the proprietor’s or partner account with the business. Capital account Rm Balance b/d Add: Cash introduced Net profit fir the period Less: Drawing Net loss for the period

X X

Rm X X X

X X

Exercises 8.1 Complete exercise 7.1 by drawing up a balance sheet as at 30 June 2004 for C Worth. 8.2 Complete exercise 7.2 by drawing up a balance sheet as at 31 December 2008 for F Chaplin.

FURTHER CONSIDERATION REGARDING FINAL ACCOUNT 1. Carriage inwards • Carriage (the cost of transport of goods) into a firm is called carriage inwards. • When you buy goods, the cost of carriage inward may either be included as part of the price, or else the firm may have to pay separately for it. • To keep the cost of buying goods shown on the same basis, carriage inwards is always added to the purchases costing the trading account. 2. Carriage outwards • Carriage from a firm out of its customer is called carriage outwards. • This is always treated as an expense to be transferred to the debit of the profit and loss account. 3. Final account • The term final account is used to describe the final figures of a period of account, and comprise the trading and profit and loss account, the balance sheets. 4. •

Other expenses in the trading account. The cost of putting goods into a saleable condition should be charged in the trading account.

20


5. Treatment of return inwards and return outwards in final account. • When a business buys and sells goods, it is very probable that some of the goods will turn out to be either faulty or unsuitable. • A large number of firms will return such goods to their suppliers (returns outwards), and will have goods returned to them by their customers (return inwards). • Return inwards should be deducted from ‘sales’ • Return outwards should be deducted from ‘purchases’ 6. Loses For all kinds of reasons, such as poor trading conditions, bad management, or unexpected increases in expenses, the business may trade at a loss for a given period. •

Exercises 9.1 From the following details draw up the trading account for the year ended 31 December 2007.

Carriage inwards Sales Purchases Stock of goods: 1 January 2007 31 December 2007

Rm 670 38,742 26,409 6,924 7,489

9.2 The following details for the years ended 31 March 2008 are available. Draw up a trading account for the year.

Stocks: 31 March 2007 31 March 2008 Purchases Carriage inwards Sales

Rm 16,492 18,504 36,905 1,122 54,600

9.3 Draw up the trading and profit and loss account for the year ended 31 December 2006, in respect of T. Mann, from the following details. Rm Returns inwards 490 Returns outwards 560 Purchases 31,000 Sales 52,790 Stock of goods: 1 January 2006 5,690 31 December 2006 4,230 Carriage inwards 1,700 Salaries and wages 5,010 Rent 1,460 Motor expenses 3,120 General expenses 420 Carriage outwards 790

9.4 A trading and profit and loss account for the year ended 31 December 2008 is to be drawn up for K Lake from the following: Returns inwards

Rm 1,500

21


Returns outwards Purchases Sales Stock of goods: 1 January 2008 31 December 2008 Carriage inwards Salaries and wages Rent Sundry expenses Carriage outwards

1,580 64,570 99,500 18,280 17,360 210 6,250 1,750 360 490

9.5 From the following trial balance of S Makin, draw up a trading and profit and loss account for the year ended 30 September 2006, and balance sheet as at that date. Rm Rm Stock 1 October 2005 2,368 Carriage outwards 200 Carriage inwards 310 Return inwards 205 Return outwards 322 Purchases 11,874 Sales 18,600 Salaries and wages 3,862 Rent and rates 304 Insurance 78 Motor expenses 664 Office expenses 216 Lighting and heating expenses 166 General expenses 314 Premises 15,000 Motor vehicles 1,800 Fixtures and fitting 350 Debtors 3,896 Creditors 1,731 Cash at bank 482 Drawing 1,200 Capitals 22,636 43,289 43,289 Stock at 30 September 2006 was RM2, 946 9.6 The following is the trial balance of J Smailes as at 31 March 2007. Draw up a set of final account for the year ended 31 March 2007.

Stock 1 April 2006 Sales Purchases Carriage inwards Carriage outwards Return outwards Wages and salaries Rent and rates Communication expenses Commission payables Insurance Sundry expenses Buildings Debtors Creditors Fixtures

Rm 18,160

Rm 92,340

69,185 420 1,570 640 10,240 3,015 624 216 405 318 20,000 14,320 8,160 2,850

22


Cash at bank Cash in hand Loan from K Ball Drawings Capital

2,970 115 10,000 7,620 152,028

40,888 152,028

Stock at 31 March 2007 was Rm22, 390

TOPIC 3: THE DIVISION OF THE LEDGER 1. Book of original entry • Book in which we record transaction first of all. • Sales will be entered in one book, purchases in another book, cash in another book, and so on. 2. Types of books of original entry • Sales day book – for credit sales • Purchases day book – for credit purchases • Returns inwards day book – for return inwards • Returns outwards day book – for return outwards • Cash book – for receipt and payment of cash • General journal – for other items 3. The ledger • The book of original entry lists the transaction but do not show the effect of the transaction on the account. • A separate ledger will be kept for different types of transaction; a. Sales ledger – contain the record of customers personal account. b. Purchases ledger – contain the record of supplier personal account.

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c.

General ledger – contain the remaining double entry account such as expenses, fixed assets, capital account.

4. Types of accounts Some people describe all accounts as personal accounts or as impersonal accounts. There are, in fact, four distinct types of account; a. Personal accounts – for debtors and creditors. Impersonal account – all other accounts, divided between real account and nominal account. c. Real accounts – account in which property recorded, examples is being buildings, machinery, fixtures and stock. d. Nominal account – account in which expenses, income and capital are recorded. •

TWO - COLUMN CASH BOOK Cash book consist of the cash account and the bank account put together in one book. • In the cash book, the debit column for cash is put next to the debit column for bank. The credit column for cash is put next to the credit for bank. •

Dr Date Particulars Cash Bank Date Particulars Cash Bank

Exercises 10.1 Write up a two column cash book from the following details, and balance off as at the end of the month. 2005 May 1 May 2 May 3 May 4 May 5 May 7 May 9 May 11 May 15 May 16 May 19 May 22 May 26 May 30 May 31

Started business with capital in cash Rm100 Paid rent by cash Rm10 F Lake lent us Rm500, paying by cheque We paid B Mckanzie by cheque Rm65 Cash sales Rm98 N Miller paid us by cheque Rm62 We paid B Burton in cash Rm22 Cash sales paid direct into the bank Rm53 G Moore paid us in cash Rm65 We took Rm50 out of the cash till and paid it into the bank account We repaid FLlake RM100 by cheque Cash sales paid direct into the bank Rm66 Paid motor expenses by cheque Rm12 Withdrew Rm100 cash from the bank for business use Paid wages in cash Rm97

10.2 A two – column cash book are to be written up from the following, carrying the balance down to the following month. 2004 Jan 1 Jan 2 Jan 4 Jan 6 Jan 8 Jan 10 Jan 12 Jan 14 Jan 15 Jan 20 Jan 22 Jan 28 Jan 30 Jan 31

Started business with Rm4,000 in the bank Paid for fixtures by cheque Rm660 Cash sales Rm225; paid rent by cash Rm140 T Thomas paid us by cheque Rm188 Cash sales paid direct into the bank Rm308 J King paid us in cash Rm300 Paid wages in cash Rm275 J Walter lent us Rm500 paying by cheque Withdrew Rm200 from the bank for business use Bought stationery paying by cash Rm60 We paid J French by cheque Rm166 Cash drawing Rm100 J Scott paid us by cheque Rm277 Cash sales Rm66

10.3 write up a two column cash book from the following

24


2006 Nov 1 Nov 2 Nov 3 Nov 4 Nov 5 Nov 6 Nov 7 Nov 9 Nov 11 Nov 12 Nov 14 Nov 16 Nov 20 Nov 28 Nov 30

Balance brought forward form last month: Cash Rm105 : Bank Rm2,164 Cash sales Rm605 Took Rm500 out of the cash till and paid it into the bank J Mathew paid us by cheque Rm217 We paid for postage stamps in cash Rm60 Bought office equipment by cheque Rm189 We paid J Lucas by cheque Rm50 Received rates refund by cheque Rm72 Withdrew Rm 250 from the bank for business used Paid wages in cash Rm239 Paid motor expenses by cheque Rm57 L Levy lent us Rm200 in cash R Norman paid us by cheque Rm112 We paid general expenses in cash Rm22 Paid insurance by cheque Rm74

CASH DISCOUNT AND THE THREE COLUMN CASH BOOK The amount of the reduction of the sum to be paid is known as a ‘Cash discount’. Cash discount refers to the allowance given for quick payment. It is still called cash discount even if the account is paid by cheque. •

1. Discount allowed and discount received • Discount allowed – cash discount allowed by a firms to it customer when they pay their account quickly. Discount received – cash discount received by a firm from its suppliers when it pays their account quickly. • Discount received are entered in the discount column on the credit side of the cash book, and discount allowed in the discount column on the debit side of the cash book. •

2. Bank overdraft and the cash book • A firm may borrow money from a bank by mean of a bank overdraft, this mean that the firm is allowed to pay more out of the bank account, by paying out cheque, than the total amount place in the account. When the account is overdrawn, the firm owes money to the bank and so the account is a liability and the balance becomes a credit ones. •

Dr Date Particular Discount Cash Bank Date Particular Discount Cash Bank

Exercises 11.1 Enter up a three – column cash book from the details following. Balance off at the end of the month, and show the relevant discount accounts as they would appear in the general ledger. 2004 May 1 May 1 May 2 May 3 May 4 May 5 May 7 May 9 May 12 May 14 May 16 May 20 May 31

Started a business with Rm6,000 in the bank Bought fixtures paying by cheque Rm950 Bought goods paying by cheque Rm1,240 Cash sales Rm407 Paid rent in cash Rm200 N Morgan paid us his account of Rm220 by a cheque for Rm210, we allowed him Rm10 discount. Paid S Thomson & co Rm80 owing to them by means of a cheque Rm76, they allowed us Rm4 discount We received a cheque for Rm380 from S Cooper, discount having been allowed Rm20 Paid rates by cheque Rm410 L Curtis pays us a cheque for Rm115 Paid M Monroe his account of Rm120 by cash Rm114, having deducted Rm6 cash discount P Exeter paid us a cheque for Rm78, having deducted Rm2 cash discount Cash sales paid direct into the bank Rm88

25


11.2 From the following details, write up a three column cash book, balance off at the end of the month, and show the relevant discount accounts as they would appear in the general ledger. 2003 Mar 1

Mar 2 Mar 4 Mar 6 Mar 7 Mar 9 Mar 12 Mar 18 Mar 21 Mar 23 Mar 28 Mar 31

Balance brought forward : Cash in hand Rm211 Cash at bank Rm3,984 We paid each of the following account by cheque, in case we deducted a 5 percent discount: T Adams Rm80; C Bibby Rm260; D Clarke Rm440 C Potts pays us a cheque for Rm98 Cash sales paid direct into the bank Rm49 Paid insurance by cash Rm65 The following person pay us their account by cheque, in each cash they deducted a discount of 2 ½ percent : R Smiley Rm160, J Turner Rm640, R Pimlott Rm520, Paid motors expenses by cash Rm100 Cash sales Rm98 Paid salaries by cheque Rm120 Paid rent by cash Rm60 Received a cheque for Rm500 being a loan from R Godfrey Paid for stationery by cheque Rm27

TOPIC 4: THE JOURNAL AND POSTING THE SALES DAY BOOK AND SALES LEDGER 1. Cash sales • When good were paid for immediately by cash, there is no need to enter these sales in the sales day book. 2. Credit sales • For each credit sales the selling firm will send a document to the buyer showing full details of the goods sold and the price of the goods. •

This document is known as an invoice, and to the seller it is known as a sales invoice.

3. Entering credit sales into the sales day book • There is no need to show details of the goods sold in the sales day book. Example: Sales Day Books 2005

Invoice no

Amount (RM)

26


Sep 1 Sep 8 Sep 28 Sep 30

D Poole & Co T Cockburn C Carter D Stevens & Co

16554 16555 16556 16557

560 1,640 220 1,100 3,520

4. Posting credit sales to the sales ledger. • Sales ledger is used for recording credit sales transaction. • •

Credit sales are posted to the debit of each customer’s account in the sales ledger. At the end of each period, the total of the credit sales is posted to the credit of the sales account in the general ledger.

Sales Day Books 2005

Invoice no


D Poole & Co T Cockburn C Carter D Stevens & Co

16554 16555 16556 16557

Amount (RM) 560 1,640 220 1,100 3,520

Sales ledger D Poole & Co account Dr 2005 Sep 1

Rm 560

Sales

Cr Rm

2005

T Cockburn account Dr 2005 Sep 8

Rm 1,640

Sales

Cr Rm

2005

C Carter account Dr 2005 Sep 28

Rm 220

Sales

Cr Rm

2005

D Stevens & Co account Dr 2005 Sep 30

Rm 1,100

Sales

Cr Rm

2005

General ledger Sales account Dr 2005

Rm

2005 Sep 30

Credit sales for the month

Cr Rm 3,520

5. Trade discount • A reduction (Discount), called a trade discount is given to traders who buy many goods from us, and traders who buy only a few items from us. Example:

Rental price Less: Trader discount

Trader A 200 50 (20%)

27


Price to be paid by customer

150

6. Trade discount and cash discount •

As the trade discount is simply a way of calculating sales price, no entry for a trade discount should be made in the double entry record or in the sales day book.

•

Cash discount is given for prompt payment, and do not affect the amount of balance on the personal accounts. There are therefore parts of the double entry accounting. To compare cash discount and trade discount; 1. Trade discounts are not shown in double accounts. 2. Cash discounts are shown in double entry account.

•

Exercises 12.1 You are to enter up the sales day book from the following details. Post the items to the relevant accounts in the sales ledger and then show the transfer to the sales account in the general ledger. 2006 Mar 1 Mar 3 Mar 6 Mar 10 Mar 17 Mar 19 Mar 27 Mar 31

Credit sales to J Gordon Credit sales to G Abraham Credit sales to V White Credit sales to J Gordon Credit sales to F Williams Credit sale to C Richard Credit sales to V Wood Credit sales to L Simes

RM 187 166 12 55 289 66 28 78

12.2 Enter up the sales day book from the following, and then post the items to the relevant account in the sales ledger. Show the transfer to the sales account in the general ledger. 2006 May 1 May 3 May 5 May 7 May 16 May 23 May 30

Credit sales to J Johnson Credit sales to T Royes Credit sales to B Howe Credit sales to M Lee Credit sales to J Jakes Credit sale to A Vinden Credit sales to J Samuels

RM 305 164 45 100 308 212 1,296

THE PURCHASES DAY BOOK AND PURCHASES LEDGER 1. Purchase orders • When a business or organization decides to buy goods or engage the services of another company, it usually issues a purchase order. • Each purchase order is normally raised by the customer’s purchasing office and then sent to the suppliers. 2. Entering into the purchases day book • • •

From the purchase invoices for bought on credit, the purchaser enter the details in his purchases day book. There is no need to show details of the goods bought in the purchases day book. The purchase day book is often known also as the purchases book or the purchases journal.

Example Purchases Day Books 2005 Sep 2

Invoice no R Simpsom

9/101

Amount (RM) 670

28


Sep 8 Sep 19 Sep 30

B Hamilton C Brown K Gabriel

9/102 9/103 9/104

1,380 120 510 2,680

3. Posting credit purchases to the purchases ledger. • The double entry are as follow; 1. The credit purchases are posted one by one, to the credit of each supplier’s account in the purchases ledger. 2. At the end of each period, the total of the credit purchases is posted to the debit of the purchases account in the general ledger. Purchases Day Books 2005

Invoice no


R Simpsom B Hamilton C Brown K Gabriel

9/101 9/102 9/103 9/104

Amount (RM) 670 1,380 120 510 2,680

Purchases ledger R Simpson account Dr 2005

Rm

2005 Sep 2

Purchases

Cr Rm 670

Purchases

Cr Rm 1,380

Purchases

Cr Rm 120

Purchases

Cr Rm 510

B Hamilton account Dr 2005

Rm

2005 Sep 8

C Brown account Dr 2005

Rm

2005 Sep 19

K Gabriel account Dr 2005

Rm

2005 Sep 30

General ledger Purchases account Dr 2005 Sep 30

Credit purchases for the month

Rm 2,680

2005

Cr Rm

Exercises 13.1 B Mann has the following purchases for the month of May 2004: 2004 May 1 May 3 May 15 May 20 May 30

From K King: 4 radio at Rm30 each, 3 music centre at Rm160 each. Less 25 percent trade discount. From A Bell: 2 washing machines at Rm200 each, 5 vacuum cleaners at Rm60 each, 2 dish dryer at Rm150 each. Less 20 percent trade discount. From J Key: 1 music’s centers at Rm30 each, 2 washing machine at Rm250 each. Less 25 percent trade discount. From B Powel: radios at Rm70 each, less 33 ½ percent trade discount. From B Lewis: 4 dish dryers at Rm200 each, less 20 percent trade discount.

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Required; (a) Enter up the purchases day book for the month. (b) Transfer the total to the purchases account. 13.2 A Rowland has the following purchases for the month of June 2009:

2005 Mar 1 Mar 8 Mar 15 Mar 23 Mar 24 Mar 31

Bought from Smith stores: silk Rm40, cotton Rm80, all less 25 per cent trade discount. Sold to A Grandly: Linen goods Rm28, woolen items Rm44, cotton goods Rm120.No trade discount. Sold to A Henry: silk Rm36, linen Rm144, cotton gods Rm120, all less 20 percent trade discount. Bought from K Kelly: cotton Rm88, linen Rm52, all less 20 percent trade discount. Sold to D Sangster : linen goods Rm42, cotton Rm48, less 10 percent trade discount. Bought from J Hamilton: linen goods, Rm270 less 33 1/3 percent trade discount.

THE RETURNS DAY BOOKS 1. Return inwards and credit notes • Customer may return goods to the supplier if they are faulty, damaged or not suitable for their requirements, where the consignment is incomplete when compared with the delivery notes, or where an overcharge has been made. • When this happen, supplier will make an allowance to correct the situation. • Since customer will have been sent an invoice at the same time as the good were delivered, they will be in debt to the supplier for the value of the goods. • When supplier makes an allowance for goods that have been returned or a reduction in price has been agreed, the supplier will issue credit note to the customer. • It is called a credit note since the customer’s account will be credited with the amount of the allowance, thereby showing a reduction in the amount owed by the customer. • The procedures involving credit note is necessary so that the various books of account that are maintained by the supplier and customer do, in fact, reflect the correct amount owed. 2. Return inward day book. • Credit notes are listed in a return inwards day book. This is then used for posting the items as follows: Sales ledger – credit the amount of credit notes, one by one, to the account of the customers in the sales ledger. General ledger – at the end of the period the total of the returned inward day book is posted to the debit of the return inward account. 3. Returns outwards and debits notes. • If supplier agreed, good bought previously may be returned. When this happen, a debit note is sent to the supplies giving detail of the goods and the reason for their return. 4. Returns outwards day book. • Debit note are listed in the return outwards day book. This is then used for posting the items, as follows: Purchase ledger – debit amount of debits notes, one by one to the account of the supplier in the purchases ledger. General ledger – at the end of the period, the total of the return outwards day book is posted, to the credit of the return outwards account. Exercises 14.1 On 30 April 2008, the balance in the sales and purchase ledger of a particular company were as follows: Debtors – C Cooks: K King Rm560: AB Ltd Rm40: Creditors – S Todd Rm120: W Mears Rm520: K Fisher Rm280. The following are transaction for May 2008: 2008 May 2 May 4 May 6 May 8

Sold good on credit to K King RM119 Bought good n credit from S Todd Rm200 C Cook paid us the balance on his account by cheque less cash discount of 5 per cent. We return good Rm40 to W Mears

30


May 11 May 14 May 15 May 17 May 19 May 20 May 22 May 24 May 27 May 28

Sold good on credit to AB ltd Rm99 Sold good on credit to K King Rm720 AB Ltd return good to us Rm19 Bought good on credit from T Jay Rm142 We paid W Mears the balance in his account by cheque, less 5 per cent cash discount Bought goods on credit from K Fisher Rm180 We returned good to K Fisher Rm49 K King returned good to us Rm39 K King paid his account in full, less 5 per cent discount, by cheque We paid S Todd’s account by cash less 5 percent cash discount.

Write up the following for May 2008: Sales day book. (b) Purchase day book. (c) Return inward day book. (d) Return outward day book. (e) Sales ledger. (f) Purchase ledger. (g) All necessary account in the general ledger.

TOPIC 5: DEPRECIATION OF FIXED ASSETS AND ADJUSTMENT FOR FINAL ACCOUNT METHODS OF DEPRECIATION 1. Depreciation of fixed asset. • Fixed asset are those asset of material value that are: a. of long life b. to be use in the business c. Not bought with the intention of being resold. Fixed asset such as machinery, motor vehicle, fixtures and even building do not last forever. If the amount receive (if any) on disposal is deducted form the cost of buying them, the differences is called depreciation. •

2. Depreciation as an expense • Depreciation then, is the part of the original cost of a fixed asset consumed during its period of use by a firm. It is an expense for service consumed, in the same way as expenses for items such as wages, rent, or electricity.

31

Basic Hotel Accounting •

•

Since depreciation is an expense, it will have to be charged to the profit and loss account and will, therefore, reduce net profit. The only difference between the cost of depreciation for a motor vehicle and the cost of petrol for the motor vehicle is that the petrol cost is used up in day or two, whereas the cost of depreciation for the motor vehicle is spread over several years.

3. Cause of depreciation. • The principle cause of depreciation are: a. Physical deterioration when motor vehicle or machinery are used, they eventually wear out; Wear and tear Erosion, rut, rot and decay Land may be eroded or wasted away by the action of wind, rain, sun or the other element of nature. Similarly the metal in motor vehicles or machinery will rust away. Wood will rot eventually. Decay is a process, which will be present due to the element of nature and the lack of proper attention. b. Economic factor Obsolescence. This is the process of becoming out of date. Inadequacy. This arise when an assets is no longer used because of the growth and change in the size of the firm. c. The time factors. These are asset that have a legal life fixed in term of years. For instance, you may agree to rent some buildings for ten year. Such an agreement is normally called lease. When a lease expired, it is worth nothing to you as it has finished ; whether you paid for the lease is now of no value. 4. Land and building • It was contended that, as property value tended to rise instead of fall, it was inappropriate to charge depreciation. 5. Methods of calculating depreciation charges • The two main methods for calculating depreciation charges are the straight line method and reducing balance method. a. Straight Line Method By this method, sometimes also called the fixed installment method, the number of years of used is estimated. The cost is then divided by the number of years, to give the depreciation charge each year. For instance, if a lorry was bought for Rm22,000 and we thought we will keep it for four years and then sell it for Rm2,000, the depreciation to be charge would be: Cost(Rm22,000)- Disposal value(M2,000) Number of years used (4 years)

=

Rm20,000 4 years

= RM 5, 000 depreciation each year for four years. been:

if after the four years, the lorry would have no disposal value, the charge for depreciation would have

Cost(Rm22,000) Number of years used (4 years)

=

Rm22,000 4 years

= Rm5, 500 depreciation for four years.

b.

Reducing Balance Method By this method fixed percentage for deprecation is deducted from the cost in the first year. In the second or later year the same percentage is taken of the reduced balance. This method is also known as the diminishing balance method. For instance, if machine is bought for Rm10, 000 and depreciation to be charged at 20 percent, the calculation for the first three years would be as followed.

Cost First year; depreciation (20% of Rm10,000)

Rm 10,00 0 2,000

32


Second year; depreciation (20% of Rm8,000) Third year; depreciation (20% of Rm6,400) Net book value at the end of the third year -

8,000 1,600 6,400 1,280 5,120

Net book value means the cost of fixed asset with depreciation deducted.

Exercises 15.1 D Sanky, a manufacturer, purchase a lathe for the sum of Rm4, 000. It has an estimated life of five years and a scrap value of RM500. Sanky is not certain whether he should use the ‘straight line’ or the ‘reducing balance’ basis for the purpose of calculating depreciation on the machine. You are required to calculate the depreciation on the lathe using both methods, showing clearly the balance remaining in the lathe account at the end of each of the five years for each method. Assume 40 percent per annum is to be used for the reducing balance method, and make your calculations to the nearest Rm. 15.2 A machine cost Rm12, 500. It will be kept for four years and then sold for estimated figures of Rm5, 120. Show the calculation of the figures for depreciation for each of the four year using straight line method, and the reducing balance method. For reducing balance method use the depreciation rate of 20 per cent. 15.3 A motor vehicle cost Rm6, 400. It will be kept for five years and then sold for scrap for Rm200. Calculate the depreciation for each year using the reducing balance method, using a depreciation rate of 50 per cent, and the straight line method.

BAD DEBTS AND PROVISION FOR BAD DEBTS 1. Bad debts • •

If a firm finds that it is impossible to collect a debt, then that debt should be written off as a bad debt. This could happen if the debtor is suffering a loss in the business, or may even have gone bankrupt and is thus unable to pay the debt. A bad debt is therefore, an expense on the firm that is owed the money.

Example; We sold goods Rm50 to k Leeming on 5 January 2005, but that firm becomes bankrupt. On 16 February 2005 we sold Rm240 goods to T Young. Young manage to pay Rm200 on 17 May 2005, but it become obvious that he would never be able to pay the final Rm40. Accounting entries: Accounting entries Debit: Bad Debt account Credit: Debtor account Debit: Profit and loss account Credit: Bad debt account

Explanation To transfer the amount of unpaid debt to the bad debt account. To reduce the liability of the debtors who is unable to settle the debt. To record the amount of bad debt of the period concern. To transfer the amount of bad debt to profit and loss account.

The account would appear as follow; Dr 2005 Jan 5 Sales

Dr 2005 Feb 16

Sales

K Leeming Account Rm 2005 5 Dec 31 0 T Young Account Rm 2005 24 May 17

Bad Debts

Cr Rm 50

Cash

Cr Rm 20

33


0 Dec 31

0 40 24 0

Bad Debts

24 0 Dr 2005 Dec 31

K Lee

Dec 31

T Young

Bad debts Account Rm 2005 5 Dec 31 0 4 0 9 0

Cr Rm 90

Profit and Loss a/c

90

Profit and loss account for the year ended 31 December 2005 (extract) Gross profit Expenses Bad debts

RM

RM XXX

90

90

2. Provision for bad debts / doubtful debts • Why provision are needed, When we are drawing up our financial statements, we want to achieve the following objective: i. To charge as an expense in the profit and loss account for that year an amount representing debts that will never be paid. ii. To show in the balance sheet a debtors figure as close as possible to the true value of debtors at the balance sheets date. • Debts declared bad are usually debts that have existed for same times, perhaps even from earlier accounting periods. • However for debts that have not been paid by the year end which may not have owed for so long, it is difficult to determine which of them will be bad debts. • In this case, this possibility need to be provided for in the current period, otherwise both the debtors balance reported in the balance sheets and the profit reported in the profit and loss account will almost certainly be overstated. It is impossible to determine with absolute accuracy at the year end what the true amount is in respect of debtors who will never pay their accounts. • In order to arrive at a figure for doubtful debts, a business must first consider that some debtors will never paid any of the amount they owed, while other will paid a part of the amount owing only, leaving the remainder permanently unpaid. •

3. Provision for doubtful debts: estimating provision • The estimates of provision for bad debts can be made thus: i. By looking into each debts, and estimating which one will be bad debts. ii. By estimating, on the basis of experience, what percentage of the debts will result in bad debts? • It is well known that the longer a debt owes, the more likely it will become a bad debt. Some firms draw up an aging debtor’s schedule, showing how long debts have been owed. Older debtors need higher percentage estimates of bad debts than newer debtors. •

4. Accounting entries for provision for bad debts •

When decision has been taken as to the amount of provision to be made, then the accounting entries needed for the provision relate to the year in which provision is first made, as follows: i. Debit : profit and lost account with the amount of provision ii. Credit: provision for bad debts account.

34


Example: As at 31 December 2003, the debtors figure for a firms amounted to RM10, 000 after writing off RM422 of definite bad debts. It is estimated that 2 per cents of debts will prove to be bad debts, and it is decided to make a provision for these. Profit and loss account for the year ended 31 December 2003 (extract) RM Gross profit Expenses Bad debts Provision for bad debts Dr 2003 Dec 31

•

422 200

RM XXX

622

Provision for bad debts account Rm 2003 20 Dec 31 Profit and Loss a/c 0 2004 Jan 1 Balance d/c

Balance c/d

Cr Rm 20 0 20 0

In the balance sheet, the balance on the provision for bad debts will be deducted from the total of debtors; Thus Balance sheet (extracts) 31 December 2003 Current asset Debtors Less: provision for bad debts

RM

RM

10,000 200

9,800

5. Increasing the provisions Example: at the end f the following year, on 30 December 2004, the bad debts provision needed to be increased because the provision could be kept at 2 percent but the debtors had risen to Rm12, 000. The double entry will be: Debit: Profit and loss account Credit: Provision for bad debt account And the relevant accounts will look as set out below. Profit and loss account for the year ended 31 December 2004 Gross profit Less: Expenses Bad debts Provision for bad debts Dr 2004 Dec 31

Balance c/d

RM

RM

884 40

924

Provision for bad debts account Rm 2004 24 Jan 1 Balance b/d 0 Dec 31 Profit and loss account 24 0 2005 Jan Balance b/d

Cr Rm 20 0 40 24 0 24 0

Balance sheet (extracts) 31 December 2004 RM

RM

35


Current asset Debtors Less: provision for bad debts

12,000 240

11,760

6. Reducing the provision •

The provision is shown in credit balance. To reduce it, we would need a debit entry in the provision account. Example: On 31 December 2005 the debtors figure have fallen to RM10, 500 but the provision remained at 2 per cent. As the provision had previously been RM240, it now needs a reduction of RM30. Bad debts of RM616 had already been written off during the year and are not included in the debtors’ figure of RM10, 500. The double entry is: Debit: Provision for bad debts account Credit: Profit and loss account And the relevant account looks thus:

Profit and loss account for the year ended 31 December 2005 RM Gross profit Add: Reduction in provision for bad debt Less: Expenses Bad debts

RM xxx 30 xxx 616

Dr 2005 Dec 31

Profit and loss account

Dec 31

Balance c/d

Provision for bad debts account Rm 2005 30 Jan 1 Balance b/d

Cr Rm 24 0

21 0 24 0

24 0 2006 Jan 1

Balance b/d

21 0

Balance sheet (extracts) 31 December 2005 Current asset Debtors Less: provision for bad debts

RM

RM

10,500 210

10,290

Exercises 16.1 Data Computer Services commences in business on 1 January 2004, and during its first year of trading the following debts are found to be bad and the firm decided to write them off as bad: 2004 April 30 August 31 October 31

H Gordon D Bellamy Ltd J Alderton

RM1,110 RM 640 RM120

On 31 December 2004, the schedule of remaining debtor, amounting in total to RM68, 500, is examined, and it is decided to make a provision for bad debts of RM2, 200.

36


You are required to show: a) b) c) 16.2

The bad debts account and the provision for bad debts account. The charge to the profit and loss account The relevant extract fro the balance sheet as at 31 December 2004

A business has always made a provision for bad debts at the rates of 5 percent of debtors. On 1 January 2003 the provision for this, brought forward from the previous year, amounted to RM2, 600. During the year to 31 December 2003 the bad debts written off amounted to RM540. On 31 December 2003 the remaining debtors totaled RM62, 000 and the usual provision for bad debts is to be made.

You are to show: a) b) c) d) 16.3

the bad debts account for the year ended 31 December 2003 the provision for bad debts account for the year an extract from the profit and loss account for the year the relevant extract from the balance sheet as at 31 December 2003

A business started trading on 1 January 2006. During the two years ended 31 December 2006 and 2007, the following debts were written off to the bad debts account on the dates stated: 31 August 2006 30 September 2006 28 February 2007 31 August 2007 30 November 2007

W Best S Avon L J Friend N Kelly A Oliver

RM85 RM140 RM180 RM60 RM250

On 31 December 2006 there had been a total of debtors remaining of RM40, 500, and it was decided to make a provision for doubtful debts of RM550. On 31 December 2007 there had been a total of debtors remaining of RM47, 300, and it was decided to make a provision for doubtful debts of RM600. You are required to show:

a) b)

The bad debts account and the provision for bad debts account for each of the two years. The relevant extract from the balance sheet as at 31 December 2006 and 2007

OTHER ADJUSTMENT FOR FINAL ACCOUNT 1. Adjustment needed for expenses owing or paid in advance. • Not all business pay their rent exactly on time and, indeed, some businesses prefer to pay for their rent in advance. Example: A firm rent their premises for RM1, 200 per year. Firm A pay RM1, 000 during the year and owes RM200 rent at the end of the year. o o

Rent expenses used up during the year = RM1,200 Rent actually paid in the year = RM1,000 Firm B pays RM1, 300 during the year, including RM100 in advance for the following year.

o

o

•

Rent expense used up during the year = RM1,200 Rent actually paid for in the year = RM1, 300.

A profit and loss account for the 12 month needs 12 months’ rent as an expense (RM1, 200). That mean that in the above two example the double entry accounts will have to be adjust.

2. Accrued expenses (Owing expenses) • Those expenses incurred but not yet paid or recorded in the accounts. Item such as interest, rent and salaries can be accrued expenses. •

At the end of the accounting period, an adjusting entry should be made to recognize those expenses, which, have accrued but have not yet been recorded.

37


Example: Assume accounting period ends on 31 December every year. On 1 December 2006, AB Enterprise hired Encik Dollah as a part-time salesman. The agreed salary was Rm1, 200 monthly payable on the fifth of the following month. Payment for the first month was made on 5 January 2007. To ensure that the January salary is reflected in the accounts, an adjusting entry is necessary on 31 December 2006.

On 31 December 2006, adjusting entry for accrued expense is as follows: Date Particular Dec 31 DR Salary account CR Accrued account

RM 1,200

RM 1,200

The accounts show the following ledger: Dr 2006

Accrued salary account Rm 2006 Dec 31 Salaries expense

Dr 2006 Dec 31

•

•

Accrued salaries

Cr Rm 1,20 0

Salaries expense account Rm 2006 1,20 0

Cr Rm

The correct amount of salaries expense to be charged to the year 2006 income statement is RM1, 200. Notice that the liability of RM1, 200 has been recognized. This amount is represented by a credit balance in the accrued salaries account and would be shown in the balance sheet under the heading of current liabilities. At the end of the accounting period, the expenses account is closed and related amount is transferred to the income statement.

3. Accrued or unrecorded Revenue • Refer to any revenue which has been earned during the period but which has not been recorded prior to the closing date. • An adjusting entry is required at the end of the accounting period to record the revenue, which has been earned during the period, and to show that asset exists at the balance sheet date. Example: Assume that AB enterprise is a publishing business, which receives 12 months’ subscription for a magazine its produces. On 31 December 2006, the business send a reminder to a customer who is late in making payment for the 12 months’ subscriptions, which amount to RM8,000. To ensure that the subscription revenue that has been earned is reflected in the account, an adjusting entry is necessary on 31 December 2006.

On 30 December 2006, adjusting entry for accrued revenue is as follow: Date Dec 31

Particular DR Accrued subscription revenues CR Subscription revenues ( to record accrued subscription revenue which has been earned)

The accounts show the following ledger: Dr 2006 Dec 31 Subscription revenue Dr 2006

RM 8,000

Accrued Subscription Revenues account Rm 2006 8,000 Subscription revenue account Rm 2006 Dec 31 Accrued Subscription

RM 8,000

Cr Rm

Cr Rm 8,00 0

38


At the end of the accounting period, the income account is closed and related amount is transferred to the income statement.

•

The correct amount of subscription revenue to be credited to the year 2006 income statement is Rm8, 000. Notice that an asset of Rm8, 000 has been recognize. This amount is representing by the debit balance in the accrued subscription revenue account and would be shown in the balance sheet under the heading of current asset.

•

4. Prepaid Expenses • Expenses paid in advance where payment is made to cover future period as well. Such as expenses has been paid during the current accounting period but will not be incurred until the next accounting period. • •

•

Typical items that often are required to be paid in advance are insurance, rent, and road tax and office supplies. The portion that is used up in the current period will be treated as an expense on that period. The portion that is not used is allocated t expense in the accounting period in which the services or the supplies are used. Adjusting entry is needed to ensure that only part of the payment, which related to the current period, should be matched against revenue of the related period and no items of expenses that related to future period be recognize in the current income statement.

Example: Assume that the accounting period ends on 31 December every year. AB Enterprise pays Rm4, 800 for one year insurance premium beginning on 1 April 2006. This payment is recorded as a debit entry of RM4, 800 to the insurance expense account and a credit entry to the bank account. The amount paid is treated as an expense on the date of payment.

Dr 2006 Dec 31

Dr 2006 April 1

Insurance expense

Bank

Prepaid insurance account Rm 2006 1,200 Dec 31 Balance c/d

Cr Rm 2,40 0

Insurance expense account Rm 2006 4,80 Dec 31 Prepaid insurance 0 Income statement

Cr Rm 1,20 0 3,60 0

•

From the above it shows that the correct amount of insurance expense to be charged to the year 2006 income statement is RM3, 600.

•

Notice that an asset of RM1, 200 has been recognized. This amount is represented by a debit balance in the prepaid insurance account and would be shown in the balance sheet under the heading of current asset.

5. Prepaid or unearned Revenues • •

•

Revenues received in advance. Customer may pay in advance for service to be rendered in a later accounting period. For accounting purpose, amount collected in advance, do not represent revenue because these amount have not yet been earned and as such they are not realized yet in the current accounting period. At the end of the accounting period, adjusting entry is mad to ensure that part of the revenues, which relates to the current period, are recognized.

Example: Assume accounting period end on 31 December every year. On 1 November 2006, AB enterprise agreed to act as consultant for a monthly fee of RM1, 00 and received a 6 month consultancy fees on the same date. The amount received of RM6, 000 would be recorded as a debit to bank account and a credit to the consultancy fees account.

Dr 2006 Dec 31

Dr

Balance c/d

Prepaid consultancy Fees (Liability) Rm 2006 4,000 Dec 31 Consultancy fees

Consultancy fees

Cr Rm 4,00 0 Cr

39


2006 Dec 31

Prepaid consultancy fees Income statement

Rm 4,00 0 2,00 0

2006 Nov 1

Rm 6,00 0

Bank

•

From the above, it shows that the correct amount of consultancy fees to be credited to the year 2006 income statement is RM2, 000.

•

Notice that a liability of RM4, 000 has been recognized. This amount is represented by a credit balance in the prepaid consultancy fees account and would be shown in the balance sheet under the heading of current liabilities.

Exercise 17.1 The financial year of H Samberg ended on 31 December 2008. Show the ledger account for the following items including the balance transferred to the necessary part of the final accounts, and the balance carried down to 2009. a. b.

c. d.

e.

Motor expenses: paid in 2008 RM744; owing at 31 December 2008 RM28. Insurance: paid in 2008 RM420; prepaid as at 31 December 2008 RM35. Stationery: paid during 2008 RM1, 800; owing as at 31 December 2007 RM250; owing as at 31 December 2008 RM490. Rent: paid during 2008 RM950; prepaid as at 31 December 2007 RM220; prepaid as at 31 December 2008 RM290. Samberg sub-let part of the premises. Receives RM550 during the year ended 31 December 2008. The tenant owed Samberg RM180 on 30 December 2007 and RM210 on 31 December 2008.

17.2 The following balances were part of the trial balance of C Cane on 31 December 2008.

Stock 1 January 2008 Sales Purchases Rent Wages and salary Insurance Bad debts Telephone General expenses

Dr(RM) 2,050

Cr(RM) 18,590

11,170 640 2,140 590 270 300 180

On 31 December 2008 you ascertain that: a. The rent for four months of 2009, RM160, has been paid in 2008. b. RM290 owes for wages and salaries. c. Insurance has been prepaid RM190 d. A telephone bill of RM110 is owed e. Stock is valued at RM3, 910. Draw up Cane’s trading and profit and loss account for the year ended 31 December 2008. 17.3 From the following trial balance of J Sears, a store owner, prepare a trading and profit and loss account for the year ended 31 December 2007 and a balance sheet as at that date, taking into consideration the adjustment shown below: Trial balance as at 31 December 2007 Sales Purchases Return inward Return outward Stock at 1 January 2007 Provision for bad debts

Dr(RM)

Cr(RM) 80,000

70,000 1,000 1,240 20,000 160

40


Wages and salaries Telephone Store fittings Motor Van Debtors and creditor Bad debts Capital Bank Balance Drawings

7,200 200 8,000 6,00 1,960 40

1,400 35,800

600 3,600 118,600

118,600

Adjustments: a. Closing stock at 31 December 2007 is RM24, 000. b. Accrued wages RM450 c. Telephone prepaid RM20 d. Provision for bad debts to be increase to 10 per cent of debtors. e. Depreciation on store fittings RM800 and motor van RM1, 200.

TOPIC 6: THE ANALYTICAL PETTY CASH BOOK AND THE IMPREST SYSTEM 1. Division of the cash book • In almost any firm there will be many small cash payment to be made. It would be an advantage if the record of these payments could be kept separate from the main cash book. • Where separate book is kept, it is known as a petty cash book. Illustration 1 2004 Sep 1 The cashier gave RM600 as float to the petty cashier Payment out of petty cash during September Sep 2 Petrol Sep 3 K Long-traveling expenses Sep 3 Postage Sep 4 D Campell-travelling expenses Sep 7 Cleaning expenses Sep 9 Petrol Sep 12 K Lee- traveling expenses Sep 14 Petrol Sep 15 L Waites – refund: sales ledger account overpaid Sep 16 Cleaning expenses Sep 18 Petrol Sep 20 Postage Sep 22 Cleaning expenses Sep 24 H Wood – traveling expenses Sep 27 Settlement of K Young’s account in the purchase ledger Sep 29 Postage Oct 1 The cashier reimbursed the petty cashier the amount spent in the month.

RM

63 32 24 21 15 19 30 35 50 15 24 28 19 75 33 22

PETTY CASH BOOK

41


Receipt

Folio

RM 600

Date 2004 Sep 1 Sep 2 Sep 3 Sep 3 Sep 4 Sep 7 Sep 9 Sep 12 Sep 14 Sep 15 Sep 16 Sep 18 Sep 20 Sep 22 Sep 24 Sep 27 Sep 29

Detail

Cash Petrol K long Postage D Campbell Cleaning Petrol K Lee Petrol L Waites Cleaning Petrol Postage Cleaning H Wood K young Postage

Voucher Total No

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Motor Staff expense traveling s

63 32 24 21 15 19 30 35 50 15 24 28 19 75 33 22 505

600 75 505

Balance c/d

Oct 1 Oct 1

Balance b/d Cash

Cleaning

Ledger Account

63 32 24 21 15 19 30 35 50 15 24 28 19 75 33 22 141

Sep 30

Postage

158

74

49

83

95 600

2. The imprest system • Imprest system is where the cashier gives the petty cashier enough cash to meet the needs of the following period. •

•

At the end of the period, the cashier finds out the amount equal to that spent. The petty cash in hand should then be equal to the original amount with which the period was started. It may necessary to increase the fixed sum, often called the cash float, to be held at the start of each period.

Exercises 18.1 Enter the following transactions in a petty cash book that has analysis columns for motor expenses, postage and stationery, cleaning, sundry expenses, and a ledger column. This is to be kept on the imprest system, the amount spent to be reimbursed on the last of each month. The opening petty cash float is Rm1, 000. 200 6 May May May May May May May May May May May May May May May May

1 3 4 5 6 8 9 11 12 13 15 16 17 19 21 25

Cleaning Speedy garage- petrol Postage stamp Envelope Poison license Unique garage – petrol Corner garage – petrol Postage stamps F Lee – ledger account H Norman – Ledger account Sweeping brush (cleaning) Bends garage – petrol K King – stationery Driving license C Hope – ledger account Cleaning

36 24 55 17 18 57 64 58 99 44 23 77 65 11 72 68

42


May May May

27 28 31

License for guar dog Guard dog – food Corner garage – petrol

12 29 54

18.2 Write up a petty cash book with analysis columns for office expenses, motor expenses, cleaning expenses and casual labor. The cash float brought down is RM500 and the amount spent is reimbursed on 30 June. Show the balance carried down to 1 July. 200 7 June June June June June June June June June June June June June June June June June June June June

1 2 2 3 6 8 11 12 12 14 16 16 21 22 23 24 25 26 29 30

H Sangster – casual labor Letterhaeding Unique motors - motor repair Cleaning material Envelope Petrol J Hogan – casual labor Paper- clip Mrs Bell – cleaner Petrol Computer disks Petrol Motor vehicle repair T Cooke – casual labor Mrs Bell - cleaner P King – casual labor Stationery Flat cars – motor repairs Petrol J Young – casual labor

13 22 30 16 14 28 15 12 27 11 31 29 50 21 10 19 27 21 12 16

ACCOUNTING ERRORS AND THEIR EFFECT ON ACCOUNTING RECORDS 1. Trial balance agreement and errors • Classification of errors: a. Errors not affecting trial balance agreement. • These error results in the same amount of debit being entered as there are credits, or no entry being made either on the debit or the credit side. This mean that the trial balance will still balance evens thought errors have been made in the account. b.

Errors affecting trial balance agreement • These error results in the total of the debit columns in the trial balance not being the same as the total of the credit columns.

2. Types of errors not affecting trial balance agreement. a. Errors of commission • Arise when a correct amount is entered in the books, but in the wrong person’s account.

Dr 2005

Example 1: D Long paid us RM50 by cheque on 18 May 2005. The transaction is correctly entered in the cash book, but it was entered by mistake in the account for D Longman. This means that there had been both a debit of RM50 and a credit of RM50. Entry: D Longman account Cr Rm 2005 Rm May 18 Bank 50

Correction entry:

Dr

D Longman account

Cr

43


2005 May 31

D long: error correction

Dr 2005

b.

Dr 2005 May 14

Rm 50

2005 May 18

D Long Rm 2005 May 31

Bank

Rm 50

Cr Rm Cash entered in error in D Longman’s account 50

Errors of principle • A transaction is entered in the wrong type of account. For instance, the purchase of a fixed asset should be debited to a fixed asset account. If in error it is debited to an expenses account, then it has been entered in the wrong type of account. Example 2: The purchase of a motor car for RM5, 500 by cheque on 14 May 2005 has been debited in error to a motor expenses account. In the cash book it is shown correctly. This means that there has been both a debit of RM5, 500 and a credit of RM5, 500. Entry: Motor expenses account Cr Rm 2005 Rm Bank 5,500 Correction entry:

Dr 2005 May 14

Dr 2005 May 31

c.

Motor Expenses Account Rm 2005 5,500 May 31 Motor car error correction

Bank

Motor Car account Rm 2005 Bank: entered originally in motor expenses 5,500

Cr Rm 5,50 0 Cr Rm

Error of original entry • Occur where an original amount is incorrect and is then entered in double entry. Example 3: Sales of RM150 to T Higgins on 13 May 2005 have been entered as both a debit and a debit of RM130. Entry:

Dr 2005 May 13

Sales

Dr 2005

T Higgins Account Rm 2005 130

Cr Rm

Sales account Rm 2005 May 31

Cr Rm 130

Sales Journal

Correction entry:

Dr 2005 May 13 May 31 Dr 2005

Sales Sales: Error

T Higgins Account Rm 2005 130 20

Cr Rm

Sales account Rm 2005 May 31 May 31

Cr Rm 130 20

Sales Journal T Higgins: error corrected

44


d.

Error of omission •

Where transactions are not entered in the book at all.

Example 4: We purchase good from T Hope for RM250 on 13 May 2005 but did not enter the transaction in the account. So there were nil debits and nil credit. Correction entry:

Dr 2005 May 13

T Hope: error corrected

Dr 2005

e.

Dr 2005 May 13

Purchase account Rm 2005 250 T Hope account Rm 2005 May 31

Purchases: error corrected

Cr Rm

Cr Rm 250

Compensating error • When errors in total for both the debit and credit side compensate or cancel each other. Example 5: let us take a case where incorrect totals had purchase of RM7, 900 and sales of RM9, 900. The purchases journal adds up to be RM100 too much. In the same period, the sales journal also adds up to be RM100 too much. Entry: Purchase account Cr Rm 2005 Rm Purchases 7,900

Dr 2005

Sales account Rm 2005 May 31

Sales

Cr Rm 9,90 0

Correction entry:

Dr 2005 May 13 Dr 2005 May 31

f.

Dr 2005 May 28 Dr 2005

Purchases

The journal: Error corrected

Purchases account Rm 2005 7,900 May 31 Sales account Rm 2005 100 May 31

Cr Rm 100

The journal: error corected

Sales

Cr Rm 9,90 0

Complete reversal of entries. • This error is where the correct amounts are entered in the correct account, but each item is shown on the wrong side of each account. Example 6: We paid a cheque for RM200 on 28 May 2005 to D Charles. We have entered it as follows in accounts with the letter (A). There has therefore been both a debit and a credit of RM200. Entry: Cash Book (A) Cr Rm 2005 Rm D Charles 200

D Charles account (A) Rm 2005

Cr Rm

45


May 28

Bank

200

D Charles

Cr Rm 200 Cr Rm

Correction entry:

Dr 2005

Cash Book (B) Rm 2005 May 28

Dr 2005 May 28

D Charles (B) Rm 2005 200

bank

Exercises 19.1 Show the journal entry necessary to correct the following errors: a. b. c. d. e.

A Sale of goods RM678 to J Harkness had been entered in J Harker’s account. The purchase of a machine on credit from L Pearson for RM4, 390 had been completely omitted from our books. The purchase of a motor vehicle for RM3, 800 had been entered in error in the motor expenses account. A sale of RM221 to E Fletcher had been entered in the book - both debit and credit – as RM212. Commission received RM257 had been entered in error in the sales account.

19.2 Elaine Rowe extracted the following balances from her books on 31 May 2008:

Equipment General expenses Sales Purchases Sales return Purchase return Creditors Drawings Debtors Bank overdraft Capital

RM 9,752 1,394 15,863 7,590 426 674 2,095 1,420 3,738 372 5,314

A short time later the following errors were discovered. a. b. c. d.

A sales invoice for RM392 has not been entered in the sales day book. A cheque of RM545, receive from a customer, has not been recorded in the books. An invoice for RM196, receive from a supplier, has been entered in the account twice. Elaine Rowe has taken RM150 by cheque for her own use, but no entries have been made in the account.

You are required to prepare a trial balance as at 31 may 2008 after considering the above information. SUSPENSE ACCOUNT AND ERRORS 1. Errors and the trial balance. • Trial balance may not balance because of the following possibility: a. Incorrect additions in any account. b. Making an entry on only one side of the accounts. c. Entering a different amount on the debit side from the amount on the credit side. 2. Suspense account. We should try a very hard to find errors immediately when the trial balance totals are not equal. • When they cannot be found, the trial balance totals should be made to agree with each other by inserting the amount of the difference between the two sides in a suspense account. •

46


Example:

Trial Balance as at 31 December 2005 Total after all the account been listed Suspense account •

RM 100,000

RM 99,960 40

To make the two totals the same, a figure of Rm40 for the suspense account has been shown on the credit side. A suspense account is opened and the RM40 difference is also shown there o the credit side.

Dr 2005

Suspense account Rm 2005 Dec 31

Different per trial balance

Cr Rm 40

3. Suspense account and the balance sheet. •

•

If the errors are not found before the final accounts are prepared, the suspense account balance will be included in the balance sheet. Where the balance is a credit balance, it should be included under current liabilities on the balance sheet. When the balance is a debit balance, it should be shown under current assets on the balance sheet.

4. Correction of errors. •

When errors are found, they must be corrected using double entry. Each correction must be described by an entry in the journal.

Example 1: One error only. Assume that the errors of RM40 is found in the following year on 31 March 2006, the errors being that the sales account was under cast by RM40. Action taken: • Debit the suspense account to close it. • Credit sales account to show items were it should have been.

Dr 2006 Mar 31

Sales

Dr 2006

Suspense account Rm 2005 40 Dec 31

Sales account Rm 2006 Dec 31

Different per trial balance

Cr Rm 40

Suspense

Cr Rm 40

Example 2: More than 1 error A trial balance at 31 December 2007 show a difference of RM77, being a shortage on the debit side. A suspense account is opened, and the difference of RM77 is entered on the debit side of the account. On 28 February all the errors from the previous year were found.

a. A cheque of RM150 paid to L.Kent had been correctly entered in the cash book, but had not been entered in Kent’s account. b. The purchases account has been under cast by RM20. c. A cheque of RM93 received from K Sand has been correctly entered in the cash book but has not been entered in Sand account. These three errors have result in a net error of RM77 shown by a debit of RM77 on the debit side of the suspense account. Dr 2008 Feb 28

Suspense (a)

L Kent account Rm 2008 150

Cr Rm

47


Dr 2008 Feb 28

Suspense (b)

Dr 2008

Dr 2008 Jan 1 Feb 28

Balance b/d K Sand ( c )

Purchases account Rm 2008 20

Cr Rm

K Sand account Rm 2008 Feb 28

Cr Rm 93

Cr Rm 150 20 17 0

Suspense account Rm 2008 77 Feb 28 93 Feb 28 170

Suspense ( c )

L Kent ( a) Purchases (b)

Exercises 20.1 On 31 March 2005 the following items are to be corrected via the journal. Show the corrections. a. b. c. d. e.

T.Thomas, a customer, had paid us a cheque for RM900 to settle his debts. The cheque has now been returned to us marked ‘Dishonored’. We had allowed C Charles, a debtor, a cash discount of RM35. Because of a dispute with her, we had now disallowed the cash discount. Office equipment bought for Rm6, 000 has been debited to motor vehicles account. The copy sales invoice of sales to J Graham RM715 was lost, and therefore was completely omitted form our books. Cash drawings of RM210 have been correctly entered in the cash book but have been credited to the wages account.

20.2 On 31 December 2004, your bookkeeper extracted a trial balance that fail to agree by RM330, being a shortage on the credit side of the trial balance. A suspense account was opened for the difference. In January 2005 the following errors made I 2004 were found.

i. ii.

iii. iv. v.

Sales day book has been under cast by Rm100. Sales of RM250 to K Hart had been debited in errors to K Hartley’s account. Rent account had been under cast by RM 70. Discount received account had been under cast by RM300. The sales of motor vehicles at net book value had been credited in errors to sales account RM360.

Required: a. Show the journal entry necessary to correct the errors. b. Draw up the suspense account after the error described have been corrected c. If the net profit have previously been calculated at RM7, 900 for the year ended 31 December 2004, show the calculation of the corrected net profit. CONTROL ACCOUNT 1. Need for control account • When all accounts were kept in one ledger, a trial balance could be drawn up as a test of the arithmetical accuracy of the account. It must be remember that certain errors were not reveal by such a trial balance. • We have to check every item in every ledger. What is required is a type of trial balance for each ledger, and this requirement is met by the control account. 2. Principle of control account • If the opening balance of an account is known, together with the information of the additions and deductions entered in the account, the closing balance can be calculated. 3. Information for control account

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The following tables show where information is obtained from in order to draw up control accounts.

Sales ledger control 1. Opening debtors 2. Credit sales 3. Return inwards 4. Cheque receives 5. Cash received 6. Discount allowed 7. Closing debtors

Purchases Ledger Control 1. Opening Creditor 2. Credit Purchases 3. Return Outward 4. Cheque paid 5. Cash paid 6. Discount received 7. Closing creditors

Sources List of debtors’ balance drawn up at the end of the previous period. Total from sales journal. Total of return inwards journal. Cash book: Bank Column on received side. All transaction of credit purchased extracted. Cash book: Cash column on received side. All transaction of cash sales extracted. Total of discount allowed column in the cash book. List of debtors’ balances drawn up at the end of the period.

Sources List of creditors’ balances drawn up at the end of the previous period. Total from purchases journal Total of return outward journal Cash Book: Bank column on payment side. All transaction of credit purchases extracted. Cash book: Cash column on payment side. All transaction of cash purchases extracted. Total of discount received column in the cash book. List of creditors’ balances drawn up at the end of the period.

Exercises 21.1 You are required to prepare a sales ledger control account from the following: 2004 May 1

May 30

Sales ledger balances Total of entry for may: Sales day book Return inward day book Cheque and cash received form customers Discount allowed Sales ledger balances

RM 4,560 10,870 460 9,615 305 5,050

21.2 You are to prepare a sales ledger control account from the following. Deduce the closing figure for the sales ledger balance as at 31 March 2008. 2008 Mar 1

Mar 31

Sales ledger balances Totals for March: Discount allowed Cash and cheque received from debtors Sales day book Bad debts written off Return inwards day book Sales ledger balances

RM 6,708 300 8,970 11,500 115 210 ?

21.3 Draw up a purchases ledger control account form the following: 2002 June 1

Purchases ledger balances Total for June: Purchases day book Return outward day book

RM 3,890 5,640 315

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June 31

Cash and cheque paid to creditors Discount received Purchases ledger balances

5,230 110 ?

VALUE ADDED TAX 1. Introduction • Value added tax (VAT) is a tax on turnover, not on profit. It is describe as an indirect tax, and ultimately the tax is paid by the final consumer of the goods or services. •

The rate of VAT is decided by parliament through the finance acts, which are passed each year after the budget.

2. VAT system work Example: A toymaker manufactures toys from scarf of material, and sell them to a wholesaler for RM200 plus VAT. The wholesaler sales these toys to a chain of retailers for RM300 plus VAT, who in turn retail the toys in their shops for RM400 plus VAT. (I)

The toymaker account for VAT as follows: Net (RM)

Sales of toys Cost VAT payable (II)

200 0

The wholesaler account for VAT as follow: Net (RM)

Sales of toys Cost VAT payable

(III)

300 200

The retailer account for VAT as follows: Net (RM)

Sales of toys Cost VAT payable

400 300

VAT (RM) @ 17.5% 35 00 35

VAT (RM) @ 17.5% 52.50 35.00 17.50

VAT (RM) @ 17.5% 70.00 52.50 17.50

3. Vat included in gross amount • To find the gross amount of VAT that has been added to the net amount , a formula capable of being used with any rate of VAT is: % rate of Vat 100 + % rate of VAT

X

Gross amount

=

VAT in RM

Example: Suppose that gross amount of sales was RM940.00 and the rate of VAT was 17.5 per cent. Finding the amount of VAT and the net amount before VAT was added using the formula yields: 17.5 100 + 17.5

X

940

17.5 117.50

X

940

= 140

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Exercises 22.1 Comart Supplies Ltd recently purchased from Ace Import Ltd 10 printer originally priced at RM200 each. A 10 percent trade discount was negotiated, together with a 5 percent cash discount if payment was made within 14 days. Calculate the following: a. b. c.

the total of the trade discount the total of the cash discount the total of the VAT

22.2 A manufacturer sales a product to a wholesaler for RM200 plus VAT of RM35. The wholesaler sells the same product to a retailer fro RM280 plus VAT of RM49. The retailer then sells the product to a customer for RM320 plus VAT of RM56. What is the amount of VAT collectable?

TOPIC 7: SINGLE ENTRY AND INCOMPLETE RECORD 1. Why does double entry sometime is not use? •

•

For every small shopkeeper, market stall or other small business to keep it books using a full double entry system would not be practical. A large number of the owner of such firm would not know how to write up a double entry records, even if they want to.

•

It is more likely that they would enter details of a transaction once only, using a single entry system. Many of them would fail to record every transaction, resulting n incomplete records.

•

However despite many small business not having any need for accounting record, most do have to prepare financial statement or at least calculate their sales or profit once a year.

2. Profit as an increase in capital. a. identifying profit when opening and closing capital are known. Profit can be found by subtracting capital at the start of the period from that at the end of the period. b. identify when you only have a list of the opening and closing asset and liabilities. • Using statement of affairs to calculate the amount of profit. Statement of affair is a balance sheet, but it is used when you are dealing with incomplete record. •

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Exercises 23.1 F Lee starts in business on 1 January 2002 with RM35, 00 in a bank account. Unfortunately he did not keep proper books of account. He forces to submit a calculation of profit for the year ended31 December 2003 to the inspector of tax. He ascertain that at 31 December 2002 he had stock valued at cost RM6,200, a van which has cost RM6,400 during the year and which had depreciated during the year by RM1,600, debtors of RM15,200, expenses prepaid of RM310, a bank balance of RM33,490, a cash balance RM270, trade creditors RM7,100 and expenses owing RM640. His drawings were: Cash RM400 per week for 50 weeks, cheque payments RM870. Draw up statement to show the profit or loss for the year. 23.2 Ivor Clue is a magician. He has conjures up the following result form his non-existent accounting records. Fees are equal to 5 times his direct cost. At any given times his stock equal one week’s direct costs. He defines a month as four weeks. His stocks at both 31 May and 30 June were valued at RM500. Required: Calculate his fees and profit for the month of June. 23.3 The following is the summary of Jane’s bank account for the year ended 31 December 2002. RM Balance 1.1.2002 4,100 Payment to creditors for goods Receipt from debtors 91,190 Rent Balance 31.12.2002 6,300 Insurance Sundry expenses Drawings 101,590

RM 67,360 3,950 1,470 610 28,200 101,590

All of the business taking have been paid into the bank with the exception of RM17, 400. Out of this Jane has paid wages of RM11, 260, drawing of rM1, 200 and purchase of goods RM4, 940. The following additional information is available: 31.12.200 31.12.200 1 2 Stock 10,800 12,200 Creditors for goods 12,700 14,100 Debtors for goods 21,200 19,800 Insurance prepaid 420 440 Rent owing 390 Fixtures at valuation 1,800 1,600 You are to draw up a set of financial statement for the year ended 31 December 2002. Show all of your working. TOPIC 8: HOTEL EXPENSES ACCOUNTING •

•

•

•

In the accounting terminology, expense is an income statement account representing the cost of items consumed in the process of generating revenue (ex. Cost of Goods Sold) or that expires due to the passage of time (ex. Depreciation Expense). Expense cannot be mixed with expenditure. For, Expenditure represents the purchase amount (whether paid in cash or credited with the Accounts Payable) of a certain asset. According to the matching principle, all expenses must be recorded in the same accounting period as the revenue that they helped to generate. In the hotel industry, expenses are divided into two main categories: a.

b.

Direct Expenses: • These are the expenses that vary with the level of production. For example, in the Food and Beverage department, the Cost of Food Sales is a direct expense. Indirect Expenses:

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These are the expenses that do not vary with the level of production, or variable costs that can not be feasibly distributed to various Financial Reporting Centers. In the hotel industry, indirect expenses are, hence, divided into two different categories: i. Fixed Charges: • For, these very expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single department. • To illustrate, if a hotel insures itself against fire, theft and burglary, and one day some valuable equipment has been stolen, from any department whatsoever, the insurance company will indemnify the hotel. ii. •

•

1. •

Undistributed Expenses: Examples might include electricity, energy, and water expenses. For, usually the hotel receives a total energy bill to be paid. In the old days, some hotels went for allocating this amount according to certain factors (ex. Surface, Department Usage) However, this practice proved to be misleading, since it might under-allocate energy expenses for some departments and over-allocate it for others. Nowadays, most of the hotels decide not to allocate such expenses any more. Rather, hotels report such expenses in separate schedules.

Typical Hotel Departments: Rooms Division Department: It is the place where guests receive several kinds of services ranging from reservation, registration, to checkout and settlement of their accounts. This department typically compromises a Rooms Division manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform service personnel. This department typically compromises a Rooms Division manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform service personnel. - The various types of Rooms Division department direct expenses include: a. Commission’s expenses : This account includes payments by the hotel to authorized agents that bring room business to the hotel. Usually at the end of each month, hotels sit with these agents in order to reconcile their monthly sales figures and authorize commission payment (usually in the form of a percentage of room revenue). Reservation expenses : This expense account represents any payment to various age b. contracting to bring potential room revenue business to the hotel. These agents might have the form of Central Reservation Offices (Whether affiliate or non-affiliate), Intersell agencie. Contract cleaning expenses: This expense account represents payment to contracting outside c. cleaning agencies. Some hotels (especially small and middle size hotels) might opt for contract cleaning because of its attractive financial implications. If this is the case, these hotels might not be forced to have a housekeeping department, or might keep housekeeping staff to minimum. Such expenses should be determined in light of the contract signed between both parties (i.e. the hotel from one side and the cleaning company from the other.) Laundry and dry cleaning expenses: This cost applies to outside laundry and dry cleaning costs d. . In most of the cases, such contracts are signed to benefit more for the Rooms Division department than one revenue generator. In this case, the Rooms Division department shall report the laundry and dry cleaning expenses related only to the Rooms Division department. e. Guest transportation expenses: These expenses include the cost of transporting guests from and to the hotel via various means of transportation (ex: Mini-buses, buses, limousines…). If the guest transportation's volume business, staff, and costs are significantly high, then a separate department might be established. Linen expenses: This specific expense account includes the allocation of a portion of linen f. expenditure for a specific period of time. This practice goes along with one of the accounting principles: the matching principle. Some sub-accounts of linen expense might be: Towels expenses, Facecloth expenses, Blankets expenses, Sheets expenses, Pillow expenses. g. Guest supplies expenses: This account includes the various guest supplies provided free of charge to guests in their rooms. Some sub-accounts of guest supplies expenses might include: Newspaper expenses Coffee expenses

Guest stationary expenses Writing supplies

Shoe cloth expenses Toilet requisites expenses

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h.

expenses Flowers expenses Hangers expenses Matches expenses Ice expenses Candy expenses Cleaning supplies expenses: Such an account includes the cost of Rooms Division's cleaning supplies. Some sub-accounts of guest supplies expenses might include: Brooms expenses

i.

Soaps and polishes cleaning cloths expenses expenses Mops expenses Cleaning chemicals Dusters expenses expenses Brushes expenses Insecticides expenses Dustpans expenses Pail expenses cleaning accessories Disinfectants expenses expense Printing and stationary expenses: This expense account includes printed formats (ex: virgin registration records, reservation records, guest folios…), office supplies (ex: pens, pencils, rubbers, erasers…), printed manuals and guidelines for the use of the Rooms Division employees. Some sub-accounts of printing and stationary expenses might include: Binders expenses Vouchers expenses Desk pad expenses Folio expenses

j.

Floor plans expenses Rack card expenses Envelopes expenses Ink expenses

Pencils and Pens expenses Reports expenses

Uniforms expenses: This expense account includes the allocation of a portion of uniforms asset (if the hotel purchases uniforms) for a certain period of time along with the expense of repairing, and cleaning them. If the hotel rents uniforms rather than purchasing them, then the uniform expense shall include the renting cost, usually predetermined in light of the contract linking the hotel and the uniform renting company.

•

Food & Beverage Department : This department is responsible for the preparation and service of food and beverage to guests. It compromises the kitchen, restaurants, bars, and any premise in which Food and Beverage is served.

•

Telephone Department : This department is responsible to handle guest communication. This might be insured through connecting guests to desired locations, whether in-house, local or long distance calls. Moreover, this department is usually composed of a chief operator, supervisors, operators, and messengers. Last, with the automation revolution affecting right now most hotels, it became possible to separate calls of guests and communication handled by hotel employees, therefore, making it possible to have the telephone department as a minor revenue generating department. For, prior to automation, the separation of cost of calls was not possible and hence the telephone department might show frequently a loss since telephone direct costs are overstated.

•

: Actually looking at any hotel organization chart, Administrative and General Administrative & General Department Department (referred usually as A&G) does not exist. It is however a financial reporting centers including executives of the Hotel (ex: General Manager, Assistant General Managers…) and other employees involved with executive and financial activities (ex: Accounting personnel, resident Manager, Accounts Receivable clerks, Night Auditors…). Moreover, if there is staff in the hotel not included in departments due to low business volume not justifying the establishment of a department, they might be included under the A& G department (ex. Data Processing Staff, Transportation Staff, and Personnel Staff…).

•

: This department is composed of a marketing manager, marketing assistant managers responsible for Marketing Department sales, convention, public relations, and advertising functions, along with marketing personnel. This department is a cost center that indirectly supports revenue generators in their sole aim of generating hotel revenue. This can be insured, for example, through large group reservations, hence maximizing room revenue, or buffet, conference, and catering opportunities brought by this very department hence maximizing room revenue, F& B revenue, and the hotel revenue as a whole.

•

Property, Operation and Maintenance (POM) : Concerned with the appearance and physical condition of the building, the repair and maintenance of equipment, and rubbish removal. Some positions of this department might include POM manager, POM assistant manager(s), electricians, plumbers, gardeners, painters, and interior design specialists.

•

: This special department might be established in hotels operating under the fully automated Data Processing Department system. Moreover, such hotels should have significant investment in computer equipment and staff to justify the

54


establishment of a single department. If these conditions do not exist, than the Data Processing functions would be financially grouped under Administrative & General Department. •

: Similar to Data Processing Department, if the Dollar Amount and Staff incurred for Human Resources Department employees' hiring, screening, interviewing, selecting, recruiting, and Training is significant, than a Human Resources Department may be established. Otherwise, Human Resources functions would be financially grouped under Administrative & General Department

•

: If the Dollar Amount and Number of Staff employed in the transportation of Guests is Guest Transportation Department significant, a separate Department might be established. Otherwise, guest transportation staff would be grouped under Rooms Division Department.

2. Financial Reporting Centers: A Financial Reporting Center is an area of responsibility for which separate Cost Information must be collected Might be classified as Revenue Centers, Support Centers, and Other Financial Reporting Centers 1. Revenue Centers ⇒ Generate Revenue through sales of Products and/or Services to Guests • Rooms • Food and Beverage • Telephone • Gift Shops • Garage and Parking • Other Operated Departments • Rentals and other Income 2. Support Centers ⇒ those departments that have minimal Guest Contact and do not produce Sales. Yet, they do provide services to Revenue Centers, which, in turn, provide Services to Guests • Administrative & General • Marketing • Property Operation and Maintenance • Data Processing • Human Resources 3. Other Financial Reporting Centers ⇒ include Energy Costs and Fixed Charges (Rent Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and Amortization Expenses) Each Financial Reporting Center should be assigned an Identification Number. To illustrate, consider the following Example: Financial Reporting Center Rooms Food and Beverage Telephone Administrative & General Marketing Property Operation and Maintenance Energy Costs Fixed Charges

Identification Number 11 15 17 31 36 38 41 51

Furthermore, each Account should be assigned an Identification Number. Hotels commonly opt for either the Five-Digit (xx-xxx) or Eight-Digit Account Numbering Systems (xx-xxx-xxx) 3. Responsibility Accounting: Aim ⇒ provides Financial Information useful in evaluating the effectiveness of Managers and Department Heads. That's why only Direct Expenses should be charged to Specific Departments 1. Expenses ⇒ include the day-to-day Costs of Operating the Business, the Expired Costs of Assets through Depreciation and Amortization, and the "write-off" of pre-paid items. Expenses are classified as Direct expenses (Cost of Sales and Operating Expenses), Indirect Expenses (Fixed Charges and Undistributed Expenses) and Income Taxes a) Direct Expenses ⇒ they are Costs incurred solely for the benefit of a particular Department

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HAC 1001 NOTES

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