Download Financial Accounting II

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Financial Accounting II
ACC 3309
ACC 3309 FIN. ACCOUNTING II
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1. Subsidiary and Control account
• Control account – summary of subsidiary
accounts.
• Subsidiary accounts – individuals of trade
creditors/debtors account.
Customer A
Customer B
Customer C
Customer D
Customer E
Sale Ledger Control account
Balance b/f
Sales Day
(total of credit sales)
x,xxx Return Inward Day xxx
Book
xx,xxx
Total payment by xx,xxx
T.Debtors from CB
Balance c/f
xx,xxx
x,xxx
xx,xxx
ACC 3309 FIN. ACCOUNTING II
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Subsidiary account
• A subsidiary ledger - group of accounts
with a common characteristic, eg.
customer accounts.
• The subsidiary ledger - eliminate details
to be recorded in GL.
• Two common subsidiary ledgers are
the Accounts Receivable Ledger and
the Accounts Payable Ledger.
ACC 3309 FIN. ACCOUNTING II
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CONTROL ACCOUNT
• The general ledger account that
summarizes subsidiary ledger data
is called a control account.
• Each general ledger control
account balance must equal the
composite balance of the individual
accounts in the subsidiary ledger.
ACC 3309 FIN. ACCOUNTING II
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1.1. Information for control account
Sales ledger Control
Sales Ledger
Control
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Source
1 Opening Balance
List of AR balance from previous period
2 Credit sales
3 Return Inward
Total from Sales Day Book/Journal
4 Cheques received
Total payment by Debtor from Cash
Book (Bank Column)
5 Cash received
Total payment by Debtor from Cash
Book (Cash Column)
6 Discount allowed
Total discount allowed from Cash Book
7 Closing Balance
List of debtor balances at year end
Total from Return Inward Day Book
ACC 3309 FIN. ACCOUNTING II
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1.2. Information for control account
Purchase ledger Control
Purchase Ledger
Control
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Source
1 Opening AP
List of AP balances from previous
period
2 Credit purchases
Total from Purchase Day Book
3 Return outwards
Total of Return Outward Day Book
4 Cheque paid
Total payment of AP on Bank column
of Cash Book
5 Cash paid
Total cash payment on Cash Column
of Cash Book
6 Discounts received
Total of discount received from AP
7 Closing account AP
List of AP year end balance
ACC 3309 FIN. ACCOUNTING II
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Exhibit 31.3 - example of Sales
ledger control
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Account receivable balances on 1 Jan 2006
Total credit sales for the month
Cheques received from customers in the month
Cash received from customers in the month
Return inwards from customers during the month
Account receivable balances on 31 January 2006
Sales Ledger Control
2006
Jan 1
31
Balances b/d
Sales
RM
1,894
10,290
2006
Jan 31
31
31
31
Bank
Cash
Return inwards
Balance c/d
12,184
ACC 3309 FIN. ACCOUNTING II
RM
7,284
1,236
296
3,368
12,184
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Exhibit 31.4 - example of
Purchases ledger control
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Account payable balances on 1 Jan 2006
Bought on credit from suppliers for the month
Cheques paid to suppliers in the month
Return outwards to suppliers during the month
Account payable balances on 31 January 2006
Purchases Ledger Control
2006
Jan 31 Bank
31 Return inwards
31 Balance c/d
RM
3,620
95
5,151
2006
Jan 1 Balances b/d
31 Purchases
8,866
ACC 3309 FIN. ACCOUNTING II
RM
3,890
4,936
8.886
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Transfers of account
(A) The business has sold A Hughes RM600 goods.
(B) Hughes has supplied the business with RM880 goods
(C) The RM600 owing by Hughes is set off against RM880
owing to him.
(D) This leaves RM280 owing to Hughes
Sales Ledger ( A Hughes)
Sales (A)
Purchases Ledger ( A Hughes)
Purchases (B)
600
880
Set off take place
Sales Ledger ( A Hughes)
Sales (A)
600 Set-off Purchases 600
Ledger
Purchases Ledger ( A Hughes)
Set-off Sales 600 Purchases (B)
Ledger
Balance c/d 280
880
880
Balance b/d
ACC 3309 FIN. ACCOUNTING II
880
280
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Exhibit 31.6 - example of more complicated
Sales ledger control
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Aug 1 Sales ledger – debit balances (3,816), Sales Ledger –
credit balances ( 22)
Aug 31 Transaction for the month
Cash received (104), Cheques Received (6,239), Sales
(7,090), Bad Debts written-off (306), Discounts (298),
Return inwards (664), Cash refunded to customer being
overpaid (37), Dishonoured cheques (29), Interest
charged to customer for overdue account (50)
At the end of the month
Sales ledger – Debit balances (3,429), Sales ledger –
credit balances (40)
Sales Ledger Control
Aug 1 Balances b/d
Sales
Cash refunded
Dishonoured cheque
Interest on debt
Balances c/d
3,816
7,090
37
29
50
40
Aug 1 Balances B/d
Aug 31 Cash
Bank
Bad Debt
Discount allowed
Returned inwards
Balances c/d
11,062
ACC 3309 FIN. ACCOUNTING II
22
104
6,239
306
298
664
3,429
11,062
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Reconciliation of control account
• Errors and omissions
• Unbalanced ledger control account
• Investigation would be carry out to find the
causes
• To verify and rectify the problem a
reconciliation of control account is carried
out
ACC 3309 FIN. ACCOUNTING II
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Exhibit 31.7 – An example of a Purchase
Ledger Control account reconciliation
Original purchases ledger control account balance
Add: Invoice omitted from control account but entered in
Purchase Ledger (PL)
Supplier balance excluded from the PL because the
account had been included in the Sales Ledger (SL)
by mistakes
Credit sale posted in error to the debit of a PL account
instead of the debit of an account in the SL
Undercasting error in calculation of total end of period
creditors’ balance
Less: Customer account with a credit balance included in PL
Return inwards posted in error to the credit of a PL
account instead of the credit of an account in SL
Credit notes entered in error in the Return Outwards
Day Book as RM223 instead of RM332
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Revised PL control account balance obtained from revised source amount xxx
ACC 3309 FIN. ACCOUNTING II
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Review
questions,
Tutorial
questions, Assignment questions
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• Frank Wood’s Business Accounting I, 11th
Edition, 2008
• Review Questions:
– Page 380 (Q31.1, Q31.2A, Q31.3 & Q31.4A)
• Tutorials Questions:
– Page 381 (Q31.6, Q31.7A & Q31.9)
• Assignment Question:
– Page 382 (Q31.8A)
ACC 3309 FIN. ACCOUNTING II
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Review questions
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Correction of errors
&
Suspense Account
Chapter 2
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Types of Error
• Errors of omission – completely omitted
• Errors of commission- correct amount but wrong
account
• Errors of principle- wrong class of account
• Compensating errors- error cancel each other out
• Errors of original entry- incorrect figure but correct
double entry
• Complete reversal of entries- correct account
but wrong side of both account
• Transposition errors- eg 142 as 124
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Correction of errors
Error of omission
A sales of RM59 worth of goods to E. George has
been completely omitted from the books
The Journal
Dr
E George
Sales
Cr
59
59
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Error of commission
A purchase RM44 worth of goods from C. Simons
was entered in error in C Simpson’s account.
The Journal
Dr
C. Simpson
C. Simon
Cr
44
44
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Error of principle
A purchase of a machine for RM200 is debited to
the purchase account instead machinery account.
The Journal
Dr
Machinery
Purchases
Cr
200
200
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Compensating error
A cash sales transferred to the sales account was
overstated by RM20 and amount transferred to
wages account was overstated by RM20 too .
The Journal
Dr
Sales
Wages
Cr
20
20
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Error of original entry
A sale of RM38 to A Smailes was entered in the
books as RM28.
The Journal
Dr
A Smailes
Sales
Cr
10
10
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Complete reversal of entries
A payment of cash of RM16 to M Dickson was
entered on the receipt side of the cash book in
error and credited to M Dickson’s account.
The Journal
Dr
M Dickson
Cash
Cr
32
32
ACC 3309 FIN. ACCOUNTING II
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Correction of errors
Transposition error
A credit purchased from P Maclaran costing
RM56 was entered in the books as RM65.
The Journal
Dr
P Maclaran
Purchases
Cr
9
9
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Suspense accounts and errors
• Incorrect additions in any accounts;
• Single entry recorded eg. A debit but no
credit; a credit no debit
• Entering debit amount not equal to credit
amount.
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Suspense account
Exhibit 33.1
Trial Balance as at 31 December 2008
Dr
Totals after all the accounts have been listed
Suspense
Cr
100,000 99,960
40
100,000
100,000
Balancing and the different
is suspense
ACC 3309 FIN. ACCOUNTING II
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One error only – example 1
Assume that cause of the error of RM40 in Exhibit 33.1 was
due to the sales account being undercast.
Journal Entry
Dr
40
suspense account (to close it)
sales account (to show item where it should be)
Sales
Suspense
40 Diff. as per TB 40
ACC 3309 FIN. ACCOUNTING II
Cr
40
Sales
Suspense 40
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One error only – example 2
The trial balance on 31 December 2009 had a difference of RM168.
A suspense account is opened and the different of RM168. It was a
shortage on the debit side. On 31 May 2010 the error was found. We
had made a payment of RM168 to K Leek to close his account. It was
correctly entered in the cash the cash book, but was not entered in K
Leek account.
K Leek
2010
May 31
Bank
168
2010
Jan 1
Balance b/d
168
The account of K Leek is now corrected
Suspense
2010
Jan 1
Balance b/d
168
2010
May 31
K Leek
The Journal
2010
May 31
K Leek
Suspense
168
Dr
Cr
168
168
ACC 3309 FIN. ACCOUNTING II
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More than one error – example 3
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The trial balance at 31/12/2007 showed a difference of RM77 shortage on the debit
side. On 28/2/2008, all the errors from The previous year were found.
1. 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
2. The purchase account had been undercast by RM20
3. A cheque of RM93 received from K Sand had been correctly entered in the cash book, but
had not been entered in Sand’s account.
Suspense
2008
Jan 1
Feb 28
balance b/d
K Sand
77
93
170
2008
Feb 28
28
L Kent
Purchases
The Journal
2008
Feb 28
L Kent
150
20
170
Dr
150
Suspense
Cr
150
(Cheque paid omitted from Kent’s account)
28
Feb 28
28
Purchases
20
Suspense
(Undercasting of purchase by RM20 in last year account)
Suspense
93
K Sand
(Cheque received omitted from Sand’s account)
ACC 3309 FIN. ACCOUNTING II
20
93
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Errors which do not affect profit
calculation – example 4
On 1 November 2005 we paid RM80 to a creditor T Monk. It was
Correctly entered in the cash book. It was not entered anywhere else.
The error was identified on 1 June 2006.
The journal entries to correct it will be:
Journal
2006
June 1
Dr
T Monk
Suspense
Cr
80
80
Payment to T Monk on 1 November 2005 not
entered in his account. Correction now made.
Both of these accounts appeared in the balance sheet
Only with T Monk as part of accounts payable. Therefore
Net Profit is not affected by the errors.
ACC 3309 FIN. ACCOUNTING II
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Errors which do affect profit
calculation – example 5
Assume that RM80 debit balance was due to rent account was added
up incorrectly. It should be recorded as RM8,480 instead RM8,400.The
Errors was identified on June 1 2006.
The journal entries to correct it will be:
Journal
2006
June 1
Rent
Dr
Cr
80
Suspense
Correction of Rent undercast last year
80
K Davis
Statement of Corrected Net Profit for the year ended 31 December 2005
Net Profit per the financial statement
Less Rent
Correct Net profit for the year
ACC 3309 FIN. ACCOUNTING II
xxxx
(80)
xxxx
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Review questions
ACC 3309 FIN. ACCOUNTING II
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3. Manufacturing Account
• Prepared in addition to income statement
• It is produced for internal use
• To calculate and to show the cost of
manufacturing goods
• Total cost of manufacturing is called
production cost
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Division of cost (exhibit 37.1)
Direct materials
PRIME COST
Direct labour
Direct expenses
Plus
Indirect manufacturing costs
Plus
Administrative expenses
Selling and distribution expenses
Financial charges
PRODUCTION
COST
ACC 3309 FIN. ACCOUNTING II
TOTAL
COST
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Direct and indirect costs
• All costs associate direct in production of
goods is call direct cost.
• The sum of direct cost is called Prime
Costs
• Costs that are uneasily traced and
indirectly associated in the production of
goods is called indirect cost.
• Sometimes is called factory overhead.
• Production cost is the sum of direct and
indirect manufacturing costs.
ACC 3309 FIN. ACCOUNTING II
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Format of manufacturing and
trading account (exhibit 37.2)
Manufacturing Account
Production costs for the period:
Direct materials
Direct labour
Direct expenses
PRIME COST
Indirect manufacturing costs
Production cost of goods completed c/d to trading account
RM
xxx
xxx
xxx
xxx
xxx
xxx
===
Trading Account
Sales
Less: Production cost of Goods sold
Opening inventory of finished goods
Add production cost of goods completed b/d
Less: Closing inventory of finished goods
GROSS PROFIT
ACC 3309 FIN. ACCOUNTING II
xxx
xxx
xxx
(xxx)
(xxx)
xxx
===
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Example of manufacturing account
(Exhibit 37.3)
Details of production costs for the year ended 31 December 2007
1 January 2007, inventory of raw materials
31 December 2007, inventory of raw materials
Raw materials purchased
Manufacturing (direct) wages
Royalties
Indirect wages
Rent of factory – excluding administration, S&D
Depreciation of plant and machinery in factory
General indirect expenses
ACC 3309 FIN. ACCOUNTING II
5,000
7,000
80,000
210,000
1,500
90,000
4,400
4,000
3,100
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Example of manufacturing account
(Exhibit 37.3)
Manufacturing Account for the year ended 31 December 2007
Inventory of raw materials, 1/1/07
Add: Raw materials purchased
Less: Inventory of raw materials, 31/12/07
Cost of raw materials consumed
Manufacturing (direct) wages
Royalties
Prime Cost
Indirect wages
Rent of factory
Depreciation of plant and machinery
General indirect expenses
Production cost of goods completed
5,000
80,000
85,000
(7,000)
78,000
210,000
1,500
289,500
(90,000)
(4,400)
(4,000)
(3,100) 101,000
391,000
======
ACC 3309 FIN. ACCOUNTING II
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Work-in-progress
• Partly completed product
• Only finished or completed product would
be carried forward to trading account.
• Uncompleted product or partly completed
product is called work-in-progress
• This product should not appear in trading
account as it is not ready for sales.
ACC 3309 FIN. ACCOUNTING II
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Worked example (exhibit 37.4)
1 January 2007, Inventory of raw materials
31 December 2007, Inventory of raw materials
1 January 2007, Work-in-progress
31 December 2007, Work-in-progress
Year to 31 December 2007:
Wages: Direct
Indirect
Purchase of raw materials
Fuel and power
Direct expenses
Lubricants
Carriage inward of raw material
Rent of factory
Depreciation of factory plant & machinery
Internal transport expenses
Insurance of factory buildings and plant
General factory expenses
ACC 3309 FIN. ACCOUNTING II
8,000
10,500
3,500
4,200
39,600
25,500
87,000
9,900
1,400
3,000
2,000
7,200
4,200
1,800
1,500
3,300
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Worked example (exhibit 37.4)
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Manufactory Account for the year ending 31 December 2007
Inventory of raw materials, 1 January 2007
8,000
Add: Purchase of raw materials
87,000
Carriage inward of raw material
2,000
97,000
31 December 2007, Inventory of raw materials
(10,500)
Cost of raw material consumed
86,500
Wages: Direct
39,600
Direct expenses
1,400
Prime cost
127,500
Indirect Wages
25,500
Fuel and power
9,900
Lubricants
3,000
Rent of factory
7,200
Depreciation of factory plant & machinery
4,200
Internal transport expenses
1,800
Insurance of factory buildings and plant
1,500
General factory expenses
3,300
183,900
1 January 2007, Work-in-progress
3,500
187,400
31 December 2007, Work-in-progress
(4,200)
Production cost of goods completed c/d
183,200
ACC 3309 FIN. ACCOUNTING II
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Trading account
• Concerned with finished goods (FG)
• Unsold finished goods (previous year) = opening
inventory of FG of current year
• Unsold FG in current year = closing inventory of
current year or opening FG for next year.
Trading Account for the year ending 31 December 2007
Sales
250,000
Less: Cost of Goods sold:
Inventory of FG 1.1.2007
3,500
Add: production cost of goods completed c/d 183,200
186,700
Less: Inventory of FG 31.12.2007
(4,400)
182,300
Gross profit c/d
67,700
ACC 3309 FIN. ACCOUNTING II
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Review questions
ACC 3309 FIN. ACCOUNTING II
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4. Departmental Account
• Useful for business like supermarket,
chain store and etc
• Purpose to know the performance of each
department whether making profit or not
• Expenses would be split between various
department and profit of each department
would be determine
• Sometimes it is a strategy to lose money
on one department and hoping that the
crowd (customer) would buy other goods
from other departments.
ACC 3309 FIN. ACCOUNTING II
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Allocation of expenses (exhibit 38.1)
Northern Store has three departments
(a)
Jewellery
Inventory of goods 1/1/2008
Purchases
Inventory of goods 31/12/2008
Sales and work done
Wages and assistance
20,000
110,000
30,000
180,000
28,000
(b)
(c)
Hairdressing
Clothing
15,000
30,000
25,000
90,000
50,000
30,000
150,000
40,000
270,000
60,000
The following expenses cannot be traced to any particular department
Rent
Administrative expenses
Air conditioning and lighting
General expenses
8,200
48,000
6,000
2,400
It is decided that Rent and Air conditioning & lighting exp. To be apportioned to
(a) one-fifth (b) half and (c) three-fifth. General and Administrative expenses
to be apportioned based on sales.
ACC 3309 FIN. ACCOUNTING II
44
Northern Store
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Departmental Income Statement for Y/E 31/12/2008
Jewellery
Sales
Less: COGS
Inventory 1/1/2008
Purchases
Less:Inventory
31/12/08
GROSS PROFIT
Less: Expenses
Wages
Rent
Admin. Exp
Air Con./light
General
NET PROFIT/(LOSS)
180
20
110
130
(30) (100)
80
28.00
1.64
16.00
1.20
0.80 (47.64)
32.36
Hairdressing
(RM’000)
90
15
30
45
(25) (20)
70
Clothing
270
30
150
180
(40) (140)
130
55.00
60.00
4.10
2.46
8.00
24.00
3.00
1.80
0.40 (70.50) 1.20(89.46)
(500)
40.50
ACC 3309 FIN. ACCOUNTING II
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Northern Store
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Departmental Income Statement for Y/E
31/12/2008
Jewellery
Sales
Less: COGS
Inventory 1/1/2008
Purchases
Less:Inventory
31/12/08
GROSS PROFIT
Wages
Contribution c/d
Hairdressing
(RM’000)
180
Clothing
90
270
20
110
130
(30)
100
28 (128)
15
30
45
(25)
20
55 (75)
30
150
180
(40)
140
60 (200)
52
15
70
Jewellery
Hairdressing
Clothing
Less:
52
15
70
137
Rent
Admin. Exp
Air Con./light
General
8.20
48.00
6.00
2.40
ACC 3309 FIN. ACCOUNTING II
(64.60)
72.40 46
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Review questions
ACC 3309 FIN. ACCOUNTING II
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5. Branch Account
• Method of recording branch transactions
and issues regarding items in transit
• Head office will keep all accounting
records and each branch do have their
own accounting record
• Ledger are used for 3 purposes:
– Record transaction of changes in assets,
liabilities and capital
– Profitability of each branch
– Internal control in term of good’s safety
ACC 3309 FIN. ACCOUNTING II
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Method for checking stock and
cash
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• Easy to monitor if branches only selling very
expensive cars
• Branches like a supermarket which handling a
large amount of stock – expose to risk eg. stock
loss and etc.
Example
Stock on hand at 1 Jan – at selling price
January – Goods sent to branch by the HQ – selling price
January – Sales by the branch – obviously at selling price
Opening stock 1 January @ selling price
Add: Goods sent to branch @ selling price
Goods available for sales at branch
Less: Goods sold (selling price)
Closing stock at 31 January should therefore be
ACC 3309 FIN. ACCOUNTING II
5,000
20,000
18,000
5,000
20,000
25,000
18,000
7,000
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Allowances for deficiencies
• In every business there will be:
– Waste of goods due to damage,
broken, kept for too long or waste away
– Stealing by customers especially retail
business
– Theft by employees
ACC 3309 FIN. ACCOUNTING II
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Double column system (exhibit 1.1)
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Frank Wood 10th edition, business accounting 2, 2005
Exhibit 1.1 is drafted from the following details for the business
Which Sells goods at uniform mark-up of 33⅓ percent on cost
price.
Stock 1 January 2008 ( at cost)
Goods sent to the branch during the year (at cost)
Sales (selling price)
Stock 31 December 2008 (at cost)
Expenses
1,200
6,000
7,428
1,500
1,000
Allowances for wastage, etc., 1 percent of sales.
ACC 3309 FIN. ACCOUNTING II
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Double column system (exhibit 1.1)
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Frank Wood 10th edition, business accounting 2, 2005
1200 + (1200 x
33⅓%)
Branch Trading and Profit and Loss Account for the year ended 31.12.2008
Stock 1 Jan 2008
Goods from HQ
6000 + (6000 x
33⅓%)
1500 +(1500
x 33⅓%)
Less:
Stock 31 Dec
SP
1,600
8,000
1,200
6,000
9,600
2,000
7,200
1,500
7,600
5,700
1,728
7,600
7,428
Gross profit c/d
Expenses
Net profit
SP
1,000
728
Sales
Deficiency (diff.)
7,428
172
7,600
Gross profit b/d
1,728
ACC 3309 FIN. ACCOUNTING II
7,428
7,428
1,728
1,728
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Double column system (exhibit 1.1)
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Frank Wood 10th edition, business accounting 2, 2005
Branch Trading and Profit and Loss Account for the year ended 31.12.2008
Stock 1 Jan 2008
Goods from HQ
Less:
Stock 31 Dec
SP
1,600
8,000
1,200
6,000
9,600
2,000
7,200
1,500
7,600
5,700
1,728
7,600
7,428
Gross profit c/d
Expenses
Net profit
SP
1,000
728
Sales
Deficiency (diff.)
7,428
172
7,600
Gross profit b/d
1,728
ACC 3309 FIN. ACCOUNTING II
7,428
7,428
1,728
1,728
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Stock and Debtors system
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(exhibit 1.2)
First day of the period:
Stock (at cost)
Debtors
During the period:
Goods sent to the branch (at cost)
Sales – cash
Sales – credit
Cash remitted by debtors to head office
At the close of the last day of the period:
Stock
Debtors
2,000
400
7,000
6,000
4,800
4,500
1,800
700
Uniform mark-up of 50% on cost price.
ACC 3309 FIN. ACCOUNTING II
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First Day: Stock at cost (RM2000);
Debtors (RM400)
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Exhibit 1.2
Branch Stock
Stock b/d
3,000
2,000
Branch Debtors
Balance b/d
400
ACC 3309 FIN. ACCOUNTING II
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During the period: Goods set to branch at cost (RM7000);
cash sales (RM6000); credit sales (RM4800); cash
remittance (RM4500)
REV 00
Exhibit 1.2
Branch Stock
Stock b/d
Goods sent to Branch
3,000
10,500
2,000
7,000
Cash sales
Credit sales
6,000
4,800
6,000
4,800
Branch Debtors
Balance b/d
Credit sales
400
4,800
Cash remittance
Goods sent to Branch
Goods from HQ
4,500
Cash Book
7,000
Cash sales
Cash
6,000
4,500
ACC 3309 FIN. ACCOUNTING II
56
Last day of the period:
stock at cost (RM1800) and Debtors (RM700)
REV 00
Exhibit 1.2
Branch Stock
Stock b/d
Goods sent to Branch
3,000
10,500
2,000
7,000
Cash sales
Credit sales
Stock b/d
6,000
4,800
2,700
6,000
4,800
1,800
Branch Debtors
Balance b/d
Credit sales
400
4,800
Cash remittance
Goods sent to Branch
Goods from HQ
4,500
Cash Book
7,000
Cash sales
Cash
6,000
4,500
ACC 3309 FIN. ACCOUNTING II
57
REV 00
6. Partnership Account - Nature
•
•
•
•
Formed to make profit
Govern by Partnership Act
Minimum of 2 and maximum of 20
Unlimited liability except for limited
partner
ACC 3309 FIN. ACCOUNTING II
58
REV 00
Partnership agreement-content
• Capital to be distributed by each partner
• Ratio in which profit/losses to be shared
• Rate of interest on capital before profit to
be shared
• Rate of interest charged to partner’s
drawings
• Salaries to be paid to partners
• Arrangement of admission for new partner
• Procedures to be carried out when a
partner retires or dies
ACC 3309 FIN. ACCOUNTING II
59
REV 00
Capital contributions
• Need not contribute equal amount
• Depend on how much partner willing to
contribute
• Partner may increase the amount of
capital contributed
ACC 3309 FIN. ACCOUNTING II
60
REV 00
Profit (or Loss) sharing ratios
Say capital contribution by Allen and Beet are as follows:
Allen
RM40,000
Beet
RM20,000
They agree that profit to be shared in the ratio of two-third and one-third
Years
Net profit
Shared:
Allen (two-third)
Beet (one-third)
1
2
3
4
5
36000
48000
60000 60000
72000
24000
12000
32000
16000
40000 40000
20000 20000
48000
24000
Issue: Capital contribution not equal,
amount of work put into partnership , not equal
ACC 3309 FIN. ACCOUNTING II
61
REV 00
Interest on capital
Profit to be shared equally after charging interest on capital
is 5% per annum
Years
Net profit
Interest on capital
Allen
Beet
Shared:
Allen (50%)
Beet (50%)
Summary
Interest on capital
Balance of profit
1
2
36000
48000
3
4
5
60000 60000 72000
40000 X 5%
2000
1000
2000
1000
2000
1000
2000
1000
2000
1000
20000 X 5%
16500
16500
Allen
10000
130500
140500
22500
22500
28500 28500 34500
28500 28500 34500
Beet
5000
130500
135500
ACC 3309 FIN. ACCOUNTING II
62
REV 00
Interest on drawings
Interest on drawing at 5% per annum
Allen
Drawings
1 January
1 March
1 May
1 July
1 October
2,000
4,800
2,400
4,800
1,600
Interest
2,000 x 5% x 12 months
4,800 x 5% x 10 months
2,400 x 5% x 8 months
4,800 x 5% x 6 months
1,600 x 5% x 3 months
=
=
=
=
=
100
200
80
120
20
= 520
Beet
Drawings
1 January
1 August
1 December
1,200
9,600
4,800
Interest
1,200 x 5% x 12 months = 60
9,600 x 5% x 5 months = 200
4,800 x 5% x 1 months = 20
= 280
ACC 3309 FIN. ACCOUNTING II
63
REV 00
Example – distribution of profit
Taylor and Clarke are partners and their
Agreement are as follows:
•Capital: Taylor (RM20,000); Clarke (RM60,000)
•Profit sharing - Taylor 3/5; Clarke 2/5.
•Interest on capital: 5% per annum.
•Salary: Taylor (NIL); Clarke RM15,000
•Drawings: Taylor (RM500); Clarke (RM1000)
•Net profit before distribution: RM50,000
ACC 3309 FIN. ACCOUNTING II
64
REV 00
Example – distribution of profit
Net profit
Add: Interest on drawing
Taylor
20,000 x 5% = 1,000
Clarke
50,000
500
1000
60,000 x 5% = 3,000
Less: Salary: Clarke
Interest on capital
Taylor
Clarke
1,500
51,500
15,000
1,000
3,000
4,000
(19,000)
32,500
Balance of profit shared:
Taylor (3/5)
Clarke (2/5)
32,500 x 3/5 =19500
32,500 x 2/5 =13000
19,500
13,000
32,500
ACC 3309 FIN. ACCOUNTING II
65
Fixed and fluctuating capital
accounts
REV 00
• Two choices
–Fixed capital account and current account
–Fluctuating capital account
• Using the same data, assuming Taylor
and Clarke drawings were RM15,000 and
RM26,000 respectively
ACC 3309 FIN. ACCOUNTING II
66
REV 00
Fixed capital accounts
Taylor –Capital
Clarke –Capital
2007
Jan 1 Bank 20,000
2007
Jan 1 Bank 60,000
Taylor –Current Account
2007
2007
Dec 31 Cash: Drawings
15,000
Dec 31 Profit and Loss App.
31 Profit and Loss App.
Account: Interest on
Account: Interest on
Capital
Share of profit
drawings
500
31 Balance c/d
5,000
20,500
1,000
19,500
20,500
Clarke –Current Account
2007
2007
Dec 31 Cash: Drawings
26,000 Dec 31 Profit and Loss App.
Account:
31 Profit and Loss App.
Salary
Account: Interest on
drawings
1,000
Interest on Capital
Share of profit
31 Balance c/d
4,000
15,000
3,000
13,000
31,000
31,000
ACC 3309 FIN. ACCOUNTING II
67
REV 00
Fluctuating capital accounts
Taylor –Current Account
2007
2007
Dec 31 Cash: Drawings
15,000
Jan 1
Bank
31 Profit and Loss App.
Dec 31 Profit and Loss App.
Account: Interest on
Account: Interest on
drawings
500
Capital
31 Balance c/d
2 5,000
Share of profit
1,000
19,500
40,500
40,500
31 Balance b/d
20,000
2 5,000
Clarke –Current Account
2007
2007
Bank
Dec 31 Cash: Drawings
26,000 Jan 1
31 Profit and Loss App.
Dec 31 Profit and Loss App.
Account: Interest on
Account:
drawings
1,000
Salary
Interest on Capital
31 Balance c/d
64,000
Share of profit
15,000
3,000
13,000
91,000
91,000
31 Balance c/d
ACC 3309 FIN. ACCOUNTING II
60,000
64,000
68
REV 00
Review questions
ACC 3309 FIN. ACCOUNTING II
69
REV 00
Goodwill for partnership
• Goodwill is an intangible asset
• Happened when a business is purchased
and amount paid greater than the value of
net asset
• It can illustrate by the following formula
• Eg
net asset value of company is
RM400,000 and Mr Lee bought the
business for RM450,000. Therefore
RM50,000 extra paid by Mr Lee is a
Goodwill.
Purchased Goodwill = Total Price - value of net identifiable assets
ACC 3309 FIN. ACCOUNTING II
70
REV 00
Reasons for payment of goodwill
• Business having large number of
customers
• Business having good reputation
• Experienced, efficient and reliable staff
• Good location
• Good contact with supplier
• Well-known brand name, valued and
included as an assets
ACC 3309 FIN. ACCOUNTING II
71
REV 00
Partnership books
• Goodwill only appear in the financial
statement when it has been purchased
• In partnership, goodwill arise when:
– Existing partner deciding to change sharing
ratio
– A new partner being introduce
– A partner retiring or dying
ACC 3309 FIN. ACCOUNTING II
72
REV 00
Exhibit 42.1
E, F and G have been in the business for 10 years. They share profit
Equally and no goodwill has been recorded in the books.
On 31 December 2006 they agree that G only take a one-fifth of the
The profit as from 1 January 2007 because he will be devoting less
time in the business in the future. E and F will each take two-fifth. The
summarised balance sheet of the business on 31 December 2006
Appears as follow:
Balance Sheet as at 31 December 2006
Net assets
70,000
=====
Capital E
F
G
30,000
18,000
12,000
70,000
=====
ACC 3309 FIN. ACCOUNTING II
73
REV 00
Goodwill account opened
Goodwill
Capital valuation shared
E
F
G
10,000
10,000
10,000
30,000
Balance c/d
30,000
30,000
Capital Account
G
E
F
E
F
G
40,000 28,000 32,000
Balance b/d
30,000 18,000 22,000
Goodwill: old ratio 10,000 10,000 10,000
Balance c/d
40,000 28,000 32,000
40,000 28,000 32,000
Balance sheet before and after adjustment had been made
Before After
Before After
Goodwill
Other assets
30,000
70,000 70,000
Capital:
E
F
G
70,000 100,000
ACC 3309 FIN. ACCOUNTING II
30,000 40,000
18,000 28,000
22,000 32,000
70,000 100,000
74
Goodwill account not opened
REV 00
The effect of the change of ownership of Goodwill
Before
E One-third 10,000
F One-third 10,000
G One-third 10,000
After
Two-fifths 12,000
Two-fifths 12,000
One-fifth
6,000
30,000
30,000
Goodwill adjustments
Balance c/d
Loss or Gain
Action required
Gain 2,000 Dr E’s capital account 2,000
Gain 2,000 Dr F’s capital account 2,000
Loss 4,000 Cr G’s capital account 4,000
Capital Account
G
E
F
E
F
G
2,000 2,000
Balance b/d
30,000 18,000 22,000
4,000
28,000 16,000 26,000 Goodwill adjustments
30,000 18,000 26,000
30,000 18,000 26,000
Balance sheet before and after adjustment had been made
Before After
Before After
Other assets
70,000 70,000
Capital:
E
F
G
70,000 70,000
ACC 3309 FIN. ACCOUNTING II
30,000 28,000
18,000 16,000
22,000 26,000
70,000 70,000
75
REV 00
Admission of new partner
• Increase in number of partner could be
due to expansion, new partner with
difference skills
• As a replacement due to partner
retirement or death
• Goodwill calculated by:
– Divided between old partner using old ratio
– Then to show value of goodwill divided
between partners (including new partner)
using new sharing ratio
– Gains and losses to be charge to partners’
capital account
ACC 3309 FIN. ACCOUNTING II
76
REV 00
Exhibit 42.2
A and B are in partnership, sharing profits and losses equally.
C is admitted as a new partner. The three partners will share
Profits and losses one-third each. Total goodwill is valued at
RM60,000.
Part
ner
Stage 1
Stage 2
Old ratio Goodwill
A
B
C
½
30,000
½
30,000
60,000
Dr C’s
Stage 3
New ratio Goodwill Gain/loss Adjustment
⅓
20,000 (10,000) Cr
⅓
⅓
20,000
20,000
60,000
(10,000)
20,000
Cr
Dr
Capital
10,000
Cr A’s Capital
10,000
Cr B’s capital
10,000
ACC 3309 FIN. ACCOUNTING II
77
REV 00
Exhibit 42.3
Cash is paid by new partner into the business bank account for
His/her share of the goodwill. No goodwill account is to be opeNed. Assume that the capital balances before F was admitted
Were D RM50,000, E RM50,000 and F was to pay in RM50,000
As capital plus RM24,000 for goodwill.
Part
ner
Stage 1
Stage 2
Old ratio Goodwill
A
B
C
½
30,000
½
30,000
60,000
Dr F’s
Stage 3
New ratio Goodwill Gain/loss Adjustment
1/
12,000 (18,000) Cr
5
1/
5
1/
5
24,000
24,000
60,000
(6,000)
24,000
Cr
Dr
Capital
10,000
Cr D’s Capital
10,000
Cr E’s capital
10,000
ACC 3309 FIN. ACCOUNTING II
78
REV 00
Accounting entries for goodwill
adjustment
Capital Accounts
A
B
C
A
B
C
Adjustments
For goodwill
Balance b/d
50,000 50,000
24,000 Cash for capital
50,000
Cash for Goodwill
24,000
Balance c/d 68,00 56,000 50,000 Loss on Goodwill 18,000 6,000
68,000 56,000 74,000
ACC 3309 FIN. ACCOUNTING II
68,000 56,000 74,000
79
REV 00
Goodwill on withdrawal or death of
partner (no goodwill account opened)
H, I and J have been in partnership for many years sharing profit and losses
Equally. No goodwill account has ever existed. J is leaving the partnership
The other two partners are to take his share of profits equally. Each partners’
Capital before entering goodwill was RM50,000. The goodwill is valued at
RM45,000.
Goodwill
Valuation : capital H
capital I
capital J
15,000
15,000
15,000
Balance c/d
45,000
45,000
Balance b/d
45,000
H
Balance c/d
45,000
I
J
65,000 65,000 65,000
H
I
J
Balance b/d
50,000 50,000 50,000
Goodwill shares
15,000 15,000 15,000
65,000 65,000 65,000
Balance b/d
ACC 3309 FIN. ACCOUNTING II
65,000 65,000 65,000
65,000 65,000 65,000
80
REV 00
Review questions
ACC 3309 FIN. ACCOUNTING II
81
REV 00
Partnership assets revaluation
Profit or Loss on revaluation
If:
Is more than:
The result is:
New total valuation of assets
Old total valuation of assets
Gain on revaluation
90,000
(60,000)
30,000
If:
Is more than:
The result is:
New total valuation of assets
Old total valuation of assets
Loss on revaluation
40,000
(50,000)
10,000
ACC 3309 FIN. ACCOUNTING II
82
REV 00
Accounting for revaluation
Gain on revaluation:
Dr Assets ( with gain amount)
Cr Revaluation Account
Loss on revaluation:
Dr Revaluation account
Cr Assets (with loss amount)
Increase in total valuation of Assets
Dr profit to revaluation account
Cr old partners’ capital account (old ratio)
Decrease in total valuation of Assets
Dr old partners’ capital account (old ratio)
Cr Loss to revaluation account
ACC 3309 FIN. ACCOUNTING II
83
REV 00
Exhibit 43.1
Following is a Balance sheet as at 31 December 2005 of W and Y
Who sharing profits and losses in the ratio of : W-two-third and Y
One-third. From 1st January 2006 the profit change to W: 0ne-half
Y: one-half.
Balance Sheet as at 31 December 2005
Premises (at cost)
65,000 The assets were
st
Equipment (at cost less depreciation)
15,000 Revalued on 1
January 2006 to
80,000 be:
Inventory
Accounts receivable
Bank
Total Assets
Capital : W
Y
20,000
12,000
8,000
Premises
RM90,000
40,000
120,000
70,000
50,000
120,000
ACC 3309 FIN. ACCOUNTING II
Equipment
RM11,000.
Other assets
unchanged.
84
REV 00
Exhibit 43.1
Revaluation
Assets reduced in value:
Equipment
4,000
Gain on revaluation carried
to Capital accounts:
W two-third
14,000
Y one-third
7,000
21,000
25,000
Assets increased in value:
Premises
25,000
25,000
Premises
Balance b/d
Revaluation: Increase
65,000
25,000
Balance c/d
90,000
90,000
90,000
Equipment
Balance b/d
15,000
Revaluation
Balance b/d
15,000
ACC 3309 FIN. ACCOUNTING II
4,000
11,000
15,000
85
REV 00
Review questions
ACC 3309 FIN. ACCOUNTING II
86
REV 00
Partnership dissolution
•
•
•
•
Assets are disposed off
Liabilities of business are to be settled
Partners to pay any advances made
Partners to be paid the amount due to
them.
ACC 3309 FIN. ACCOUNTING II
87
Accounting for partnership dissolution
REV 00
(exhibit 44.1)
The last balance sheet of X and Y, who share profits X two-thirds;
Y one-third is shown below. On this date they are to dissolve the
partnership.
Balance Sheet at 31 December 2009
Non-current assets
Buildings
Motor vehicle
100,000
12,000
112,000
Current Assets
Inventory
Account receivable
Bank
6,000
8,000
2,000
Total assets
Current liabilities
Account payable
Nets assets
Capital X:
Y:
ACC 3309 FIN. ACCOUNTING II
16,000
128,000
(5,000)
123,000
======
82,000
41,000
123,000
======
88
REV 00
The building were sold for RM105,000 and inventory for RM4,600. RM6,800
was collected from debtors. Motor vehicles were taken by X at an agreement
value RM9,400 but he did not pay any cash. RM5,000 was paid to settle
accounts payable. The RM400 cost of The dissolutions was paid.
Type
A
B
C
D
E
description
Transfer Book value to realisation account:
Amounts received from disposal of assets:
Dr
Realisation account
Asset account
Bank
Realisation account
112,000
112,000
6,800
6,800
Values of assets taken over by partner without payment: Partner’s capital account
Realisation account
9,400
Payment to creditors:
5,000
Costs on dissolution:
Account Payable
Bank
Realisation account
Bank
F
Sharing of profit :
Realisation account
Bank
G
Sharing of Loss:
Partners’ capital account
Realisation account
ACC 3309 FIN. ACCOUNTING II
Cr
9,400
5,000
400
400
89
REV 00
Continue…..
Firstly
Buildings
Balance b/d
100,000
Realisation
100,000
Motor Vehicle
Balance b/d
12,000
Realisation
12,000
Inventory
Balance b/d
6,000
Realisation
6,000
Accounts receivable
Balance b/d
8,000
Realisation
8,000
Accounts payable
Bank
5,000
Balance b/d
ACC 3309 FIN. ACCOUNTING II
5,000
90
REV 00
Continue……
Secondly
Realisation
Assets to be realised:
Buildings
100,000
Motor Vehicle
12,000
Inventory
6,000
Accounts Receivable 8,000
Bank: Dissolution cost 400
Bank: Assets sold:
Buildings
105,000
Inventory
4,600
Accounts Receivable 6,800
Taken over by partner X:
Motor Vehicle
9,400
2
Loss on Realisation X /3 400
Y 1/3 200
126,400
126,400
Bank
Balance b/d
2,000 Realisation: Dissolution cost 400
Realisation: Assets sold:
Account payable
5,000
Buildings
105,000 Capitals: to close
Inventory
4,600
X
72,200
Y
40,800
Accounts Receivable 6,800
118,400
ACC 3309 FIN. ACCOUNTING II
118,400
91
REV 00
Continue……
X : Capital
Realisation: Motor
Realisation:
Share of Loss
9,400
Balance b/d
82,000
400
Bank: Dissolution Loss
72,200
82,000
82,000
Y : Capital
Balance b/d
Realisation:
Share of Loss
41,000
200
Bank: Dissolution Loss
40,800
41,000
ACC 3309 FIN. ACCOUNTING II
41,000
92
REV 00
Garner Vs Murray
• Partnership
dissolution
–sometimes
partner unable to pay
• According to Garner Vs Murray – such
deficiency would be shared by other
partners.
• Amount shared not in profit and loss
sharing ratio but their last agreed capital.
ACC 3309 FIN. ACCOUNTING II
93
REV 00
Exhibit 44.3
After completing the realisation of all the assets, in respect of
Which a loss of RM14,000 was incurred, but before making the
Final payments to the partners, the balance sheet appears:
Balance Sheet
Cash at bank
Capitals : R
S
T
91,000
Less Q (debit balance)
66,000
18,000
8,000
92,000
(1,000)
91,000
ACC 3309 FIN. ACCOUNTING II
94
REV 00
Balance sheet drawn up before dissolution where:
Capital account : Q RM5,000 R RM70,000 S RM20,000 T RM10,000
Profit and Loss ratio: Q3 R2 S1 T1
Q Unable to meet deficiency and under Garner v Murray rule, each
Other partners suffers the deficiency as follows:
Own capital per balance sheet before dissolution
Total of all solvent partners’ capital per balance sheet
x Deficiency
Therefore,
R
70,000
70,000 + 20,000 + 10,000
x
1,000
= 700
S
20,000
70,000 + 20,000 + 10,000
x
1,000
= 200
x
1,000
=
T
10,000
70,000 + 20,000 + 10,000
100
1,000
ACC 3309 FIN. ACCOUNTING II
95
REV 00
When these amounts have been charged to the capital accounts,
Then the balances remaining on them will equal the amount of the
Bank balance. Payment may therefore be made to clear their capital
Accounts.
Share of deficiency
Now debited
Credit balance
b/d
Final credit
balances
R
66,000
-
700
=
65,300
S
18,000
-
200
=
17,800
T
8,000
-
100
=
7,900
Equals the bank balance
ACC 3309 FIN. ACCOUNTING II
91,000
96
REV 00
Review questions
ACC 3309 FIN. ACCOUNTING II
97
REV 00
Limited Company
• Capital divided into shares.
• Shares can be at any nominal value – 0.10 sen,
0.25 sen, 0.50 sen, RM1.00, RM2.00 and so
forth.
• To become a shareholder or member of limited
company, you need to buy one or more of the
shares.
• If a shareholder has fully paid his shares, his
liability limited to the amount he/she invested.
• Shareholders said to have limited liability and
that is why it is called limited company.
ACC 3309 FIN. ACCOUNTING II
98
Legal status of a limited
company
REV 00
• Separate legal entity from its
shareholders.
• The company is seen to be separate from
its shareholders.
• Therefore, the company can sue the
shareholder and vice-versa.
• Saloman v Saloman Co Ltd.
ACC 3309 FIN. ACCOUNTING II
99
REV 00
Share capital
• Shareholders of limited company receive
its rewards in term of dividend.
• Dividend paid out of company retained
profit.
• Amount of dividend paid decide by
company’s director during company’s
AGM.
• Dividend is normally expressed in
percentage.
ACC 3309 FIN. ACCOUNTING II
100
REV 00
Share capital: different meanings
• Authorised share capital: Also known as
registered capital or nominal capital-amount
allowed to issue.
• Issued share capital: Actual number of shares
issued to shareholder.
• Called-up capital: Part of the amount payable on
each issued share has been asked for.
• Uncalled capital: Amount to be received in future.
• Calls in arrears: No payment made by
shareholders for payment of share that has been
asked for (i.e.”called for”).
• Paid-up capital: Total amount of share capital
which has been paid by shareholders.
ACC 3309 FIN. ACCOUNTING II
101
REV 00
Exhibit 45.4
Better Enterprise Bhd was formed with
the legal right to issue 1 Million shares of
RM1 each.
The company has actually issued
750,000 shares
None of the shares has yet been fully
paid-up. So far, the company has made
calls of RM0.80 per share.
All the calls have been paid by
shareholders except for RM200 owing
from one shareholder.
Authorised share capital
Of RM 1 million
Issued share capital is
RM750,000
Called-up share capital is:
750,000 x RM0.80=
RM600,000
Calls in arrears is RM200.
Paid-up share capital is:
RM600,000 – RM200 =
RM599,800
ACC 3309 FIN. ACCOUNTING II
102
REV 00
CLASSES OF SHARES
• ORDINARY SHARES
• PREFERENCE SHARES
• cumulative preference shares
• non-cumulative preference
shares
ACC 3309 FIN. ACCOUNTING II
103
ORDINARY SHARES
• Carries the right to vote.
• Entitled to share dividends only after
dividend, if any have been paid to the
other classes of shares.
• The rate of dividend is not fixed
dependent upon the company’s level of
profits and dividend policy.
ACC 3309 FIN. ACCOUNTING II
104
PREFERENCE SHARES
• CUMULATIVE PREFERENCE SHARES
• Receive a fixed dividend per annum. The
prior year dividend can be carried forward
and become payable in the future.
• NON-CUMULATIVE PREFERENCE
SHARES
• Receive a fixed rate dividend only when the
company has profit, however if dividend not
declare for that year, it will be forfeited and
cannot be carried forward.
ACC 3309 FIN. ACCOUNTING II
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Share and dividend
A dividend of 10% in Business A on 500,000 ordinary share of
RM1 each will amount to RM50,000. A dividend of 6% in a
Business B on 200,000 ordinary share of RM2 will amount to
RM24,000.
There are two types of shares:
1. Preference shares
2. Ordinary shares
For example, if a company had 50,000 5 per cent preference shares
Of RM1 each and 200,000 ordinary shares of RM1 each, then the
Dividend could be payable as followings:
Year
1
Profit appropriate for
6,500
dividends
Preference dividend (5%) 2,500
Ordinary share
dividends
(2%) 4,000
6,500
2
3
4
10,500
13,500
28,500
17,500
2,500
2,500
2,500
2,500
8,000
(5½%)11,000 (13%)
26,000
(7½)15,000
10,500
13,500
28,500
17,500
(4%)
ACC 3309 FIN. ACCOUNTING II
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NON-CUMULATIVE
PREFERENCE SHARES
A company has 500,000 ordinary shares and 100,000 5% nonCumulative preference shares of RM1 each. The profit available for
Dividends are: Y1 RM145,000, Y2 RM2,000, Y3 44,000 Y4 RM118,000
Y5 264,000. Assume all profits are paid out in dividends, the amounts
Paid to each class of shareholder are:
Profit appropriate for
dividends
Preference dividend (5%)
Ordinary share
dividends
145,000
2,000
44,000
118,000
264,000
5,000
2,000
5,000
5,000
5,000
140,000
-
39,000
113,000
259,000
145,000
2,000
44,000
118,000
264,000
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CUMULATIVE PREFERENCE
SHARES
Using the same example
Year
Profit appropriate for
dividends
Preference dividend (5%)
Ordinary share
dividends
1
2
3
4
5
145,000
2,000
44,000
118,000
264,000
5,000
2,000
8,000
5,000
5,000
140,000
-
36,000
113,000
259,000
145,000
2,000
44,000
118,000
264,000
ACC 3309 FIN. ACCOUNTING II
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8. Limited Company-issuance of
shares
• Limited company can issue ordinary share
directly to investors or indirectly through
an investment banking firm.
• Factors in setting price for a new issue of
share:
• the company’s anticipated future earnings
•
•
•
•
its expected dividend rate per share
its current financial position
the current state of the economy
the current state of the securities market
ACC 3309 FIN. ACCOUNTING II
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Corporate Capital
Ordinary Share
Account
Paid-up Capital
Paid-up Capital in
Excess of Par
Preferred Share
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Paid-up capital is the total amount of cash and other assets paid
in to the corporation by stockholders in exchange for capital share.
Retained earnings is net income that a corporation retains for
future use.
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Accounting for Common Stock Issues
Primary objectives:
1) Identify the specific sources of capital.
2) Maintain the distinction between capital and
retained earnings.
The issuance of ordinary share affects
only capital accounts.
ACC 3309 FIN. ACCOUNTING II
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Accounting for Ordinary Share Issues
Illustration: Terus Maju Bhd issued 300 shares of
RM10 ordinary share for RM4,100. Prepare Terus
Maju’s journal entry.
Cash
4,100
Ordinary share (300 x $10)
Share premium
ACC 3309 FIN. ACCOUNTING II
3,000
1,100
112
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Accounting for Ordinary Share Issues
Illustration: Better P Bhd issued 600 shares of
Ordinary share for RM10,200. Prepare Better P’s
journal entry if (a) the share has no stated value,
and (b) the share has a stated value of RM2 per
share.
a.
Cash
10,200
Ordinary share
10,200
b.
Cash
10,200
Ordinary share (600 x RM2)
Share Premium
ACC 3309 FIN. ACCOUNTING II
1,200
9,000
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Preference Share
Features often associated with preferred
stock.
1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
Accounting for preference share at issuance is
similar to that for Ordinary share.
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Preference Share
BE13-7 Boleh Tahan Bhd. issues 5,000 shares of
RM100 par value preference share for cash at
RM130 per share. Journalize the issuance of the
preference share.
Cash (5,000 x RM130)
650,000
Preference share (5,000 x RM100)
500,000
Share Premium - Preference share
150,000
Preference share may have a par value or no-par value.
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Preference Share
Dividend Preferences
Right to receive dividends
Ordinary shareholders.
before
Per share dividend amount is stated as
a percentage of the preferred share’s
par value or as a specified amount.
Cumulative dividend – holders of
preferred share must be paid their
annual dividend plus any dividends in
arrears before ordinary shareholders
receive dividends.
ACC 3309 FIN. ACCOUNTING II
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Review questions
ACC 3309 FIN. ACCOUNTING II
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9. Final Account
• Income statement
– Private and limited company income statement are
drawn up exactly the same way.
– Limited companies are no different from that of a sole
trader or a partnership except directors’ remuneration
and loan interest are included in the profit and loss.
• Statement of changes in equity
– Retained profit for the year
– Distribution and contribution of equity
– Reconciliation between opening and closing of equity.
• Balance sheet
– Itemised (assets, liabilities, shares and reserves)
ACC 3309 FIN. ACCOUNTING II
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Exhibit 45.5
IDC Ltd has share capital of 400,000 ordinary shares of RM1 each and 200,000
5% preference share of RM1 each.
The retained profits for the first 3 years of business ended 31 December
are: 2004, RM109,670; 2005, RM148,640; 2006, RM158,220
IDC
Statement of changes in equity (extract)
Year ended 31 December 2004
Retained profits
Less: Dividend paid: Preference 5%
Ordinary 10%
Retained profits carried forward
109,670
10,000
40,000
59,670
Year ended 31 December 2005
Retained profits
Add: Retained profits carried forward
Less: Transfer to general reserve
Less: Dividend paid: Preference 5%
Ordinary 12.5%
Retained profits carried forward
10,000
10,000
50,000
148,640
59,670
138,310
Year ended 31 December 2005
Retained profits
Retained profits carried forward
Less: Transfer to non-current assets replacement
reserve
Less: Dividend paid: Preference 5%
Ordinary 15%
Retained profits carried forward
158,220
174,310
22,500
10,000
60,000
ACC 3309 FIN. ACCOUNTING II
240,030
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Review questions
END
ACC 3309 FIN. ACCOUNTING II
120