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Published by odllab, 2019-12-20 03:01:28

BBM206/03 Accounting and Costing

COURSE MODULE
ACCOUNTING
and costing
Course Code: BBM206/03
Course adapted by: Mr. Lim Peng Keat School of Business and Administration (SBA)


PROJECT ADVISOR
Professor Dr Zoraini Wati Abas
COURSE MODULE DEVELOPMENT TEAM
Content Adapter: Lim Peng Keat
Lead Instructional and Visual Designer: Fauziyah Md Aris Instructional and Visual Designers: Norliza Mhd Rodzi and Nurain Mohd Hassan Language Editor: Rina Fadil
Proof Reading: Koh Kah Ling
Margin Setting: Magic Khaw Yeok Yee
Cover Page and Content Design: Nurain Mohd Hassan
COURSE COORDINATOR
Lim Peng Keat
DESIGNED AND DEVELOPED BY
Online Digital Learning Lab (ODL Lab)
PRODUCED BY
Instructional Design for Engaging Experiences (IDeX) Wawasan Open University
Acknowledgement: This course module has been adapted by the
School of Business and Administration (SBA) from the Online Course Materials for the Business Accounting II (BBM206/05) developed by Wawasan Open University.
First edition, December 2019
This course material was published to support the learning of students registered with Wawasan Open University. Wawasan Open University does not grant any degree, certification or credits based solely on your completion of this course material.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior written permission from Wawasan Open University.
© 2019 Wawasan Open University
Wawasan Open University is Malaysia’s first private not-for-profit tertiary institution dedicated to adult learners.


01 02
03
04 05
Part 1 |
Part 2 |
About the Course
Course Overview
Course Synopsis
Course Learning Outcomes Course Content
Study Schedule Assessment Methods
Course Study Guide
Accounting for Plant and Non-Current Assets Introducing to Cost and Management Accounting Company Accounting
Financial Statement Analysis
Partnership
References
Feedback Form
TABLE OF CONTENTS
Part 3 |
Unit 1 Unit 2 Unit 3 Unit 4 Unit 5
Part 4 |
Part 5 |


PART 1 ABOUT THE COURSE
COURSE DETAILS
School
Course Type Credit Hours Learning Hours
Course Title Course Code
: School of Business and Administration (SBA) : Core Course
: 3 hours
: 120 hours
: Accounting and Costing : BBM206/03
Course Coordinator : Mr. Lim Peng Keat Email : [email protected]
Core Reading Materials : BBM206/05 Business Accounting II
ALLOCATION OF STUDENT LEARNING TIME
No. Activities
Study Learning Materials, Learning Activities and Self- Tests
1
60
10
10
30
8 3
120
2 Attending 5 Tutorial Classes (2 hours per class)
Participation in Online Forum Discussions
4 Completing the Course Assignments (CA1 & CA2)
3
5 Exam Revision
6 Examination
BUY NOW
BBM206/03 Accounting and Costing
1
Total
No. of Hours


PART 2 COURSE OVERVIEW
COURSE SYNOPSIS
This course extends the topics covered in BBM 205/03 Basic Accounting and aims to advance students’ knowledge in various areas such as accounting for non-current assets, natural resources and intangible assets. This course presents the basic concepts in cost and management accounting for managerial decision making. This includes introduction of costing, break-even analysis and budgeting. It also equips students with the knowledge in preparing a statement of cash flows as well as the skills in interpreting and analysing financial statements via ratio analysis. Through this course, the students are introduced to preparation of financial statements for partnerships and limited companies, besides exposing students to the financial reporting standards and statutory requirements in Malaysia. The students are introduced to issuance of shares, dividends and financial statements for limited companies.
COURSE CONTENT
Course topics include:
1. Accounting for Plant and Non-Current Assets
2. Introducing to Cost and Management Accounting
3. Company Accounting
4. Financial Statement Analysis
5. Partnership
BBM206/03 Accounting and Costing 2


COURSE LEARNING OUTCOMES (CLOS)
By the end of this course, you should be able to:
COURSE LEARNING OUTCOMES (CLOS)
1. Apply the accounting principles for tangible and intangible non-current assets.
2. Discuss and apply the basic concepts and principles of cost and management
accounting.
3. Conduct ratio analysis to analyse the financial statements and interpret the
performance of a business.
4. Prepare financial statements including statement of cash flows for partnerships and
companies.
BBM206/03 Accounting and Costing 2
BBM206/03 Accounting and Costing 3


STUDY SCHEDULE
(Weekly topic and study activity for each unit)
Unit Week
1 1 1 2 1 3
1 4
2 5
2 6 2 7
2 8
3 9
3 10
3 11
4 12
4 13 4 14
4 15
5 16
5 17
5 18
Topic
1.1 & 1.2
1.3 1.4
1.5, 1.6 & 1.7 2.1
2.2
2.3
2.4
3.1, 3.2 & 3.3 3.4
3.4 4.1
4.1 4.2 4.4 5.1 5.1
5.2
Focus
Understanding Depreciation
Recording of Depreciation
Accounting for Disposal
Accounting for Depletion, Amortization and Goodwill
Management Accounting vs Financial Accounting
Understanding of Cost Elements
Break Even Analysis Budgeting
Limited Companies Financial Statements
Financial Statements
Ratio Analysis
Analysis of Company Performance
Statement of Cash Flow
Analysis of Company Performance
Partnership Act/Deed
Preparation of Partnership Accounts
Dissolution of Partnership
Learning Activities/ Self-Check
Videos Self-check 1.1 & 1.2
Self-check 1.3
Self-check 1.4
Videos Self-check 1.5, 1.6 & 1.7
Video Self-check 2.1
Self-check 2.2
Self-check 2.3
Self-check 2.4
Self-check 3.1, 3.2 & 3.3 Self-check 3.4 Self-check 3.4 Video Self-check 4.1 Video Self-check 4.2 Self-check 5.1 Self-check 5.1
Self-check 5.2
BBM206/03 Accounting and Costing 3
BBM206/03 Accounting and Costing 4


ASSESSMENT METHODS
COURSE
ASSIGNMENT 1
(CA1)
Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.
COURSE ASSIGNMENT 2 (CA2)
Quiz, Group Work, Presentation, Proposal, Essay, Annotated Bibliography, etc.
The student will be assessed through the following methods
TOTAL 100%
BBM206/03 Accounting and Costing
4
BBM206/03 Accounting and Costing
5
FINAL EXAM


PART 3
TABLE OF CONTENTS
U1 : ACCOUNTING FOR PLANT AND NON-CURRENT ASSETS
1.1 Capital expenditure and revenue expenditure 1.2 Depreciation
1.3 Recording of depreciation in the books
1.4 Disposal of non-current assets
1.5 Accounting for natural resource assets and their depletion 1.6 Accounting for intangible assets and their amortisation 1.7 Goodwill
U2 : INTRODUCING TO COST AND MANAGEMENT ACCOUNTING
2.1 Introducing management accounting 2.2 The concept of cost
2.3 Break-even analysis
2.4 Budgeting
U3 : COMPANY ACCOUNTING
3.1 Limited companies
3.2 Recording issuance of shares
3.3 Dividends
3.4 Financial statements for limited companies
U4 : FINANCIAL STATEMENT ANALYSIS
4.1 Ratio analysis
4.2 Analysis of company performance
4.3 Preparation of Statement of Cash Flow 4.4 Company performance analysis
U5 : PARTNERSHIP
5.1 Partnership Act 1961 and Partnership Deed 5.2 Dissolution of partnership
BBM206/03 Accounting and Costing 5
BBM206/03 Accounting and Costing 6


COURSE MODULE
Unit 1
ACCOUNTING FOR PLANT AND NON-CURRENT ASSETS


U1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8 1.9
Capital Expenditure and Revenue Expenditure
Learning Activity 1.1 Self-Check 1.1
UNIT STRUCTURE
Depreciation
Learning Activity 1.2 Self-Check 1.2
Recording of Depreciation in the Books
Learning Activity 1.3 Self-Check 1.3
Disposal of Non-Current Assets
Learning Activity 1.4 Self-Check 1.4
Accounting for Natural Resource Assets and their Depletion
Learning Activity 1.5 Self-Check 1.5
Accounting for Intangible Assets and their Amortisation
Learning Activity 1.6 Self-Check 1.6
Goodwill
Learning Activity 1.7 Self-Check 1.7
Summary
References
BBM206/03 Accounting and Costing 8
ACCOUNTING FOR PLANT AND NON-CURRENT ASSETS


U1 ACCOUNTING FOR PLANT AND NON-CURRENT ASSETS INTRODUCTION
Welcome to Unit 1 of BBM206/05 Accounting and Costing, ‘Accounting for Plant and Non-current Assets’.
What are Non-Current Assets?
Non-current assets include loans to clients for periods in excess of one financial year. It also includes amounts paid to acquire intangible long-term benefits such as leasing costs and goodwill, and the costs of purchasing tangible assets for use over several accounting periods. In this unit, we will look at tangible assets which are bought to be used over several accounting periods, such as land, buildings, office equipment, plant and machinery, and motor vehicles. These tangible assets are frequently called non-current assets or property, plant and equipment or plant assets (the term that we will use). In Malaysia, the accounting standard that governs property, plant and equipment is the Malaysian Financial Reporting Standard (MFRS 116). We shall also look briefly at the treatment of natural resources and intangible assets (governed by MFRS 3 and 138 in Malaysia).
The accounting entries for this topic are easy. You already know the adjusting entry for straight-line depreciation and the purpose of the accumulated depreciation account. You will next learn about the other depreciation methods. You will also learn how to record the other internal transactions that are used when plant assets are scrapped, sold or traded in for new ones.
Do not forget that you should follow the formats and layouts of the accounting records that appear in this unit.
UNIT LEARNING OUTCOMES
By the end of this Unit 1, you should be able to:
1. Differentiate between capital and revenue expenditure.
2. Explain why depreciation is charged and how to calculate the depreciation of non-current
assets using various methods.
3. Compute the gain/loss due to the disposal of non-current assets in the books.
4. Account for natural resource assets with their depletion, intangible assets with their
amortisation and impairment to goodwill.
BBM206/03 Accounting and Costing 9


1.1 CAPITAL EXPENDITURE AND REVENUE EXPENDITURE
In business, expenditure can be classified into capital expenditure and revenue expenditure. Capital expenditure
Capital expenditure refers to the amount spent on acquiring items of long-term nature such as motor vehicles, machinery and equipment. We would use such assets for many years. The useful life of the items is usually more than an accounting period. Such items are purchased for the improvement and enhancement of a business. Some expenditures which increase capacity or efficiency of the assets are included in capital expenditure.
Revenue expenditure
Revenue expenditure refers to a recurring expenditure like payment of salaries, rental and telephone
charges. This expenditure is normally for the purpose of running a business.
To understand the difference between capital expenditure and revenue expenditure, consider the cost to purchase a new machine and the cost to repair and maintain the machine. The cost to acquire the machine is considered to be capital expenditure, because the machine will be used for more than one accounting period and it will help to improve the production process.
Learning Activity 1.1
For a better understanding of these expenditures, please read Unit 1 (pg. 7-10) Business Accounting II of the WOU course material and refer to MFRS 116, Property, Plant and Equipment. You may also watch the following video to help you learn and study about revenue and capital expenditure, deferred revenue expenditure, and other related concepts. Duration: 5.46 minutes
Learning Activity 1.1
BBM206/03 Accounting and Costing
10


Self-Check 1.1
Source: https://youtu.be/HivdhjwWAqI
Please choose the correct cost classification for each of following expenses:
Types of expenses
Capital expenditure
Revenue expenditure
Cost of acquiring a van
Staff salary
Purchase of stationary
Renovation of factory
Electrical installation costs
BBM206/03 Accounting and Costing 11


1.2 DEPRECIATION
What is depreciation?
Depreciation is the portion of the original cost of a non-current asset that is utilised in an accounting period. When an asset is purchased, it is assumed that the asset can be used for a certain number of years. Under the matching principle, the cost of the asset have to be spread out over its useful lifespan and charged to the Statement of Comprehensive Income according to each accounting period. The matching principle states that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs. Now, you have just learnt that depreciation is an expense and it reduces profits as well as the value of the non-current asset. It is done to show a true and fair view of the financial performance and financial position of a business. Without depreciation, financial performance and financial position will be inflated.
It is not easy to determine the actual utilisation of an asset for an accounting period. This is because we cannot quantify the exact cost of an asset that has been utilised in an accounting period as we cannot really know the actual useful life of the asset. We also cannot really know the exact disposal value of an asset. Thus, depreciation is charged based on estimation.
Depreciation is mostly calculated using the following methods:
1. 2.
Straight line method Reducing balance method
Learning Activity 1.2
You can learn more about depreciation by reading Unit 1 (pg. 11-17) Business Accounting II of the WOU course materials and watching the following video.
Duration: 4.20 minutes
BBM206/03 Accounting and Costing 12


Self-Check 1.2
Source: https://youtu.be/nR3k2VkEjzw
Please attempt Activity 1.1 (pg. 13), Activity 1.2 (pg. 14), Activity 1.3 (pg. 16) in Unit 1, Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 13


1.3 RECORDING OF DEPRECIATION IN THE BOOKS
How do we record depreciation in the books?
After depreciation charges are calculated, it will be recorded in the books. The depreciation charges for the year will be charged to the Statement of Comprehensive Income. On the other hand, the cost of assets will be reduced after charging the depreciation. However, we do not credit the depreciation charges to the assets account. Instead, an account called accumulated depreciation is created to record the accumulative depreciation over the years.
The accumulated depreciation account is a provision account. Unlike other forms of expenses such as stationery, the business does not actually use up the item.
Learning Activity 1.3
Unit 1 (pg. 19-21) Business Accounting II of the WOU course materials will help you to better understand this provision.
Self-Check 1.3
Please attempt Activity 1.4 (pg. 21) and Activity 1.5 (pg. 22) in Unit I, Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 14


1.4 DISPOSAL OF NON-CURRENT ASSETS
A non-current asset may be sold or traded in at or before the end of its useful life. When a business disposes of its non-current asset, the selling price could be higher or lower than the net book value. If the selling price of a non-current asset is higher than the net book value, it is said that the business has made a “gain” on the disposal of the non-current asset. If the selling price is lower than the net book value, the business has made a “loss” on the disposal of the non-current asset.
The “gain” or “loss” from the disposal is not the normal “profit” or “loss” from business operations. It happens due to the over or under estimation of depreciation during the course of the usage of the asset. The gain or loss that arises from the disposal is just to compensate for the over or under estimated depreciation in the past.
The gain on the disposal of a non-current asset is to be credited to the Statement of Comprehensive Income while the loss on the disposal of a non-current asset is to be debited to the Statement of Comprehensive Income.
Learning Activity 1.4
For the accounting treatment of the disposal, please read Unit 1 (pg. 25-29) Business Accounting II of the WOU course materials.
Self-Check 1.4
Please attempt Activity 1.6 (pg. 29), Activity 1.7 (pg. 30) and Activity 1.8 (pg. 30) in Unit 1, Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 15


1.5 ACCOUNTING FOR NATURAL RESOURCE ASSETS AND THEIR DEPLETION
Natural resources are assets which come from the earth. Examples include timber, oil, minerals and gas. These resources can only be expended by extracting, mining and cutting them. Some natural resources are replaceable by nature.
This asset does not depreciate, but reduces in fair value in another way, namely, depletion. Is depletion the same as depreciation?
The answer is yes. Like other non-current assets which are depreciable, natural resources deplete over their useful life until nothing is left to extract.
Learning Activity 1.5
To learn the computation of depletion, please read Unit 1 (pg. 35-37) Business Accounting II of the WOU course materials.
Self-Check 1.5
Please attempt Activity 1.9 in Unit 1 (pg. 36) Business Accounting II of the WOU course materials.
1.6 ACCOUNTING FOR INTANGIBLE ASSETS AND THEIR AMORTISATION
You have learnt about tangible non-current assets and natural resources in previous sections. Here, you will be introduced to one more type of non-current asset, namely, intangible assets and learn about their importance and value to a business.
In Malaysia, accounting for intangible assets is governed by MFRS 138 Intangible Assets. Paragraph 8 of MFRS 138 defines an intangible asset as an identifiable non-monetary asset without physical substance. Intangible assets include scientific and technical knowledge, licenses, trademarks, intellectual property, customer loyalty, brand name, patents, copyrights, goodwill and creative works.
To reduce the value of intangible non-current assets, we amortise. The method of computing the value of amortisation is the same as the straight-line method in depreciation which you have learnt in prior section.
BBM206/03 Accounting and Costing 16


Learning Activity 1.6
You will learn more about amortisation by reading Unit 1 (pg. 39-40) Business Accounting II of the WOU course materials and referring to MFRS 138, Intangible Assets. Watch the following video .
Duration: 11.08 minutes
Source: https://youtu.be/DzR1HBfRDjg
Self-Check 1.6
Please attempt Activity 1.10 Unit 1 (pg. 40) Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 17


1.7 GOODWILL
Goodwill is a kind of intangible asset. However, it is not governed under MFRS 138 as the intangible assets in the previous section is. Goodwill is not an identifiable resource controlled by an entity and its cost cannot be reliably measured. Under MFRS 3, goodwill is defined as “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.”
Goodwill should not be amortised, instead it is tested for impairment at least once a year. Learning Activity 1.7
Please read unit 1 (pg. 43-45) Business Accounting II of the WOU course materials and watch the following video for a better understanding of goodwill. Duration: 9.11 minutes.
Source: https://youtu.be/yq9qjCmUfS4
Self-Check 1.7
Please attempt Activity 1.9 in Unit 1 (pg. 36) Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 18


1.8 SUMMARY
Now that you have completed Unit 1 you should be able to:
1. Explain the difference between capital and revenue expenditure.
2. Define the term “depreciation”.
3. Explain why depreciation is charged.
4. Calculate the depreciation of non-current assets using various methods.
5. Record the depreciation of non-current assets in the books.
6. Record the disposal of non-current assets in the books.
7. Calculate the gain/loss due to the disposal of non-current assets.
8. Account for natural resource assets and their depletion.
9. Account for intangible assets and their amortisation.
10. Account for impairment to goodwill.
1.9 REFERENCES
iProfIndia. (2016, Mar 2). Revenue and capital expenditure: CA CPT video lecture [Video file]. Retrieved from https://youtu.be/HivdhjwWAqI
MFRS 116 Property, Plant and Equipment. (2016, January). Retrieved from http://www.masb.org.my/pdf.php?pdf=BV2018_MFRS 116.pdf&file_path=pdf_file.
MFRS 138 Intangible Assets. (2012, January). Retrieved from http://www.masb.org.my/pdf.php?pdf=BV2018_MFRS%20138.pdf&file_path=pdf_file
Sangster, A. & Wood, F. (2018) Business accounting 1, (14th ed.) Harlow, UK: Pearson.
Sangster, A. & Wood, F. (2018) Business accounting 2, (14th ed.) Harlow, UK: Pearson.
Silvia M. (2018, July 27). IAS 38 intangible assets (summary) [Video file]. Retrieved from https://youtu.be/DzR1HBfRDjg
Suchen, N. (2013, May 25). Depreciation: the straight-line method [Video file]. Retrieved from https://youtu.be/nR3k2VkEjzw
The Finance Storyteller. (2017, Mar 27). Goodwill explained [Video file]. Retrieved from https://youtu.be/yq9qjCmUfS4
Wawasan Open University. (2008) Unit 1, BBM206/05 Business Accounting II: Accounting for plant and non-current assets. Penang: Wawasan Open University.
Wild, J.J., [et.al] (2016) Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education.
BBM206/03 Accounting and Costing 19


http://www.wou.edu.my/


COURSE MODULE
Unit 2
introducing to cost and management accounting


U2
2.1
2.2
2.3
2.4
2.5 2.6
Introducing Management Accounting
Learning Activity 2.1 Self-Check 2.1
UNIT STRUCTURE
The Concept of Cost
Learning Activity 2.2 Self-Check 2.2
Break-even Analysis
Learning Activity 2.3 Self-Check 2.3
Budgeting
Learning Activity 2.4 Self-Check 2.4
Summary References
BBM206/03 Accounting and Costing 22
INTRODUCINGTOCOSTANDMANAGEMENT ACCOUNTING


U2
INTRODUCTION
Managerial accounting is referred to in the CIMA terminology as: “...that part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or products, and the analysis of variances, profitability or social use of funds.”
Did you know that break-even analysis in costing refers to the point in which total cost and total revenue are equal? A break-even point analysis is used to determine the number of units or revenue needed to cover total costs (fixed and variable costs).
UNIT LEARNING OUTCOMES
By the end of this Unit 2, you should be able to:
1. Describe the purposes of cost and managerial accounting.
2. Explain the term “contribution margin”.
3. Explain the purpose and usage of break-even analysis with fixed and variable cost.
4. Prepare the master budget for a company.
INTRODUCING TO COST AND MANAGEMENT ACCOUNTING
BBM206/03 Accounting and Costing 23


2.1 INTRODUCING MANAGEMENT ACCOUNTING
What is management accounting? It is also referred to as managerial accounting. These two terms are interchangeable. Management accounting is defined as the provision of information required by management for purposes such as:
Formulation of policies
Planning and controlling the activities of a business entity
Disclosure to external users
Decision making on alternative courses of action
Disclosure to internal users
The above involves participation in management. The main reason is to ensure that there is effective:
1. Formulation of plans to meet objectives (long-term planning)
2. Formulation of short-term operational plans (budgeting/profit planning)
The focus of management accounting is on the preparation of reports for internal users to plan, control and make decisions.
BBM206/03 Accounting and Costing 24
Safeguarding assets


In summary, the objectives of manageme accounting are:
Planning
Planning involves the process of setting the short- or long-term objectives for an organisation and deciding how to achieve the objectives.
Control
Control involves the evaluation of the performance of individual departments in an organisation, to identify who is performing and who is not.
Organisation
There is a direct correlation between organisational structure and the management accounting system. The management accounting system should produce the right information at the right time and cost, and the organisational structure should be able to make good use of it.
Communication
Communication – plans are communicated to managers so that they are aware of the organisation’s objectives, and the management accountants will inform them of their progress in achieving objectives.
BBM206/03 Accounting and Costing 25


Learning Activity 2.1
Please read Unit 2 (pg. 3-4) Business Accounting II of the WOU course materials and watch the following video for a better understanding of management accounting. Duration: 10.33 minutes
Source: https://youtu.be/KCyg8-zM9bA
Self-Check 2.1
Please give five (5) differences between management accounting and financial accounting in the table below:
You can refer to page 4, Unit 2, of Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 26


2.2 THE CONCEPT OF COST
Do you know how cost is classified? Cost can be classified either by element or function.
The following are the CIMA definitions for the general concepts and classifications used in cost and management accounting:
Direct materials
Direct labour
Direct expenses
Indirect materials
Indirect labour
Indirect expenses
Prime cost Overhead cost
The cost of materials entering into and becoming constituent elements of a product or saleable service, and which can be identified separately in product costs.
The cost of remuneration for employees’ efforts and skills applied directly to a product or saleable service, and which can be identified separately in product costs.
Cost, other than materials or labour, which can be identified in a specific product or saleable service.
Material costs which are not charged directly to a product, for example, coolants and cleaning materials.
Labour cost which are not charged directly to a product, for example, the salary of supervisors or repairmen.
Expenses which are not charged directly to a product, for example, insurance for plant and machinery, water and electricity expenses and depreciation charges on plant and machinery.
The total cost of direct materials, direct labour and direct expenses.
The total cost of indirect materials, indirect labour and indirect expenses.
Table1.1. General concepts and classifications used in cost and management accounting.
BBM206/03 Accounting and Costing 27


Learning Activity 2.2
The concept of cost can also be found in Unit 2 (pg. 5-11) Business Accounting II of the WOU course materials.
Self-Check 2.2
Please attempt Activity 2.1 in Unit 2 (pg. 9) Business Accounting II of the WOU course material.
2.3 BREAK-EVEN ANALYSIS
The term “break-even” refers to the point at which a company neither makes a profit nor suffers a loss. In other words, this is the point where the total cost is equal to the total income of the company. This section will show you how the break-even point is computed.
Break-even analysis is a model that is used to analyse the relation of cost, volume and profit. Remember that Sales – Cost = Profit. We can segregate the total cost of a company into fixed and variable costs. Thus, we can establish the formula below:
Sales – Variable Expenses – Fixed Expenses = Net Profit or
Sales = Variable Expenses + Fixed Expenses + Net Profit
Break-even analysis is used to establish the total units of sales at which a company achieves its break-even point. Any additional quantity sold after the break-even point will contribute to the profit of the company.
In order to illustrate the analysis, there is another term to learn: contribution margin. Contribution Margin = Sales – Variable Cost.
BBM206/03 Accounting and Costing 28


The formula for break-even analysis is:
Fixed Cost
Contribution Margin
Fixed Cost
Sales - Variable
Learning Activity 2.3
or
Please read Unit 2 (pg. 13-18) Business Accounting II of the WOU course materials for the calculation of break-even point and contribution margin.
Self-Check 2.3
Please attempt Activity 2.2 (pg. 18), Activity 2.3 (pg. 19), Activity 2.4 and activity 2.5 (pg. 19) in Unit 2, Business Accounting II of the WOU course materials.
BBM206/03 Accounting and Costing 29


2.4 BUDGETING
A budget is: “A plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.”
A budget can be for income; for example, the sales budget of a company. A budget can also be for expenditure; for example, the budgeted expenditure incurred to achieve desired sales.
The preparation of the budget involves efforts from all departments in the organisation, working together to set the target for the next financial year, and the expenditure required to achieve the target.
The various budgets will be linked together to form the master budget. The master budget is referred to as the budgeted financial statement.
The master budget consists of the following:
Sales budget
Administrative expenses budget
Production budget
Budgeted
statement of financial position
Selling expenses budget
Budgeted statement of cash flows
BBM206/03 Accounting and Costing
30


Learning Activity 2.4
For preparation of budgets, please read Unit 2 (pg. 23-33) Business Accounting II of the WOU course materials.
Self-Check 2.4
Please attempt Activity 2.6 (pg. 32) and Activity 2.7 (pg. 33) in unit 2, Business Accounting II of the WOU course materials.
2.5 SUMMARY
Now that you have completed Unit 2, you should be able to:
1. Describe the purposes of cost and managerial accounting.
2. Explain fixed and variable cost.
3. Define the term “contribution margin”.
4. Explain the purpose and usage of break-even analysis.
5. Prepare the master budget for a company.
2.6 REFERENCES
Edspira. (2014, Feb 11). Introduction managerial accounting [Video file]. Retrieved from https://youtu.be/KCyg8-zM9bA
Sangster, A. & Wood, F. (2018) Business accounting 1, (14th ed.) Harlow, UK: Pearson
Sangster, A. & Wood, F. (2018) Business accounting 2, (14th ed.) Harlow, UK: Pearson.
Wawasan Open University. (2008) Unit 2, BBM206/05 Business Accounting II: Introduction to cost and management accounting. Penang: Wawasan Open University.
Wild, J.J., [et.al] (2016) Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education.
BBM206/03 Accounting and Costing 31


http://www.wou.edu.my/


COURSE MODULE
Unit 3
company accounting


U3
3.1
3.2
3.3
3.4
3.5 3.6
Limited Companies
Learning Activity 3.1 Self-Check 3.1
UNIT STRUCTURE
Recording The Issuance of Shares
Learning Activity 3.2 Self-Check 3.2
Dividends
Learning Activity 3.3 Self-Check 2.3
Financial Statements for Limited Companies
Learning Activity 3.4 Self-Check 3.4
Summary
References
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COMPANY ACCOUNTING


U3
INTRODUCTION
Limited companies are formed under the Company Act 1965 and 2016. Unlike a sole proprietorship or a partnership, the capital of a limited company is raised by the issuance of shares. The owners of limited companies are called shareholders. Each shareholder’s liability to the company is limited to the amount of shares he or she has bought. The shareholder’s personal property will not be affected if the company were to go bankrupt. The shareholders are able to receive dividend if the company makes profit.
UNIT LEARNING OUTCOMES
By the end of this Unit 3, you should be able to:
1. Explain the features of a limited company including the different classes of capital.
2. List the differences between the classes of shares.
3. Calculate the dividends payable.
4. Explain the meanings of retained earnings and reserves.
COMPANY ACCOUNTING
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3.1 LIMITED COMPANIES
A limited company is a legal entity. A limited company can hold property, enter into contracts, sue others and, unfortunately, be sued as well. Also, as the company exists separately from its owners, it has perpetuity of existence.
In summary, the important features of a limited company are:
1. Separate entity
A limited company exists separately from its owners; it can enter into contracts, sue others and be sued.
3. Perpetual existence
A limited company has perpetual existence. The death or withdrawal of shareholders will not affect the operations of the company.
2. Limited liabilities
The liabilities of the shareholders of limited companies are limited to the amount of shares they have invested in the company. Should the company go bankrupt or be dissolved, the shareholders will only lose the value of their shares and their personal properties will not be affected.
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Sendirian Berhad (SDN BHD)
Sendirian Berhad (SDN BHD) is a private limited company. It prohibits any invitation to the public to subscribe to any of its shares, deposit money with the company for investment or subscription. The minimum number of members in a private limited company is one (1) while the maximum is fifty (50).
Berhad (BHD)
Berhad (BHD) is a public limited company where its shares can be offered to the public. It can be for fixed periods and it can be in any other forms of subscription. The minimum number of members (shareholders) is two (2) while there is no maximum, that is, unlimited number of members.
There are three (3) types of limited companies in Malaysia:
Limited by Shares
Learning Activity 3.1
Limited by Guarantee
Unlimited company with/without share capital
You can learn more about limited companies by reading Unit 3 (pg. 4-7) Business Accounting II of the WOU course materials and referring to Companies Act 2016.
Self-Check 3.1
What are the features of a private limited company (Sendirian Berhad)? How are limited liability companies regulated in Malaysia?
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3.2 RECORDING THE ISSUANCE OF SHARES
The issuance of shares involves a process of offer, application and allotment. When a company plans to offer shares to the public, it will appoint an issuing house, for example, Malaysian Industrial and Corporate Services Sdn. Bhd. (MIDFCCS) or Malaysian Issuing House Sdn. Bhd. (MIH) to execute it.
The company has to first submit an application to the Securities Commission for approval. Upon approval, the company will circulate a prospectus relating to the share issue and the financial affairs of the company.
Interested members of the public will then apply for the shares by sending in their application forms and the subscription amount. The company will then allot the shares to the successful applicants and refund the subscription amount to the unsuccessful applicants.
What are the journal entries involved in recording the issuance of shares?
Learning Activity 3.2
Please read Unit 3 (pg. 9-11) Business Accounting II of the WOU course materials for the journal entries involved in recording the issuance of shares.
Self-Check 3.2
Please attempt Activity 3.1 (pg. 11) in Unit 3 Business Accounting II of the WOU course materials.
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3.3 DIVIDENDS
Dividends are the returns that shareholders will receive from a limited company. They are distributed from the profits of the company. Dividends are proposed by the directors based on the performance of the company and are distributed to the shareholders.
There are two classes of dividends. The interim dividends refer to the dividends paid prior to the closure of the annual financial accounts. The final dividends are declared at the end of a financial year, after the profits are determined.
The decision on the amount of dividend payable has to be planned carefully by the directors, as this involves not only the cash outflow of the company but also the affects the dividend on the individual share price and market value of the company. In addition, there are other external implications such as those based on the prevailing market perspectives. The directors will recommend the dividend payable and declare it in the annual general meeting. The shareholders will normally agree with the proposed dividend.
How is the dividend calculated?
Learning Activity 3.3
For the calculation of dividends, read Unit 3 (pg. 13-16) Business Accounting II of the WOU course materials.
Self-Check 3.3
Please attempt Activity 3.2 and Activity 3.3 (pg. 15) in Unit 3 Business Accounting II of the WOU course materials.
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3.4 FINANCIAL STATEMENTS FOR LIMITED COMPANIES
Under the structure of limited companies, the board of directors is responsible for the management of a company. The shareholders, although they are the owners of the company, can only vote for the board of directors in the annual general meetings but have no direct influence in the operation of the company. They will have to rely on the information from the financial statements of the company to understand the financial position of the company.
Other external parties such as creditors, bankers and potential investors also depend on the information from the financial statements for their decision making. Thus, the information disclosed in the financial statements is crucial. In line with this, the presentation of the financial statements for limited companies must comply with the Malaysian Financial Reporting Standard (MFRS) 101 – Presentation of Financial Statements.
Under MFRS 101, a complete set of financial statements consists of:
1. A statement of financial position as at the end of the period.
2. A statement of profit or loss and other comprehensive income for the period.
3. A statement of changes in equity for the period.
4. A statement of cash flows for the period.
5. Note, comprising a summary of significant accounting policies and other explanatory
information.
In this section, you will learn about the presentation of the statement of financial position, the statement of profit or loss and other comprehensive income, and the statement of changes in equity. The statement of cash flows will be discussed in Unit 4.
Learning Activity 3.4
Please read Unit 3 (pg. 19-26) Business Accounting II of the WOU course materials and refer to MFRS 101, Presentation of Financial Statements for the preparation of Statement of Comprehensive Income and Financial Position.
Self-Check 3.4
Please attempt Activity 3.4 (pg. 24) and Activity 3.5 (pg. 25) in Unit 3 Business Accounting II of the WOU course materials.
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3.5 SUMMARY
Now that you have completed Unit 3 you should be able to:
1. Explain the features of a limited company.
2. List the differences between the classes of capital of a limited company.
3. List the differences between the classes of shares.
4. Calculate the dividends payable.
5. Explain the meanings of retained earnings and reserves.
3.6 REFERENCES
MFRS 101 Presentation of Financial Statements. (2012, January). Retrieved from http://www.masb.org.my/pdf.php?pdf=BV2018_MFRS%20101.pdf&file_path=pdf_file
Sangster, A. & Wood, F. (2018) Business accounting 1, (14th ed.) Harlow, UK: Pearson.
Sangster, A. & Wood, F. (2018) Business accounting 2, (14th ed.) Harlow, UK: Pearson.
Wawasan Open University. (2008) Unit 3, BBM206/05 Business Accounting II:Company accounting. Penang: Wawasan Open University.
Wild, J.J., [et.al] (2016) Fundamental accounting principles Asia global edition, (2nd ed.) Asia: McGraw-Hill Education.
WOU EduChannel. (2019, Feb 20) Expense accured [Video file]. Retrieved from https://youtu.be/Gp0xghc0_Ro
WOU EduChannel. (2019, Feb 20) Reversal of expense accrued [Video file]. Retrieved from https://youtu.be/zK1nWqAb6GQ
WOU EduChannel. (2019, Feb 20) Revenue accrued [Video file]. Retrieved from https://youtu.be/Rcs_XD0e7JE
WOU EduChannel. (2019, Feb 20) Depreciation [Video file]. Retrieved from https://youtu.be/RhukVW-XlTA
WOU EduChannel. (2019, Feb 20) Methods of calculating depreciation [Video file]. Retrieved from https://youtu.be/SkFle2JlZ2o
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http://www.wou.edu.my/


COURSE MODULE
Unit 4
FINANCE STATEMENT ANALYSIS


U4
4.1
4.2
4.3 4.4
Ratio Analysis
Learning Activity 4.1 Self-Check 4.1
UNIT STRUCTURE
Statement of Cash Flow
Learning Activity 4.2 Self-Check 4.2
Summary References
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FINANCIAL STATEMENT ANALYSIS


U4 FINANCIAL STATEMENT ANALYSIS INTRODUCTION
You should now have learnt about how to prepare the statement of financial position or statement of comprehensive income for limited companies. You should also, by now, know the rules and regulations that govern the preparation of these financial statements, as well as the concepts and principles of preparing them.
If you were to look at a statement of financial position or statement of comprehensive income, how would you decide whether the company was doing well or badly? What would you be looking at in
the figures to help you to make your judgement?
In this unit, you will learn to interpret the information obtained from financial statements by using ratio analysis. Ratio analysis involves comparing one figure against another to produce a ratio, and assessing whether the ratio indicates a weakness or strength in the company's affairs.
You will also learn how to prepare the Statement of Cash Flows and its uses. The Statement of Cash Flows shows the changes in the net cash and bank balances in relation to the net income of a company. It also shows the sources and the usage of funds in the stipulated period.
UNIT LEARNING OUTCOMES
By the end of this Unit 4, you should be able to:
1. Explain the need for financial analysis in a business.
2. Compute the basic financial ratios and interpret the ratios based on the information from
the financial statements.
3. Explain the purpose and usage of the Statement of Cash Flows.
4. Prepare Statement of Cash Flows and relevant headings in the statement.
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4.1 RATIO ANALYSIS
We use ratios analysis to compare the performance of businesses, either in different financial periods, or against other companies in the same industry. Different ratios are used to measure different area of performance.
Basic ratios can be grouped into four categories: 01Profitability of business
03 Liquidity of the business
02 The level of efficiency of business activities
04 Capital structure
1. Gross profit margin
2. Mark-up on cost
3. Net profit margin
1. Working capital
2. Current ratio
3. Quick ratio
Learning Activity 4.1
1. Leverage ratio or the debts assets ratio or the gearing ratio.
Please read Unit 4 (pg. 3-11) Business Accounting II of the WOU course materials and watch the following video for a better understanding of ratio analysis. Duration: 16.13 minutes
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1. Rate of stock turnover
2. Percentage of expenses to
turnover


Self-Check 4.1
Source: https://youtu.be/55af7cmyczo
Please attempt Activity 4.1(pg. 11), Activity 4.2 (pg. 11), Activity 4.3 (pg. 12), and Activity 4.4 (pg. 13) in Unit 4 Business Accounting II of the WOU course materials.
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