The words you are searching are inside this book. To get more targeted content, please make full-text search by clicking here.
Discover the best professional documents and content resources in AnyFlip Document Base.
Search
Published by odllab, 2019-12-20 02:42:07

BBM205/03 Basic Accounting

COURSE MODULE
BASIC ACCOUNTING
Course Code: BBM205/03
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: Ong Cheng Teik
Proof Reading: Jeanne Chow Min Hian
Margin Setting: Magic Khaw Yoke 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 I (BBM205/05) 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 | About the Course
Part 2 | Course Overview
TABLE OF CONTENTS
Course Synopsis
Course Learning Outcomes Course Contents
Study Schedule Assessment Methods
Part 3 | Course Study Guide
Unit 1 Unit 2 Unit 3 Unit 4 Unit 5
Accounting in Business
Double Entry Bookkeeping
Performing Advanced Transactions
Internal Control for Cash and Correction of Errors Preparing Basic Financial Statements and Cash Budgets
Part 4 | References
Part 5 | Feedback Form


COURSE DETAILS
School
Course Type Credit Hours Learning Hours
Course Title Course Code
: School of Business & Administration (SBA) : Core Course
: 3 hours
: 120 hours
: Basic Accounting : BBM 205/03
PART 1 ABOUT THE COURSE
Course Coordinator : Mr. Lim Peng Keat Email : [email protected]
Core Reading Material(s) : BBM205/05 Business Accounting I
ALLOCATION OF STUDENT LEARNING TIME
Study Learning Materials, Learning Activities and Self- Tests
No.
Activities
No. of Hours
1
60
10
10
30
8 3
121
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
BBM205/03 Basic Accounting
1
Total


COURSE SYNOPSIS
PART 2 COURSE OVERVIEW
This course equips the student with the essential concepts and principles of accounting and familiarises the student with the basics of preparing the books of accounts and financial statements. The course first introduces the student to the basic building blocks and major components of financial reporting and to the context within which accounting operates. This includes the organisations where accounting transactions are performed; the accounting equation, a brief introduction to the basic financial statements, the users of the accounting information and accounting concepts. The student will then learn how to prepare general journals, specialised journals, ledgers, trial balance, and the financial statements. Besides that, the student will also learn the basic business documentation, practical knowledge of internal controls relating to cash, correcting errors, preparing petty cash accounts, bank reconciliation, suspense accounts, and cash budget.
COURSE CONTENT
Course topics include:
1. Accounting in Business.
2. Double Entry Bookkeeping.
3. Performing Advanced Transactions.
4. Internal Control for Cash and Correction of Errors.
5. Preparing Basic Financial Statements and Cash Budget.
BBM205/03 Basic Accounting 2


COURSE LEARNING OUTCOMES (CLOS)
By the end of this course, you should be able to:
1. Discuss and apply the basic concepts and Principles of Accountancy.
2. Display and apply the competencies in the knowledge of Accounting and recording
Business Transactions.
3. Apply and demonstrate skills in Double Entry System, Preparation of Financial
Statements and the Procedures of the Accounting Cycle.
BBM205/03 Basic Accounting 3


STUDY SCHEDULE
(Weekly topic and study activity for each unit)
Unit Week
1
Topic
1.1 & 1.2 1.3 1.3
1.4 2.1 2.2
2.3 & 2.4 3.1
3.2 3.3 3.4 3.5 & 3.6 4.1 & 4.2 4.3
4.4 5.1 5.2
5.3 & 5.4
Focus
Importance of Accounting
Accounting Equation
Accounting Equation
Business Documents
Journal Entries
T-Ledger G-Ledger
Trial Balance
Accruals & Prepayments
Bad Debts Depreciation
Control Accounts
Inventory Valuation
Control for Cash
Bank Reconciliation
Suspense Accounts
Closing Entries
10-Column Worksheet
Financial Statements & Cash Budgets
Learning Activities/ Self-Check
Video Self-Check 1.1 &1.2
Video Self-Check 1.3
Video Self-Check 1.3
Self-Check 1.4
Self-Check 2.1
Video Self-Check 2.2 & 2.3
Self-Check 2.4
Videos Self-Check 3.1
Self-Check 3.2
Video Self-Check 3.3
Self-Check 3.4 Self-Check 3.6
Self-Check 4.1 & 4.2 Self-Check 4.3 Self-Check 4.4 Self-Check 5.1 Self-Check 5.2
Self-Check 5.3 & 5.4
1 12 1 3
1 4
2 5
2
2 7
3 8
3 9 3 10 3 11
3 12
4 13
4 14
4 15
5 16
6
5 17 5 18
BBM205/03 Basic Accounting 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%
BBM205/03 Basic Accounting
5
FINAL EXAM


PART 3
TABLE OF CONTENTS
U1 : ACCOUNTING IN BUSINESS
1.1 Introducing Accounting
1.2 Objectives and Users of Financial Statements
1.3 Demonstrate and Justify the Accounting Equation 1.4 Explain and Prepare the Basic Financial Statements
U2 : DOUBLE ENTRY BOOKKEEPING
2.1 Books of Prime Entry & Journals 2.2 Double Entry Recording
2.3 General Ledger
2.4 Trial Balance
U3 : PERFORMING ADVANCED TRANSACTIONS
3.1 Accruals and Prepayments
3.2 Bad Debts and Provision for Doubtful Debts
3.3 Depreciation on Fixed Assets
3.4 Preparing Control Accounts and Subsidiary Ledgers
3.5 Inventory Valuation
3.6 Perpetual Inventory System and Periodic Inventory System
U4 : INTERNAL CONTROL FOR CASH & CORRECTION OF ERRORS
4.1 Internal Control for Cash
4.2 Preparing Petty Cash Accounts
4.3 Performing Bank Reconciliation
4.4 Suspense Accounts and Correction of Errors
U5 : PREPARING BASIC FINANCIAL STATEMENTS & CASH BUDGETS
5.1 Performing Closing Entries
5.2 Preparing the ten-column Worksheet 5.3 Preparing Basic Financial Statements 5.4 Preparing Cash Budgets
BBM205/03 Basic Accounting 6


COURSE MODULE
ACCOUNTING IN BUSINESS
UNIT 1


U1
1.1
1.2
1.3
1.4
1.5 1.6
Introducing Accounting
Learning Activity 1.1 Self-Check 1.1
UNIT STRUCTURE
Objectives and Users of Financial Statements
Learning Activity 1.2 Self-Check 1.2
Demonstrate and Justify the Accounting Equation
Learning Activity 1.3 Self-Check 1.3
Explain and Prepare the Basic Statements
Learning Activity 1.4 Self-Check 1.4
Summary
References
BBM205/03 Basic Accounting 8
ACCOUNTING IN BUSINESS


U1
INTRODUCTION
ACCOUNTING IN BUSINESS
Source: https://bit.ly/2IWjiUo
What is money as related to accounting? If money is the resource then accounting is the system to track the money. In this course, you will learn the fundamental skills to trade and plan this resource in your business.
Welcome to the first unit of BBM205/03 Basic Accounting. The first unit is meant to give you a brief introduction to the Process of Accounting before you start learning how to prepare Journals, Ledgers, Trial Balance, and the detailed Financial Statements.
You are going to come across many new terms and concepts. Do not worry if you are not familiar with them at this moment. They will be revisited many times in the other four units. Nevertheless, whenever you meet a new term or concept, be sure to maintain a list of these items cross-referenced to their explanation or definition in the course unit.
The actual time you need depends on your rate of study. To complete this unit, you need to work diligently through all the activities.
BBM205/03 Basic Accounting 9
Please watch this video.
Title: Introduction to Accounting Duration : 2.08 minutes


UNIT LEARNING OUTCOMES
By the end of this Unit 1, you should be able to:
1. Describe what accounting is and examine the accounting concepts.
2. Illustrate the uses of accounting for different categories of users.
3. Demonstrate and justify the accounting equation.
4. Explain and prepare the basic financial statements.
1.1 INTRODUCING ACCOUNTING
Accounting is an information system that identifies, records, and communicates relevant, reliable, and comparable information on the entire organisation’s business activities (Wild, Shaw, & Chiappetta, 2016). A business must first identify its business activity. For example, Starbucks needs to know how much coffee it sells for the day and, similarly, Wawasan Open University needs to know how many students enrolled for a course for the new semester.
Before we introduce the basics of preparing accounts, you will need to understand the basic accounting concepts. These concepts are the fundamentals in the preparation, understanding, and interpretation of financial statements.
Here is the list of accounting concepts that you need to know. All of them are important! (see Figure 1.1).
1. Going concern 2. Accruals
3. Matching
4. Entity
5. Materiality
6. Time Period
7. Historical Cost
8. Money Measurement
Figure 1.1 Important accounting concepts
9. Duality
10. Prudence
11. Substance Over Form 12. Consistency
13. Separate Determination
In order to understand each of the above 13 concepts, read Unit 1 (pg. 26 to 30) Business Accounting 1 of WOU course materials.
BBM205/03 Basic Accounting 10


Learning Activity 1.1
The following video will explain each of the 13 Accounting Concepts.
Duration: 3.18 minutes
Source: https://youtu.be/XYxTnVWDBDM
Self-Check 1.1
When you are ready, attempt Self-test 1.1 in Business Accounting I of WOU course materials to see if you have understood some of the important accounting concepts.
BBM205/03 Basic Accounting 11


1.2 OBJECTIVES AND USERS OF FINANCIAL STATEMENTS
In Section 1.1, you have learnt about the Accounting important concepts .
According to the Framework of the Preparation and Presentation of Financial Statements (MFRS 101), the Objective of Financial Statements is to provide information about the financial position, performance, and changes in Financial Position of an entity. A Financial Statement is useful to a wide range of users for making economic decisions. In this section, you will identify the users and the user group of accounting information.
Users of Annual Reports can be categorised into two (2) groups: Internal Users and External Users. Internal Users are those who are involved directly with the resources of the company. External Users are the people who do not have direct control on the resources of the company (see Figure 1.2).
Internal Users
• Management • Employees
Users of Annual Reports
External Users
• Investors & Potential Investors • Lenders
• Suppliers & other Creditors
• Customers
Figure 1.2 Internal and external users of annual reports
Learning Activity 1.2
Please read Unit 1 (pg. 17 to 19) Business Accounting 1 of WOU course materials. You will learn about investors and potential investors and implications on various stakeholders (management, employees, lenders, suppliers and other creditors, customers, public, government, analyst advisor group as well as competitors and takeover bidders).
Self-Check 1.2
When you are ready, attempt Self-test 1.2 in Business Accounting 1 of WOU course materials to determine how well you understand the group of users.
BBM205/03 Basic Accounting 12


1.3 DEMONSTRATE AND JUSTIFY THE ACCOUNTING EQUATION
Before you can prepare the basic financial statements, you should understand the components of the accounting equation like asset, liability and equity. In this section, you will be introduced to these accounting terms which are the basic of financial statements. You will then learn the way to prepare the basic financial statements.
Note that, knowing and understanding the accounting equation is the key to understand the Double Entry Bookkeeping System.
Now, let us get down to business. Let us set up a burger stall at a shopping mall selling burgers and hot dogs. A business definitely needs resources. This business needs a stall, kitchenware, food supply and of course someone to cook and serve. All of these resources do not fall from the sky. Someone certainly needs to provide those resources. Who else will that be but the Business Owner!
Here is your very first Accounting Equation:
Resources Supplied by the Owner = Resources in the Business
[ Equity or Capital ] [ Assets ]
The resource supplied by the owner is the capital of the business. It is also known as the owner’s equity or capital. The resources in the business are called the assets of the business.
To simplify the above equation, let us rewrite the Accounting Equation.
Capital = Assets
There are times when other people rather than the owner provide resources to the business. The amount owed to those people who provide the resource is referred to as a liability. The Accounting Equation will now looks like this:
Capital = Assets - Liabilities
The assets of the business are either provided by the owner or other people. So, a better way to understand it is to rearrange the Accounting Equation as below:
Assets = Capital + Liabilities
BBM205/03 Basic Accounting
13


The total amount of the assets is always equal to the total amount of capital plus liabilities. Now you can clearly see that the assets are funded by both the owner’s capital and liabilities.
Always remember that both sides should equal to each other. The duality concept keeps the accounting equation in balance.
The Accounting Equation is important because it forms the basis for the whole Accounting Process. It is the foundation for the preparation of the Statement of Financial Position.
For now, let us learn the three (3) main components in the Accounting Equation:
Assets are resources held by an entity that will help the entity to generate income in the future (Thomas & Ward, 2016). Examples of assets are land, buildings, motor vehicles, inventories, accounts receivable and cash.
Assets
Liabilities are the present obligations of the entity that it has to meet in the future. Examples of liabilities are loans from the bank and accounts payable.
Liabilities
Equity or owner’s equity or capital, they all mean the same thing. Equity is the owner’s claims against the business entity. It is the net worth of the organisation to the owners.
Equity
The Statement of Financial Position lists out the Assets, Liabilities and Capital of the Business at the end of a given Accounting Period. It basically shows the financial position of the entity at a specific time. The Statement of Financial Position reflects the Accounting Equation and it shows us the Resources and Debts of the Entity.
BBM205/03 Basic Accounting 14


Learning Activity 1.3
To further understand all the above, let us now walk through a series of transactions to illustrate the Accounting Equation. Read Unit 1 (pg. 35 to 44) Business Accounting 1 of WOU course materials.
Source: https://youtu.be/lgqcuGLTkrg
Self-Check 1.3
Next, please attempt Self-test 1.4, (pg. 47) in Business Accounting I of WOU course materials to check your understanding of assets, liabilities, and owner’s equity.
BBM205/03 Basic Accounting 15
Next, watch the video on additional explanations of the Accounting Equation.
Duration: 4.15 minutes


1.4 EXPLAIN AND PREPARE THE BASIC FINANCIAL STATEMENTS
The end product of the entire accounting process is the Financial Statements. Practically, there are five ( 5 ) components in a complete set of Financial Statements ( see Figure 1.3 ).
Components of the Financial Statement
1. Statement of Comprehensive Income
(Income Statement or Profit and Loss Accounts).
2. Statement of Changes in Equity.
3. Statement of Financial Position (Balance Sheet).
4. Statement of Cash Flows.
5. Notes to the Financial Statements.
Figure 1.3 Five components of a complete set of financial statements
All Business Entities in Malaysia except Private Entities are required to comply with the Malaysian Financial Reporting Standards (MFRS) 101 – Presentation of Financial Statements.
All entities
1.
2. 3. 4. 5.
6.
should prepare a complete set of Financial Statements, which include:
Financial Statements
Statement of comprehensive income (or an income statement and a statement of comprehensive income).
Statement of changes in equity.
Statement of financial position.
Statement of cash flows.
Notes, comprising a summary of significant Accounting Policies and other explanatory information.
Statement of financial position at the beginning of the earliest period when an entity applies an accounting policy retrospectively or a retrospective restatement of items in its financial statements, or when reclassifies items in its Financial Statements.
BBM205/03 Basic Accounting 16


The MFRS 101 applies to Annual Accounting Periods commencing on or after January 1, 2010, with early application permitted.There is a relationship between (1) the Statement of Financial Position, and (2) the Statement of Comprehensive Income, and (3) the Statement of Changes in Equity
(see Figure 1.4).
STATEMENT OF FINANCIAL BEGINNING POSITION
Assets - Liabilities = Owner’s Equity
STATEMENT OF COMPREHENSIVE INCOME
Revenue - Expenses = Net Profit
STATEMENT OF CHANGES IN EQUITY
Beginning Owner’s Equity
Figure 1.4 The relationship between the statement of financial position, the statement of comprehensive income, the statement of changes in equity
The statement of financial position can be presented in two (2) formats:
1. Horizontal Format.
2. Vertical Format.
In the Horizontal Format, the assets will be listed on the left side while the Liabilities and Owner’s Equity will be listed on the right side. The Horizontal Format is basically presented in a T-Format. An example of statement of financial position prepared in a horizontal format is presented in Figure 1.5. Please note that the company and the figures illustrated here are fictional.
BBM205/03 Basic Accounting 17
END OF YEAR STATEMENT OF
FINANCIAL


Figure 1.5 The statement of financial position in the horizontal format
In the vertical format, the assets, liabilities, and owner’s equity are listed vertically. This is the more common format that you will see in practice. The statement of financial position is presented as an example in a vertical format in MFRS 101. An example of statement of financial position prepared in a horizontal format is presented in Figure 1.6.
Figure 1.6 The statement of financial position in the vertical format
BBM205/03 Basic Accounting 18


Learning Activity 1.4
By now, you should be able to read and understand the financial statements. Let us see if you can apply your knowledge of Financial Statements .Browse through the Annual Reports of some local listed companies you know of. Visit the website of your chosen local listed company and go to the Investor Relations Section of the website to view their Annual Report.
Make a list of the Financial Statements that you have seen in the Annual Reports.
Next, study the figures carefully and look at the relationship between the Financial Statements. For example, trace the Total Comprehensive Income from the Statement of Comprehensive Income to the Statement of Changes in Equity. Also, you can trace the total retained earnings from the Statement of Changes in Equity to the Statement of Financial Position.
To further strengthen your skill in reading Financial Statements, look for other Financial Statements and do the same.
Additionally, ask yourself a few questions as you read the financial statements. Some of the questions you may ask yourself include:
1. How much revenue is the company making?
2. Is the company making a profit or a loss?
3. What assets does the company own?
4. How much do they owe to outsiders?
5. Is the company having a lot of cash in its business?
6. Does the company issue any shares for the year?
Self-Check 1.4
Please attempt Activity 1.7 (pg. 59) in Business Accounting I of WOU course materials to reinforce your understanding of financial statements.
BBM205/03 Basic Accounting 19


1.5 SUMMARY
Now that you have completed Unit 1, you should be able to:
1. Describe what accounting is and illustrate the uses of accounting for different categories of
users.
2. Examine and apply the accounting concepts.
3. Demonstrate and justify the accounting equation.
4. Explain the basic financial statements and prepare the basic financial statements.
1.6 REFERENCES
FutureLearn. (2019, Oct 14). Introduction to financial accounting [Video file]. Retrieved from https://www.futurelearn.com/courses/introduction-to-financial- accounting-organizations-decisions-through-numbers
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. (2007). BBM205/05 Business Accounting 1: Accounting in business.
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). Accounting concepts [Video file]. Retrieved from
https://youtu.be/XYxTnVWDBDM
WOU EduChannel. (2019, May 23). Accounting equation [Video file]. Retrieved from
https://youtu.be/lgqcuGLTkrg
BBM205/03 Basic Accounting 20


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


COURSE MODULE
DOUBLE ENTRY BOOKKEEPING
UNIT 2


U2
2.1
2.2
2.3
2.4
2.5 2.6
Books of Prime Entry & Journals
Learning Activity 2.1 Self-Check 2.1
UNIT STRUCTURE
Double Entry Recording
Learning Activity 2.2 Self-Check 2.2
General Ledger
Learning Activity 2.3 Self-Check 2.3
Trial Balance
Learning Activity 2.4 Self-Check 2.4
Summary
References
BBM205/03 Basic Accounting 23
DOUBLE ENTRY BOOKKEEPING


U2 DOUBLE ENTRY BOOKKEEPING INTRODUCTION
Are you ready to get down to business?
In this unit, we will learn how to record business transactions in the double-entry system by preparing general journals and general ledgers . Besides that, we will also learn how to balance the general ledger accounts and prepare the trial balance, before we can actually prepare the financial statements for the use of internal and external parties.
We will start with the basic business documents which include delivery notes, invoices, credit notes, debit notes, statement of accounts, cheques, cheque butts, payment vouchers, and receipts. You will also be given an introduction to the various books of prime entry, such as purchases journals, sales journals, purchases returns journals, sales returns journals and cash books. The important part is the general journal as you will learn how to prepare it in this unit. This unit also shows the flow of recording process starting from the basic business documents and ending with the trial balance.
Please read Unit 2 (pg. 3 to 13) Business Accounting I of WOU course materials for the understanding of basic business documents.
UNIT LEARNING OUTCOMES
By the end of this Unit 2, you should be able to:
1. Analyse and record transactions in the general journals, the general ledger and trial
balance by using the accounting equation.
2. Explain the journals, T-accounts, general ledgers, trial balances, debits and credits as
useful tools in the accounting process.
3. Describe and perform the closing process of the temporary accounts.
BBM205/03 Basic Accounting 24


2.1 BOOKS OF PRIME ENTRY AND JOURNALS
Based on the source documents mentioned earlier, a transaction will first be recorded in the books of prime entry before posting it to the ledgers. The books of prime entry enable a transaction to be recorded with more details. The diagram below depicts the flow of transactions from the source documents to the financial statements (see Figure 1.1):
Credit Credit Sales Purchases
Sales Purchases Returns
Returns
Bank Transactions Transactions
Cash & Other
vvvvvv
Sales Journal
Purchases Journal
Purchases Returns Journal
Cash Book
General Journal
Sales Returns Journal
v
General Ledger
v
Trial Balance
v
Financial Statements
Figure 1.1 Flow of transactions from the source documents to the financial statements
BBM205/03 Basic Accounting 25


Another way to look into the process of recording transactions is shown below (see Figure 1.2):
Steps in recording: STEP 1
STEP 2 STEP 3 STEP 4
STEP 5
Figure 1.2 Process of recording transactions
From the diagram above, we can see that information from the business documents are first recorded
into journals. There are two (2) types of journals, namely specialised journals and general journals. Specialised Journal
Specialised journals are used to record specific transactions only. There are four (4) specialised journals as shown below:
Analyse each transaction from the source documents.
Record the transactions into the specialised journals, cash book or general journal.
Post the journal entries into the general ledger.
Transfer balances from the general ledger into the trial balance.
Prepare financial statements.
Sales Journal
Purchases Journal
Sales Returns Journal
Purchases Returns Journal
The format of a Sales Journal is shown below (see Table 1.1):
Date
Particulars
Invoice No.
RM
xxxx
xxxx
xxxx
xxxx
Name of credit customer Name of credit customer Name of credit customer Name of credit customer
Sales Account CR
1234
1235
1236
1237
xxx
xxx
xxx
xxx
xxx
BBM205/03 Basic Accounting
26
Table 1.1 Format of sales journal


General Journal
The general journal is one of the books of prime entry and transactions are entered daily into the
general journal based on the information from the source documents. The format of the general journal is shown below (see Table 1.2):
Table 1.2 Format of general journal
We record the following transactions in the general journal (see Figure 1.3):
The general journal is normally used to record the following transactions:
12345
Date
Particulars
Folio
DR
CR
Opening Entries - entries that are made when opening a new set of books or a new financial period
Learning Activity 2.1
Introduction of additional capital other than cash
Closing Entries
Purchase or Sales of Fixed Assets on Credit
Any other transactions that are not recorded in other books of Prime Entry
Figure 1.3 General journal transactions
Please read Unit 2 (pg.15 to 24) Business Accounting I of WOU course materials for the understanding of journals.
Self-Check 2.1
Please attempt Self-test 2.1 (pg. 21), Activity 2.4 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of journals.
BBM205/03 Basic Accounting 27


2.2 DOUBLE ENTRY RECORDING
The double-entry system is the recording of the dual effect of each transaction in appropriate account. For every transaction, there must be at least a debit entry and a credit entry. The total of the debit and credit entries must be tallied to meet the rule of the accounting equation.
Figure 1.4 below depicts the combination of the double entry system and the accounting equation (Clarke, 2009):
Relationship of Debit and Credit in Accounting Equation Increase
Decrease
Debit Credit Assets
Debit
Credit
v
Assets ==
Liabilities v Liabilities ++
Capital + Revenue
- Expenses
v Capital +
Revenue - Expenses
v
v
A debit entry to an asset or an expense will see an increase in the amount of the asset or expenses. Meanwhile, a credit entry to an asset or an expense will see a decrease in the amount of the asset or expenses, as illustrated in Figure 1.4 above.
A credit entry to a liability, capital, or revenue will see an increase in the amount of the liability, capital or revenue. A debit entry to a liability, capital or revenue will see a decrease in the amount of the liability, capital or revenue, as illustrated in Figure 1.4 above.
Figure 1.4 Relationship of debit and credit in accounting equation
BBM205/03 Basic Accounting 28
v v
v
v
v


Learning Activity 2.2
Please watch the following video below to know more about double entry recording.
Duration: 3.18 minutes
Source: https://youtu.be/Gk_VNstFC5E
Self-Check 2.2
Please attempt Activity 2.5 (pg. 31) in Business Accounting I of WOU course materials to gauge your understanding of double entry recording.
BBM205/03 Basic Accounting 29


2.3 GENERAL LEDGER
General Ledger is a book which contains all accounts affected by various transactions in a business. Therefore, it can be termed as a classified and summarised record of business transactions relating to all personal, real and nominal accounts. It is a book where all accounts are maintained and into which all journal entries are posted. It is a permanent, ultimate and up-to date record of all transactions which provides a means of easy and ready reference for the users.
The general ledger comprises several T-accounts. The name of T-account comes from its shape as it resembles the letter T which is shown in the Table 1.3 below:
Table 1.3 Format of the T-Account general ledger
Please read Unit 2 (pg. 34-37) Business Accounting I of WOU course materials for the understanding of general ledger.
At the end of the month, we may want to know the balance remaining in the T-accounts. If you own a business, you would want to know what balances are remaining in your Bank account, Motor Vehicle account, or Capital account. This needs to be done so that the balance for a specific T-account can be easily read, seen, and understood. When it comes to balancing and closing the accounts, one should know the differences between a permanent account and a temporary account as summarised in Figure 1.5 below:
Date
Particulars
Folio
RM
Date
Particulars
Folio
RM
Permanent Account
Permanent accounts are the assets, liabilities, and capital accounts. Examples include bank, motor vehicles, inventory, accounts receivable control, accounts payable control, loan from bank, and capital. All of these accounts belong to the statement of financial position. Balances remaining in these accounts at the end of the period will be reflected in the statement of financial position.
Temporary Account
Temporary accounts are the revenue, expenses, gains, and losses accounts. Examples include sales, commissions income, purchases, electricity, and wages. All of these accounts belong to the income statement/statement of comprehensive income. Balances remaining in these accounts at the end of the period are transferred to the income statement or statement of comprehensive income.
Figure 1.5 Difference between a permanent account and a temporary account
BBM205/03 Basic Accounting 30


Please read Unit 2 (pg. 38 to 45) Business Accounting I of WOU course materials for the understanding of permanent and temporary account.
Learning Activity 2.3
Please watch the following video to learn more about general ledger.
Duration: 5.25 minutes
Source: https://youtu.be/j2678WLaziw
Self-Check 2.3
Please attempt Activity 2.6 (pg. 37) in Business Accounting I of WOU course materials to find out how much you have learned about general ledger.
BBM205/03 Basic Accounting 31


2.4 TRIAL BALANCE
After balancing all of the individual T-accounts, it is only natural that we need to check whether all the T-accounts truly balance or not! A trial balance lists down all the balances of the T-accounts in the general ledger as at a particular date at the end of a specific period. It is a test or a trail to make sure that the accounting equation is in balance. A trial balance that is in balance shows that the debits equal the credits. Please also take note that the specific period could be one week, one month or one year depending on the need of the business.
The proper heading of a trial balance will have at least two lines: the name of the company and the specific date the trial balance represents as shown below:
An example of the trial balance of Mike Stationery is shown below.
Mike Stationery Line 1
Trial balance as at 31st October 2019
Line 2
Cash
Bank
Capital
Motor Vehicle Furniture Beng Co Purchases Sample
Sales
Wages
Rental
Sales Returns Success Supply Smooth Enterprise Bright Venture Discount Received
RM 1,200 1,850
35,000 1,000
9,880 120
300 1,200 220
1,080
51,850
RM 40,000 500 4,800
2,800 3,400
350
51,850
Mike Stationery
Trial balance as at 31st October 2019
BBM205/03 Basic Accounting 32
vv


Learning Activity 2.3
Please watch the following video to learn more about trial balance.
Duration: 1.57 minutes
Source: https://youtu.be/iy0IB0Aom-A
Self-Check 2.4
Please attempt Self-test 2.2 (pg. 49) in Business Accounting I of WOU course materials to see how much you have understood about trial balance.
BBM205/03 Basic Accounting 33


2.5 SUMMARY
Now that you have completed Unit 2, you should be able to:
1. Analyse business transactions using the accounting equation.
2. Explain the usage of various business documents.
3. Examine the steps in analysing and recording of transactions.
4. Analyse and record transactions in the general journals.
5. Analyse and record transactions in the general ledger and trial balance.
6. Explain the journal, T-account, general ledger, trial balance, debits and credits as useful tools
in the accounting process.
7. Describe and perform the closing process of the temporary accounts.
2.6 REFERENCES
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. (2007). BBM205/05 Business Accounting 1: Accounting in business.
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) Double entry recording [Video file].Retrieved from
https://youtu.be/Gk_VNstFC5E
WOU EduChannel. (2019, Feb 20) General ledger [Video file]. Retrieved from
https://youtu.be/j2678WLaziw
WOU EduChannel. (2019, Feb 20) Trial balance [Video file]. Retrieved from
https://youtu.be/iy0IB0Aom-A
BBM205/03 Basic Accounting 34


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


COURSE MODULE
PERFORMING ADVANCED TRANSACTIONS
UNIT 3


U23
UNIT STRUCTURE
23.1
23.2 23.3
23.4 23.5
2.6 3.6
3.7 3.8
BAoccorkusaolsfaPnrdimPereEpnatyrym&enJtosurnals
Learning Activity 23.1 Self-Check 23.1
DBaodubDlebEtnstaryndRePcrorvdisiniogn for Doubtful Debts Learning Activity 23.2
Self-Check 23.2
GDepnereracilaLteiodngoern Fixed Assets Learning Activity 23.3 Self-Check 23.3
TPrieapl aBrainlagncCeontrol Accounts and Subsidiary Ledgers Learning Activity 23.4
Self-Check 23.4
Learning Activity 3.5 Self-Check 3.5
Perpetual Inventory System and Periodic Inventory System
Learning Activity 3.6 Self-Check 3.6
Inventory Valuation
Summary
References
Summary References
BBM205/03 Basic Accounting 37
DOUBLE ENTRY BOOKKEEPING
PERFORMING ADVANCED TRANSACTIONS


U3
INTRODUCTION
In this unit, we will learn various types of balance day adjustments, control accounts and inventory systems. In order to prepare a financial statement, adjustments need to be made based on various accounting concepts.
The matching concept dictates that revenue and expenses should be recognised in the accounting period as they are incurred. Hence, accruals and prepayments arise due to the matching concept.
The prudence concept is the cornerstone to the creation of the provision for doubtful debts. Bad debts and doubtful debts are expenses to the business entity while the provision for doubtful debts is a reduction from the trade receivables. This reduction is necessary for the uncertainty in business.
Depreciation is an expense to the business entity. It arises under the matching concept. Under the matching concept, the cost of the assets consumed in an accounting period has to be captured under the Income Statement, hence the expenses are called depreciation.
Control Accounts are the summary of all debtors and creditors accounts in the subsidiary ledgers. They are included in the general ledger to facilitate the preparation of trial balance. The Control Accounts also serve as checking tool for the accuracy of the subsidiary ledgers. This is because the total debtors and creditors balances in the subsidiary ledgers have to agree with the balances in the Control Accounts.
PERFORMING ADVANCED TRANSACTIONS
Can you still remember the prudence concept?
What do you know about depreciation?
Why do we need to have control accounts?
BBM205/03 Basic Accounting 38


Have you heard about the term FIFO and LIFO?
These are the different methods involved in recording the purchase and sale of inventory. By now, you should have known that inventory is an asset. Inventory is an important item to many businesses. There are two inventory systems which are known as the perpetual inventory system and periodic inventory system.
UNIT LEARNING OUTCOMES
By the end of this Unit 3, you should be able to:
1. Analyse and record transactions for prepayments/accruals, bad debts/doubtful debts and
depreciation on fixed assets.
2. Prepare control accounts and subsidiary ledgers for both accounts receivables and
accounts payables.
3. Analyse and record transactions for merchandise purchases for both perpetual and
periodic inventory systems.
BBM205/03 Basic Accounting 39


3.1 ACCRUALS AND PREPAYMENTS
Accruals and prepayments come about as a result of the matching and accruals concept. The matching concept is based on the understanding that the expenses incurred to generate revenue must be recognised for that period in order to measure the profit or loss of the entity. Matching concept is related to the accrual concept.
The accrual concept is based on the premise that effects of transactions and business events are recognised in the financial statements when they occur. This is not to be confused with cash or its equivalent which is received or paid. Revenue is recognised when it becomes receivable and an expense is recognised when it becomes due and payable regardless of whether cash has been received or paid.
In this section, you will learn how to make adjustments for various scenarios. You will learn accrued expenses, prepaid expenses, accrued revenue, and revenue received in advance. The adjustments are called balance day adjustments.
Please read Unit 3 (pg. 4-14) Business Accounting I of WOU course materials for the understanding of accruals and prepayments.
Learning Activity 3.1a
Please watch the following video to learn more about expense accrued. Duration: 2.53 minutes
BBM205/03 Basic Accounting
40
Source: https://youtu.be/Gp0xghc0_Ro


Learning Activity 3.1b
Please watch the following video for a better understanding of reversal of expense accrued. Duration: 1.11 minutes
Source: https://youtu.be/zK1nWqAb6GQ
Learning Activity 3.1c
Please watch the following video for further details about revenue accrued. Duration: 3.13 minutes
BBM205/03 Basic Accounting
41
Source: https://youtu.be/Rcs_XD0e7JE


Learning Activity 3.1d
Please watch the following video for more information about reversal of revenue accrued.
Duration: 1.11 minutes
Source: https://youtu.be/SiA_T0xcqu0
Self-Check 3.1
Please attempt Activity 3.1 (pg. 6), Activity 3.2 (pg. 9), Activity 3.3 (pg.) and Activity 3.4 (pg. 15) in Business Accounting 1of WOU course materials to see how much you have understood about reversal of revenue accrued.
BBM205/03 Basic Accounting 42


3.2 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS
Credit transactions are a norm in the business world. A business which sells its goods on credit to another entity may only receive payment a few months later. Sometimes, the business may not receive any payment at all. Attempts may be made to call up the debtor to recover the debt (accounts receivable). However, such attempts are futile when the business owner finds out that the customer has gone bankrupt or is facing problems of cash flow. This is a sign that bad debts have occurred.What is the difference between a bad debt and a doubtful debt? Read on to find out more (Table 1.1):
Bad Debts
A bad debt is a norm in the business world and is considered as a normal business expense. When you know that the debt is irrecoverable (meaning that you are unable to recover the debt to be paid), you have to make some accounting entries to reflect that the debt is irrecoverable. So, when the debt has gone bad, it is an expense to you.
Doubtful Debts
A doubtful debt is created when it is uncertain or doubtful that a debtor or a group of debtors are unable to pay up their debt. A doubtful debt is also an expense to the business entity. It is created to meet the prudence concept. The business entity should be prudent and cautious to set aside a specific amount of money in the event that those doubtful debtors are unable to pay up their debt.
Table 1.1 Bad debts and doubtful debts
An increase to the provision for doubtful debts is an expense while a decrease to the provision for doubtful debt is an income to the business entity. A debt may eventually be recovered although it has been written off as a bad debt. When this happens, this is called a bad debt recovered. Again, you will have to make some accounting entries to reflect that the debt has been recovered. When an entity recovers its debts, it is treated as an income.
Learning Activity 3.2
Please read Unit 3 (pg. 21-30) Business Accounting I of WOU course materials for the understanding of bad debts and provision for doubtful debts.
Self-Check 3.2
Please attempt Activity 3.7 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of bad debts and provision for doubtful debts.
BBM205/03 Basic Accounting 43


3.3 DEPRECIATION ON FIXED ASSETS
Do you know the difference between business expenditure, capital expenditure and revenue expenditure? Business expenditure is categorised into capital or revenue expenditure. Capital expenditure refers to amount spent on fixed assets or value-added to a fixed asset. Revenue expenditure refers to the cost of running the daily operation of a business. Examples of capital and revenue expenditure are listed in Table 1.2 below:
>> Purchase of furniture
>> Extension of existing factory >> Payment of legal fees for
purchases
Capital Expenditure
Revenue Expenditure
>> Purchase of stationery
>> Repair of building leakage >> Payment of salary and wages
RM
Table 1.2 Capital expenditure and revenue expenditure
What is depreciation?
Depreciation is charged to the Income Statement as an expense. Depreciation is a method of allocating the cost of an asset over its useful life.
There are two (2) main reasons for depreciation:
1. Physical deterioration. This is caused mainly by wear and tear when the asset is in use. For example, when a machine is no longer running at its optimum capacity after a few years.
2. Obsolescence. This means the process of becoming obsolete or out of date. We can find a few good examples around us. One of them is the machines that produce cassette players.
BBM205/03 Basic Accounting 44


There are two main methods in use for calculating depreciation:
RM
1.
2.
Straight line method.
The calculation of depreciation will be:
Original Cost – Estimated Scrap Value Number of years of useful life
Reducing balance method.
The formula for calculation is as below:
Depreciation Charges = Rate of Depreciation
x Net book value of asset at the
beginning of accounting period
Learning Activity 3.3a
Please read Unit 3 (pg. 38-41) Business Accounting I of WOU course materials for the understanding of depreciation on fixed asset.
Learning Activity 3.3b
Please watch the following video to learn more about depreciation. Duration: 1.26 minutes
BBM205/03 Basic Accounting
45
Source: https://youtu.be/RhukVW-XlTA


Learning Activity 3.3c
Please watch the following video to find out more about methods of calculating depreciation.
Duration: 3.38 minutes
Source: https://youtu.be/SkFle2JlZ2o
Self-Check 3.3
Please attempt Activity 3.7 (pg. 30) in Business Accounting I of WOU course materials to check your understanding of methods of calculating depreciation.
BBM205/03 Basic Accounting 46


3.4 PREPARING CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS
The details of trade receivables and trade payables are recorded in the subsidiary ledgers which are separated from the general ledger. Therefore, control accounts are drawn up in the general ledger to enable the preparation of trial balance and also for checking purposes.
As mentioned in Unit 2, all business transactions will be entered in the book of prime entry before being posted to the general ledger. However, as business grows, we need more than one ledger to ease the process of recording. The ledger is then subdivided into general ledger and subsidiary ledgers.
From Figure 1.1 below, we can see that all the debtor accounts are kept in the sales ledger and all the creditor accounts are kept in the purchases ledger. With this, we are not able to prepare a trial balance from the general ledger as the debtors and creditors are not shown. Therefore, control accounts for both debtors and creditors are set up in the general ledger to enable the preparation of trial balance.
Ledger
General Ledger
Subsidiary Ledgers
All other accounts
Learning Activity 3.4
Sales Ledgers
Debtors Accounts
Figure 1.1 Control accounts and subsidiary ledgers
Purchases Ledgers
Creditors Accounts
Please read Unit 3 (pg. 46-48) Business Accounting I of WOU course materials for the understanding of Control Accounts and Subsidiary Ledgers.
BBM205/03 Basic Accounting
47


Click to View FlipBook Version