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Various Types of Transactions - Part 6, Refund of Deposits Placed Earlier With Third Parties 2008-02-11 06:20:00 I have discussed in detail the relevant double entries for the recording of rental income and the rental deposits and utility deposits in the books of the landlord, ABC Co. Ltd., in my post:Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income).The recording of all these transactions in the books of the tenant, XYZ Co. Ltd., are the opposite of those of the landlord. If XYZ Co. Ltd. records its transactions on cash basis, the double entry used to record the transactions when XYZ Co. Ltd. pays the monthly rentals is: - Balance SheetIncome Statement DRCRDRCR Rental expense xxxx Cash at bank xxxx 1. The double entry for the recording of the security deposits is: - Balance SheetIncome Statement DRCRDRCR Refund
able deposits (c Read more:Placed
Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties 2008-01-27 11:07:00 Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the principal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay the price for this – interest). Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers.The double entry involved in the recording of the realease of the loan is as follows:- Balance SheetIncome StatementDRCRDRCRCash at bank24,000Loan from XXX Bank24,000A decision need to be made as to whether the loan Read more:Principal
, Loans
, Release
Various Types of Transactions – Part 4, Collection from Other Source of Revenue and Income 2008-01-18 08:16:00 As mentioned in my post: Various Types of Transactions - Part 1, Introduction, there were 5 examples of other source of revenue or income highlighted – interest income, dividend income, rental income, proceeds from disposal of assets and compensation received for loss of assets. Please take note that this is not an exhaustive list as there are more types of other source of revenue and income not mentioned. For the purpose of easy understanding and simplicity, I will only discuss these 5 different other source of revenue and income in the following posts:-Various Types of Transactions – Part 4a, Collection from Other Source
of Revenue
and Income
(Interest Income)Various Types of Transactions – Part 4b, Collection from Other Source of Revenue and Income (Dividend Income)Various Types o
Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income) 2008-01-18 05:49:00 Rental income is earned by business entities for allowing another party to "use" the resources (assets) of the business entities. For example, letting of property, machinery, equipment & etc.An agreement is usually drafted and agreed by both parties. The terms agreed upon usually include the details or specifications of the assets, date of agreement, period, amount of rental e.g. per month.Many small businesses record rental income on cash basis, i.e. upon receipt. The double entry for recording rental income on cash basis is:- Balance SheetIncome
Statement DRCRDRCR Cash at bankXXXX Rental income XXXXExampleThe financial period of ABC Co. Ltd. is from 1 January to 31 December. On 10 January 2006, XYZ Co. Ltd. agreed to rent Level 1 of a 3 levels shop owned by ABC Co. Ltd for 3 Read more:Rental Income
, Rental
, Revenue
, Source
Dividend Imputation 2008-01-17 18:56:00 In some countries, dividends are distributed to shareholders under dividend imputation system. The purpose of this system is to avoid imposing tax "2 times" on the same income is first generated by companies (taxed the first time when the income is reported by companies), which is then distributed to shareholders as dividends (taxed the second time when the dividend income is reported by individual shareholders).ExampleCompany A has 2 shareholders – Mr Big and Mr Small, each holding 50% of the shares in Company A. The details of the share capital of Company A are shown below: -$Authorised Share Capital:100,000 ordinary shares or $1.00 each100,000Issued and Fully Paid-up Share Capital:100,000 ordinary shares or $1.00 each100,000For the financial year ended 31 December 2007, Company A made Read more:Dividend
Various Types of Transactions – Part 4e, Collection from Other Source of Revenue and Income (Compensation Received for Loss of Assets) 2008-01-17 06:41:00 Business entities may encounter some unfortunate events such as fire, flood or others that cause damage to their assets. After assessment of the damages caused, the insurance companies will then pay the relevant compensation to these business entities. If the assets damaged are fixed assets, the relevant double entries involved in the recording of the loss of the assets have been illustrated in my post: Various Types of Transactions – Pat 4d, Collection from Other Source
of Revenue
and Income
(Proceeds from Disposal of Assets
) However, if the damaged assets are inventories or stocks, the carrying value of the inventories or stock should be deducted against the compensation received to determine the net loss:- $Compensation
receivedXXXXCarrying value of inventories(XXXX)Loss on damaged in
Various Types of Transactions – Part 4d, Collection from Other Source of Revenue and Income (Proceeds from Disposal of Assets) 2008-01-17 06:39:00 When a business entity dispose of its fixed assets or more commonly now referred to as property, plant and equipment, the carrying amount or the net book value of the assets concerned is deducted from the proceeds received at the date of disposal to determine the gain or loss on disposal:-$Proceeds from disposalXXXXCarrying amount or net book value of fixed assets(XXXX)Gain/(Loss) on disposalXXXX/(XXXX)ExampleThe financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 February 2006, ABC Co. Ltd paid cash to purchase a motor vehicle costing $24,000. The depreciation rate applied to this motor vehicle is 20% per annum (I will have a detailed discussion on depreciation in my future post). On 1 February 2007, ABC Co. Ltd decided to dispose this motor vehicle and sold it for $16 Read more:Assets
, Income
, Revenue
, Source
Various Types of Transactions – Part 4b, Collection from Other Source of Revenue and Income (Dividend Income) 2008-01-17 06:32:00 For those business entities who have invested in shares of another company, dividends may be received by these business entities as a way of distributing the earnings or profits made by the investee companies to the shareholders. Dividend
s could take the form of cash or non-cash (e.g. bonus shares, property etc.). I will only discuss the recording of cash dividend income in this post.Whenever dividends are distributed to the shareholders, enclosed together with the cheques to the shareholders are dividend warrants or vouchers. The dividend warrants or vouchers show the details of the dividends payments.Dividends are classified into two types: 1. Interim dividends, and; 2. Final dividends. It should be noted that it is the Board of Directors of companies that has the power to determine how Read more:Income
, Revenue
, Source
Various Types of Transactions – Part 4a, Collection from Other Source of Revenue and Income (Interest Income) 2008-01-17 06:30:00 Interest income is earned usually through deposits placements with financial institutions. Sometimes, it is also earned through lending of money to third parties (some countries have strict laws governing money lending activities). Interest is the price that borrowers pay for enjoying the resources (money) borrowed from the lenders. Usually, the interest rates are made known to the depositors by financial institutions at the time of deposits placement.A very common practice by small businesses when comes to the timing of recording interest income the accounts is upon receiving the interest income. This is an example of cash basis of recording transactions instead of accrual basis of accounting. Please refer to my post: Cash Vs Accrual Basis of Accounting for further illustrations on this t Read more:Interest
, Revenue
, Income
, Source
Cash Basis Vs Accrual Basis of Accounting 2008-01-09 01:20:00 Many small businesses use cash basis of accounting to record transactions, especially those who prepare the accounts once a year. Please refer to my post: Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To Avoid for further illustrations.Indications that cash basis of accounting is used includes the following:-No books of original entry such as sales day book and purchases day book used to record sales and purchases.No debtors ledger or creditors ledger maintained.All receipts and payments are recorded directly in cash book.Cash basis of recording transactions and presenting the financial statements produced has long been deemed an inappropriate basis to use. Accrual basis of accounting is the accepted basis and this is stated in International Accounting Standard (IA Read more:Basis
Effective Interest? Simple Interest? Compound Interest? Nominal Interest? 2008-01-06 07:23:00 Simple interest is usually discussed and compared with compound interest. Simple interest is named as such because the interest calculated is not compounded.In contrast, when compound interest is calculated, nominal interest rate and effective interest rate would be the relevant interest rates involved in the calculations or discussions.ExampleSimple Interest
ABC Co Ltd. placed $100,000 deposit with Bank A for 1 year with interest of 3.5% per annum and calculated on simple interest method.Interest earned at the end of the one year period is therefore calculated as follows: -$100,000 x 3.5%= $3,500Compound InterestIn the context of compound interest calculation, you need to specify the following: -The total length of the placement of deposit. In this example, one year.The frequency of compou Read more:Simple
Various Types of Transactions – Part 3, Collection from Sales or Services Rendered 2008-01-01 01:42:00 For profit orientated entities, revenue is the "bloodline" of the businesses. The cash collected from invoicing or billing is vital in keeping the businesses up and running – meeting all sorts of daily expenses. Depending on the nature of the businesses, the sales invoices or bills issued to customers are for the sale of goods or services rendered. Generally the invoices or bills issued could be on cash term (pay on delivery of goods or services performed) or on credit term (e.g. 30 days, 60 days, 90 days etc). I have discussed in length the day book used in recording sales, the sales ledger and posting to the relevant accounts in the general ledger in my post:General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Trial Balance . The double entry for recording both the c Read more:Rendered
, Services
, Sales
Various Types of Transactions – Part 2, Contribution of Capital from Owners 2007-12-24 00:27:00 When owners inject cash into businesses as capital, the double entry to record this type of transactions is: - Balance SheetIncome Statement DRCRDRCR Petty cash/cash at bankXXXX Capital XXXX Cash injections could be done by way of contributing "hard cash". If this is the case, the asset account debited is the Petty Cash account. Cash injections could also be done by way of the owners issue cheques. If this is the case, the asset account debited is the Cash at Bank account. Usually, if the amount involved is huge, cheques are issued instead of hard cash.Following the rule of double entry recording system, whenever there is a debit entry made to an account (the Petty Cash of Cash at Bank account in this illustration), there must also be a credit entry made to an account ( Read more:Owners
, Contribution
Three Most Common Types of Small Businesses – Sole Proprietorship, Partnership and Private Limited Company 2007-12-22 12:50:00 Sole ProprietorshipThis is the type of business which legally the business entity is not separated from the owner. However, do not get yourself confused with the Separate Entity Concept in accounting. Usually the business is registered with government under a trade name (either with some association with the name of the owner or a different name altogether) and this trade name will represent the business entity in the conduct of its business activities.PartnershipThis is the type of business with more than one owner. All the owners are called partners. In general all the partners contribute capital to the business and share common objectives of making the business successful and share the profits generated. Generally in law, the partners may have joint liability or joint and several liabil Read more:Small Businesses
, Private
, Small
, Common
, Three
Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To Avoid 2007-12-15 23:50:00 Many small business owners started the businesses on their own or with minimal staff strength. Usually, the major focus of the businesses is on revenue generation and leaves the function of transactions record keeping and accounting to inexperience staff. Many business owners leave it aside until the end of the financial year or when the deadline of accounts submission to the authorities coming close. The accounts and financial statements of the business entities are prepared once a year. Please take note that this practice of recording transactions once a year is definitely not encouraged and may even contravene the law imposed on businesses in some countries with the owners unaware of this. Depending on how the accounting documents are filed and kept, the accounting personnel assigned th Read more:Avoid
, Accounts
, Small Businesses
, Small
Separate Entity Concept 2007-12-15 06:22:00 In accounting, a business entity is treated as a separate entity from the owner(s). Therefore, any capital injections made by the owner(s) are recorded as capital contribution from owners in the books of the business entity. The owner(s)’ private expenditure/spending are not recorded in the books of the business entity. There are many instances whereby the owner(s) withdrew money from the business for their personal use. This is actually a lending of money from the business to the owner(s) and should be recorded as such in the books of the business entity. On the other hand, when the owner(s) inject cash into the business to help easing tight cash flow situation faced by the business entity, it is a lending of money from the owner(s) to the business and should also be recorded as such in Read more:Concept
, Entity
Various Types of Transactions - Part 1, Introduction 2007-12-13 07:49:00 It is easier to understand the basic principles and concepts of accounting once you are familiar with the types of transactions that a typical business entity has to deal with. There is no better place to start with knowing what kind of receipts a typical business receives and also the type of payments made. Even though numerous transactions nowadays are done on credit, eventually the amount owed is expected to be settled or paid.ReceiptsGenerally, the receipt transactions of a typical business include the following:-·Contribution of capital from owners (Please refer to: Various Types of Transactions – Part 2, Contribution of Capital from Owners)·Collection from sales or services rendered (cash sales or payments received from trade debtors). This is usually the major source of revenue Read more:Introduction
Inventories or Stocks - Part 3, Cost Formulas 2007-12-05 19:12:00 In Example 1 of my previous post, Inventories or Stocks
– Part 2, Methods of Recording in General Ledger, the cost of purchasing inventories had been fixed in order to show the effect of two different methods of recording in General Ledger clearly. In reality, cost of inventory purchases fluctuates from time to time. Let’s explore the common ways of calculating the cost of inventories when purchase price fluctuates from time to time – This is called the Cost Formula of inventories. There are three common Cost Formulas
for inventories: -1. FIFO (First-in-first-out)2. Weighted Average3. LIFO (Last-in-last-out)Please take note of the difference between Cost Formulas (FIFO, Weighted Average or LIFO) and the methods of recording inventories in General Ledger (Periodic Meth
Inventories or Stocks - Part 2, Methods of Recording in General Ledger 2007-11-30 08:28:00 There are two common methods of recording inventories or stocks in the General
Ledger of business entities:-1. The Periodic Method2. The Perpetual MethodThe choice of the method used will directly determine the double entries for the recording of inventories or stocks of the entity concerned.1. The Periodic MethodUnder this method, the inventories or stocks account in the General Ledger would not be updated regularly with the movement of inventories or stocks throughout the whole financial period until the last closing day of the financial period in which the new inventories balance would be determined and adjusted accordingly. The balance of the inventories or stocks account remained at the amount brought forward from the previous financial period i.e. the opening inventori Read more:Methods
, Recording
, Stocks
Inventories or Stocks – Part 1, Introduction 2007-11-28 06:08:00 Inventories or stocks are one type of assets to many business entities. Inventories or stocks could be in the form of trading goods/merchandise for those business entities principally engaged in purchasing the goods from suppliers and resell those goods to the customers. For a typical manufacturer, inventories or stocks could be in the form of raw materials used in the manufacturing process. Other than raw materials, inventories or stocks could also be in the form of unfinished products called work-in-progress or they could also be in the form of finished goods/products that are ready for sale to the customers. For many business entities that engaged mainly in providing services, all the tangible inventories mentioned earlier simply are not applicable because these businesses provide servi Read more:Stocks
, Introduction
More On Books of Original Entry - Cash Book 2007-11-23 01:47:00 Cash Book is used to record cash transactions. However, due to the fact that there is a difference between cheques and the “hard cash”, normally these two types of transactions are recorded in two separate Books
of OriginalEntry
– Cheques transactions in Cash or Bank Book (I just refer to it as Cash Book) and “hard cash” transactions in Petty Cash Book. For small businesses, a common format of Cash Book adopted is to present the “T” account and in multi-columns manner. For receipts, the transactions are recorded on the debit side of the Cash Book and for payments, on the credit side of the Cash Book. The total of each column at the end of each month would then be posted to the respective accounts in the General Ledger. The month end balance of each account would then be used
General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Trial Balance? 2007-11-23 01:43:00 Not sure about these? In my previous post on " Accounting Documents & Accounting Cycles ", I have discussed the commonly used accounting documents (function is record occurrence of transactions) and also examples of accounting cycles (Sales, Purchases, Cash Receipts Payments).In order to record the occurrence of transactions in a systematic manner, some form of record keeping must be adopted. The accounting documents such as official receipts, sales invoices, bills etc. are the "Source Documents" in which these documents serve as the evidence of the occurrence of transactions and are based upon to record the transactions as the first entry point of an accounting recording system – "Books
of Original Entry". Examples of books of original entry are the following: - Sales Journal or Sales Read more:Balance
, Trial
, Creditors
, Journals
, General
Accounting Documents & Accounting Cycles 2007-11-23 01:42:00 It is important that you know the type of documents commonly used to record the occurrence of transactions (Can you think of any examples?). Some of them are: -Official receipts Normally you will get these when you make payment over the counter to the cashierCash bills You seldom get these nowadays. However, if you made purchase of goods from a shop that has no cash register, normally you will get these as proof of payments.Bills Electricity, water, quit rent & assessment, services. Normally you received these and asked to pay by a specified date.Invoices Normally you receive these when you purchase physical goods. Same function as bills, invoices ask the recipients to pay by a specified date.Delivery Orders You get these when you receive the goods that you have ordered previously. How Read more:Cycles
, Documents
The Income Statement 2007-11-23 01:42:00 Remember in my previous post on the Balance Sheet? The Balance Sheet shows the “position” of an entity at a certain point in time. However, the Income
Statement shows a different picture than the Balance Sheet - Income Statement or Profit and Loss Accounts is used to match the income/revenue generated by an entity with all the expenses/costs/losses the entity incurred over a specific period of time, normally this is done yearly to arrive at the final outcome, i.e. the Profit for the year/period. Examples of transactions that have an effect on the Income Statement are as follows:- 3. Purchase from trade creditorAssume ABC Co. Ltd purchase goods worth $2,500 from its supplier, Top Goods Co. Ltd on credit term of 30 days. The double entry to record this transaction is as follows: -Balance
The Balance Sheet 2007-11-23 01:41:00 As discussed in my earlier posts, the balance sheet shows the financial position of an entity. In addition to the example introduced earlier whereby the owner contributed $10,000 cash at bank as capital (please refer to my post titled Debits and Credits), there are many more examples of transactions that have an impact on the balance sheet, i.e. they would change the items and figures relected in the balance sheet. Some of the examples are as follows:-1. Purchase of asset using cash at bank (by way of issuing cheque)Using the example of ABC Limited in which the owner have contributed $10,000 cash at bank as capital, assume the owner decided to use part of the money to purchase an asset e.g. a computer desk costing $500, the double entry would be as follow:-Dr. Computer desk Read more:Balance
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