L3@Man. Double Entry Systems 2.pdf

PRINCIPLES OF ACCOUNTING MANUAL DOUBLE ENTRY SYSTEMS - 2 LIABILITIES  THE NATURE OF LIABILITIES Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or less Maturity > 1 year Short-term Long Term...

PRINCIPLES OF ACCOUNTING MANUAL DOUBLE ENTRY SYSTEMS - 2 LIABILITIES  THE NATURE OF LIABILITIES Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or less Maturity > 1 year Short-term Long Term Liabilities or Liabilities Current I.O.U. Liabilities DISTINCTION BETWEEN DEBT AND EQUITY THE ACQUISITION OF ASSETS IS FINANCED FROM TWO SOURCES: DEBT EQUITY Funds from creditors, with Funds from a definite due date, and owners sometimes bearing interest.  Short- term Liability Accounts Payable Accrued Expenses Prepaid Revenue  ACCOUNTS PAYABLE Short-term obligations to suppliers for purchases of merchandise and to others for goods and services. Office Merchandise supplies Inventory invoices invoices Utility and Shipping phone bills charges  RECORDING ACCOUNTS PAYABLE’S TRANSACTIONS  A.K.A CREDITORS A/C  NOT ONLY FOR PURCHASING STOCK BUT ALSO PURCHASING ASSET  DEBT SHOULD BE PAID LESS THAN 90 DAYS  SOME PAYABLE MATURED > 90 DAYS BUT MUST LESS THAN A YEAR  RECORDING TRANSACTION OF CREDIT PURCHASES, RETURNING PURCHASES, PAYMENT TO THE CREDITORS AND CASH DISCOUNT RECEIVED RECORDING CREDIT PURCHASES AND RETURN OUTWARDS (EXAMPLE) A HAS BEEN APPROVED BY EM SDN BHD A CREDIT LIMIT OF RM5000. ON 1/2 A PURCHASES STOCK FROM EM AMOUNTED TO RM1200. ON 5/2 A RETURN FEW OF THE GOODS WORTH RM160 DUE TO PRODUCT ERROR. HELP A TO RECORD THESE TRANSACTIONS.  LEDGER ENTRIES Dr EM Cr 5/2 return outwards 160 1/2 purchases 1200 Dr Purchases Cr 1/2 EM 1200 Dr Return outwards Cr 5/2 EM 160 PAYMENT AND CASH DISCOUNT EXAMPLE A HAS BEEN APPROVED BY EM SDN BHD A CREDIT LIMIT OF RM5000. ON 1/3 A OWED EM RM2100. ON 25/3 A SETTLE HIS DEBT IN FULL BY CHEQUE AND RECEIVED 5% CASH DISCOUNT FOR HIS PROMPT PAYMENT. HELP A TO RECORD THESE TRANSACTIONS.  LEDGER ENTRIES Dr EM Cr 25/3 Bank 1995 1/3 Bal b/d 2100 25/3 Discount Received 105 2100 2100 Dr Bank Cr 25/3 EM 1995 Dr Discount Received Cr 25/3 EM 105  RECORDING CREDIT PURCHASES ASSET (EXAMPLE) ON 1/2 A BOUGHT THREE SET OF COMPUTERS COMPLETE WITH OTHER PERIPHERALS SUCH AS SCANNER, PRINTERS, NETWORK FACILITIES AND OTHERS FROM SUPPLIER NAMED BC. THE COST IS RM12900 AND A IS GIVEN A FOUR-MONTH CREDIT TERM.  LEDGER ENTRIES Dr BC Cr 1/2 Computers 12900 Dr Computers Cr 1/2 BC 12900  PAYROLL LIABILITIES EMPLOYERS INCUR SEVERAL EXPENSES AND LIABILITIES FROM HAVING EMPLOYEES.  PAYROLL LIABILITIES Gross Pay Net Pay KWSP SOCSO Income Tax Voluntary Deductions  ACCRUALS AND PREPAYMENTS Current Accrued Liability Expenses Prepaid Current Asset Current Accrued Asset Income Current Prepaid Liability  RECORDING ACCRUAL AND PREPAYMENT EXPENSES (EXAMPLE) TELEPHONE BILL RECEIVED AND PAYMENTS AS FOLLOWS: Bill Received Bill Payment Date Amount (RM) Date Amount (RM) 6/1 175 15/1 175 6/2 150 15/2 none 6/3 90 15/3 250 Total 415 Total 425  ACCRUAL AND PREPAYMENT EXPENSES LEDGER ENTRIES Dr Tel. Bills Cr 15/1 Bank 175 15/3 Tel Bill Accrued 150 15/2 Tel Bill Accrued 150 31/3 Tel Bill Prepaid 10 15/3 Bank 250 Bal c/f 415 575 575 Dr Bank Cr 15/1 Tel. Bills 175 15/3 Tel. Bills 250 Dr Tel Bill Accrued Cr 15/3 Tel. Bills 150 15/2 Tel. Bills 150 Dr Tel Bill prepaid Cr 31/3 Tel. Bills 10  LONG-TERM DEBT Relatively small debt needs can be filled from single sources. or Insurance or Pension Banks Companies Plans  INSTALLMENT LONG TERM DEBT Long-term notes that call for a series of installment payments. Each payment covers With each payment, the interest for the period interest portion gets AND a portion of the smaller and the principal principal. portion gets larger.  CALCULATING INTEREST ON OUTSTANDING LOAN  IDENTIFY THE UNPAID PRINCIPAL BALANCE.  UNPAID PRINCIPAL × INTEREST RATE = INTEREST EXPENSE.  INSTALLMENT PAYMENT - INTEREST EXPENSE = REDUCTION IN UNPAID PRINCIPAL BALANCE.  COMPUTE NEW UNPAID PRINCIPAL BALANCE.  LEASE PAYMENT OBLIGATIONS Operating Leases Capital Leases Lease agreement transfers Lessor retains risks and risks and benefits benefits associated with associated with ownership ownership. to lessee. Lessee records rent Lessee records a leased expense as incurred. asset and lease liability.  CAPITAL LEASE CRITERIA - the lease transfers ownership to lessee - Contains a bargain purchase option - Lease term equal to or > 75% of economic life of the property - PV of the minimum of lease payments = 90% of FMV of the property  FINANCIAL LEVERAGE BORROWING AT ONE RATE AND INVESTING If we borrow AT A HIGHER RATE. RM1,000,000 at 8% and invest it at 10%, we will clear RM20,000 profit! EQUITY  EQUITY Capital or Drawings Paid in Capital Net Profit  CAPITAL  FOR SOLE PROPRIETOR OR PARTNERSHIP  TREATED SIMILAR AS DEBT BECAUSE ORGANISATION OWED THE OWNER  TREATMENT IN A/C - BRING IN ASSET INTO THE COMPANY AS CAPITAL WILL BE: DR ASSETS CR CAPITAL A/C  RECORDING CAPITAL (EXAMPLE) ON 1/3 A STARTED A BUSINESS WITH RM5000 CASH IN HAND, RM24000 CASH IN BANK AND RM40000 WORTH OF A LORRY. ON 15/3, A BROUGHT IN HIS PERSONAL COMPUTER INTO THE BUSINESS THAT IS VALUED AT RM2000 AT MARKET PRICE.  CAPITAL LEDGER ENTRIES Dr Capital Cr 1/3 Cash 5000 Bank 24000 Vehicle 40000 15/3 Computer 2000 Dr Cash Cr 1/3 Capital 5000 Dr Bank Cr 1/3 Capital 24000 Dr Vehicle Cr 1/3 Capital 40000 Dr Computer Cr 15/3 Capital 2000  PAID –IN CAPITAL  FOR CORPORATE  SHARES ISSUED TO SELECTED PEOPLE (SDN BHD) OR PUBLIC (BHD)  NO MATURITY DATE  MAY BE REDEEMED  TYPES OF SHARES Ordinary Preference Shares Shares Cumulative Treasury Preference Shares Shares  DRAWINGS  TAKING GOODS OR CASH FOR PERSONAL USE  MUST BE RECORDED – TO CURB MISUSE OF POWER  TREATMENT IN A/C WILL BE: DR DRAWINGS CR CASH/PURCHASES THANK YOU!