Units 5 & 6 - Monetary Transactions & Accounting Equation PDF

UNIT 5 HANDLE MONETARY TRANSACTIONS Lesson Objectives At the end of this unit, students should be able to: 1 Describe the features, benefits and services associated with corporate accounts. Business Digital Account Corporate Multi-Currency Account F...

UNIT 5 HANDLE MONETARY TRANSACTIONS Lesson Objectives At the end of this unit, students should be able to: 1 Describe the features, benefits and services associated with corporate accounts. Business Digital Account Corporate Multi-Currency Account Fixed Deposit Account 2 Describe Deposit Insurance Scheme offered by Singapore Deposit Insurance Corporation. Scope of coverage Compensation 3 Describe the usage, features and benefits associated with corporate loans. Business loan Overdraft Green financing 4 Describe the common major currencies. 5 Describe the ways to handle fund transfer application: Drawers / Applicants Payee / Beneficiary Receiving Bank Paying / Remitting Bank Correspondent / Agent Bank 6 Describe the usage and associated charges of Demand draft Cashier’s order Standing instruction (Standing order) GIRO 5.1 Corporate Accounts A corporate bank account is a typical bank account that is opened to keep the business income separate from personal or other types of income. It is also a bank account in the name of the business that gives transactions a certain legitimacy. Corporate accounts, relative to other types of bank accounts have the most formalized requirements. All Singapore registered companies require a registered address, company business profile, company secretary, and corporate bank account before business activities may be conducted. Source: Paul Hype Page & Co Singapore companies have multiple options when it comes to opening a corporate account. The majority of banks here offer attractive features such as multi-currency accounts, internet banking, credit cards, trade financing, freedom to move funds across countries, and more. However, it is crucial to compare the account features of various banks to select the one that best fits company requirements. 1 5.1.1. Types and Features of Corporate Accounts Table 1 below is a comparison of some of the corporate account features of several selected banks in Singapore 1 Bank/ DBS OCBC Maybank (FlexiBiz) Standard Chartered CitiBank Feature (CitiBusiness) Set-up fee None None None None None Initial Deposit S$1,000 - S$3,000 S$3,000 S$1,000 S$30,000 S$100,000 Minimum Balance $10,000; or S$35 S$5000; or S$35 Nil S$30,000 or S$50 S$50,000 or S$100 required monthly fee applies monthly fee applies monthly fee applies monthly fee applies Cheque Book Yes Yes Yes Yes Yes Credit Card Yes No Yes No Yes Internet Banking Yes Yes Yes Yes Yes Business Loans Yes. Yes. Yes. Yes. Yes. Loan amount depends Loan amount depends Generally, the entity Loan amount depends Subject to bank’s on factors such as on factors such as must have been in on factors such as assessment. company history, company history, operation for a company history, number of employees, number of employees, minimum of 1-3 years number of employees, local shareholding, etc. local shareholding, etc. local shareholding, etc. Trade Finance Services: Import Export products and Yes Yes Yes Yes Yes Bank Guarantees 1 Information accurate as of June 2020. 2 5.1.2. Business Digital Account With a business digital account, records, communications, record of transactions and money exist only online. Unlike a traditional bank where one transacts with a bank teller, with a digital account businesses can self-access any service in an account through the internet. The services offered vary across the banks and may include free digital tokens and eStatements. Benefits Convenience – Able to manage everything via a smartphone or laptop. Low initial deposit – Does not require a high initial deposit. Low fees and higher interest rates – Lower operating costs for banks to maintain accounts, which translates to lower fees and higher interest rates for customers. Fast and cheap international transfer – Typically automated transactions and hence lower fees for transfer. 24/7 support – Traditional banks may operate only during working hours. 5.1.3. Corporate Multi-Currency Account A corporate multi-currency bank account is a type of bank account, which allows businesses to receive, pay and hold multiple currencies. With a multi-currency account, businesses are able to perform transactions involving various currencies. The services offered vary across the banks and may include free digital tokens, cheque books and eStatements. Benefits Convenience – Able to manage Singapore dollars and many foreign currencies in separate wallets under one account. Efficient and cost effective – Avoid currency conversions when transacting and save on administrative costs with just one account for multiple wallets. Low initial deposit – Does not require a high initial deposit. 3 5.1.4 Fixed Deposit Account Fixed deposit (Time deposit) account is a low-risk investment instrument provided by a bank, which provides investors a higher rate of interest than a regular savings account. It allows an investor to invest a certain sum of money for a fixed period at a predetermined rate of interest. The rate of interest offered depends on the principal amount and chosen tenure. Typically, the interest rates are higher for long-term fixed deposits and lower for short- term ones. In addition, the money invested in a fixed deposit cannot be withdrawn before its maturity, subject to a penalty or forfeiture of interest earned during the period. Benefits Safe and Steady Returns – The investment is secure as the interest rate on fixed deposit is fixed regardless of market situations. Customisable – Businesses can start a fixed deposit at a minimum amount without an upper limit. They can also choose the tenure (short-term, mid-term, or long- term). Easy liquidity – In times of a cash crunch, businesses can use the fixed deposit to overcome the situation. The principal amount of the fixed deposit along with the accrued interest could be easily withdrawn. 4 5.1.4 Annual Interest Rates Banks provide interest rates to their customers for business digital, multi- currency and fixed deposit accounts. Table 1: ANB Bank Accounts Types of bank Business Digital Corporate Multi- Fixed Deposit accounts Account Currency Account Account Set-up fee S$- S$- S$- Initial Deposit S$1,000 S$1,000 S$2,000 Minimum Balance S$1,000 S$2,000 S$- required Tenure NIL NIL 12 months Annual fee NIL S$25 S$- Cheque Book NIL NIL NIL Interest rate p.a. 1.4% Refer to Table 2 2.02% below. Table 2: ANB Corporate Multi-Currency Account Interest Rates Corporate Multi- Currency Account First Next Next Next $100,000 $250,000 $650,000 $1,000,000 Currency Australian Dollar 0.01% p.a. 0.01% p.a. 0.02 p.a. 0.02% p.a. (AUD) Singapore Dollar 0.50% p.a. 0.50% p.a. 0.60% p.a. 0.60% p.a. (SGD) United States Dollar 0.03% p.a. 0.03% p.a. 0.03% p.a. 0.03% p.a. (USD) Based on Tables 1 and 2, compute the interest Michael will earn for the next 12 months for the 3 scenarios below in Table 3. Assume there is no further deposits and/or withdrawals for the next 12 months. Table 3 DEPOSITS Annual Interest Scenario 1 Michael deposits USD $20,000. USD $20,000 x 0.03% = USD$6 Scenario 2 Michael invests S$15,000 in a S$15,000 x 2.02% = S$303 fixed deposit account. 5  Scenario 3 Michael deposits $3,000 in S$3,000 x 1.4% = S$42 business digital account. 5.2. Deposit Insurance Scheme Banks and finance institutions licensed in Singapore are supervised by the Monetary Authority of Singapore (MAS). Its aim is to ensure the stability of the banking system in Singapore and require financial institutions to have sound risk management systems and adequate internal controls. However, MAS does not guarantee the soundness of individual financial institutions. Therefore, a Deposit Insurance (DI) Scheme has been set up to protect the core savings of small depositors in Singapore in the event a full bank or finance company fails. All full banks and finance companies in Singapore are required to be members of the DI Scheme, except for those exempted by the MAS. 5.2.1. Scope of Coverage DI Scheme covers individuals and other non-bank depositors with insured deposits placed with a DI Scheme member. Other non-bank depositors include sole proprietorships, partnerships, companies and unincorporated entities like associations and societies. All these persons are insured depositors. DI Scheme insures Singapore dollar denominated deposits placed with a DI Scheme member in any of its branches in Singapore. These include: A deposit held in a savings account A deposit held in a fixed deposit account A deposit held in a current account 6  Other products as prescribed by the Authority Financial products that are not insured include:  Foreign currency deposits  Structured deposits  Structured notes  Investment products such as unit trusts, shares, and other securities These products carry high risks and are not part of the core savings or transaction accounts of small depositors. Hence, businesses who buy them should be prepared to assume the high risks for the potentially higher rewards. 5.2.2. Compensation In the event a DI Scheme member fails, all the insured deposits placed with that member, except for monies under the CPFIS and CPFRS, are aggregated and insured up to S$100,000. The insured deposits are not insured separately in each branch office of a DI Scheme member i.e., all the insured deposits maintained with different branches of a DI Scheme member are aggregated and insured up to S$100,000. 5.3. Corporate Loans Corporate loans are loans that are given to a company instead of the government or an individual. It is mainly sought out by business owners, companies, and corporates for the following purposes: To fulfil their daily business needs To add to their working capital 7  To procure raw materials To acquire assets 5.3.1. Business Loans A business loan is a loan specifically intended for business purposes. Business loans serve as a powerful tool to help fund, launch, and grow a business. It helps to secure financing to maintain business operations, expand locations, invest in new equipment, or hire more employees. As with all loans, it involves the creation of a debt, which would be repaid with an added interest. A bank loan may be obtained from a bank and may be either secured or unsecured. For secured loans, banks will require a collateral, which may be lost if repayments are not made. In the event of default, the lender can use the collateral to repay the funds it has advanced to the borrower. For unsecured loans, there is an absence of collateral, which backs up the debt. It is a form of security to the lender against non-payment from the borrower. If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed. Lenders issue funds for an unsecured loan based solely on the borrower's creditworthiness and promise to repay. Therefore, banks typically charge a higher interest rate than a secured loan. 5.3.2. Overdraft An overdraft is a credit facility that allows one to withdraw or pay from a current account when there is insufficient balance to cover a transaction or withdrawal, up to the overdraft limit. It is a short-term facility (usually up to 12 months), renewable on a yearly basis and repayable on demand by the bank at any time. 8 An overdraft is flexible as one only borrows what is required, cheaper than a loan and can be quickly arranged. 5.3.3. Green Financing Green financing is any structured financial activity (product/service) that is created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms and investments used to encourage the development of green projects or minimise the impact on the climate from regular projects. Typical projects that fall under the green finance umbrella include: Renewable energy and energy efficiency Pollution prevention and control Biodiversity conservation Circular economy initiatives Sustainable use of natural resources and land 5.4. Foreign Currencies and Foreign Exchange (Forex) Rate The exchange rate of different currencies fluctuates throughout the day. Forex rates are determined by the demand for and supply of individual currencies, which in turn are influenced by economic, social, political, and technological factors. 5.4.1. Major currencies Major currencies are those in which most of the world’s foreign transactions are denominated. They are also the currencies that countries commonly value their own currency against, make up a significant portion of the foreign exchange market and therefore exhibit a very high market liquidity. 9 Examples of major currencies are as follows: USD US Dollar EUR European Euro JPY Japanese Yen GBP British Pound (Sterling Pound) CHF Swiss Franc AUD Australian Dollar CAD Canadian Dollar NZD New Zealand Dollar Major currency pairs are main drivers in the global forex market and the most heavily traded. Examples of major currency pairs are as follows: EUR / USD European Euro/US Dollar USD / JPY USD Dollar/Japanese Yen GBP / USD British Pound/US Dollar USD / CHF USD Dollar/Swiss Franc USD / CAD USD Dollar/Canadian Dollar AUD / USD Australian Dollar/US Dollar NZD / USD New Zealand Dollar/US Dollar 5.5. Remittance and Fund Transfer Service Money can be sent locally or abroad using a fund transfer service. The two types of services available are: Cross-border fund transfer/remittance services involve the transfer of funds to persons or entities outside Singapore. Domestic fund transfer services are local funds transfer services within Singapore. 10 5.5.1. Terms used in Fund Transfers Drawer/Applicant – The owner of the account from which money will be paid out; and is the party which made the payment request. Paying/Remitting bank – The drawer’s bank. Helps the drawer transmit money to the beneficiary. Correspondent/Agent bank – A third-party bank that helps link and process the funds between the remitting and receiving banks in cross-border funds transfers. Receiving bank – The bank representing the payee/beneficiary to receive the funds. Payee/Beneficiary – The final recipient of the transferred money. 11 5.5.2. Features of Cross-border Fund Transfer/Remittance Banks, financial institutions, and licensed remittance agencies provide cross-border fund-transfer services to help businesses and individuals remit money to recipients internationally. An administration fee is usually charged for this service and varies amongst different service providers. People overseas can also use similar services to remit money to recipients in Singapore. Users simply instruct these agencies to convert their physical cash or money in their bank accounts into the desired foreign currency and send it to their overseas recipient through secured electronic means. The advantage of cross-border transfers is that no physical currency is involved in the transfer process as the money transfer is done electronically. Upon receiving the transfer, the receiving bank will deposit the money into the recipient’s account. In some instances, a third-party financial institution may be required to act as an intermediary to link up the paying and receiving banks to effect the transfer. Drawer Beneficiary Diagram Instructs his bank Receives the illustrating to make cross- transferred border funds cross-border fund transfer mechanism funds in the transfer desired currency Remitting Bank Correspondent Convert drawer’s Bank money into Acts as Receiving Bank desired foreign intermediary to Receives currency & process funds transferred funds & transmits it between remitting forwards it to digitally overseas & receiving banks beneficiary 12 Demand draft allows one to transfer foreign currency overseas in the form of a bank draft, based on one’s instructions. It is suitable for payments to beneficiaries who do not accept cash and is ideal for non-urgent overseas payment. Unlike cheques, demand drafts do not require the drawer’s signature. This reduces the risk of forgery and makes it more secure than a personal cheque. The application process is also simple as one needs to only make a deposit and once cleared, the bank will issue the draft instantly. It is also convenient as one does not need his beneficiary’s bank account details. In recent years, many remittance agencies have been set up to cater to the tremendous demand for remittance services by the foreign worker population. Some of the larger ones are Western Union, TransferWise, OFX and InstaRem. Technological innovations, increased consumer sophistication and intense competition has resulted in new and diverse fund transfer mechanics in the last few years. Consumers now have a host of options which includes internet banking, mobile Apps, E-wallets and other creative solutions like PayPal, AliPay etc, without even the need to personally visit banks or remittance offices. 5.5.3. Domestic Money Transfer Services Technological advancements in the banking industry have led to a decline in popularity of traditional paper-based local fund transfer methods like cheques and cashier’s orders. A. Cashier’s Order A cashier’s order is known as banker’s cheque, as it acts like a regular cheque but is issued by the bank itself. When one requests for a cashier’s order, the money is instantaneously withdrawn from his account and transferred to the bank and is subsequently withdrawn when the recipient deposits the cashier’s order. Cashier's 13 order provides a higher level of guarantee as it is drawn on the bank's own funds, making it more secure. B. Standing Instruction (Standing Order) A standing instruction is a service offered by the bank that allows banks to make payments to a particular account for a specified amount at regular intervals according to one’s requirements. This is usually free unless one does not have enough cash in his bank account to pay off the payments, which results in the bank charging for the overdraft. 14 C. GIRO GIRO is an arrangement with the bank to make payments directly to a billing organisation (BO) for any outstanding bills. A Standing Instruction is usually for the regular payment of fixed amounts such as rent. It is not suitable for paying bills of variable amounts such as utilities and credit card debts. GIRO is different from a Standing Instruction as it authorises the billing organisation to collect money directly from the person based on the amount owed to them. It is generally used in the payment of variable amounts such as utilities. 15 16  Tutorial - Unit 5 TUTORIAL QUESTIONS 1. Describe the common features, benefits, and services of corporate accounts. 2. Describe the Deposit Insurance Scheme. 3. List the purposes of corporate loans. 4. Describe the common Major currencies. 5. Distinguish between Demand Draft and Cashier’s Order. 6. Distinguish between Standing Order and GIRO. 17 UNIT 6 COMPUTE ACCOUNTING EQUATION Lesson Objectives At the end of this unit, students should be able to: 1. Define assets, liabilities and owner’s equity in the accounting equation 2. Explain the effects of assets, liabilities and owner’s equity on the accounting equation 18 6.1. Introduction Accounting is the process of recording, summarising, analysing, interpreting and reporting the financial information of an organisation. This information is measured and expressed in monetary terms and is important for making business decisions. 6.2. Elements of Financial Statements 6.2.1 Assets Assets are items of value owned or controlled by a business to carry out its business activity. Assets are expected to generate future benefits. These consist of items, such as land and buildings, machinery, inventory, money deposited with the bank, physical cash held on hand and amounts of money owed by customers. A. Non-Current Assets These are assets which are not easily convertible to cash or not expected to be converted to cash within the next year. Some examples are: Investments. Fixed assets such as motor vehicles and buildings, which are bought for use in the business operations. Loan to staff. Intangible assets such as copyrights and goodwill. 19 B. Current Assets These are assets which can be easily converted into cash within one year. Some examples are: Cash at bank. Cash in hand. Inventory. Trade receivables. 6.2.2 Liabilities Liabilities are amounts owed by the business to external parties. These consist of money owing for goods supplied to the business and expenses owing. If the business has taken out a loan from the bank or finance company, this is also known as a liability. A. Non-Current Liabilities These are debts of the business which has a repayment period of more than one year. Some examples are: Loan from banks. Mortgage loans. 20 B. Current Liabilities These are short-term owing which are settled within one year. Some examples are: Trade payables. Bank overdraft. Loans which are repayable within one year. 1.2.3. Owner’s Equity Owner’s equity comprises the amount contributed by the owner and the profit generated by the business. In accounting terms, the amount of the resources contributed by the owner to the business is called capital while the assets taken from the business by its owner for personal use is called drawings. Owner’s equity is the difference between the assets and liabilities of a business and is the amount of the owner’s interest or investment in the business. 6.3 Accounting Equation OWNER’S EQUITY = ASSETS - LIABILITIES Or ASSETS = LIABILITIES + OWNER’S EQUITY (RESOURCES = SOURCES OF FUNDS) 21 A business needs resources to operate. These resources are called assets and to obtain these assets, the business needs funds. These funds could be borrowed from external parties (liabilities) or contributions by the owners (owner’s equity). At any one time, all the assets in the business must equal all its liabilities and owner’s equity. Hence, the accounting equation above will always stay in balance as business transactions take place. Since the accounting equation must always balance, it can be used to calculate missing values of items. List of Account Names A. Assets No. Account Names 1. Office Equipment 2. Office Furniture 3. Fixtures and Fittings 4. Machinery 5. Land and Buildings 6. Motor Vehicle 7. Bank 8. Cash 9. Petty Cash 10. Trade Receivables 11. Loan to XYZ 12. Fixed Deposits 13. Inventory 22 B. Classification of Fixed Assets Account Names Descriptions Office Equipment Printer, fax machine, cash register, bar code scanner, computer, laptop, telephone, photocopier machine, television, DVD player and refrigerator etc. Office Furniture Table, chair, sofa, office desk, display shelf, cabinets, cupboard and book shelf etc. Fixtures and Fittings Shop fitting, lighting, decoration, accessory, air- conditioner and carpet etc. Machinery Cutting machine, drilling machine, baking machine, sewing machine, factory machine etc. All items with the word “machine” except fax machine and photocopier machine. Land and Buildings Land, building, premise, office, factory and warehouse etc. Motor Vehicle Delivery van, truck, motor car, motorcycle and motor van etc. C. Liabilities No. Account Names 1. Trade Payables 2. Bank Overdraft 3. Loan from HIJ Bank 4. Loan from CDE 5. Mortgage Loan from UVW Bank 23 D. Owner’s Equity No. Account Names 1. Capital 2. Drawings 24 Illustrative Example 1 The following assets and liabilities were obtained from the records of a business on 1 January 2024. Calculate the owner’s equity of the business. $ Inventory 8,000 Bank 4,200 Office Equipment 12,000 Trade Payables 2,500 Loan from DBD Bank 5,000 Total assets = $8,000 + $4,200 + $12,000 = $24,200. Total liabilities = $2,500 + $5,000 = $7,500. Owner’s equity = Assets - Liabilities = $24,200 - $7,500 = $16,700. 25  Tutorial - Unit 6 TUTORIAL QUESTIONS Question 1 Calculate the missing figures based on the Accounting Equation. Assets Liabilities Owner’s Equity $355,000 $12,000 $14,800 $13,400 $42,000 $60,000 $7,350 $5,350 $66,000 $15,000 $200,600 $13,600 $52,100 $21,400 $76,400 $35,810 Question 2 Classify the following items into assets, liabilities and owner’s equity by putting a tick (√) in the correct column. Items Assets Liabilities Owner’s Equity Petty cash Fixtures and fittings Cash Trade payables 26  Loan from finance company Bank overdraft Fax machine Delivery van Unpaid telephone charges Loan to staff, Andy Mortgage loan from HSB Bank Question 3 Bryan owns a seafood breeding business at Changi. He sells seafood to wholesalers and walk-in customers who pay cash for the live catch. Classify each of the following items in Bryan’s business as “Asset”, “Liability” or “Owner’s Equity”: Transactions Items Classifications Vendors who supply fish food on Amount owed to credit supplier Unpaid instalments for a car Unpaid car bought on credit instalments Personal cheque brought in by Resources Bryan contributed by owner Customers bought seafood on Money owed by credit customers Live fish waiting to be sold Live fish Purchase display shelves from a Display shelves furniture shop using cash Purchase a printer from Comp Printer Ltd by cheque Purchases a cash register from Cash register Value Trading Cash kept in the cash register Cash 27 Bank overdraft with a local bank Bank overdraft Took a loan from GITO Finance Loan from bank Bank Purchase a machine from Yap Machinery Corporation Petty cash kept with the Petty cash Accounts Assistant for office expenses Purchase a motorcycle for use in Motorcycle the business Invest money with Sunny Bank to Investment earn dividends Lend money to a company, Sea Loan to Sea Wind Ltd Wind Ltd 28 Question 4 Carol runs a business with a capital of $40,000. She has a photocopier costing $2,000 and machinery valued at $28,000. She has stocks of goods $5,000 and has yet to receive $6,000 from Patrick which is due for payment for the sale of the goods. Required: Classify the above transactions and their amount under Asset, Liability or Owner’s Equity. Compute the missing item (Asset, Liability or Owner’s Equity) using the accounting equation. Show all workings clearly. 29 Question 5 Mike owns a food and beverage business. One of his customers, James, bought goods worth $12,000 on one month’s credit and has only settled one-third of the invoice. He has also given a loan of $3,000 to his friend Oliver. His capital account balance is $12,000 while his cash at bank balance is $15,000. Required: Classify the above transactions and their amount under Asset, Liability or Owner’s Equity. Compute the missing item (Asset, Liability or Owner’s Equity) using the accounting equation. Show all workings clearly. 30