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Sl. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Topic list Components of financial statements Elements of financial statements Objectives of financial statements Users of financial statements Financial reporting framework Qualitative characteristics of financial statements Capital and revenue expenditure Capital and revenue income Other capital transactions Why distinctions between capital & revenue item? Measurement of elements of financial statements (additional) Concept of capital and capital maintenance (additional)

Text BAS-1, para-8 Framework, para 49,70 BAS-1, para-7 Manual + Framework, para-9 Manual Manual + Framework, para 24-46 Manual Manual Manual Manual Framework, para-100 Framework, para102-104

1. Components of financial statements Complete set of financial statements has following 5 components: Balance sheet; (financial position at a particular time); (list of asset & liability at a particular time) Income statement; (financial performance for a particular period); (income recognized and expense incurred for a particular period) Statement of changes in equity; Cash flow statement; and Notes to the financial statements. Period: - for statutory purpose - for management purpose : 1 year : Monthly/Quarterly/Half-yearly

From 1 January 2010, name of the components of financial statements has been revised as: Balance sheet:Statement of financial position Income statement : Statement of comprehensive income Cash flow statement : Statement of cash flow The Companies Act 1994 requires followings as part of financial statements: Balance sheet Profit & loss account/ Income & expenditure account

2. Elements of financial statements: BAS-1 identifies 5 elements of financial statement: Asset Liability Equity Income Expense
Prepared by: Mohammad Shahidul Islam MBA, ACA

3. Objectives/purpose of financial statements: Is to provide information about the financial position, financial performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decision. To meet the objectives financial statements provide information about an entitys: Assets Liabilities Equity Income and expenses including gain and losses Other changes in equity Cash flows 4. Users of financial information in financial statements: Internal users: o Directors (operating business effectively; stewardship function; making effective decisions) o Employees (Career; remuneration; bonus; retirement benefits; employment opportunities) External users: o Shareholders/investors/ (risk & return; management performance; profit; dividend; decision to buy/hold/sell shares) o Trade contacts (Suppliers: ability to pay; Customer: secure source of supply) o Finance providers/lenders (Short-term: liquidity; Long-term: solvency) o Tax authority (Tax assessment; determining taxation policy) o Financial analysts/advisors (analyzed date for clients) o Government agencies (employment opportunities; national statistics; efficient allocation of resources; regulation ) o Public (employment for local people; using local suppliers; environment pollution ) Financial reporting framework/Regulation of accounting: Legislation (Private plus Public Ltd. Company: the Companies Act 1994; Listed Company: BAS & BFRS/SEC Rules) Accounting concept & individual judgment: (Accounting concept: detailed in chap-7; Judgment: valuation of building; research and development; brand valuation; regulated by BAS) BAS and BFRS (Harmonization; Comparability) True and fair view/Faithful representation Who promulgated Accounting standards? Accounting standards are promulgated by the IASB (International Accounting Standard Board), previously IASC (International Accounting Standard Committee), and auditing standards are promulgated by the IFAC (International Federation of Accountants). In Bangladesh: ICAB. What are the main objectives of accounting standards? Harmonization of accounting treatment around the world Ensuring comparability of financial statements Accounting standards described on recognition, measurement and presentation/disclosure of elements of f/s 6. Qualitative chrematistics of financial statements: 4 principal qualitative characteristics are: Relevance (evaluating past, present and future event, materiality; timeliness) Understandability (information: not incomplete; not too much. User: reasonable knowledge of business; diligent) Reliability (free from error; true & fair view; substance over form; prudent; neutral; complete) Comparability (consistent basis) Materiality: information is material if its omission or misstatement could influence the economic decision of users taken on the basis of financial statements. Materiality depends on the size and nature of omission or misstatements. True & fair view: means faithful representation of the effects of transactions. Substance over form: transactions are recorded and presented in accordance with the substance & economic reality and not merely their legal form. Example: Finance lease
Prepared by: Mohammad Shahidul Islam MBA, ACA



Capital & revenue expenditure: Capital expenditure (long tern asset- non-current asset aged more than 1 year) - Initial cost: up to final condition and location; for example: legal fee, duties, carriage costs, installation costs. - Subsequent cost: increase earning capacity/efficiency Capital expenditure reported to balance sheet Revenue expenditure: - Subsequent cost: subsequent cost with existing earning capacity; - Depreciation of capital expenditure; - Repair, maintenance and staff cost of capital expenditure; - Capital type asset for trading purpose; Expenditure for trade purpose: i.e. normal course of business; for example: Raw material, wages and salaries, selling and distribution, admin cost, finance cost etc.;

Revenue expenditure reported to income statement 8. Capital & revenue income: Capital income (sale of non-current asset)

Profit/loss on sale of capital income reported to income statement Revenue income: - sale of goods - rendering services - Interest, dividend, royalty income

Revenue income reported to income statement 9. Other capital transactions: Increasing capital Taking bank loan Repaying bank loan

These would not be reported through income statement 10. Why distinction between capital and revenue items important: o To calculate exact profit for a period

11. Measurement of elements of financial statements Measurement means: the amount at which elements are recognized in balance sheet and income statement Elements of financial statements are measured at 5 different ways: Historical cost: assets are recorded at the amount expected to be given at the time of acquisition and liabilities are recorded at the amount expected to be paid on the date of liability occurred. Current cost: assets are recorded at the amount of the same asset if acquired currently and liabilities are recorded at the amount if the liability settled currently. Realizable value/ settlement value: assets are recorded at the settlement value after disposal of existing asset and liabilities are recorded at their settlement value i.e. amount to be paid in normal course of business. Present value: assets are recorded at discounted value of future cash inflows and liabilities are recorded at discounted value of future cash outflow. Fair value: fair value is the amount for which assets could be exchanged or liabilities could be settled between knowledgeable, willing parties in an arms length transaction.

Prepared by: Mohammad Shahidul Islam MBA, ACA

12. Concepts of capital maintenance Financial concept: Capital maintenance = (Beginning net asset value/equity-Ending net asset value/equity) Physical concept: Capital maintenance = (Beginning productive capacity-Ending productive capacity)


Sl. 1. 2. 3. 4. 5. 6. 1. 1. Topic list Q & A of last class Assets & Liabilities - current and non-current distinction Format of Balance sheet & Income statement Business entity concept Formation of accounting equation Effect of transactions on equation Reference Synopsis Manual+Synopsis Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis

Questions & Answers on Basics of Financial Statements Definition: [1 marks for each] a) b) c) d) e) d) e) Accounting Management stewardship Balance sheet Income statement Substance over form Prudent Measurement f) g) h) i) j) k) l) m) Materiality Faithful representation Capital expenditure Revenue expenditure Capital income Revenue income Fair value Concept of capital maintenance

[2 marks for each] 2. Mention the components of financial statements as per BAS? 3. Mention the components of financial statements as per Companies Act 1994? 4. How comparatives are shown for interim financial statements? 5. What are the elements of financial statements? 6. Point out the elements of a balance sheet? 7. Point out the elements of an income statement? 8. Which part of financial statements represents financial position at a particular point of time ? 9. Which part of financial statements represents financial performance for a particular period ? 10. Explain why an entity maintains financial statements? 11. Who are the users of financial statements? 12. Who are internal user and who are external users? 13. What information are required by directors. etc. from financial statements? 14. What is the financial reporting framework for financial statements prepared in Bangladesh? 15. What are the main objectives of IAS/BAS? 16. What 3 major things an accounting standard describe? 17. What are the principal qualitative characteristics of financial statements? 18. To be relevant what qualities are necessary for an information? 19. To be understandable what qualities are necessary for an information? 20. To be reliable what qualities are necessary for an information? 21. Why identification of capital and revenue items is important? 22. What are the ways for measurement of elements in financial statements? 23. How assets and liabilities under historical cost system are measured? 24. Under which system assets and liabilities are measured at a price settled between knowledgeable, willing parties in an arms length transaction? 25. Capital expenditure is recorded in income statement and revenue expenditure is recorded in balance sheet. If wrong, make correct statement.

Prepared by: Mohammad Shahidul Islam MBA, ACA


Identify CapEx; RevEx; Capital income and Revenue income from following list:[1 marks for each] a) b) c) d) e) f) g) h) i) j) k) Invoice value of machine purchased Freight charge of the machine Depreciation of the machine Purchase of a building by a real estate company Fees for inspection of the machine by an engineer Royalty Repair & maintenance of the machine within an existing capacity Bank interest Repair & maintenance of the machine within enhanced capacity Rendering of services Spare parts with existing capacity l) m) n) o) p) q) r) s) t) u) v) Dividend Spare parts with enhanced capacity Sale of goods Any administrative, selling & dist. expenses Income from sell on fixed assets Loss on sale of fixed assets Import duty charged on imported machine Add additional 128 mb RAM for office computer Sale of fixed assets Sale of land by a real estate company Purchase of new computer after replacing old one within the existing capacity


Assets & Liabilities - current and non-current distinction

Current Asset: Current assets are assets those are expected to be converted into cash within 1year. Non-current Assets: Non-current assets are those assets acquired for long term use and would not be realized into cash within 1 year. Examples of current and non-current distinctions are presented by way of format of Balance sheet 3. Format of Balance Sheet and Income Statement
ABC Company Limited Income Statement for the year ended 31 December 2009 Notes 2009 Taka Current tax Deferred tax 2008 Taka -

Sales (net of VAT) Cost of goods sold

Gross profit
Other income Operating expenses (Administrative, Distribution & Other) -

Profit from operation

Finance expense Finance income -

Net finance expense Profit before contribution to WPPF

Contribution to WPPF

Profit before income tax

Income tax: -

Profit after tax

Earnings per share -

Prepared by: Mohammad Shahidul Islam MBA, ACA

ABC Company Limited Balance Sheet as at 31 December 2009 Notes ASSETS: Property, plant and equipment Intangible assets Investments Loans and deposits Deferred tax assets Total non-current assets Inventories Trade and other debtors Advances, deposits and prepayments Advance income tax Cash and cash equivalents Total current assets Total assets EQUITY: Share capital Share premium Retained earnings Reserves and surplus Total equity LIABILITY: Deferred liability - gratuity payable Deferred tax - liability Long-term loan Total non-current liabilities Short term loan Trade and other creditors Accrued expenses Provision for taxation Provision for royalty Total current liabilities and provisions Total liabilities Total equity and liabilities 2009 Taka 2008 Taka


Business entity concept

Business entity concept means- a business is a separate legal entity from its owner. A company may, in its own name, acquire asets, incur debts, and enter into contracts. If a companys assets became insuffient to meet its liabilities, the company as a separate entity becomes insolvent. However, the owners of the company are not usually re quired to pay the debts from their own private resources. Exception: the concept is not applicable for Sole tradership and Partnership business.

Formation of Accounting Equation

Prepared by: Mohammad Shahidul Islam MBA, ACA

6. Effect of transactions on equation 1. 2. 3. 4. 5. 6. 7. 8. 9. Initial investment by owner/shareholder (Tk. 100,000) Introduction of further capital (Tk. 50,000) Issue of share against machinery/any asset (Tk. 35,000) Acquisition of equipment/any assets on credit(Tk. 5,000) Acquisition of equipment/any assets on credit (Tk. 2,000) Purchase of raw material for cash (Tk. 15,000) Factory overhead (Tk. 3,000) in cash. Admin, selling and distribution expenses (Tk. 5,000) Sale of all goods/ services on credit(Tk. 25,000) 10. 11. 12. 13. 14. 15. 16. 17. 18. Payment for creditors/accounts payable Receipt of cash on debtor/accounts receivable Investment (Tk. 8,000) Loan from banks etc. (Tk. 10,000) Issuance of debenture (Tk. 5,000) Drawings/dividend (Tk. 2,000) Purchase of supplies for cash of Tk. 300. During the year supplies for an amount of Tk. 250 were used. Depreciation of equipment was Tk. 35,000 Proceeds from sale of equipment Tk. 25,000


Cash & Cash equivalents 100,000 50,000 (15,000) (3,000) (5,000) (7,000) 25,000 (8,000) 10,000 5,000 (2,000) (300) 25,000


ASSETS Inventories/ Supplies 15,000 3,000 (18,000) -

= Plant,Property & Equipment 35,000 5,000 2,000 Investments

CAPITAL Paid up Retained capital earnings 100,000 50,000 35,000 -

+ Loan

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Total

25,000 (25,000) -


300 (250) -

(35,000) (7,000)

= = = = = = = = = = = = = = = = = = = =

(5,000) 7,000 -

(2,000) (250) (35,000) 8,000

+ + + + + + + + + + + + + + + + + + + +

LIABILITY Debenture Creditors/ Accounts payable 5,000 2,000




Prepared by: Mohammad Shahidul Islam MBA, ACA


Sl. 1. 2. 3. 4. 5. 6. 7.

Topic list Ledger and its format Nominal ledger & Subsidiary ledger (Receivable/Payable ledger) Double entry bookkeeping Duality concept Basic rules of debit credit (double entry) Accounting for discount Accounting for VAT

Reference Manual+Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis

1. Ledger and its format Ledger: summarization, analysis Format: chronological order, properly dated, particulars, debit, credit, cumulative total

(daily/weekly/monthly/yearly) Ledger book: manual/computerized T format: Left side-debit, Right side-credit

2. Nominal ledger & Subsidiary ledger (Receivable/Payable ledger) Nominal ledger vs. subsidiary ledger: nominal: all transaction by nature; subsidiary: breakdown of receivable & payable control ledger for each individual customer & supplier (personal account) nominal: total; subsidiary: detailed Example

3. Double entry bookkeeping Rule: dual effect, every debit has credit

4. Duality concept Every transaction has two equal but opposite effect Recorded twice in the ledger account

5. Basic rules of debit-credit (double entry) Elements of financial statements (Asset, liability, equity, income, expense) Asset and expense show debit balance Liability, equity and income shows credit balance Debit balance increase- debit; decrease- credit Credit balance increase- credit; decrease- debit

Prepared by: Mohammad Shahidul Islam MBA, ACA

6. Accounting for discount Trade discount/volume discount and Cash discount: Allowed & Received

Objective: Trade discount: bulk sale, prime customers Cash discount: to enhance cash collection Accounting entry: Trade discount: none, because it is known from the invoice price Cash discount: Yes, as income/expense Terms: 2/10, n/30 5/14, n/60 Trade and cash discount at a time: ABC Company purchases 10 printers originally priced at Tk. 200 each. A 10% discount was negotiated together with a 5% discount if payment was made within 14 days. Calculate followings: o Trade discount o Cash discount

7. Accounting for VAT Consumption tax Consumer is the ultimate payer Manufacturer is responsible for collecting from the consumer Rates: o Zero rated o Reduced rate (@4%) o Standard rate (@15%) Recoverable and irrecoverable VAT Calculating VAT from Gross amount and net amount o Gross amount: 15/115; 3/23 o Net amount: 15/100 VAT and discount at a time: o Invoicing system (List price, invoice price) o XYZ usually sales goods at Tk. 200 each. It gives a 10% trade discount and 5% cash discount to its customer. Calculate VAT and invoice price VAT current account Preparation of income statement o Manual math

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VAT journal entries 1. Purchase Purchase Input VAT Accounts payable Accounts receivable Sales Output VAT VAT current A/C Bank Sales return Output VAT Accounts receivable VAT current account Input VAT Output VAT VAT current A/C Dr. Dr. Cr. Dr. Cr. Cr. Dr. Cr. Dr. Dr. Cr. Dr. Cr. Dr. Cr.



3. 4.

Deposit to Govt. Sales return


VAT return submitted

Math: M/S Kabir Traders is a VAT registered trader. It has the following transactions for the month of January 2009: o Goods purchased for Tk. 57,500 including VAT o The above goods has been sold for Tk. 80,500 including VAT o Tk. 3,000 deposited to Bangladesh Bank o Out of goods sold Tk. 4,600 has been returned o VAT return submitted after adjusting the input and output VAT Journal entries Income statement Balance sheet

Prepared by: Mohammad Shahidul Islam MBA, ACA



Sl. 1. 2. 3. 4. 5. Topic list Cash book, Bank statement Preparing Bank Reconciliation Statement (BRS) Errors and omission Correction of errors BAS-8 implication Reference Manual+Synopsis Manual+Synopsis Manual+Synopsis Manual+Synopsis Synopsis

1. Bank statement, cash book


Account: Account no.: Print date:

ABC Company Ltd. 1003800960 31 December 2009 Details Balance Cheques 004450 004452 Dhaka City Council (DD) Cheques 004455 Bond insurance 004454 Bank charges Rahim Afroz Ltd. Debit Credit 50 10 89 250 122 49 12.95 179.75 330 220


Date 1 December 2009 4 December 2009 9 December 2009 14 December 2009 16 December 2009 19 December 2009 24 December 2009 26 December 2009 30 December 2009 31 December 2009 31 December 2009


756.20 976.20 926.20 916.20 827.20 1157.20 907.20 785.20 736.20 723.25 903.00


CASH BOOK December 2009

Date Receipts Taka Date Payments



1 Dec. 2009 3 Dec. 2009 15 Dec. 2009 31 Dec. 2009

Balance b/d
Superstore Ltd. M/s Rahim Brothers Techinfo Ltd.

756.20 220.00 330.00 63.00

2 July 2009 2 July 2009 2 July 2009 8 July 2009 17 July 2009 19 July 2009 25 July 2009 26 July 2009 31 July 2009

Table ltd. Broad & Co. Gee & Co. Minter Ltd. Dhaka City Council (DD) Salim Shipbreakers Arc Ltd. Bond insurance

Balance c/d


50.00 130.00 10.00 27.50 89.00 49.00 250.00 122 641.70 1,369.20

Prepared by: Mohammad Shahidul Islam MBA, ACA


2. Preparing Bank Reconciliation Statement (BRS) Step-1: tick off the items that appear in both cash book and the bank statement. Step-2: update cash book by the unticked items in the bank statement. Step-3: the remaining unticked items in the cash book will be the timing difference. This timing difference are used to prepare BRS.
ABC COMPANY LTD. 63 DILKUSHA C/A DHAKA-1000 CASH BOOK [Adjusted] December 2009
Date Receipts Taka Date Payments Taka

31 Dec. 2009 31 Dec. 2009

Balance b/d
Rahim Afroz Ltd.

641.70 179.75 31 Dec. 2009 Bank charge 12.95 808.50 821.45

Balance c/d



December 2009 Balance as per cash book Broad & Co. Minter Ltd. 808.50

Add: Unpresented cheques:

130.00 27.50

Less: Outstanding lodgment:
Techinfo Ltd. Balance as per bank statement


3. Errors and omission Current year Prior year 4. Correction of errors

5. BAS-8 implication [prior year error]

Prepared by: Mohammad Shahidul Islam MBA, ACA



Sl. 1. 2. 3. Topic list BAS Framework BAS-1 BAS-8 Reference Main standard Main standard Main standard

sl. BAS-Framework BAS-1

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Accrual basis Going concern Prudence Substance over form Neutrality Completeness

Accrual basis Going concern Consistency Materiality & Aggregation Off-setting Comparative information

Accrual basis:

Under this basis, the effects of transactions and other events are recognized when they occur and nor as cash or its equivalent is received or paid and they are recorded in the accounting records and reported in the financial statement of the periods to which they relate. Example:

Costs only recognized for that part which is sold (COGS concept comes from accrual basis accounting) Provisions maintained Accruals of various expenses Depreciation

Linked with matching concept: According to the matching concept, when computing profit, income earned must be matched against the expenditure incurred in earning it Linked with going concern assumption: While it is assumed that company will not run in future, financial statements will be prepared on break-up value i.e. net realizable value (sales price less selling expenses) basis rather than accrual basis of accounting. Going concern:

Under this assumption it is assumed that an entity will continue its operation for the foreseeable future (12 months from balance sheet date). It is also assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. Accounting treatment, while going concern is not appropriate: All items in the balance sheet and profit and loss accounts shall be recorded on break-up value basis i.e. net realizable value (sales price less selling expenses).

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Disclosure requirement in case of going concern problem: a) Basis on which financial statements have been prepared b) Reasons why the entity is not considered to be a going concern c) Nature of the uncertainty Example: Indications of going concern assumption: (BSA-570: Going Concern) Financial Negative operating cash flows Adverse key financial ratios Substantial operating losses Arrears in discontinuance of operations Inability to pay creditors Change from credit to cash-on-delivery transaction with suppliers Withdrawal of financial support by debtor and creditor Negative current assets Loss of key management without replacement Loss of major market Cancellation of license/franchise etc. Labor difficulties or shortage of important suppliers Non-compliance of capital or other statutory requirement Changes in legislation




Items in the financial statements shall be presented and classified consistently year to year. However, in some cases presentation/classification can be re-arranged. a) Significant change in nature of operation b) Change will result clear understanding to user c) Change in presentation is required by any BAS Disclosure requirement for inconsistency: Reason for re-arrangement shall be disclosed by way of notes. Previous years figures shall also be re-arranged. Materiality & Aggregation:

Each material item should be presented separately in the financial statement. Immaterial amounts should be aggregated with amount of similar nature or function. Materiality depends on the size and nature of business. There is no specific rule for calculating materiality. However, following rule for calculating materiality can be suggested:

Thumb rule Companies Act 1994

5% of profit before tax any amount exceeding 1% of total revenue or Tk. 5,000 whichever is higher, shall be shown in distinct head in the financial statements

Off-setting: Assets and liabilities should not be off-set except when off-setting is required by another BAS (Example: BAS-12); Income and expenses should only be off-set if standard permits and if the figure is immaterial.
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Following items are permitted by BAS-1 for off-setting: a) Gain or losses on disposal of non-current assets b) Foreign currency translation gain or losses c) Extraordinary items Comparative information:

To ensure comparability, comparative information should be given in the financial statements. BAS requires numerical information and narrative information as comparative figure. Comparative for the year ended 31 December 2009 shall be presented as below: Particulars 2009 (Taka) 2008 (Taka)

Prudence Degree of caution in exercise of the judgments needed in making the management estimates. Examples of estimates are: Estimate of useful life of assets to calculate depreciation Provision for doubtful loss (example: Receivable may not be collected) Inventory allowance/ obsolescence allowance Deferred tax Provision for warranty claim Accrued revenue Provision for loss from a lawsuit

Substance over form Neutrality Completeness

2. Other important concept and convention Business entity concept Monetary unit concept Historical cost convention Realization concept Duality concept Timeliness

2. Other important concept and convention Accounting policies are principles, bases, convention, rules and practices applied by an entity in preparing and presenting financial statements. Following are example of accounting policies to be incorporated by way of notes to the financial statements.
1. 2. 2.1 2.2 2.3 2.4 Reporting entity Basis of preparation Statement of compliance Basis of measurement Functional and presentational currency Use of estimates and judgments
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2.5 3. 3.1 3.2 3.3

Going concern Significant accounting policies Foreign exchange Financial instruments Property, plant and equipment and depreciation i. Recognition and measurement: ii. Subsequent costs: iii. Depreciation:


Impairment: Recognition Calculation of recoverable amount Reversal of impairment

3.5 3.6 3.7 3.7.1 3.7.2 3.8 3.9 3.11 3.12 3.12.1 3.12.2 3.13

Lease transactions Borrowing costs Inventories Stocks Stores Trade and other debtors Provisions Revenue recognition Taxation Provision for income tax Deferred tax Events after the balance sheet


Creation of allowance for bad debt Bad debt written-off Written-off debt received Creation of allowance for bad debt

Circumstances: Doubt on repayment supported by prior experience. Accounting entry:

Bad debt expense Allowance for receivable Cr. Dr.

Bad debt written off

Circumstances: when a bad debt is not expected to be paid. Accounting entry:

Allowance for receivable Dr. Accounts receivable Cr.

Written-off debt received

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Circumstances: debt may be received after it was written-off from the accounts Accounting entry:
Allowance for receivable Dr. Accounts receivable Cr.

Exam Requirement: How alloance is created How allowance is retired Accounting entry for written off and written-off debt recovered Implication of treatment in income statement and balance sheet Identify effect of irrecoverable debt in gross profit and in net profit [admin exp] Maths on calculation of bad debt allowance
Practical problem Provision on bad debt depends on accounting policy of a Company Accounts Receivable (Accounting policy) Provision for doubtful debts is made based on the followings: Aged 6 months 1 year : 5% Aged 1 year 2 years : 20% Aged 2 years 5 years : 50% Aged over 5 years : 100% Bad debts are written-off on consideration of the status of individual debtors.

Ageing of Accounts Receivable (at 31 December 2009): Sl. Subsidiary ledger (Details of receivables)
1 2 3 4 5 Unilever Bangladesh Ltd. Zaman Traders Social Islamic Bank Ltd. Rupayan Builders Ltd. Dhaka Club Ltd.

500,000 200,000 100,000 600,000 400,000

Ageing (years)
1.5 0.5 6 3 2


1,800,000 Rate
20% 0% 100% 50% 20%

Calculation of provision for doubtful debts (at 31 December 2009): Sl. Subsidiary ledger (Details of Amount Ageing receivables) (years)
1 2 3 4 5 Unilever Bangladesh Ltd. Zaman Traders Social Islamic Bank Ltd. Rupayan Builders Ltd. Dhaka Club Ltd. 500,000 200,000 100,000 600,000 400,000 1.5 0.5 6 3 2

Provision for bad debt

100,000 100,000 300,000 80,000




At each period-end, calculation of provision for doubtful debts shall be revised.

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Inventory Count Inventory Valuation Inventory write-off Inventory Recording


A. INVENTORY COUNT CONSIDERATIONS AND PROCEDURES: Item-wise list of each inventory with quantity [from store ledger] Invite internal and external auditor for observation of inventory count Count each and every items and note for any deficiency Get the verification sheet signed by the internal auditor and if possible by the external auditor Accounting entry for deficiency [Loss Dr.; Inventory Cr.]

B. INVENTORY VALUATION: Valuation Methods: Benchmark (Commonly used and BAS supported) method: Lower of Cost and NRV (Net Realizable Value)

Allowed alternative (not BAS supported) method: Historical cost Expected selling price NRV Replacement cost

Measurement Methods: FIFO LIFO (Prohibited by BAS) Average Cost Standard Cost

Valuation Technique
Raw material valuation Work-in-process valuation Finished Goods valuation

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Cost: Purchase price Transport cost Handling cost Non-recoverable taxes

Cost: Purchase price Transport cost Handling cost Non-recoverable taxes Conversion cost (Labor and overhead) NRV: Sales price (-) VAT (-) cost incurred to complete as FG (-) selling cost 75% of Sales

Cost: Purchase price Transport cost Handling cost Non-recoverable taxes Conversion cost (Labor and overhead) NRV: Sales price (-) VAT (-) selling cost

NRV: Sales price (-) profit (-) VAT (-) cost incurred to complete as FG Many Companies estimate

90% of sales

PRACTICAL PROBLEM Provision on bad debt depends on accounting policy of a Company Inventory (Accounting policy)
Inventories except inventories in transit are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs are other costs incurred in bringing them to their existing location and condition.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Finished Goods - costing

Material name
Filament Shell Coper

Invoice price
10 6 4

Transport cost
2 0.5 0.25

Handling cost
1 0.5 0.5

Non-recoverable tax
1.5 1 0.75

Total cost
14.5 8 5.5

Total cost of bulb (25 MW)

Finished Goods - NRV


Material name
Bulb 25 MW

Sales price



Selling cost


Valuation [Lower of Cost and NRV]:

Material name
Bulb 25 MW C.



Value to be included as inventory


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Inventory may be written-off when becomes obsolete/damaged.



Beginning inventory: Cost of sales Inventory Ending inventory: Inventory Cost of sales Inventory write-off: Inventory write-off (expenses) Inventory

Dr. Cr. Dr. Cr. Dr. Cr.

Inventory lost at the time of counting Loss of inventory on counting (expenses)Dr. Inventory Cr.

Prepared by: Mohammad Shahidul Islam MBA, ACA



Recognition Measurement of PPE Depreciation Revaluation Disposal Impairment [BAS-36] Asset Register Intangible Assets [BAS-39]

Recognition Initial recognition At cost Subsequent to initial recognition

Cost model:

Cost Accumulated depreciation Accumulated impairment loss

Revaluation model:

Revalued amount - Accumulated depreciation Accumulated impairment loss

Measurement Asset should be measured initially at cost Initial expenditure Cost of site preparation Initial delivery & handling cost Installation cost Professional fee; architects and engineers Dismantling cost Subsequent expenditure Increase capacity Increase useful life Improvement in quality

Depreciation Commonly used methods of depreciation are: Straight line method Calculation: [Cost-Residual value]/Useful life Reducing balance method Calculation: [Carrying amount (WDV)]*Depreciation rate

Stop charging of depreciation:

A depreciation charge is made even if production stopped. Revaluation: Revaluation is made when actual life of an asset has increased than that of the estimated useful life.
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Once revalued, interval of revaluation is 3-5 years Professional valuer shall be used in revaluation

Depreciation after revaluation: Rate of depreciation shall be changed after re-valuation and shall based on remaining useful life of the asset. Accounting entry: Plant properties and equipment Revaluation surplus Dr. Cr.

Disposal Asset is disposed off when life of the asset has exhausted or not usable. Procedure of Disposal of Fixed Assets (DOFA): - Concerned management takes decision to dispose off particular assets. - The decision is communicated to the respective asset Co-ordinator - Raising DOFA - Go for auction - Physically remove the asset - Remove from asset register - Remove from books Raising DOFA: Asset no. Description Asset class Location Cost Acc. Dep. WDV Reason

Disposal of assets carried at cost: Accumulated Depreciation Dr. Cash Dr. PPE Cr. Gain Cr. Disposal of assets carried at revalued: Other than land: Accumulated depreciation Dr. PPE Cr. Land: Revaluation reserve Retained earnings Dr. Cr.

Impairment [BAS] Impairment loss = Carrying amount > recoverable amount

Asset register ID no. description



Purchase date


Depreciation method


Carrying amount

Prepared by: Mohammad Shahidul Islam MBA, ACA


Intangible assets: Goodwill Preliminary expenses Development cost [BAS-38: design, construction and testing of pre-production, operation of pilot plant, feasibility study, initiate process systems etc.]. Application Software Purchased goodwill: Goodwill Cash/Bank Dr. Cr.

Internally generated goodwill: No entry Amortization of intangible assets Managements estimate on useful life


Unsold goods at the end of the accounting period Cost of sales Cost of carriage inward and outward Inventory written-off or down Inventory destroyed or stolen and subject to insurance claim Accrual Principle/Marching principle

Prepared by: Mohammad Shahidul Islam MBA, ACA


Cost of goods sold

2009 Opening stock of raw materials Purchase during the year Closing stock of raw materials Sale of scrap Raw materials consumed Salaries and wages Gratuity Contribution to provident fund Medical expenses Staff welfare expenses Canteen expenses Power and fuel Vehicle running expenses Repairs and maintenance - General Repairs and maintenance - Machinery Stores and spares consumed Rent, rates and taxes Insurance Telephone and fax Replacement cost Depreciation (Note 4.3) 27,515,359 321,351,326 (29,735,731) (1,249,481) 317,881,473 34,483,840 3,495,821 873,581 1,057,694 990,719 6,500,794 13,781,605 42,896 1,538,548 2,192,548 8,725,775 6,073,500 888,787 441,016 8,473,160 17,980,501 425,422,258 Opening work-in-process Closing work-in-process Cost of production Opening stock of finished goods Closing stock of finished goods (Note 23.3) COGS 443,588 (699,359) 425,166,487 8,003,822 (3,346,108) 429,824,201 2008 26,679,871 193,508,744 (27,515,359) (637,666) 192,035,590 24,906,220 2,225,850 722,979 934,086 1,220,628 5,001,700 11,852,508 4,050 1,369,689 1,586,300 5,226,998 6,073,500 1,189,091 172,594 17,488,028 272,009,811 73,798 (443,588) 271,640,021 6,037,208 (8,003,822) 269,673,407

Prepared by: Mohammad Shahidul Islam MBA, ACA



1. Mention the users of financial statements specifying internal and external users. 2. List the financial reporting framework of Bangladesh. 3. Mention 4 qualitative characteristics of accounting information. 4. What information are required for information be reliable? 5. How accrual basis of accounting is related to matching concept? 6. Identify key points to distinguish CAPEX and REVEX 7. Briefly describe the responsibility of directors for preparation of financial statements. 8. What statements comprise a complete set of financial statements? 9. Describe, in brief, the recognition criteria of an asset. 10. Mention BAS term of fixed assets, stock, debtors, creditors and profit and loss account. 11. Describe, in brief, the accounting consequences, if business entity concept followed and if not. 12. Mention the name of measurement techniques used in accounting. Explain Break -up value of measurement technique. 13. How do you identify non-current and current assets and liabilities? 14. Mention the formula for Gross profit, Net profit, and admin cost to sales. 15. Mention few examples of distribution expenses. 16. What are the elements of financial statements? 17. How do you distinguish petty cash book in traditional system and petty cash book in imprest system. 18. What documents are called source document? Why? 19. What information are generally included in the GRN? 20. What are books of original entry used for? Why? 21. Describe, in brief, all types of discount. 22. Why payroll costs shown in the profit and loss account is higher than the gross payroll cost of employees. 23. Distinguish nominal ledger and subsidiary ledger. Why subsidiary ledger is maintained? 24. Define duality concept in double entry book keeping system. 25. Point out the basic rules for double entry book keeping. 26. What is the implication of VAT on registered and non-registered person? 27. Distinguish between errors that cause trial balance imbalance and those that do not. 28. What is adjusted cash book? Why computation of adjusted cash book is necessary for an accountant? 29. Mention the types of errors in accounting. 30. Describe the use of suspense account in rectifying errors. 31. Explain the terms Fair presentation, substance over form and Prudence.
Prepared by: Mohammad Shahidul Islam MBA, ACA


32. Describe the effect in accounting if going concern assumption followed and if not followed. 33. Mention the cases where offsetting is permitted by accounting standards?

CLASS TEST-2 KNOWLEDGE LEVEL-ACCOUNTING, SECTION-1 Course Teacher: Mohammad Shahidul Islam ACA [All questions carry equal marks]

CHAPTER-1: INTRODUCTION TO ACCOUNTING 1. What is the objective of financial statements? 2. Mention the users of financial statements. 3. Why it is easier to get financial information for internal user and harder for external user? 4. Point out the information needs of following users? a) Stewardship functioning b) Management performance analysis c) Ability to pay debt d) Assessing tax liability and determine tax policy e) Efficient allocation of resources f) Contribution to local economy, using local supplier, environmental effect 5. Mention financial reporting framework in Bangladesh. 6. What qualitative characteristic are appropriate for each of the below cases? a) undue delay in financial reporting b) incomplete information or redundant information in the financial statement c) error free, neutral information presented in the financial statement , prudence and economic substance used d) information provided in the financial statements on a consistence basis 7. Give 50 examples of CAPEX and 20 for REVEX? 8. Identifying CAPEX and REVEX a) purchase of an application software for the company b) purchase a second hand machine with reduced price c) wages for operating the newly purchased machine d) advertisement bill given for 5 years at time e) gain on sale of fixed assets 9. Mention responsibility of directors/management in preparing f/s 10. Define faithful representation CHAPTER-2: THE ACCOUNTING EQUATION 11. what are BAS term of following account heads: a) Fixed assets b) Stock c) Debtor d) Creditor e) Profit & loss account 12. Suppose, list price in an invoice of sales was tk. 500 (VAT inclusive, at standard rate), trade discount @10%, cash discount @ 5% (2/10, n/30), customer paid the amount on 21st day. Determine the invoice value. Determine GP ratio NP ratio and Administrative cost to sale if COGS was tk. 300 and Admin cost was tk. 80. CHAPTER-3: RECORDING FINANCIAL TRANSATIONS 13. Mention the name of all source documents. 14. What are the main books of original entries 15. State system note for credit sales process indicating basic documents required in each stage 16. State system note for credit purchase process indicating basic documents required in each stage
Prepared by: Mohammad Shahidul Islam MBA, ACA


17. 18. 19. 20. 21. 22. 23. 24. 25.

State system note for purchase of fixed assets in credit indicating basic documents required in each stage What are basis inclusion of Goods Received Notes (GRN) What information are needed to draft invoice, credit notes, delivery challan and GRN Mention the names of 6 main books of original entries Draft a sales day book, purchase day book, cash book, petty cash book, payroll book (assignment) Mention the name of 7 source documents Three documents i.e. purchase order, invoice and GRN is necessary for 3 way checking explain Draft a invoice mentioning the amount of VAT fill in the blanks:
Source document Books of original entry


27. 28. 29. 30.

31. 32.

33. 34. 35.

Sales invoince ? Purchase invoice ? Debit note ? Credit note ? Cheque remittance advice ? Payslip ? Petty cash voucher ? Preparing cash book: As on 1 January 2010, ABC Company had Tk. 900 in the bank as overdraft. During the year 2010 the company had following receipts and payments. Prepare an analyzed cash book from the above transactions. Transactions during 2010: a. Cash sale: receipt of Tk. 94 (including VAT @ 15%); b. Payment from credit customer XYZ Tk. 380; c. Cheque received from as a short term loan from PQR Tk. 1800; d. Cash sale: receipt of Tk 141 (including VAT @ 15%); e. Cash received for dale of machine Tk 1200 (no VAT); f. Payment to supplier Tk 120; g. Payment of telephone bill Tk. 376 (including VAT Tk. 76); h. Tk. 100 withdrawn from bank for petty cash; i. Payment of Tk. 1,500 to Otobi for new furniture (no VAT); State few example for which petty cash book is used Difference between imprest system of petty cash book and normal petty cash book Draft a typical petty cash book in imprest system State which books of original entry the following transactions would be entered into: a. Payment to a supplier a cheque for Tk. 450 b. Send and invoice to customer for Tk. 650 c. Buy envelops for Tk. 12 d. Receive an invoice from a supplier for Tk. 300 e. Pay Tk 500 to customer through online transfer f. Customer returns goods for tk. 250 g. Return goods to supplier for tk. 504 h. Customer pays you a cheque for tk. 500 Draft a dummy payroll sheet/book of your company ABC Ltd. Has 10 employees who had gross pay of tk. 140,000 per annum among them in 2009. In that year the company made net pay payments to employees of tk. 129,200 and paid tk. 20,900 to e\the pension trustees. Its total payroll cost was tk. 170,400. how much did the company pay to Government treasury in respect of withholding tax? What transactions are recorded via journal as a book of original entry? Gross payroll cost is more than employees gross pay since explain why? Suppose that ABC Ltd. Pay tk. 380 in full settlement of an invoice that had been recorded at tk. 385 in total in the sales day book. How cash book would be written up?

CHAPTER-4: LEDGER ACCOUNTING & DOUBLE ENTRY 36. Distinguish nominal ledger and subsidiary ledger 37. Define duality concept with example
Prepared by: Mohammad Shahidul Islam MBA, ACA


38. State the general rule of double entry bookkeeping. 39. Identify the debit and credit entries in the following transactions (ignore VAT) a) bought a machine on credit from A, cost tk. 8,000 b) bought goods on credit from B, cost tk. 500 c) sale goods on credit to C, valu tk. 1,200 d) paid D (a credit supplier) tk. 300 e) collected tk. 180 from E, a credit customer f) paid net pay tk. 4,000 g) received rent bill of tk. 700 from landlord G h) paid rent insurance premium tk. 90 40. Summit Power operates an imprest petty cash system. The imprest amount is Tk. 5000. at the end of the period the totals of the four analysis columns in the petty cash book were as follows: Column -1 tk. 23.12 Column -2 tk. 6.74 Column -3 tk. 12.90 Column -4 tk. 28.50 How much cash is required to restore the imprest amount? 41. Give two example of subsidiary ledger. 42. Soft Supplies Co. recently purchase from Hard Imports Co. 10 printers originally priced at tk. 200 each. A 10% trade discount was negotiated together with a 5% cash discount if payment was made within 14 days. Calculate the following. a) The total of the trade discount b) The total of the cash discount 43. Define trade discount and cash discount with two examples 44. Define the term 2/10, n/30 45. Prepare an income statement from the following items: Taka a) purchase at gross cost 120,000 b) trade discount allowed 4,000 c) cash discount received 1,500 d) cash sales 34,000 e) credit sale at invoice price 150,000 f) cash discount allowed 8,000 g) distributaries cost 32,000 h) administrative cost 40,000 i) drawings by proprietor 22,000 46. Explain why VAT is called expenditure tax? 47. Explain how VAT is collected? 48. Explain implication of VAT for registered and non-registered persons 49. A manufacturing company purchase raw materials at a cost of tk. 1,000 plus VAT at standard rate of 15%. From the raw materials the company makes finished products which it sales to a retail outlet, B ltd. For tk. 1,600 plus VAT a\@ 15%. B Ltd. Sales the products to customers at a total price of tk. 2,000 plus VAT @15%. How much VAT is paid at each stage in the chain? 50. Define the term irrecoverable VAT with two examples 51. ABC Company usually sell goods at tk. 130 each, it gives XYZ Trade discount of tk. 10 so he sells goods to XYZ for tk. 120. ABC is registered for VAT. How much output VAT should ABC company include on XYZs invoice? 52. If you are told that an amount includes VAT @ 15% (gross amount), calculate the VAT amount? 53. ABC is preparing financial statements for the year ended 31 December 2009. Included in its balance sheet as at 31 December 2008 was a balance for VAT due from government of tk. 15,000. ABCs summary income statement for the year 31 December 2009 was as follows: Taka Revenue (net) (all standard rated) 500,000 Purchase (net) (all standard rated) (120,000) Gross profit 380,000
Prepared by: Mohammad Shahidul Islam MBA, ACA


Expenses: Wages & salaries (VAT exempted) Entertainment (Tk. 40 plus irrecoverable VAT Tk. 6) Other (net, all standard rated) Net profit

(163,000) (46,000) (71,000) 100,000

Payments of tk. 5,000, 15,000 and 20,000 have been made in the year to government and a repayment of tk. 12,000 was received. a) What is the balance for VAT in the balance sheet as at 31 December 2009 (assume VAT @ 15%) 54. When a credit customer pays an invoice for tk. 115 including VAT @ 15%. What will the credit entry in the VAT ledger account? 55. Define input VAT and output VAT with example. CHAPTER 5: PREPARING BASIC FINANCIAL STATEMENTS 56. What are the components of a complete set of financial statements 57. What are the basis elements of a financial statements 58. What are the errors do not make a trial balance imbalance? 59. Distinguish between errors that cause trial balance imbalance and those that do not. CHAPTER 6: CONTROL ACCOUNT, ERRORS AND OMISSION 60. The total of the balance in a companys receivables ledger is tk. 800 more than the debit balance on its receivables control account. Which one of the following errors could by itself account for the discrepancy? a) The sales day book total column has been under cast by tk.800 b) Cash discounts totallling tk. 800 have been omitted form the nominal ledger c) One receivables ledger account with a credit balance of tk. 800 has been treated as a debit balance in the list of balances d) The cash receipts book has been under cast by tk. 800 61. For Export Co. on 1 October 2008 the receivables ledger balance were tk. 8,024 debit and tk. 57 credit, and the payables ledger balance on the same date were tk. 6.135 credit and tk. 105 debit. There balance have been checked and are correct. For the year ended 30 September 2009 the following particulars are available (in taka): Sales 62.514 Purchase 39,439 Cash from credit customers 55,212 Cash to credit suppliers 37,307 Discount received 1,475 Discount allowed 2,328 Irrecoverable debts written off 326 Refund from suppliers 105 Amount due from customers as shown by receivables ledger, offset against amount due to the same firm as shown by payable ledger (settlement by contra). 434 What are the balances as at 30 September 2009 on: a) receivables control account b) payable control account 62. Bank statement is the mirror image of the cash book -explain 63. Mention the 5 common explanations for differences between cash book and bank statement 64. Explain, in brief, the adjusted cash book 65. ABCs bank statement shows tk. 715 direct debits and tk. 353 investment income not recorded in the cash book. The bank statement does not show a customers cheque for tk. 875 entered in the cash book on the last day of the accounting period. The cash book has a credit balance of tk. 610. What balance appear in the bank statement? 66. What are the 5 broad types of error in accounting 67. Identity types of error from following transactions
Prepared by: Mohammad Shahidul Islam MBA, ACA




A credit sales of tk. 6,843 has been incorrectly debited in the receivable ledger as tk. 6,483 A business receives an invoice from a supplier for tk. 250 and the transaction is missed from the books An error is to treat revenue expenditure incorrectly as capital expenditure Putting a debit entry or a credit entry in the wrong account Casting error Admin expenses of tk. 2,822 are entered as tk. 2,282 in the administrative expenses ledger account. At the same time, income of tk. 8,931 is shown in te sales account as tk. 8,391. 68. A bank statement shows a balance of tk, 1,200 in credit. An examination of the statement shows a tk. 500 cheques paid in per the cash book but not yet on the bank statement and a tk. 1,250 cheque paid out nu\\but not yet on the statement. In addition the cash book shows the proprietors correct calculation of savings interest of tk. 50 which should have been received, but which is not on the statement. What is the balance per the cash book? 69. ABC Company had a difference on its trial balance. After investigation the following errors were discovered. a) A sales invoice for tk. 500 was mis-read by the clerk as tk. 600 ad\nd entered as such into the ledger accounts b) Bank charge of tk. 145 had been debited to the cash at bank account tk. 154 How much was the original difference on the trial balance? 70. Give 3 examples for which a suspense account is required for correction of an error. 71. Bank statement of a company showed an overdrawn balance of tk. 5,250 on 31 December 2009. when this was reconciled to the cash book, the following difference were noted: o Un-presented cheques o Un-credited lodgment o Standing order for insurance premium payable not entered in cash book o Overdraft interest not recorded in the cash book o Credited in error to companys account by bank What is the original balance on companys cash book as on 31 December 2009? 72. Closing inventory balance is not included in the initial trial balance rather included in the extended trial balance explain 73. As at 31 December 2009 a companys bank statement shows an overdraft of tk. 1,500. The statement includes bank charges of tk. 30 which have not yet been recorded in the companys cash book. On 29 December 2009 the company had paid a cheque of tk. 500 to a supplier and banked tk. 200 received from a trade receivable; neither of these terms appears in the bank statement. What would be the overdraft of the companys balance sheet at 31 December 2009? 74. The cash book shows a bank balance of tk. 5,675 overdrawn at 31 December 2009. it is subsequently discovered that a standing order payment for tk. 125 has been entered twice, and that a dishonored cheque for tk. 450 has been debited in the cash book instead of credited. What should be correct bank balance? 75. Give 10 examples for which amendments of cash book is required. (Assignment) 76. Give 5 example for which amendments of banks statement is required (assignment) CHAPTER 7: ACCOUNTING CONCEPT AND CONVENTIONS: 77. identifying concepts and conventions:


Concept and convention

Owner of the business takes goods from inventories for his own personal use Application of degree of caution in exercising judgment under conditions of uncertainty The directors do not intend to liquidate the entity or to cease trading in the foreseeable future The entitys financial position financial performance and cash flow are presented fairly When computing profit, income earned must be matched against the expenditure incurred in earning it
Prepared by: Mohammad Shahidul Islam MBA, ACA


The presentation and classification of items in the financial statements should stay the same from one period to the next Financial statements are produced within a time interval that enables users to make relevant economic decision. 78. State few items for which set-off of is allowed? 79. When break-up value of accounting is attracted? 80. A retailer commences business on 1 January 2009 and buys 20 washing machines, each costing tk. 100. During the year he sells 17 machines at tk. 150 each. How should the remaining machines be valued at 31 December in the following circumstances? a) He forced to close down his business at the end of the year and the remaining machines will realize only tk. 60 each in a forced sale. b) He intends to continue his business into the next year.

Prepared by: Mohammad Shahidul Islam MBA, ACA