CS-152 Computerized Accounting

CS-152
COMPUTERIZED ACCOUNTING
CHAPTER 1: ACCOUNTING: IT'S ROLE IN
SOCIETY
Chapter Objectives
At the completion of this chapter, you would have learnt the concepts of:
⇒ what do we mean by "Accounting"?;
⇒ accounting and "Stewardship";
⇒ qualities required of Accounting Information;
⇒ accounting as Business Information;
⇒ who needs the information?;
⇒ how does the Accountant satisfy all these people?
Introduction
"Accounting", as used in a general sense rather than its direct relation to financial
reporting, is but one of the many forms of communication that we have in this world of
ours. But it has a unique quality; it derives from the particular relationship that exists
between the parties involved in the communication process. To be "Accountable" is to
have a responsibility to another party for one's actions or performance.
Whenever there is responsibility, there is also accountability. Just as a politician (in a

democracy) is accountable for his actions to his electorate or constituency, or a doctor is
accountable to his patient for his advice and treatment, so is the manager of an enterprise
or business accountable to its owners for the conduct and profitability of that enterprise or
business.
1.1 Accounting and "Stewardship"
The term "stewardship" is sometimes used to describe the role of those responsible for
managing an enterprise. Deriving from historical times, the word "steward" was the title
given to a person appointed to look after estates on behalf of owners who were either too
distant from the scene to manage themselves, or perhaps had other priorities for their
energy and talents than spending their time on administration. We find the equivalent of
the "steward" of other days is now termed a "Manager" or a "Director".
Accounting as financial reporting is the vehicle which enables directors and managers to
report their "stewardship" to the owners of business. The financial element is essential;
without this, reports of "stewardship", while no doubt still be containing some interesting
features, would be of little practical use to an owner who actually wanted to know what
was going on.
1.2 Qualities Required of Accounting Information

Accounting therefore, as we speak of it in this Course, is the reporting of financial
information by a person who bears responsibility for what is conveyed by that
information. Like all information, of course, it must also have the six(6) qualities of:
❐ accuracy
❐ timeliness
❐ completeness
❐ relevance
❐ conciseness
❐ unambiguousness (sound presentation)
1.3 Accounting as Business Information
Our special concern is with Financial Accounting as Business Information, and it has
been said that Accounting is the "Language" of Business. This is because no transaction
could be conducted without financial information (you may accept Barter, but even then,
the value of the goods transacted remains a fundamental consideration, even if it is not
explicitly stated). Furthermore, no calculation of the results or of the worth of a business,
or of its future expectations could be possible without Financial Information expressed
through Accounting.
1.3.1 What does Accounting Information Tell Us?
⇒ Below are the broad categories of the specific information that

Accounting Information provides:
❐ whether or not the business continues to be profitable;
❐ what dividends it can afford to pay;
❐ what funds are available from it for other investments or expansion, or

conversely;
❐ what funds is it likely to need for its future viability and survival, and
finally;
❐ a background against which alternatives for the future direction of the

business can be weighed, and for forecasting the likely outcome of the range
of available decisions.
1.4 Who Needs the Information?

1.4.1 Managers / Directors
First, as indicated, those who need the information are the Directors and
Managers, under the concept of stewardship.
Accounting information can be gathered from any part of an enterprise. It makes
it possible for Management to:
❐ Look into every detailed aspect of operations within the organization as an

integrated part of the whole under taking, and
❐ exercise its function of controlling and operating the business, and taking
corrective action where this is indicated by the results reported.
⇒ The Directors of a Company are accountable to the Shareholders for

policy formulation and the overall control and direction of the Company. They
recommend the level of dividend payable from profits to the Shareholders, and
also ensure that Management is performing as it should. Like Managers, they use
the Accounts to monitor the progress and profitability of their Company and to
guide them in their decisions; however, their function being what it is, they take
a broader and a longer term view of Company operations.
1.4.2 Proprietor / Partners / Owners / Shareholders

This category includes:
⇒ ❐ the sole proprietor (in a one-man business) and
❐ Partners (for a partnership).
These people have their personal resources tied up in the business, in that the
funds they have provided to finance the business remain part of their private
assets. If the business goes bankrupt, so may they. Their interest in the
Accounting Information is that of Owners.
Example:
❐ Shareholders use the accounts to identify the future growth of their
investment.
1.4.3 Creditors / Suppliers
"Creditor" is a broad term. The Oxford Dictionary defines it simply as "someone

to whom money is owed". In practice it comes under two main classifications:
❐ Suppliers of goods and services to whom money is owing in the normal

course of business. In Accounting terms these are called "Sundry Creditors"
or "Account Payable".
❐ Lenders
These are in two sub-categories:.
• Short term
- It is an Accounting Convention to classify any party who
has lent money for a term of less than twelve months in
this category, which includes finance provided by way of
Bank Overdraft.
• Long term
- Lenders for terms beyond twelve months are in this
category, examples are lenders on mortgage (i.e.
Mortgagees), debenture holders, bond holders etc.
A mortgage is an instrument giving the lender security over an asset of the

borrower, not necessarily land - it could be buildings, or certain plants, or
even stock in trade. Debentures and bonds may be issued that give a
security, or they may not, in which case they are called "unsecured".
1.4.4 Debtors / Customers
Although they are on the other side of the Balance Sheet (when involved as
Debtors) and are "borrowing" ("owing") rather than "lending" funds, Customers,
like Creditors, have an interest in the continued viability of a business. Its
financial health may be vital to their assurance of continued supply of materials
and services. And as can be the case with Suppliers they could well become
involved in a closer relationship as investors or trading partners, etc.
If the business as their suppliers is making excessive profits and thus putting up
their own costs, customers in their role of consumers will have a common
interest with the general public if these profits are the results of Government
protectionist policies, or a monopoly situation.
1.4.5 Employees and Trade Unions
In the past, the individual employee's interest in the financial affairs of his
employer may not have gone much beyond the contents of his weekly pay packet,
and perhaps also, in whether the Annual Accounts indicated that his employer
would continue to be able to hold him in a job. Many still limit their interest in
this way. But with the growth of organized labour into Trade Unions, the accounts
of employees have come under increasing scrutiny and the information in them
used with effect in wage negotiations.
Of greatest interest as a bargaining point for such organizations is the profit

figure, and the more millions, the better. What it represents as a return on the
funds employed or whether it is but a temporary fluctuation in the fortunes of the
enterprise is immaterial to the argument. If dividends are high, they will be
mentioned. So employer's representatives involved in Collective Bargaining do
have to be as skilled in the art of interpreting these figures to their advantage as
are the employees' representatives.
Sometimes the downfall of a business can be attributed to the shortsightedness of

Boards of Directors in pursuing accounting policies that put a good light on their
work for the benefit of shareholders, only to find that Union claims based on this
information have eventually pushed costs to a level that is fatal to the enterprise.
1.4.6 Government and Economists
Company results, particularly those of industry leaders, are a good indicator to

the Government and the business community as a whole, as to the state of
economic health of a nation. But the compilers of economic surveys cannot wait
until the end of a Company's financial year. Simple surveys are done at regular
(usually 3 months) intervals, to obtain key information on such matters as order
levels, stocks, employment levels etc. Some of this information may come from
the same records as do the regular financial reports being given to management.
Government Tariff and Protection Policies are influenced by such factors as the
amount of local employment offered by protected industries; however, if the
accounts of these industries begin to indicate that their profit and investment
returns are becoming excessive, protection may be reduced, particularly if there
have been complaints from the general public about price levels or monopoly
situations. Government will take note of the profit level of the particular
enterprise involved, often comparing its accounts with results summarized from
other industry groups.
Government are also vitally interested in the tax revenue being generated by
businesses; properly certified accounts must be supplied with annual Tax
Returns, and a tax inspection may be carried out on the books and records of a
business if the Taxation Authorities are not satisfied with this information. Such
inspections can go back over a number of years, particularly if the results shown
do not reconcile with what is known to be typical in the particular business
sector involved. The use of computers by the tax authorities to obtain sector
results for comparison purposes, and so isolate possible tax avoiders whose
business results do not fit the general pattern, is a relatively recent development
in tax collection techniques.
Over the past fifty years or so, Government have, in addition to collecting
taxation, made increasing use of employers as collection agents for obligations
that properly belong to the employee, for example P.A.Y.E Tax, CPF
Deductions, Court Maintenance Orders, etc. All of these, while being a logical
development that may meet the needs of convenience, involve employers in
considerably more in record-keeping than the mere payment of wages would
involve, and require properly designed and managed accounting systems.
Local authorities are interested in financial information for measuring the

progress of industries and businesses within their area, so that they may gauge
likely requirements for such matters as housing, roads and reticulation services,
and, of course, how they are likely to be able to obtain from Rates Revenue.
1.4.7 The General Public
Public companies in particular, have found over time that they are becoming
accountable to a much wider section of the community than simply their
shareholders. Interest groups will seize on the results of companies that are for
example involved in a pollution or other environment changing processes,
operating in countries with unacceptable political regimes, allegedly involved in
cruelty to animals, or selling unsafe products etc. These companies' "ill-gotten"
profits will be paraded before the public in an endeavour to shame the enterprise
concerned into more enlightened practices. Often such groups will buy up a few
shares simply for the purpose of gaining a platform for themselves at Annual
Meetings.
And as mentioned earlier, the general public as consumers may also complain if
they are being forced through Government protectionism to buy inferior or unduly
expensive locally made products while they perceive the industry concerned to be
making excessive profits.
1.4.8 How does the Accountant Satisfy all these People?
The short answer is - he cannot. Each individual and each group has its own
special needs. Reporting of any type - and this includes the reporting of
Financial Information - can be regarded as an Art as much as a Science. The
essence of it all is knowing how to tell the party concerned what he/she needs to
know, and at the same time avoid undue risk to the interests of other parties.
There is much Accounting Information that can be classified as "Confidential" or

"Commercially Sensitive" and of necessity required the use of fine judgment in
its dissemination. What you tell a line manager will be different from what you
tell a department supervisor; and these two will differ from what you will have
to tell the Managing Director!
The Accountant in any organization has to be aware that he/she is above all an
employee, and must follow the lines of communication laid down for him/her,
both inside and outside that organization. For he/she could well become the
person in an organization who is in possession of a very large part of the
important facts relating to the administrative and financial operations of the
enterprise; if so, he/she is in a situation of considerable responsibility and
consequence.
What the Accountant can do is to consistently give his/her best information and
advice to those persons in the enterprise who actually have the responsibility for
taking action on it, and ensure that it is properly understood. Should he/she find
himself/herself being compromised, or manipulated to provide information for
purposes that are doubtful or even dishonest, all he/she can do is make the
situation clear to those that need to know – his/her superiors. His/her duty
beyond that is to his/her profession, in upholding its standards.
1.5 Accounting Today
In less than a hundred years, Accounting has come an immense distance. Not only is the
equipment now available to aggregate, sort and summarize the information and beam it
across the globe in a few seconds; more important and more significant perhaps, is the
way that techniques and standards for gathering and preparing accounting information
have become refined and regularized; both for management and owners, it provides an
awareness of how their businesses operate that ranges from the closest operational detail,
to useful and credible forecasts of future trends. For in addition to its traditional role of
reporting on events that are past, it now projects into the future, and provides the
navigational aids both for Investors and for the Captains of Enterprise.
1.6 Exercises
1. The Government requires that all firms submit their annual financial reports.
Describe at least five reasons why the government requires such reports.
2. Differentiate between internal and external users of accounting information. Outline

some reasons for these internal users.
3.
a) Define the term "stewardship"?
b) List five categories of items that can be obtained from accounting information.
c) Why do employees and/or trade unions require accounting information?
CHAPTER 2: ACCOUNTING
Chapter Objectives
At the completion of this chapter, you would have learnt the concepts of :
⇒ book keeping and accounting;
⇒ terms used in the financial position;
⇒ presentation of the financial position;
⇒ accounting concepts and conventions.
2.1 Book Keeping and Accounting

We have seen in chapter one those groups of people that require accounting information
for various reasons. How do we go about preparing all these reports? The process goes
through the following two stages:
❐ Stage 1 - Book keeping

• The recording of all business transactions in proper books of accounts.
❐ Stage 2 – Accounting
• The making use of these financial data contained in the books to
produce financial information.
The keyword to this process is "financial" data/information. What is meant by this term?
It is all the data that are stated in money terms. So in the book keeping stage, we record
into the books all transactions stated in terms of money figures - that is financial data. If
everything that happened in the business can be recorded in this way, then the books will
show the financial position of the firm at all times. Whenever there is any additional
transaction, it will affect the totals in the books. This means that the financial position
will change. In fact we can make two important assumptions.
1. That the books of accounts will reflect the financial position of the firm at all times.
2. That every transaction will affect the financial position.
2.2 Financial Position
What do we mean by the term "financial position"? It means that the data will show what
belongs to the firm and what is due to be paid out by the firm. This leads us to identify the
official terms that we normally use in this statement.
2.2.1 Assets
All those items that belong to the firm are termed assets and they fall into two
categories:
❐ fixed assets and

❐ current assets.
Current assets are items of value owned by the firm. These items may be
acquired in the course of the business. Current assets will change within the next
CS152 CHAPTER 2: ACCOUNTING
twelve months. Some assets may not exist in physical form but in the form of a
legal tender or legal rights. Examples are debtors, bank balance, prepayments
etc. Other assets may exist in a physical form such as stock - which are goods or
materials balance in the store.
Fixed assets are those items of high value that are owned by the firm. These
assets will last for a few years and are not for purposes of resale. These assets
must also be held for use in the business. Examples of such assets are motor
vehicles, premises, machinery etc.
2.3 Presentation of Financial Position
The Balance Sheet
This is a financial report prepared from the books of accounts. The Balance Sheet will
show the financial position of the firm at a given point in time. Being one of the financial
reports it is worthwhile to study the form of report that must be presented. Every report
must have a three item header.
3. 1. Name of the firm,

2 Title of the report, and
4. The date it refers to.
The balance sheet will show clearly what the firm owns and what it owes.
These three groups of items shown in the balance sheet reflects the accounting equation:
Assets = Capital + Liabilities
How do we get this equation? It is a series of transaction that will increase or decrease
these items in the accounting equation.
2.3.1 Illustration of Changes in the Financial Position
Table 2-1 :
Example table
1 June Jimmy Lim invested $50,000 into the business bank account
2 June Bought stock for $7,500 paying by cheque
3 June Took $2,000 from the bank for use in the cash till
4 June Bought a motor vehicle for $20,000 on credit from Borneo Motors
5 June Sold goods, originally costing $200 for $650 cash
6 June Bought more goods from Sea Supplies Ltd for $3,000
7 June Sold goods to ALEC Traders for $3,000 original cost $1,000
8 June Jimmy Tan took stock costing $2,000 for his own use. At the same
time he drew out cash $500 for personal expenses
Jimmy Lim (Balance Sheet)
As at 1st June 1993

Bank $50,000 Capital $50,000
$50,000 $50,000
As at 2nd June 1993
Stock $7,500 Capital $50,000
Bank $42,500
$50,000 $50,000
As at 3rd June 1993
Stock $7,500 Capital $50,000
Bank $40,500
Cash $2,000
$50,000 $50,000
As at 4th June 1993
Motorvehicle $20,000 Capital $50,000
Stock $7,500 Creditors $20,000
Bank $40,500
Cash $2,000
$70,000 $70,000
As at 5th June 1993
Stock $7,300 Add Profit $450
Bank $40,500 $50,450
Cash $2,650 Creditors $20,000
$70,450 $70,450
As at 6th June 1993
Stock $10,300 Add Profit $450
Bank $40,500 $50,450
Cash $2,650 Creditors $23,000
$73,450 $73,450
As at 7th June 1993
Stock $9,300 Add Profit $2,450
Debtors $3,000 $52,450
Bank $40,500 Creditors $23,000
Cash $2,650
$75,450 $75,450
As at 8th June 1993
Stock $7,300 Add Profit $2,450
Debtors $3,000 $52,450
Bank $40,500 Less Drawings $2,500
Cash $2,150 $49,950
Creditors $23,000
$72,950 $72,950
2.4 Accounting Concepts and Conventions

How do we make all these changes in the financial position? You should notice that we
have to follow certain accounting rules when producing these figures. In addition, these
reports that are produced from the accounting activities have to meet the needs of
different users. All these users are expected to see a universal and standardized
accounting information that is comparable amongst business. Therefore, accounting
activities today has been evolved through the process of taking into consideration the
different users and their needs. The magic number that most users look at is the "bottom
line" - that is the net profit. You can imagine a situation where there are no accounting
rules. The result will be that different people get different figures from the accounts.
Profit Figures when no Accounting Rules are followed :
Profits
Employees Government Owners Lenders

$10,000 $100,000 $1,000,000 $10,000,000
These accounting rules are known as concepts and conventions. In this context we
identify seven concepts and three conventions.
2.4.1 Business Entity Concept

The business entity concept is to ensure that we treat the owners as a separate
person from the business. In practice, all transactions are treated from the view
point of the business. The only transactions that affect the owners will only be
capital, profits and drawing.
2.4.2 Going Concern Concept

The going concern concept refers to the continued existence of the business. It is
assumed that the business when set up will not close down or terminated. This is
closely linked to the cost concept.
2.4.3 Cost Concept
The cost concept states that items to be recorded in the books would be the
amount actually paid for and not its value to the firm. The amount paid for
would be the figure that everybody can agree upon.
2.4.4 Dual Aspect Concept
The dual aspect concept is being applied whenever a transaction takes place.
This means that every transaction will affect two items - which is the application
of the accounting equation,
2.4.5 Money Measurement Concept

The money measurement concept is concerned with the entries to be included in
the accounts. This concept means that only items with a clear monetary value are
entered in the accounts. In this instance, the accounting records can show the
value of goods held but not the value of its employees.
2.4.6 Accruals Concepts
The accruals concept governs when the transaction should be recorded. In other
words, we should record the items when used and not only when it is paid for.
This also means that we bring into account items that are used but not yet paid
for or recorded in the books.
2.4.7 Realization Concept
The realization concept means that a transaction is recognized whenever title to

the goods changed hands and not dependent on receipts/payments of money.
This concept is similar to the accruals concept though it only applies to the
recognition of a "sales" made.
2.5 Accounting Conventions
2.5.1 The Materiality Convention
The term materiality refer to the relative importance of an item or event. When
the accountants prepare financial information for the users, the materiality of the
information to be disclosed is the question to be considered. For example, should
a calculator costing $20, be included as an asset to be depreciated yearly or
written off as an expense in the year of purchase. Therefore, it can be stated that
an item is material if there is reasonable expectations that knowledge of it will
influence the decisions of the users of financial statements. Internally, when
doing accounting duties, the firm should not waste time looking for the reasons
for small errors - it is not material.
2.5.2 The Prudence or Conservatism Convention
This convention derives from the principle of being cautious and careful. In
accounting, there is always a degree of uncertainty relating to the future. Being
prudent means to assume that we expect the worst to happen. So the practice of
this convention is that we should understate profits rather than underestimate
expenses.
2.5.3 The Consistency Convention
This convention requires that there is a consistency in accounting treatment of

the same item within each accounting period. This implies that our accounting
methods should not change from one period to the next.
2.6 Exercises
5. 1. Complete each of the following statement with a word or phrase.

d) The _________________ concept states that all items should be recorded at their
original cost price.
e) The accounts of a business should not include the personal transactions of the
owner. This is known as the ________________ concept.
f) The balance sheet equation is ________________.
g) A loan repayable in five years time is a _______________ liability.
h) The _________________ concept states that profit should not be taken until a
sale is made.
i) Stock is an example of a _______________ asset.
j) The ____________________ concept demands that there should be both a credit
and a debit entry for every transaction.
k) Motor vehicles are usually classed as ________________ assets.
l) The tendency to understate profits or overstate losses is known as the
_________________ convention.
m) The ruling that the firm should not change its accounting practice or system each
year is known as __________________ convention.
6. 2. Briefly describe what is meant by:

a) the cost concept.
b) the business entity concept
c) the realization concept
d) the materiality convention
e) the prudence convention
3. Complete the columns with the word increase, no effect or decrease to

show the
effects of the following transactions.
Assets Liability Capital
a a) Buy a motor van on credit.

b b) The owner invests more money into the business.
c c) Receive cash from debtor.
d d) Buy stock paying by cheque.
e e) Pay creditor by cheque.
f f) Sell stock for cash at a profit.
7. State which of the following have been recorded correctly, and which incorrectly and identify,
in each case, the relevant concept, convention or type of error:
n) a) Computer printout paper has been recorded under Office Equipment;

b) Lawyers fees relating to the purchase of new offices have been recorded under
Premises;
c) A purchase of raw materials has been recorded as a Credit entry in the Purchases
account and a Debit entry in the suppliers account;
d) A purchase of clothes for the owners has been left out of the accounts altogether;
e) A sale to A. Ahmed has been entered in the account for A.A. Ahmed;
f) A new machine costing $1,000 has been recorded at this value in the Machinery
account even though the resale value is now only $750;
g) An invoice for $740 has been recorded as $470;
h) A pocket calculator costing $9.99 has been recorded as General Office expenses.
5. Identify which Accounting Concept or Convention has been IGNORED in the

following transactions.
a) An item costing $200 has been recorded as $300 as this is its current market
value.
b) The owner of the business has bought a television for his own use and recorded
this as Fixed Asset.
c) A contract is currently being negotiated which should bring the firm a profit of
$10,000. This amount has been recorded in the books.
d) A calculator costing $3.00 has been recorded as a Fixed Asset.
e) A bill for electricity was received in the last financial year but has been recorded
in the current year as payment was only made recently.
f) A sale of goods worth $250 has only been recorded in the Sales Account.
g) An order has been received for goods worth $890. This has duly been recorded
in the Sales Account.
h) The firm has had a bad year and is likely to go bankrupt within the next 12
months. The accounts have not been altered.
6. Which Accounting concept or convention has been ignored in each of the

following transactions:
a) Floppy disks costing $10 have been recorded as Office equipment.
b) The owner has bought himself a colour TV for $200 and recorded it under Office
equipment.
c) Sales are recorded as soon as an Order form is received.
d) The method used for calculating Stock has been changed first from LIFO to
FIFO and then to AVERAGE COST, all in the last three years.
e) Rent for the year was $1,000, of which $750 has been paid. The amount shown
in the Profit/Loss Account was $750.
CHAPTER 3: ACCOUNTING SYSTEMS
Chapter Objectives
At the completion of this chapter, you would have learnt the concepts of
⇒ introduction to Accounting System;
⇒ source documents;
⇒ daybooks;
⇒ ledgers.
Introduction
In the previous chapter, we reviewed the various accounting concepts and conventions.
These rules in accounting are necessary to ensure that the accounting reports are true and
fair. Moreover, the figures presented must also be accurate. But, how do we achieve this?
There must be an accounting system set up to operate a series of activities that will
produce accounting information as and when required. There are three essential elements
for any accounting system.
8. The system must provide information.

9. There must be built-in controls to ensure there is no chance of cheating.
10. There must be an audit trail - in other words, the system must have steps for a person to
follow.
3.1 A Manual Accounting System
The following should be the stages of activities in a manual accounting system.
1. Source Documents
2. Writing up the daybooks
3. Posting to ledger accounts
4. Balancing the ledger accounts
5. Production of a Trial Balance
6. Adjustments necessary to update accounts
7. Accounting Reports
3.2 Source Documents
These are documents that provide actual proof of business transactions. Accounting
entries are not made on the basis of oral instruction or hearsay but on documents
produced. They are the initial documents to ensure accuracy and has to be kept in a
proper manner for verification by auditors, government etc.
In a typical business environment, we can identify the following types of source

documents namely:
Table 3-1: Documents used in business

CS152 CHAPTER 3: ACCOUNTING SYSTEMS
Document Name Purpose

Sales invoices To be sent to customers in respect of
credit sales
Purchase invoices Received from suppliers for goods
bought / services performed
Credit notes issued Return of goods by customers
Credit notes received Return of goods to suppliers
Bank deposits slip / Credit memo Receipts banked in
Cheque copies / Debit memo Payments made from bank
Other memos, letters etc. All other transactions not classified
above
INVOICE
Jimmy Lim Traders
International Plaza
Singapore Town
Invoice No.: JL5645
Date: 30th June 1994
BOBO Enterprise
Paradiz Building
Singapore City
Your order no. BB4414 Dated: 22nd June 1994 Terms 5% - 31 days
Quantity Description Unit Price Total $ GST Value $

$ %
50 boxes H.D. Diskettes 7.50 375.00 10%
18 pieces Hard Unit 210.00 3780.00 10%
28 reams Plain Paper A4 5.50 154.00 10%
4309.00
Trade Discount 15% 646.35
3662.65 4028.92
Authorized Signature
Figure 3-1 : An example of a sales invoice
CREDIT NOTE
Jimmy Lim Traders
International Plaza
Singapore Town
C/N. No.: R1200
Dated: 15th July 1994
BOBO Enterprise
Paradiz Building
Singapore City
Our invoice no. JL5645 Dated : 30th June 1994
Quantity Description Amoun

3 pieces Hard Disks 535.50
GST 10% 53.55
589.05
Figure 3-2: An example of credit note

IMMEDIATE BANK PLC Cheque Deposit

China Town Point Date _________
Sinagpore
Bank Cheque No. Amount
Account Name ____________________________
Account No.
Subject to conditions on the reverse
Figure 3-3: A typical bank deposit slip
IMMEDIATE BANK PLC.
Date ____________
Pay ________________________________________ or bearer
Singapore Dollars ___________________________________
______________________S$ __________________________
Timmy Lim
Authorized Signature
834604-5454-001-12345678
Eample 3-4: Eample of cheque

3.3 Daybooks
In day to day activities of the accounts department, source documents are being
distributed to different personnel for recording these transaction. All these documents are
written up into special journals set up for this particular type of document. A day book is
a simple daily recording of the source documents. All the daybooks are normally totalled
up at the end of each month (or more frequently depending on volume). Daybooks are
sometimes called books of prime entry or books of original entry.
It should be remembered that these daybooks are a diary of the business.
Table 3-2 : Daybooks used in business
Daybook Function
Sales Daybook Record of all invoices issued to customers each day
(for sales on credit)
Purchase Daybook Record of all invoices from suppliers (for purchase
on credit)
Returns in Daybook All credit notes issued to customers in respects of
returns inward
Returns out Daybook All the credit notes received from suppliers in
respect of returns outward
Bank Receipts Book All the deposits into the bank account
Bank Payments Book All the payments made from the bank account
(cheque drawn)
General Journal All other transaction that do not fall into the above
categories example correction of errors, adjustments,
other unusual transactions
Sales Daybook
Date Details Account Invoice Amount GST Total
No. No.
2nd June BOBO JL4201 1765.00 176.50 1941.50
Enterprise
3rd June Anywhere Lo JL4202 2010.00 301.50 2311.50
4th June Sorry Store JL4203 370.00 37.00 407.00
5th June Cancelled JL4204
Figure 3-5: Example of sales daybook
Jimmy Lim
Returns in Daybook
Date Details C/N No. Account Amount GST Total
No.
5th June BOBO 1022 3179 55.00 5.50 60.50
Enterprise
6th June Eastern 1023 5620 100.00 10.00 110.00
Computer
Figure 3-6: Example of a return inwards daybook

Purchase Daybook
Date Acct Inv. Details Total Purchase Motor GST Total
No. No. Expense
3rd June 2281 32668 All Rights 175.00 175.00
Co.
4th June 4180 76251 Crosswater 250.00 250.00
6th June 8116 52109 Highland 78.00 78.00
7th June 4211 17216 Aoco 250.00 250.00
Stores
Figure3-7: Example of a purchase daybook
Returns Outward Book

Date Acct Inv. Details Total Purchase Motor Statio Sundry
No. No. Expense nary
2nd June 4180 C220 Crosswater 40 40
3rd June 8116 C7201 Highland 40 20
6th June 2281 10002 All Right 75 75
Co.
Figure 3-8: Example of a returns outward daybook
Bank Receipts Book

Date Details Account No. Discount Bank
7th June Soisy Stores 5662 12 85
10th June BOBO Enterprise 2115 1200
12th June Anywhere Lo 1062 46 2254
Figure 3-9: An example of bank receipt book
Bank Payments Book

Date Details Account No. Cheque No. Discount Bank
1st June Coco Store 4211 267625 22 418
3rd June All Right Co 2281 207626 - 150
4th June Highlught 8116 207627 75 1425
5th June Crosswater 4180 207628 25 225
Figure 3-10: An example of bank payments book
General Journal
Date Details Folio Debit Credit
1st June Bank 50000
Capital 50000
Investment by Jimmy Lim
2nd June Purchases 7500

Bank 7500
Bought goods paid by cheque
3rd June Cash

Bank 2000
Draw cash from bank 2000
Figure 3-11: An example of general journal

3.4 Ledgers
In a typical accounting system there will be three ledgers:
8. 1. Nominal Ledger
- This ledger will contain the accounts of all the business transactions. This is also
called the General Ledger.
2. Sales Ledger
- Inside which contained the individual accounts for all the customers in respect of
sales on credit. It is termed a subsidiary ledger and sometimes called the Debtors
Ledger/Accounts Receivable.
9. Purchase Ledger
- This will contain the individual accounts of all the suppliers from whom we have
bought on credit. It is also termed a subsidiary ledger and sometimes called the
Creditors Ledger/Accounts Payable.
What is a Ledger?
It is a group or file of accounts stored in pages of a book, cards in a tray or tape on a reel.
A manual system is one in which the ledger accounts are individually posted from the
daybooks. The following is an example of a Ledger Account.
Bank
Date Details Folio Debit Credit
1st June Capitals 50,000
2nd June Purchase 7,500
3rd June Cash 2,000
50,000 9,500
8th June Balance at this date 40,500
Purchases
1st June Bank 7,500
2nd June Sea Supplies Ltd 3,000
3rd June Drawings 2,000
10,500 2,000
8th June Balance at this date 8,500
Cash
3rd June Bank 2,000
5th June Sales 650
8th June Drawings 500
2,650 500
8th June Balance at his date 2,150
Figure 3-12: Illustrating ledger accounts

CHAPTER 4: DOUBLE ENTRY ACCOUNTS
Chapter Objectives
⇒ identifying account names;
⇒ double entry operations;
⇒ journal and ledger accounts;
⇒ trial balance.
Introduction
We have seen the flow of the accounting system in the previous section. In order to enter
transactions correctly classified, there are various steps in the recording process by asking
three questions in respect of every transaction:
10. What are the account names to be used?

11. What type of accounts are they?
12. What accounts are to be debited and credited?
For a start we shall answer Question 1. By first of all understanding the transactions of a
trader (the business of buying and selling goods).
4.1 What are the Account Names?
Table 4-1
Account Name Purpose
Purchases To record the cost of buying goods for the purpose of being
sold
Returns Out / Outward / An account set up to record the value of goods returned to
Purchase Returns suppliers that were originally purchased
Sales Record the amount sold to customers from the goods
previously recorded as purchases
Returns In / Inward Sales A record of goods returned by customers in which we had
Returns previously made a Sale.
Stock The amount of goods held for resale:
Closing stock: - balance at the end of an accounting period
Opening stock – balance at start of an accounting period
Discount Allowed That amount of discount given to customers when they pay
their accounts
Discount Received That amount of discount given by suppliers when we pay
their accounts
The above illustration gives a brief glimpse of the account names that can be used. It is
worthwhile to remember that account names are allocated for the nature of each
transaction.
4.2 Double Entry Operations

4.2.1 What Type of Accounts?
CS152 CHAPTER 4: DOUBLE ENTRY ACCOUNTS
We have seen that the financial position of a business can be reflected in a

Balance Sheet. Each of these items in the balance sheet is an account name by
itself and all these names reflect the accounting equation :
which are the three types of accounts. In addition, from the account names
mentioned above, there are a few accounts not found in the balance sheet. Such
accounts may be found in the Trading or Profit and Loss accounts. For example,
Purchases account is classified as an Expense whereas Sales is classified as an
Income account. Both Expense and Income are the two different types of
accounts.
In summary, there are five types of accounts broadly identified as Assets,

Liabilities, Capital, Income and Expense.
The table that follows would illustrate the account names and their account
types.
Table 4-2 :
Account Names Account Types Account Natures

Motor Vehicle Assets Debit
Premises Assets Debit
Office Equipment Assets Debit
Plant and Machinery Assets Debit
Land and Building Assets Debit
Furniture and Fittings Assets Debit
Debtors Assets Debit
Cash in Hand Assets Debit
Cash at Bank Assets Debit
Prepayment Assets Debit
Stock Assets Debit
Bank Loan Liabilities Credit
Creditors Liabilities Credit
Bank Overdraft Liabilities Credit
Accruals Liabilities Credit
Provision for bad debts Contra Assets Credit
Provision for depreciation Contra Assets Credit
Capital Capital Credit
Profit Capital Credit
Drawings Contra Capital Credit
Sales Income Credit
Commission received Income Credit
Discount received Income Credit
Interest received Income Credit
Bad debts expense Expense Debit
Depreciation expense Expense Debit
Interest expense Expense Debit
Commission allowed Expense Debit
Rent and rates Expense Debit
Discount allowed Expense Debit
Purchases Expense Debit
Wages and salaries Expense Debit
Insurance Expense Debit
Advertising Expense Debit
Heat and Light Expense Debit
Carriage Inwards Expense Debit
Carriage Outwards Expense Debit
4.3 Recording of Transactions : Journals and Ledgers

As mentioned, it is necessary for any firm to record its business transactions. Such
responsible practice by the managers is known as stewardship.
This chapter would illustrate the process and method involved for recording the business
transaction. The recording process requires answering three questions:
13.
14. 1. What account names to be used?
2. What type of accounts are they?
3. Is it an increase or decrease in the account?
Question one and two have already been briefly touched on in the previous sections. This
section would put the puzzles together.
To begin, the following example shows the typical transactions that happens in a day of
the business.
Example:
Success company has the following transaction in 1st October. As an accounts clerk you
are requested by the manager to record the happenings in the general journal:
1st October 19xx
o) Owner invested $30,000 cash into the business

p) Success company sold $5000 goods to customer Info. Ltd on credit and another
$2000 goods by cash.
q) Success Co. bought an office furniture costing $3500 by cash.
r) Success Co. replenished its stock by buying $1500 worth of goods on credit with
Sure-Give Co.
To record the transactions in the general journal book, it is absolutely necessary for
students to know the double entry system.
The recording of a transaction works on the mechanism of double entry which indicates
that for every transaction two entries would be recorded: one debit entry and the other
credit entry.
Table 4-3:
Account Types Nature Treatment for Increase Treatment for Decrease

Assets Debit Debit Credit
Liabilities Credit Credit Debit
Capital Credit Credit Debit
Income Credit Credit Debit
Expense Debit Debit Credit
Referring to Example 1 and recalling 3 questions:
For transaction (a) the 2 account names are cash and owner's capital. Cash is a current
asset and owner's capital is a capital account. Since when owner invested cash the cash
balance increases and since cash is an asset the asset would as a result increase. Referring
to Table 4-3 the treatment for increase in Assets would be a Debit entry. According to
double entry rules since cash is a debit entry the other account-owner's capital would be a
credit entry.
A hint for students : to identify the account names watch out for "nouns" in the
transactions.
The recording entries for transaction (a) in the General Journal would be:
Date Accounts Folio Debit ($) Credit ($)

1/10/93 Cash 3000
Capital 3000
Owner’s investment into
Business cash accounts
Now, your turn to figure out how transactions (b) to (d) are recorded in the General
Journal Book:
Date Accounts Folio Debit ($) Credit ($)

1/10/93 Info. Ltd 5000
Sales 5000
Sold goods to Info. Ltd on credit
1/10/93 Cash 2000
Sales 2000
Sold goods for cash
1/10/93 Office furniture 3500
Cash 3500
Bought office furniture by cheque
1/10/93 Purchase 1500
Sure-give Co. 1500
Bought goods on credit with sure-
give Co.
Explanations for transaction (b) to (d)
i. Transactions (b) Info. Ltd is the debtor/customer of the company who owes
$5000 due to sales of goods to Info. Debtor is classified as asset with debit nature.
Since this transaction resulted in an increase in asset Info Ltd is debited. According
to the rules of double entry the other account sales would be credited. In the same
way, cash is also an asset account with debit nature.
ii. Transactions (c) Office furniture is a fixed asset with debit nature. Since the
purchase of office furniture would increase the asset available in the business, the
office furniture account would be debited. Accordingly, cash account would be
credited.
iii. Transactions (d)Goods or stock can be identified as either Purchases or
Sales. If goods are bought, they would be identified as purchases but if they are sold,
they would be identified as Sales.By purchasing goods on credit from Sure-Give Co.,
the business would owe Sure-Give Co. (known as creditor for the amount
purchased). Since this transaction resulted in an increase in creditor (which belongs
to account types of liabilities), Sure-Give Co. would be credited. Accordingly,
purchases would be debited.
Ledger Accounts
In the previous section, students would have learned that transactions occurrences are
recorded in the journals.
However, in many instances, the business would like to determine its individual account
balances. To determine the individual account balances, it is necessary to post the
journals to the ledgers.
Ledgers are books that contain data of individual accounts.
Example 2 :
The following are the transactions recorded in the general journal book of XYZ Co. You
are required to post the journals to the general ledger to determine the individual account
balances.
XYZ Co.
General Journal
Date Accounts Debit Credit
1st Jan. 19XX Cash 1000
Capital 1000
2nd Jan.19XX Cash 5500
Sales 5500
3rd Jan.19XX AXOB Co. 1000
Sales 1000
4th Jan.19XX Purchases 200
ABC Co. 200
5th Jan.19XX ABC Co. 200
Cash 200
6th Jan.19XX Office furniture 1200
Cash 1200
Referring to Example 2, the ledger accounts would be reflected in the General Ledger as
follow:
XYZ Co.
General Ledger
Cash Account
1st Jan.19XX Capital 1000
2nd Jan.19XX Sales 5500
6th Jan.19XX Office Furniture 1200
6500 1400
1st Feb. 19XX Balance 5100
Capital Account
1st Jan.19XX Cash 1000
Sales Account
2nd Jan.19XX Cash 5500
3rd Jan.19XX AXDB Co. 1000
6500
1st Feb.19XX Balance 6500
AXDB Co.
3rd Jan.19XX Sales 1000
Purchases
ABC Co.
4th Jan.19XX Purchases 200
Cash 200 200
200 200
Office Furniture
6th Jan.19XX Cash 1200
From the General Ledger, XYZ Co. would know that it has a cash balance of $5,100 from
all cash transactions. Similarly for other individual accounts, their balance could be
determined.
As such, students should have observed that the balances of individual accounts could be
extracted from the ledger; but difficult to retrieve by looking at journals alone.
4.4 Trial Balance
In the previous section, students should be able to differentiate the different purposes of
journals and ledgers and also identify how journals and ledgers are related.
In this section, students should recognize that as the volume of transactions increased in
the business, there must be a mechanism that ensures that any errors are highlighted to
observe accuracy of accounts. That mechanism that allows first time checking is the trial
balance.
The trial balance is simply a listing of all the balances for each account in the ledger.
Referring to the General Ledger prepared for Example 2, the trial balance for XYZ Co.
would be as follow.
XYZ Co.
Trial balance as at 31st Jan.19XX
Accounts Debit Credit
Cash 5100
Capital 1000
Sales 6500
AXDB Co. 1000
Purchases 200
ABC Co.
Office Furniture 1200
7500 7500
The trial balance for XYZ Co. was prepared by extracting the closing balances of all
accounts in the general ledgers. If the posting to the ledger is correct, the trial balance
would balance. Otherwise, it reflects errors that may occur either in the journals or
ledgers, and it is the responsibility of the account clerk to identify the errors.
4.4.1 Errors Disclosed by Trial Balance

15.
16. 1. Calculation ErrorsWhen trial balance could not balance, it could be due
to calculation
17. errors. (termed casting errors in accounting)
18. 2. Posting ErrorsTrial balance could not balance may be due to errors in
posting. This may occur as a result of recording the transactions wrongly in the
journal and as a result wrong posting to the ledger. It may occur in the ledger
accounts when one account is forgotten in ledger - this is known as single entries.
19. 3. Inconsistent FiguresTrial balance could not balance may also be due to
inconsistent figures used in the double entry for the same transaction. For example,
debiting cash $1,000 but crediting capital $100. Or it may be due to transcription
errors such as debiting cash $5,059 but crediting sales $5,095.
In certain circumstance, a balanced trial balance may not assure accuracy of
accounts. Unfortunately, such errors could not be easily detected by a balanced trial
balance. To avoid such circumstances, all cares must be exercised during posting.
4.4.2 Errors not Disclosed by Trial Balance

1. Errors of original entry.
20. This error occurs because of wrong figures reflected in the double entry
of the same transactions.
2. Errors of Omission
21. This error occurs when the whole transaction and its double entry are
forgotten or not recorded at all.
3. Errors of Principle
22. This error occurs when the posting are done into the wrong type of
accounts. For example, instead of debiting office furniture account, it was
posted to purchase account.
4. Errors of Commission
23. This error occurs due to the posting to wrong accounts of the same
nature. For example, debiting to Adam Smith instead to A.Adam Smith
when both are debtors.
5. Errors of Reversal
24. This is an error resulted due to reversing the double entry for the same
transaction.
6. Compensating Errors
25. This error is due to omission of one account figure which was
compensated at a later stage. In other words, there are more than one error
but offset each other.
26. In summary, a good practice in accounting is to record all transactions
and ensuring its accuracy. This is handled by the process of recording all
transactions in the relevant journal books, posting of accounts in the relevant

ledgers and ensuring accuracy by preparing trial balance.
27.
4.5 Exercises
28.
29. 1. Record the following transaction of Sure-Succeed in the general
journal.
6th Oct 19XX Owner invested $3,000 cash and $2,000 worth of office furniture
into business.
7th Oct 19XX Business sold $2,000 worth of goods on credit to ABC Ltd and
another $1,000 worth of goods by cash.
8th
Oct 19XX Business purchased $1,500 worth of goods on credit from XYZ
Co.
9th Oct 19XX ABC Ltd returned to Sure-Succeed $200 worth of goods because
the quality is lousy.
10th Oct 19XX ABC Ltd paid Sure-Succeed $1,620 and the remainder are taken
as discount given by Sure-Succeed.
11th Oct 19XX Sure-Succeed paid $1,450 to XYZ Co. The remaining balance is
the discount received from XYZ Co.
12th Oct 19XX Business sold $10,000 worth of goods to Data Co.
13th Oct 19XX Cash sale of $15,000 was transacted.
14th Oct 19XX Owner withdrew $2,000 stock for his own personal use.
15th Oct 19XX Business paid for wages $300, stationery $200 and rent of $1,000
by cash.
16th Oct 19XX Sure-Succeed purchased $4,000 goods from XYZ Co.
17th Oct 19XX Sure-Succeed returned $200 goods to XYZ Co due to poor
quality.
18th Oct 19XX Business expanded by purchasing $1,000 office furniture and
$3,000 machinery.
19th Oct 19XX Business borrowed from the bank a loan of $4,000 for its
expansion.
20th Oct 19XX An overdraft of $2,000 was arranged with the bank.
24th Oct 19XX Sure-Succeed returned the amount it borrowed with an interest of
7%.
26th Oct 19XX Business paid for electricity charges of $200 by cheque.
27th Oct 19XX Business paid XYZ Co. for the amounts owned.
28th Oct 19XX Business transacted cash purchases of $3,000.
30th Oct 19XX Business received commission of $500 as a result of selling goods
on behalf of Visa Pte Ltd.
30. 2. Prepare the ledger accounts of question 1 and check the accuracy of
posting by preparing the trial balance.
31. 3. Explain the purpose of preparing journals and ledgers.
4. Identify and explain errors that are not disclosed and errors that are disclosed by the
trial balance. Use examples to aid in your explanation.
CHAPTER 5: FINANCIAL STATEMENTS
Chapter Objectives
⇒ trading, profit or loss statement;
⇒ balance sheet;
⇒ adjustment entries.
Introduction
In the previous chapter, students would have learned how transactions are recorded and
how transactions accounts balances could be checked to ensure its accuracy.
However, this practice is not enough. Very often, accounting information is required by
many users. The firm would like to know its balance sheet status and its profit or loss for
its financial period.
This chapter is a continuation from the previous chapter. It illustrates how after preparing
the trial balance, the firm could make use of accounts in the trial balance to prepare its
Trading, Profit or Loss Statement and Balance Sheet.
5.1 Trading, Profit or Loss Statement
The trading, profit or loss statement reflects on the company's profit earned or loss
incurred due to its business activities.
Example 1 would illustrate how profit or loss could be determined.
Example 1
The following trial balance was prepared by Sure-Succeed after posting accounts to the
general ledger. You are required to draw the Trading, Profit or Loss Statement of Sure-
Succeed for the year ended 30/06/19xx.
Debit ($) Credit ($)

Sales 50000
Purchases 10000
Returns-Out 4200
Opening Stock 31000
Returns In 500
Discount Allowed 340 210
Discount Received 280
Carriage Inwards 350
Carriage Outwards 470
Rent 710
Interest 1230
Wages and Salaries 230
Lighting and Heating 170
Motor Expenses 4000
Stationary 5130
Insurance
54410 54410
CS152 CHAPTER 5: FINANCIAL STATEMENTS
Notes: Closing stock is $30,000
Sure-Succeed
Trading, Profit or Loss Statements for the year ended 30/6/19XX
$ $ $
Sales 50,000
Less: Returns In 500
49,500
Cost of goods sold:
Opening Stock 31,000
Purchases 10,000
Carriage Inwards 280
1,0280
Less: Returns Out 4,200
6,080
37,080
Less: Closing Stock 30,000 7,080
Gross Profit 42,420
Discount Received 210
42,630
Expenses:
Discount Allowed 340
Carriage Outward 350
Rent 470
Interest 710
Wages and Salaries 1,230
Motor Expenses 170
Stationary 4,000
Insurance 5,130
Total Expense 12630
Profit / (Loss) 30,000
In example 1, after preparing the Trading, Profit or Loss Statement, Sure-Succeed would
know that for the financial period, it has earned a profit of $30,000.
There are two parts to the Trading, Profit or Loss Statement:
❐ Trading Account; and
❐ Profit or Loss Account.
The Trading Account determines the gross profit earned due to the firm's trading
activities. However, this gross profit does not determine the net earning of the firm. This
explains why expenses incurred by the firm have to be deducted from the gross profit to
determine the profit earned. This is the profit or loss account.
A few formulae to remember to determine the net profit:
32. Net Profit = Gross Profit + Additional Revenue – Expenses

33. Gross Profit = Net Sales - Cost of Goods Sold
34. Net Sales = Sales - Returns In
35. Cost of Goods Sold = Opening Stock + Purchases + Carriage Inward -
Returns Out - Closing Stock
5.2 Balance Sheet

Knowing the profit of the firm is not sufficient. It is important for a firm to know its
financial position in the market. This could be reflected by referring to the net assets
owned by the firm in the balance sheet.
Example 2
The following information is provided by Sure-Succeed. You are required to prepare the
balance sheet as at 30/06/xx.
$
Premises 300,000
Stock 2,000
Debtors 1,800
Creditors 3,400
Cash 2,100
Bank Overdraft 2,300
Drawings 368
Fixtures and Fittings 2,800
Profit 4,700
Sales 2,800
Purchases 1,800
Capital 25,268
Bank Loan 3,400
Sure-Succeed
Balance Sheet as at 30/6/XX
$ $ $
Fixed Assets: Cost Acc. Depre NBV
Premises 30,000 - 30,000
Fixtures and Fittings 2,800 - 2,800
32,800 - 32,800
Current Assets:
Stock 2,000
Debtor 1,800
Cash 2,100
5,900
Current Liabilities:
Creditors 3,400
Bank Overdraft 2,300
5,700
Networking Capital 200
Net Assets Employed 33,000
Financed By:
Owner’s Equity:
Capital 25,268
Profit 4,700 29,968
Less Drawings 368
29,600
Long term Liabilities:
Bank Loan 3,400
33,000
5.3 Adjustment Entries

5.3.1 Prepayment and Accruals
In the previous section, it was reflected that items incurred are paid in full. But in many
occasions, items may not be paid in full. The business may have situations whereby it
pays in advance but in other situations, the items are not fully paid for. When items are
paid in advance, they are known as prepayment but when items are not fully paid for they
are known as accruals.
To adjust for such entries, the double entry would be:
s) Prepayment:
Debit Prepayment (of expense) xx
Credit Expense xx
t) Accruals:
Debit Expense xx
Credit Accruals (of expense) xx
The amount reflected would be the amount prepaid or accrued.
Whenever there are adjustment entries, it is necessary to reflect the adjustment required in
the Profit or Loss Statement and Balance Sheet.
Treatment under Profit or Loss Statement:
a) Prepayment
- The amount of expense prepaid will be deducted from the expense in the profit
or loss.
- For example, if in the trial balance Rent is reflected as $3,000 and it was
discovered that $250 was prepaid.
- Extract of Profit & Loss Statement :
Rent = 3,000
Less Prepaid = 250
2,750
b) Accruals
- The amount accrued implies that the firm does not pay enough. This would
require the firm to adjust its expense by adding the amount accrued in the Profit
& Loss Statement.
- For example, the firm only pays for three quarters of Rent where each quarter is
$300. At the end of the year when preparing for Profit & Loss, the adjustment
entries would be:
- Extract of Profit & Loss Statement :
Rent = 900
Add Accruals = 300
1,200
Treatment under Balance Sheet
c) Prepayment
- Extract of Balance Sheet
- Current Assets
- Prepayment - Rent = $250
d) Accruals
- Extract of Balance Sheet:
- Current Liabilities
- Accruals - Rent = $300
5.3.2 Depreciation
It should appear obvious that it is unlikely that the value of fixed asset would
remain consistent at its cost :
❐ as the fixed assets were used throughout its useful life,
❐ or wear and tear through use,
❐ or as a result of economic factors such as obsolescence,
❐ or due to its age that was predetermined,
❐ or when it is depleted,
the value of assets decreased or depreciated.
The decline in value has to be taken into consideration. However, the value
would not be directly adjusted due to avoidance of violating the cost concept. As
such separate adjustment entries are taken into consideration by adjusting for
depreciation.
The difficulty arises in depreciation is due to the fact that the actual amount of
depreciation can only be determined when the fixed assets are sold. The
difference between the original price to the price the assets can be sold
determines the amount depreciated. This is not a practical approach to determine
depreciation for no one firm would like to sell its fixed assets in order to
determine how much the asset has been depreciated. For this reason, to
overcome this difficulty, depreciation has to be estimated using methods such as
straight-line or reducing balance method. Whichever method was used, the firm
has to ensure that it observed the consistency convention.
Straight-line Methods
This is the easiest among all methods. To determine the amount to depreciate, the firm
has to first estimate scrap value/residual value and the assets estimated useful life.
For example, if a machinery was purchased at $10,000 and the firm estimates that the
machinery could have a residual value of $2,000 and a useful life of 5 years, then the
depreciation amount each year would be:
Depreciation = Cost – Residual Value

Value
= 10,000 – 2,000
5
= 8,000
5
= $1,600/year
This implies that machinery would depreciate at $1,600 each year.
Reducing Balance Method
This method is not as straight-forward as in straight line method. It is usually applied

when the firm could not identify how long the asset would be kept or what its disposal
value would be. This method estimates its annual depreciation by applying a certain
depreciation rate on the net book value (NBV) of the asset.
For example, if the machinery of $10,000 is to be depreciated at 25% p.a. for 4 years, the
depreciation amount calculated would be as follow:
Cost $ Accumulated NBV Depreciation

Depreciation Amount
Year 1 Machinery 10,000 2,500 7,500 2,500
Year 2 Machinery 10,000 4,375 5,625 1,875
Year 3 Machinery 10,000 5,781 4,219 1,406
Year 4 Machinery 10,000 6,836 3,164 1,055
As observed, the depreciation amount each year was different and it was calculated by
multiplying 25% to its NBV.
After calculating the depreciation amount, the firm has to ensure that it was correctly
adjusted for in the Profit and Loss Statement and Balance Sheet. All adjustments must be
recorded in the journal, where the firm possessed many types of fixed assets, a fixed
assets register would be set up to keep track of all the fixed assets in use. This register
would contain at least some of the following details:
Contents of a Fixed Assets Register
❐ Description of the asset
❐ Date of Acquisition / Purchase date
❐ Original cost and estimated disposal value
❐ Depreciation method
❐ Accruals depreciated
❐ Total depreciation to date / accumulated depreciation
❐ Net Book Value (NBV)
❐ Supplier's name and address
❐ Location in the premises
❐ Category of the fixed asset / reference number

❐ Maintenance / servicing history
Using the figure calculated on the reducing Balance Method:
❐ Double-Entries (in 2nd Year)
Debit Depreciation of Machinery $1875

Credit Provision for Depreciation of Machinery $1875
❐ Treatment under Profit & Loss (ended 2nd Year)
❐ Extract of Profit & Loss:
Less Expenses
Depreciation of Machinery $1875
❐ Treatment under Balance Sheet (as at 2nd Year)
Fixed Assets: Cost Acc Dep NBV

Machinery 10,000 4,375 5,625
5.3.3 Bad Debts and Provision for Bad Debts
In certain occasions, customers may not be able to pay for their debts. Debts that
cannot be collected back from Debtors are considered "bad".
Firms have to recognize that some debtors' accounts could not be fully collected
and as such there is a need to create a bad debts accounts.
When a named debtor is confirmed that a certain amount of debt is bad the
amount is reflected as bad debts in Profit & Loss. But if the firm tries to be
conservative by predicting that on general basis a certain percentage of debts
from its overall debtors would be bad, it would create a provision for bad debts.
A more appropriate term for provision for bad debts is Provision for doubtful
debts as the debt is doubtful and not bad as yet.
The provision for bad debts reflects an estimation of any future bad debts. At the
end of the financial period, some debtors may have become "bad" but this should
not affect the provision for doubtful debts as the figures is always an estimate for
the future years. Any increase or decrease in the provision for doubtful debts
only needs to be entered in the Profit & Loss. Otherwise no other entries is
needed in the Profit & Loss as it may have been written off in earlier year.
For example, if Michael who owes the firm $300 died, his debt is termed as
"bad".
The double-entry would be:
Debit Bad debts $300

Credit Michael $300
❐ Treatment in Profit & Loss:
❐ Extract of Profit & Loss = bad debt = $300
For example, to differentiate the treatment for provision for Doubtful debts, total
debtors of $20,000 where provision are to be increased from 10% to 20%:
❐ Treatment in Profit & Loss : bad debt = $2000

Increase in Provision for doubtful debts

(20% x $20,000 - 10% x $20,000)
❐ Treatment in Balance Sheet :
Debtors 20,000
Less provision for bad debts 4,000
16,000
Double Entries:
Provision for Doubtful Debts Account
A/C DR CR
1 Jan ’89 Bal at this date 2,000
31 Dec ’89 Profit or Loss A/C 2,000
1 Jan ’90 Bal at this date 0 4,000
Example
The following trial balance at 31 Dec. 19xx was provided by Sure-Succeed.

You're required to prepare a Trading, Profit & Loss account and Balance Sheet
at that date.
Sure Succeed
Trial Balance As At 31 Dec 19XX
Details DR $ CR $
Drawing 116 18,000
Capital 23,000
Premises 3,000
Furniture and Fittings 280
Cash at bank 780
Cash in hand 5,000
Motor Vehicles 2,800
Wages 4,500
Rent and Rates 30,000 52,000
Purchases and Sales 7,600 6,200
Debtors and Creditors 2,800
Opening Stock 250
Lighting and Heating 2,178
Discounts Received 2,300
Discounts Allowed 1,000
Provision for bad debts 2,800
Bank Loan 1,180
Returns In 1,128
Returns Out
Accumulated Depreciation:
Furniture and Fittings 300
83,606 83,606
Notes and Adjustments:

♦ Provision for bad debts is to be increased to 20% for debtors.
♦ Furniture and Fittings is to be depreciated at 10% on NBV using the
reducing balance method.
♦ Amounts owing: Wages $200 and rent $150.
♦ Lighting and heating prepaid is $50.
Sure-Succeed
Trading, Profit or Loss Account for the year ended 31/12/19XX
$ $ $
Sales 52,000
Less: Returns –In 1,180 50,820
Cost of goods sold:

Opening stock 2,800
Purchases 30,000
32,800
Less: Returns -Out 1,128
31,672
Less: Closing Stock 3,800
27,872
Gross Profit 22,948
Discounts Received 2,178
25,126
Expenses:
Wages 30,000
Rent and Rates 4,650
Discounts Allowed 2,300
Depreciation for furniture 270
and fittings
Increase in Provision for 520 10,940
bad debts
Net Profit / (Loss) 14,186
Sure-Succeed
Balance Sheet as at 31/12/19XX
Cost Acc. Depre. NBV
$ $ $
Fixed Assets
Premises 23,000 - 23,000
Furniture and Fittings 3,000 570 2,430
Motor Vehicles 5,000 - 5,000
31,000 570 30,430
Current Assets
Stock 3,800
Cash at bank 280
Cash in hand 780
Debtors 7,600
Provision for bad debts 1,520 6,080
Prepayments 50
10,990
Current Liabilities
Creditors 6,200
Accruals 350 6,550
Net working capital 4,440
Net assets employed 34,870
Financed by:
Capital 18,000
Added net profits 14,186 32,186
Less Drawings 116
Long-terms Liabilities: 32,070
Bank Loan 2,800
34,870
5.4 Exercises
36. 1. The following information is provided by Sure-Succeed. You are required to

prepare
a trial balance, trading, profit and loss statement and balance sheet.
$
Sales 63,000
Office Equipment 18,000
Purchases 2,500
Returns-In 477
Returns-Out 398
Carriage-In 1,120
Debtors 1,428
Creditors 1,876
Capital 2,852
Opening Stock 2,960
Cash in hand 1,880
Bank overdraft 2,740
Bank loan 2,916
Rent 384
Stationery 782
Discount Allowed 567
Discount received 789
Motor Expenses 234
Insurance 258
Drawings 969
2. The following transactions happened in the month of July. You're required to prepare
the journal entries and post the entries to the ledgers. Also prepare a trial balance,
trading, profit and loss statement and balance sheet.
July 1 Owner invested $30,000 of cash into business and $12,500 of

fixtures and fittings.
July 2 Bought office furniture of $5,000 from ABC Ltd.
July 3 Bought goods from XYZ traders worth $5,000.
July 7 Bought another $3,800 worth of goods. Made payment of
$3,600 and the remaining balance given as discount.
July 8 Sold goods to Michael Tan worth$7,300 and cash sales of
$2,600. Michael paid $7,100 as the remaining is offered as
discount due to his earlier settlement.
July 10 Sold goods worth $3,600 to XYZ Ltd but due to poor quality,
XYZ Ltd returned $180 worth of goods to business.
July 12 Bought $1,300 worth of goods from ABC Ltd but returned
$100 worth of goods to ABC Ltd.
July 15 Paid for wages $300, stationery $500, rent $800 and utilities
of $700 by cheque.
July 18 Owner withdraw $350 cash from business for his personal
use.
July 21 Business borrowed $3,800 from bank.
July 22 Paid interest of 10% on bank loan borrowed
July 25 Bought goods from ABC Ltd $32,500 and paying $300 for
carriage inward.
July 29 Sold goods to DBC Ltd $48,000.
July 30 Received commission from Xanadu for goods sold on their
behalf $3,000.
July 31 Owner withdrew $200 worth of goods from business for his
own personal use.
3.
$ $
Bank 1,000
Rent and Rates 270
Debtors and Creditors 2,580 1,870
Wages and Salaries 224
Insurance 231
Discounts Received 510
Fixtures and Fittings at cost 23,000
Motor vehicles at cost 48,000
Sales and Purchases 5,400 66,016
Capital 9,870
Stock (as at 1/1/19XX) 1,700
Returns-Out
Carriage Inwards 214 119
Carriage Outwards 160
Loan 1,100
Motor vehicles expenses 3,450
Commission received 217
Drawings 275
Accumulated depreciation:
Provision for bad debts 50
86,852 86,852
Given
a) Stock at 31/12/19xx $9,900.
b) Lighting and heating paid in advance $210.
c) Rents owing $455.
d) Depreciation is to be calculated at 20% of cost for fixtures and fittings and 10%
net book value for Motor Vehicles.
e) Provision of Bad Debts are to be increased to 5% of Debtors.
The above trial balance was produced by a firm. You are required to draw up a
Trading and Profit or Loss account for the year ended 31/12/19xx and a Balance
Sheet as at 31/12/19xx.
3. The following trial balance was prepared by Sure-Succeed. You are required to
prepare the Trading and Profit or Loss Account and Balance Sheet.
$ $
Stock 2,800
Returns Out 1,700
Returns In 1,600
Capital 2,800
Creditor and Debtors 2,580 2,680
Sales and Purchases 11,000 24,000
Fixtures and fittings 21,000
Wages 2,518
Discounts Received 248
Bank Loan 21,000
Cash at bank 1,400
Rents and Rates 4,000
Premises 6,790
Cash in Hand 2,500
Provision for bad debts 120
Insurance 510
Motor vehicle expenses 450
Accumulated depreciation:
Motor vehicles 2,400
82,248 82,248
Notes and Adjustments:
e) Closing Stock is $6,500.

f) Insurance owing is $350 and Rent is $750.
g) Lighting and Heating is $500 paid in advance.
h) Motor Vehicles and fixtures and fittings are to be depreciated at 10% on NBV
using reducing balance method.
i) Provision for bad debts is to be increased to 5% of debtors.
37.
CHAPTER 6: COMMON FINANCIAL RATIOS
Chapter Objectives
⇒ profitability ratio;
⇒ liquidity ratio;
⇒ performance ratio;
⇒ how to interpret the accounts?
Introduction
Previously, we have seen how Trading, Profit and Loss Accounts and Balance Sheet are
prepared to provide information for users.
However, users would often demand more than Trading, Profit and Loss A/C and Balance
Sheet. Many of the users would examine the accounts of the firm to measure the firm's
relative performance with its subsidiaries, of its competitors and its industry.
In this chapter, students would be taught on how to use formula to measure the
profitability, liquidity and efficiency of the firm. It is also of utmost importance that
students know the interpretation of accounts.
6.1 Profitability
These are the main group of formula to measure the profitability of a firm. A few of the
formula that would be discussed in the following sections include:
j) Return on Capital Employed

k) Net Profit Margin
l) Gross Profit Margin
m) Profit Markup
6.1.1 Return on Capital Employed
This ratio measures the return of the owner's capital investment. Under normal
circumstances, the higher the return on capital employed, the better.
❐ Formula :
ROCE = Net Profit x100%
Capital Employed
Capital Employed = Fixed Assets + Current Assets - Current Liabilities
For example, Jane Lim of Sure-Succeed Ltd obtained the following information
and she would like to know return on capital employed.
Net Profit : $30,000

CS152 CHAPTER 6: COMMON FINANCIAL RATIOS
Fixed Assets : $65,000

Current Assets : $35,000
Current Liabilities : $20,000
Henceforth, ROCE = 30,000 x 100%

80,000
= 37.5%
6.1.2 Net Profit Margin
This formula reflects how effective the firm has been in its operation and how it
managed to keep the expenses down. This formula calculates net profit as a
percentage of total sales.
Formula : Net Profit Margin = Net Profit x 100%

Sales
For example, Sure-Succeed sold a net sales of $100,000 and it obtains a net
profit of $10,000.
Henceforth, Net Profit Margin = 10,000 x 100%

100,000
= 10%
6.1.3 Gross Profit Margin
This formula reflects how effective it is in its trading activities. This formula
could be used for control purposes to ensure compliance of standard pricing and
to avoid fraud.
Formula : Gross Profit Margin = Gross Profit x 100%

Sales
For example, Sure-Succeed determines that its sales has been $80,000 and it also
earns a gross profit of $20,000, then its gross profit margin is
Gross Profit Margin = 20,000 x 100%

80,000
= 25%
6.1.4 Profit Markup
In part (c), knowing the margin would ensure compliance of standard pricing
policy.
For example, if the cost of goods is $10 and the firm seeks to achieve a gross
profit margin of 10%, then the firm's and its subsidiaries would have to observe
its pricing policy by selling at $11.11, not more nor less. How was $11.11
obtained? By margin, it is based on the selling price expressed as 100%. In this
example, if the firm determines to achieve 10% profit margin then it implies that
cost of goods at $10 is expressed as 90%.
However, in certain circumstance, the firm may prefer to achieve markup on its
cost. By markup, it is based in the cost price expressed as 100%.
For example, if the costs of goods is $10 and the firm seeks to achieve 10%
markup, then its selling price would be $11.
6.2 Liquidity
This ratio measures the firm's ability to meet its debts. A firm which has plenty of cash to
meet its current liabilities is termed as a "liquid" firm.
To determine the liquidity of a firm, users need to compare the firm's current assets with
its current liabilities.
These are three formulae used to measure a firm's liquidity position:
n) Current Ratio
o) Working Capital
p) Acid Test or Quick Ratio
6.2.1 Current Ratio
This ratio compares the current assets to current liabilities.
Formula: Current Asset : Current Liabilities
For example, if the current assets of Sure-Succeed amounted to $30,000 and its
total current liabilities amounted to $10,000, then current ratio would be 3 : 1.
This ratio measures the financial health of the firm. We can identify if there is
sufficient assets to meet liabilities.
6.2.2 Working Capital
This formula measures the difference in absolute monetary amount between

current assets and current liabilities.
Formula : Working Capital = Current Assets - Current Liabilities
As in the previous example, if current assets remain as $30,000 and current

liabilities at $10,000, then the firm's net working capital would be $20,000.
6.2.3 Acid Test or Quick Ratio
This ratio takes a more pessimistic view by assessing the firm's liquidity under
the worst possible situations. Only those assets that can be quickly converted
into "cash" would be taken into consideration. As such, stock which is most
difficult to convert to "cash" is excluded.
Formula : Acid Test Ratio = (Current Assets - Stock) : Current Liabilities

In previous example, if in the amount of current assets, $2,000 refers to stock,

then Acid Test would indicates (30,000 - 2000) : 10,000 or 2.8 : 1.
Note: Stock refers to Closing Stock
6.3 Performance
The last group of formulae is used to determine the effectiveness of management.
A few of the formulae that will be discussed are:
q) Stock Turnover
r) Debtors Payment Period
s) Creditors' Payment Period
6.3.1 Stock Turnover
This formula calculates how long it takes for stock to turnover or to be replaced.
If the turnover period is long, it may not be healthy as it may cause the firm in
losing any bulk discounts offered by suppliers. This will measure the efficiency
of stock management by the firm - though the interpretation will depend on what
type of stocks are involved. For example, 92 days is too long for fresh food but
not for furniture.
Formula : Stock Turnover = Cost of goods sold = x times

Average stock
Average stock = Opening stock + Closing stock

2
For example, if Sure-Succeed has cost of goods sold of $10,000, opening stock
of $2,000, and closing stock is $3,000, then Sure-Succeed's stock turnover would
be: 4 times or 92 days.
6.3.2 Debtors' Payment Period
This formula determines how long it takes for a firm to receive payments from
debtors. This formula would thus reflect on how effective a firm is in exercising
its credit control procedures.
Formula : Debtors x 365 days = x days

Sales
For example, Sure-Succeed's Debtors are $25,000 and credit sales for the period
is $250,000 then it implies that Sure-Succeed would take 37 days to collect
payments from debtors. Generally, if debtors pay earlier, the firm would have
more liquid funds. The conclusion is dependent on terms of credit offered. 37
days are not services for granted TOC (term of credit) of 30 days, although it
could be improved.
Note: Days must be rounded up.
6.3.3 Creditors Payment Period

This formula calculates the average time taken to pay off creditors. Generally, if
firm pays later, it would have more liquid funds retained to deal with its
transactions.
Formula : Creditors x 365 = x days

Purchase
For example, if Sure-Succeed has credit purchases of $10,000 and creditors of

$3,000, it implied that it takes 110 days to settle its debts with its suppliers.
This measures the extent to which credit terms are obtained from suppliers. 110
days is advantageous but must be considered in context of whether suppliers
might face liquidity problems.
Note: Days must be rounded up.
6.4 How to Interpret the Accounts?
By using the formula, users would be able to measure the firm's profitability, liquidity and
efficiency.
Under general situation, the higher the profitability ratio, the better. If liquidity ratio is
more than 2, the firm is termed to be liquid. However, be cautioned that it may not be too
healthy for a firm if it becomes too liquid.
For performance ratio, a general guide would be the lower the stock turnover ratio, the
better. However, be cautioned that the formula should be used with care when comparing
different firms. For debtors' payment period, a general guide would be the shorter the
better. For creditors payment, the converse would be true. But, firms have to exercise care
that credit control should not be too tight till customers are scared off. Similarly, firms
should not delay payment to supplier otherwise suppliers would be very hesitant in giving
future support to firms.
6.5 Exercises
38. The following is the Trading, Profit or Loss Account and Balance Sheet of Sure-
Succeed. You are required to state the formulae and calculate the following.
t) Return on Capital Employed
u) Net Profit Margin
v) Gross Profit Margin
w) Current Ratio
x) Working Capital
y) Quick Ratio
z) Stock Turnover
aa) Debtors' Payment Period
bb) Creditors' Payment Period
Trading, Profit or Loss Account

$ $
Sales 200,000
Opening Stock 15,000
Purchase 93,000
108,000
Less: Closing Stock 8,000
Cost of goods sold 100,000
Gross profit 100,000
Less: Expense 85,000
Net profit 15,000
Balance Sheet
Fixed Assets 182,000 Current Liabilities 33,000
Current Assets 51,000 Capital 200,000
233,000 233,000
* Debtors = $12,000,,,* Creditors = $20,000
39. Calculate the following ratios by referring to the Trading, Profit or Loss and
Balance Sheet you have prepared in Chapter 5 Exercise Q1 and Q2.
cc) Two accounting ratios that might be used by the firm's managers.
dd) Two accounting ratios that might be used by the shareholders.
ee) Two accounting ratios that might be used by the firm's suppliers.
ff) Compare the ratios of (a), (b) and (c) of the firms and comment on their relative
performance.
CHAPTER 7: AUDIT AND CONTROL
Chapter Objectives
⇒ necessity to have checking and controlling procedures in an accounting system;
⇒ the different methods used in internal controls;
⇒ what is external control and audit evidence.
Introduction - Why the Need for Controls
An effective accounting system should be able to produce necessary information

efficiently. In other words, these information generated should be accurate and up to date.
Recall the concept of the separation of control and ownership of a business.
Some of the reasons are:
❐ Employees will be handling monetary transactions and the management is held

to be accountable for the employees actions. Therefore, there must be effective
and careful controls to make sure that accounting jobs are carried out properly.
❐ Controls are also required so that the chances for fraud and theft can be prevented.
❐ Many groups of people use accounting reports to make decisions. Some of these
users like future investors and lending banks, will make use of these accounting
reports to decide whether to invest in the business or lend money to the business.
In this respect, they will assume that figures are true and correct - this can only be
produced from an accounting system that practice proper control and checking
procedures. However, checks and controls can fall into two categories.
gg) Internal controls - procedures implemented by management to ensure that an

effective system is in operation.
hh) External controls - carried out by the auditors who will be working on behalf of
the owners.
7.1 Internal Controls
Internal controls are those checking and controlling procedures that are implemented by
the management to prevent any errors or fraudulent practices.
These procedures can normally be divided into seven areas.
7.1.1 Checks on Numerical Accuracy
Mainly serves as a control tool to detect errors in double entry and casting mistakes.
Frequent preparation of a Trial Balance and the use of Control Accounts are the usual
tools.
CS152 CHAPTER 7: AUDIT AND CONTROL
7.1.2 A Well Defined Organization Structure should be Set Up
Employees should be given clearly defined responsibilities and scope of authority. An

organization chart should be drawn up and this will enable employees to see what they
are responsible for. An example, would be to state clearly who can receive an order, who
can approve the order, who to receive payment.
7.1.3 Segregation of Duties
Segregation of duties is another policy to be implemented for internal controls. This

means that no one person should be solely responsible for recording and processing a
transaction. The practice of having different persons for receiving an order, approving an
order, recording the order etc., will reduce the occurrence of intentional manipulation of
records and the chances of errors. In particular, the function of authorization, execution,
custody and recording should be separated if this procedure is to be followed properly.
7.1.4 Physical Controls
Physical controls would mean the use of locks and keys and restriction of access to assets
of the company. Where accounting information are concerned, there must be procedures
and security measures designed to ensure that access to information is limited to
authorized personnel only. Restriction to books of accounts will prevent any unauthorized
entries being made. For instance, important documents should be kept properly and the
keys should be retained by the manager. By restricting access to information, the chances
of information being lost or tampered with will be much reduced. Fraud will also be less
likely.
7.1.5 Authorization and Approval
Authorization and approval should cover all types of transactions. The system should set
limits for transactions especially where large sums of money are involved. In issuing
purchase orders, for instance, any amounts over certain level must have the signature of
the manager as the approving authority - in addition to the authorized signature of the
purchasing officer. The same manner can be implemented for any cheque paid out, in
which any amount over a certain sum must require an additional signature.
7.1.6 Personnel
As accounting is a specialized skill, employees should be competent in the basic skills for
the work to be done. In addition the employees should be well motivated as well as
honest and reliable. This will reduce errors and fraud.
7.1.7 Supervision
There must be adequate supervision to ensure that there are no errors. Modern techniques
such as remote video cameras can be supplemented.
7.2 External Control
External checks are being undertaken by the owners of the business. The auditors play the
role of checking on behalf of the owners.
❐ They have to verify that proper books of account are kept and that the final accounts
tally with the books.
❐ They are responsible for reporting on the accuracy of the final accounts issued to
shareholders and that is the auditors report.
❐ Audited financial statements must be prepared for all registered companies (in
accordance with the Companies Act).
❐ The auditor is particularly concerned with the adequacy of the underlying records
and the detection of major distortions in the accounts arising from improperly kept
records. They will check on the possibility of the biased use of accounting standards
and methods.
❐ Their main purpose is to detect any fraud or errors.
❐ The auditors have the right to examine all records and documents. Audit tests are
being performed to check on the effectiveness of controls in the accounting system.
The test will also prove the accuracy and validity of data produced by the accounting
system.
All these checking by the auditors are carried out by means of audit evidence. We can
break down the audit evidences into different activities as follows:
7.2.1 An Audit Trail
When designing any accounting system the analyst should bear in mind that the
system should maintain an audit trail, produce necessary information and enable
adequate control measures to be implemented. An audit trail is actually a
sequence or path by which an auditor can follow the documentation of a
transaction from source document through all the books up to its presentation in
the final accounts. This trail can also be followed backwards by picking up a
figure from the final accounts and working backwards to the source documents.
This flow of evidence will help the auditor to confirm whether accounting
records are properly maintained though it will not confirm that the accounts are
correct.
An audit trail will only demonstrate the possibility of fraud if there is no source
document found at the start of the trail. However the trail will enable the auditor
to confirm that all items have been recorded properly and that there is no fraud
or error. This form of checking is also referred to as a "walk through" test. The
figure below illustrates the audit trail for a typical purchasing system.
7.2.2 Documentation
Purchase Requisition
Purchase Order
Goods Received Note (GRN) /

Delivery note
Purchase Invoice
Purchase Day Book
Purchase Ledger Nominal Ledger
Cheque Requisition / Payment Voucher
Bank Daybook
Ledger Account
Reports
Figure 7-1: An audit trail for purchase on credit
The sighting of various documents will enable the auditors to follow the audit
trail and to ensure that information is processed correctly. It is also used to check
whether there is any possibility of fraud.
7.2.3 Flowcharts for Reviewing System
The use of accounting flowcharts provide another means of checking whether

the accounting system is effective. The flowcharts will show the stages in the
processing function and who is responsible at each stage.
7.2.4 Directors' Minutes
Resolutions by the Board of Directors are required for major business decisions.
The minutes will form the authorization of major purchases, for example buying
fixed assets or the acquisition (take-over of other companies). Minutes can also
enable the auditors to discover any plans for future changes.
7.2.5 Debtors and Creditors Circulation
An important source of independent third party confirmation of balances can be

obtained from the firm's debtors and creditors. They will be requested to confirm
outstanding balances directly to the auditors from the figures obtained from the
books.
7.2.6 Physical Inspection
The sighting of items of material values such as fixed assets are also an integral
part of gathering audit evidence. The auditors may insist on the indexing of fixed
assets to ascertain that the total items tally with the books.
7.2.7 Meetings and Discussions
Holding meetings with management and discussion with system operators (the
employees) will provide invaluable feedback to the auditors concerning the
adequacy of the system.
7.2.8 Reports from Mass Media
Reports on television; radio and articles in newspapers may also confirm the
validity of any rumours whether positive or negative.
Summary
Remember any accounting system should have checks and control in order to prevent the
occurrence of errors and the possibility of fraud being committed. We have suggested
seven internal control areas, namely:
❐ checks on calculation;
❐ proper organizational structure;
❐ segregation of duties;
❐ physical control;
❐ authorization and approval;
❐ qualified personnel and
❐ close supervision.
Internal controls are set up by the management. External controls are carried out on
behalf of owners/shareholders. Auditors carry out their work by obtaining audit evidence.
A total of eight audit evidences have been listed.
7.3 Exercises
Write the word or phrase needed to complete each of the following:
40.
ii) An ________________ means that a document can be traced from source to
final accounts.
jj) The _______________ is a person employed by the shareholders to check the
accounts.
kk) A person who checks the truth and fairness of the accounts is known as
__________________.
ll) The simplest way to avoid fraud and prevent errors is to ensure that there is a
_________________.
mm) Explain briefly the roles and duties of an External Auditor.
nn) The auditor checks the accounts of a firm gathering _______________.
41. What is the purpose of an audit trail?

42. Explain, briefly, the meaning of the term "audit trial".
43. What evidence might an auditor use to confirm the following:
i) A decision by the Board of Directors to issue more shares.
ii) A debt of $250 owned by ABC & Co.
iii) The purchase of new factory premises in a neighbouring town.
iv) The existence of standard procedures for processing data.
v) The take over of a very large competitor.
vi) The purchase of a random sample of raw materials.
44. By referring to documents/accounts/statements etc. Describe briefly, an audit

trial for purchases made on credit.
45. What evidence might an auditor examine in order to verify the Creditors figure
on a balance sheet?
46. What is meant by segregation of duties?
CHAPTER 8: CONTROL ACCOUNTS AND
SUSPENSE ACCOUNTS
Chapter Objectives
⇒ control accounts;
⇒ data flow in control accounts;
⇒ control account exercise;
⇒ suspense accounts;
⇒ step by step procedure.
8.1 What is a Control Account
This is a ledger account set up in the nominal ledger to control the total of all entries for a
set of individual accounts maintained in subsidiary ledgers.
Examples
• Stock Control Account
• Set up to keep a running balance of goods/materials held in stock

• Entries to this account would include :
- stock purchases value / total (from suppliers)
- requisitions value / total(issued out to production)
- opening stock values / totals
- closing stock values / current stock
• Bank Control Account
- For all the individual bank transactions
• Sales Ledger Control Account
- For all the debtors accounts kept in the Sales Ledger
• Purchase Ledger Control Account
- For all the individual creditors accounts kept in the Purchase Ledger
Control Accounts are necessary in manual accounting systems because it can check the
accuracy of the accounting reports. Control accounts can enable the users to highlight in
which ledger an error occurs. Where more than one user of the accounts are making use
of the system, there is minimum delay. This will mean that each user can work on one
part of the ledger at the same time. Especially so in manual accounting systems, the trial
balance will be shorter if there are control accounts being set up. A diagrammatic
illustration of the flow of data in a system for Control Accounts is shown below.
Source Documents
Daybooks
CS152 CHAPTER 8: CONTROL ACCOUNTS AND SUSPENSE ACCOUNTS
Sales Ledger Purchase Ledger Nominal Ledger
Legend = Single Entry

= Double Entry
Figure 8-1: Simplified diagram for division of the ledger

In the system for the Division of the Ledger, three ledgers are being maintained. The two
subsidiary ledgers are:
47. Sales Ledger containing the individual accounts of the various debtors.
48. Purchase Ledger containing the accounts of the individual creditors.
And a Nominal Ledger (General Ledger) containing the accounts for assets, liabilities,
income, capital and expenses. No personal names are being used as accounts in this
ledger.
8.1.1 Sales Ledger Control Account
All transactions concerning the accounts of the debtors will be updated

individually in the sales ledger (one account for each customer). At the same
time, the double entry posting will be made in the nominal ledger, the totals
involving debtors being posted to the Sales Ledger Control Account (SLC A/C).
This can be summarised below.
Transaction Daybook Sales Nominal Ledger

Ledger
Sales Invoice Sales Daybook Debit Debit SLC A/C
Credit Sales
Credit Notes Issued Returns in Daybook Credit DR. Returns in CR. SLC
A/C
Receipts Bank Receipts Book Credit DR Bank
(Payments by Debtors) CR. SLC A/C
Discount Allowed General Journal Credit DR. Discount Allowed
CR. SLC A/C
Dishonoured Cheque General Journal Debit DR. SLC A/C
CR. Bank
Bad Debts Written off General Journal Credit DR. Bad Debts CR SLC
A/C
Interest Overdue A/Cs General Journal Debit DR. SLC A/C
CR. Interest Recd.
8.1.2 Purchase Ledger Control Account
For this system, all transactions involving the creditors will be updated to the
individual accounts kept in the Purchase Ledger. At the same time, the double
entry records will be updated in the nominal ledger whereby the total affecting
the creditors will be posted to the Purchase Ledger Control Account (PLC A/C).
This can be summarized as follows.
Transaction Daybook Purchase Ledger Nominal Ledger

Purchase Invoice Purchase Credit DR. Expenses
Daybook CR. LC A/C
Credit Notes Received / Returns Out Debit DR. PLC A/C
Debit Note Issued Daybook CR. Returns Out
Payment to Creditor Bank Payments Debit DR. PLC A/C
Daybook CR. Bank
Discount Received General Journal Debit DR PLC A/C
CR. Discount Recd
8.1.3 Account Balances

The sales ledger control account and the purchase ledger control account,
normally will have a Debit and Credit balances respectively. In certain systems,
we also show at the same time a credit balance in the sales ledger control
account and a debit balance in the Purchase Ledger Control Account. The
purpose of these abnormal balances is to reflect outstanding deduction from the
balances due to - Returns Inwards and Return Outwards. As settlement have not
been made, it is more effective to show these balances as a separate figure.
In cases where the Control Accounts do not agree to the total of the subsidiary
ledger, the following actions are recommended.
49. Check additions in Daybooks, Ledger Accounts, control accounts,

and/or listing of debtors/creditors.
50. Check posting from Daybook to ledger accounts, as well as total
amounts posted to Control Accounts.
8.2 Advantages of Control Accounts
With this system in operation, errors are more likely to be spotted as more than one
person will be entering data. This will also be a deterrent against fraud (since collusion is
needed to commit this crime). Apart from having a shorter trial balance, the use of control
accounts will result in savings in time and effort for correcting any errors.
8.3 Fully Worked Example
Prepare the Sales Ledger Control Account and the Purchase Ledger Control Account at
31/12/92 from the following information.
Purchase ledger credit balances 01/01/92 $ 10872

Sales ledger debit balances 01/01/92 $ 11345
Credit sales for 1992 $ 123400
Credit purchases for 1992 $ 65986
Returns Inwards for 1992 $ 4854
Returns Outwards for 1992 $ 2834
Discounts received in 1992 $ 2103
Discounts allowed in 1992 $ 1563
Payment received from debtors in 1992 $ 105503
Payments to creditors in 1992 $ 58378
Steps in writing up the control accounts:
51. The Sales Ledger Control and Purchase Ledger Control accounts opening
balances must be entered first.
52. Any increases in the Sales Ledger Control account will be debits and decreases
will be credits. The opposite situation will apply to the Purchase Ledger Control
account.
53. Enter any abnormal balances in the control accounts, from the figures given.
Then total both sides to identify the year end balances.
Sales Ledger Control Account

Date Details Folio DR CR
01/01/92 Balance at this date 11,345
21/12/92 Credit sales 123,400
Returns Inwards 4854
Discounts Allowed 1563
Payments Received 105503
134,745 111,920
01/01/93 Balance at this date
Purchase Ledger control Account

01/01/92 Balance at this date 10,872
31/12/92 Credit purchases 65,986
Returns Outwards 2,834
Discounts Received Payments to 2,103
Creditors
58,378
63,315 76,858
Balance at this date 13,543
01/01/93
8.4 Suspense Account
A suspense account is a ledger account set up in nominal ledger to insert the amount of
difference in a Trial Balance totals. A trial balance can go out of balance due to :
❐ incorrect addition (casting errors)

❐ entering an item on one side of the books without a corresponding entry on the other
side
❐ there could also be an insertion of incorrect figures on either side of the accounts
The suspense account is a temporary account set up to balance the trial balance. Then all
the errors identified should be cleared via the suspense account. Errors identified must be
entered into the books via journal entries. These journal entries would then be posted to
the relevant ledger accounts. It should be noted that suspense account must be cleared -
i.e. zero balance - before final accounts are prepared.
The following steps should be followed in this procedure:
54. If a trial balance total disagree, insert the difference in the lesser side to balance
the total. This "difference" will be the opening balance in the suspense account.
55. Locate the errors and enter into the journal.
56. Post the journal entries to the relevant ledger accounts (including the suspense
account where necessary).
57. If there is no balance in the Suspense Account, then it is presumed that all errors
are discovered and you can proceed to prepare final accounts.
58.
8.4.1 Suspense Account - a Fully Worked Example (NCC 1/91 - Q3)
A firm has extracted a Trial Balance which does not agree, the Debit total is
$97,540 and the credit total is $98,320.
59.
60. 1. Create a suspense account for the difference at 31st March 1991.
2. During the next few weeks, the following errors were discovered:
vii) A Cheque for motor expenses of $410 had not been entered in the
motor expenses account.
viii) The total of the Returns Out daybook $120 had not been posted to the
nominal ledger.
ix) A cheque received from T. Woo for $85 had not been recorded in the
cash book.
x) The discount received of $305 from Creditors had not been recorded in
the creditors accounts.
xi) A payment to R. Nail for $210 had been recorded in their account as
$120.
xii) The petty cash float had been restored by transferring $10 but this has
not been recorded in the Petty Cash Account.
Enter the above in the suspense account and balance it off at the end of the
months.
61.
62. 1. Identify the difference in the total of the trial balance in order to set up
the
63. suspense account.
64.
65. DR CR
66. Trial Balance 97540 98320
67. Suspense Account 780
_____
68. 98320 98320
Therefore the Suspense Account will start off with a debit balance of $780.
69.
70. 2. All the errors identified must be entered into the books via journal
entries.
71. 3. Finally the journal entries will be posted to the ledger accounts. The
72. suspense account will be:
73.
Suspense A/C
Trial Balance 780
Motor Expenses 410
Returns Out 120
Bank 85
Creditors 305
R.Nails 90
Petty Cash 10
900 900
Journal
i Motor Expenses 410
Suspense A/C 410
ii Suspense S/C 120

Returns Out 120
iii Bank 85
Suspense A/C 85
iv Creditors 305
Suspense A/C 305
v R.Nail 90
Suspense A/C 90
vi Petty Cash 10
Suspense A/C 10
8.5 Exercises
74.
75. 1. A firm has the following details in its accounts at 30 September 1990. Prepare
the
76. sales ledger control account and the purchase ledger control account. The
balance in
77. the sales ledger at 1st September was $1200 and in the purchases ledger was
$3,450.
Credit purchases from suppliers $ 21345
Credit sales to customers $ 28900
Cash paid to creditors $ 13480
Receipts from trade debtors $ 21010
Discounts received $ 1100
Discounts allowed $ 825
Purchases returns $ 3100
Sales returns $ 980
Bad debts written off $ 310
78.
79. 2. a) Prepare from the following list of balances, a Sales Ledger Control
Account for
80. the year ended 30/9/91.
Returns Inwards $ 451

Returns Outwards $ 1088
Discount Allowed $ 11090
Credit Sales $ 231355
Cash from debtors $ 214567
Discounts received $ 13750
Bad Debts Written off $ 5177
Sales Ledger Debit balances 1/10/90 $ 24134
b) List four actions which an accountant might take in order to find the error(s) if,
in a manual accounting system, a Sales Ledger Control Account does not
balance.
3 a) A firm has obtained the following data from its records. You are required to
draw up the Sales Ledger and Purchases Ledger Control Accounts:
Opening balance : Debtors $ 10450

Opening balance : Creditors $ 7346
Cash Sales $ 804
Cheque Received $ 34892
Cheque Paid $ 29428
Discount Received $ 1440
Discount Allowed $ 2862
Bad Debts Written Off $ 925
Increase in Provision for bad debts $ 704
Credit Notes Issued $ 1105
Debit Notes Issued $ 1207
Sales Invoices $ 36858
Purchase Invoices $ 32324
Purchase Incorrectly
Recorded as a sale $ 1549
b) Explain why control accounts are used in Manual Accounting Systems.
4 A firm has extracted a Trial Balance which does not agree. The debit side is
$64,230 and the credit side is $65,650. Create a suspense account for the difference,
allowing for the errors listed below, which were discovered during the next few
weeks.
i) Sales worth $755 have not been entered in the debtors accounts.
ii) The balance for H. Lau, a creditor, has been recorded as $185 instead of
$158.
iii) A cheque received for $780 has not yet been entered in the Bank
Account.
iv) The owner took drawings $142 from stock which has not been entered
in the stock account.
5 The debit side of a trial balance exceeded the credit side by $860 and
after checking the accounts the following discrepancies were found:
v) A debit balance of $950 on the rent account had been omitted.
vi) An invoice for $96 in the sales daybook was entered in the Debtors' Account as $69.
vii) A bill for $150 had been credited to the electricity account instead of debited.
viii) A purchase invoice for $230 has been posted to J.J. Tall's account instead of A.A. Small's.
ix) The sales daybook had been incorrectly totalled and $11476 entered to the sales account
instead of $12613.
x) A credit balance of $627 on the Interest Received Account had been omitted.
xi) The wages account had been overcast (the total was overstated) by $373.
81.
82. 6 A business extracted a trial balance at the end of the financial year.
Because of an
83. imbalance, a suspense account had to be created. After various investigations the
following errors were discovered:
xii) The sales daybook total had been entered in the sales account as
$152,700 instead of $157,200.
xiii) The motor expenses account, totalling $2,100 had been omitted from
the trial balance.
xiv) A purchase invoice for $635 had been wrongly entered on to the debit
side of the individual creditor's account.
xv) A credit balance of $657 on the sales ledger account had been omitted
when calculating the debtors figure.
xvi) An item in the cash book, wages $5,700, had been incorrectly entered in
the wages account as $7,500.
Enter the above transactions to clear the suspense account, showing clearly the
original trial balance difference.
oo)
CHAPTER 9: COST ACCOUNTING
Chapter Objectives
⇒ classification of costs;
⇒ operating statement.
Introduction
In the previous chapters we have seen how financial transactions are recorded in their
respective books and how they are eventually transformed into useful information.
With financial accounting the firm would have a more systematic control to ensure the
healthy operation of a company. It provides a good record of the company's past
undertakings.
But to be a viable company it is not enough to exercise care by recording the company's
undertakings. Planning is equally important to assist management in deciding what is
better and how to deal well with the company's future.
This explains the need to understand this chapter : Costing and Management Accounting.
To appreciate the topics on Costing and Management Accounting, it is necessary for

students to establish a clear understanding of the various types of cost before proceeding
to appreciate how costing assists management for the future.
9.1 Classification of Cost
Costing and management accounting as its name implies concerns costs and its impact on
management of costs.
To begin with, it is important to understand the various classification of costs.
9.1.1 Variable Costs
This cost relates in direct proportion to the per unit of output generated. This
implies that if a company does not produce any output there will not be any
variable costs incurred. The variable costs would increase in accordance to the
increase in quantities of output.
Examples of variable cost are Direct Materials, Direct Labour and Direct
Expenses.
Direct Materials cost are materials cost incurred to produce each unit of output.
Cost of factory worker whose wages depend on the number of outputs produced
contribute the direct labour costs. Direct Expenses refer to cost incurred such as
royalties.
CS152 CHAPTER 9: COST ACCOUNTING
9.1.2 Fixed Cost
It is the name given to various expenses incurred in the cost of manufacture and
other functions. It is also known as fixed overheads. Such costs would remain
consistent regardless of the number of output generated. It may still incur when
there is zero output.
Since it does not vary directly to the output it is also identified as indirect costs.
Examples of fixed costs are supervisor's salaries and rent.
9.1.3 Total Cost
This cost comprises of total variable costs and total fixed costs. It determines the
overall cost incurred to produce a certain quantity of outputs.
Total Costs = Total Variable Costs + Total Fixed Costs
9.2 The Operating Statement
An operating statement displays the profit earned by the organization after detailing its
revenue and costs.
Table 9-1 : Operating Statement
$ $
Revenue 100,000
Direct Materials Cost 25,500

Direct Labour Cost 12,500
Direct Expenses 2,000
Prime Cost 4,000
Factory Costs:
Indirect Labour 3,000
Indirect Materials 2,500
Depreciation of Machinery 1,500
11,000
Total Manufacturing Costs 51,000
Administration Costs:
Depreciation Equipment 1,250
13,500
Sales and Distribution Costs:

Salesmen Salaries 5,000
Advertising 1,500
Depreciation: Shoe Fittings 2,750
Depreciation: Delivery Van 750
10,000
CS152 CHAPTER 9: COST ACCOUNTING
Finance Costs:
Audit Fees 3,000
Bank Interest 4,500
7,500
Total Cost 82,000
Profit 18,000
In table 9-1, the profit figure of $18000 is obtained from the difference of revenue and
total costs. To facilitate the students' understanding on operating statement, the following
equations would be useful.
Profit = Revenue - Total Costs
Total Costs = Manufacturing Costs + Administration Costs+

Sales and Distribution Costs + Finance Costs
Manufacturing Costs = Prime Cost + Factory Costs
Prime Costs = Direct Material Cost + Direct Labour Cost+ Direct

Expenses
Factory Costs = Indirect Labour + Indirect Materials+

Depreciation of Machinery + Lighting and
Heating + Rent and Rates (all indirect costs
relating to Factory)
Further explanation on some terms:
❐ Administration Costs
- These costs concerns the cost incurred due to administrative activities (usually
called the office).
❐ Sales and Distribution Cost
- These costs has incurred as a result of sales and distribution activities (the cost of
money).
❐ Finance Cost
- These costs has incurred as a result of financing the business.
In summary, unlike the profit and loss statement in financial accounting, operating
statement could be expanded to reflect a detailed analysis on the profit generated by each
product. It provides a detailed breakdown on the different types of costs and revenue
incurred that contributed to the profit of a product.
CHAPTER 10: COST OF RAW MATERIALS
Chapter Objectives
⇒ cost calculation for raw materials;
⇒ inventory control;
⇒ formula for calculating stock levels.
Introduction
In the previous chapter we have seen an example of an operating statement which

illustrates the breakdown of cost and revenue items. In this chapter students will be taught
on how to perform job costing. This chapter will start off to illustrate the three basic
methods on the costing of raw materials or stock taken for sale/used in production.
10.1 Cost Calculation for Raw Material
To determine the cost of raw materials of a product may not be as simple as it appears in
the equation of cost = quantity x unit price. To ensure continuity in production and that
sales are not lost because of lack of finished goods, many firms would prefer to store
sufficient stocks of raw materials. New stock of raw materials may be purchased at a
price and then issued to the production factory at a different price. The variation in
purchase and issue price may be due to inflation, natural phenomena and other factors. As
such, monitoring on the cost of raw materials becomes an important task to ensure proper
control. Three methods have been developed to record the purchase and issue status of
raw materials. The three methods are
⇒ ❐ First In First Out (FIFO),
⇒ ❐ Last In First Out (LIFO) and
❐ Average Cost (AVCO).
To illustrate how the cost of raw material are determined under the above methods, the
following information and a stock record card are used;
Table 10-1 : List of transactions
Date Receipt (Units) Per Unit Cost Issues (Units)

January 10 $2.00
February 8
March 20 $4.00
April 14
May 30 $6.00
June 10
CS152 CHAPTER 10: COST OF RAW MATERIALS
10.1.1 FIFO : First In First Out
This method states that the oldest stock of raw materials to be received should be
the first to be issued.
Table 10-2 : Stock Record Card : FIFO Method
Receipts Issues Balance

Date Units Per Unit Total Units Per Unit Total Units Per Unit Total
Jan 10 2 20 10 2 20
Feb 2 2 4
Mar 20 4 80 2 2 4
20 4 80
22 84
Apr 2 2 4
12 4 48 8 4 32
May 30 6 180 8 4 32
30 6 180
38 212
June 8 4 32
2 6 12 28 6 168
32 112
With reference to Table 10-2:
Jan 10 units @ $12 are received and this contributed to the total starting
available balance of 10 units @ $2 = $20
Feb 8 units need to be issued to the production factory. The issued price for the 8
units charged to the production factory according to FIFO method would be
the price of the earliest available stock (Jan price). Henceforth, in Feb, 8
units are issued at $2 each. After its issue of 8 units, the available stock
balance would be left with 2 units at $2 each.
March 20 more units are received at $4 each and that contributes to the available
stock balance of : 2 units @ $2 and 20 units @ $4 Total = 22 units.
Remember : the first stock received would be shown first in the balance like
old stock new stock
April 14 units need to be issued. Since there are 2 units left from Jan and it is an
earlier stock before those of March. 2 units will first be issued at $2 each,
followed by the remaining required 12 units from March stock at $4 each.
This would leave the available balance of 8 units at $4 each.
May 30 more units at $6 each is received. This resulted in the available balance
of 8 units @ $4 (March) and 30 units @ $6 (May)
June 10 units need to be issued. Since the earlier stock balance comes from
March the 8 units at $4 will be issued first followed by the two more units
required obtained from May receipts.
With the stock record card, the cost accountant could extract a few important
results. Firstly, the total cost of $112 in the issue column reflects the cost of sales
for the stock or raw materials. Secondly, the balance column will reflect to the
cost accountant that they are left with 28 units of closing stock at $6 each.
Thirdly, the gross profit could be derived given the cost of sales, and if selling
price per unit are given, say at $10 each, the gross profit would then be:
Sales (32 units @ $10) = $320

Less cost of sales = $112
Gross profit = $208
10.1.2 LIFO : Last In First Out
This method is just the opposite to FIFO as it states that the newest stock to the
received should be the first to be issued.
Table 10-3 : Stock Record Card : LIFO Method

Jan 10 2 20 10 2 20
Feb 8 2 16 2 2 4
Mar 20 4 80 2 2 4
20 4 80
22 84
Apr 14 4 56 2 2 4
6 4 24
8 28
2 2 4
May 30 6 180 6 4 24
30 6 180
38 208
June 10 6 60 2 2 2
6 4 12468
20 6 120
28 148
32 132
As in this example, until March there is no difference for FIFO and LIFO
methods. But the difference between the 2 methods should be closely observed
from April to June.
April 14 units need to be issued. Since the newest available stock balance is
March with 20 units @ $4, 14 units will be issued at $4 each. This would
leave the available stock balance in April with: 2 units @ $2 (Jan) and 6
units @ $4 (March)
June 10 units need to be issued. Since the newest available stock is May with 30
units at $6 each, 10 units will be issued from the 30 units at $6 each. This
would leave the available stock balance in June with:2 units @ $2 (Jan), 6
units @ $4 (Mar) and 10 units @ $6 (May)
Similar to the FIFO method, the cost accountant could derive the gross profit at a
selling price of $10 each:
Sales (32 units @ $10) = $320

Less Cost of Sales = $132
Gross Profit = $188
10.1.3 AVCO : Average Cost Methods
This method finds the average cost of goods received and applies this
price to the materials issued. Whenever new stock is received, a revised unit
price will be calculated and use for subsequent issues until new stock is received.
The process then continues.
Table 10-4 : Stock Record Card - AVCO Method

Jan 10 2 20 10 2 20
Feb 8 2 16 2 2 4
Mar 20 4 80 22 3.82 84.04
Apr 14 3.82 53.48 8 3.82 30.56
May 30 6 180 38 5.54 210.52
June 10 5.54 55.40 28 5.54 155.12
32 124.88
Note: Preference is for unit price to use a maximum of two-decimal points

(for currency).
Using this method the Gross Profit would be:
Sales (32 units @ $10) $320.00

Less Cost of Sales $124.88
Gross Profit $195.12
As observed the three methods of valuation gave three different gross profit
figures. This explains why it is important to observe the consistency convention -
that is the valuation methods should not change from year to year.
10.1.4 Two Types of Inventory System
❐ The stock valuation methods using the stock record card is known as the
perpetual inventory system. This system states that whenever there is a
movement in stock, the cost of receipts, issues and balances must be
identified.
❐ The periodic inventory system states that at the end of each period, the total
receipts and total issues are then identified and the stock balances are then
calculated.
❐ From the previous examples, the cost of goods sold would be calculated as
follows:
FIFO Method
10 units @$2 = $ 20.00

20 units @$4 = 80.00
2 units @$6 = 12.00
32 = $112.00
CIFO Method
30 units @$6 = $180.00
2 units @$4 = 8.00
32 = $188.00
AVCO Method
AVCO of Goods received = = 4.67 per unit
Cost of Goods Sold : 32 units @$4.67 = $149.44
Table 10-5
Method FIFO LIFO AVCO

Sales $320 320 320.00
Cost of Sales 112 188 149.44
Gross Profit $208 132 170.56
10.1.5 Some Situation for Using Each Method
❐ FIFO will be used when prices are falling and the firm wants to avoid
potential losses through over-pricing later. This method is also used where
products have a limited shelf life, e.g. perishable products like vegetables
etc.
❐ LIFO is used if the cost figures are to reflect current material prices. When
prices are rising, this method will result in older stocks remaining at the
lower prices. However, this method can easily respond to changing market
prices.
❐ AVCO - this is an intermediate figure between LIFO and FIFO. It is

normally used when prices fluctuate between highs and lows. This method
is suitable for stocks in bulk storage like liquids, furniture etc.
10.2 Inventory Control
The three valuation methods covered above have illustrated the recording process on the
receipts and issue of goods. Such recording process is an important means to effective
stock control. But this is not at all about materials. Another aspect is the quantities which
should be ordered and kept in stock. Inventory control would be the techniques used to
calculate the stock levels to ensure that stocks are kept at an economic level.
To determine the most economic levels of stock, the following formulae will be used. The
formula involves some terms and it is necessary to understand the meaning of the various
terms.
Definition of terms :
❐ Lead Time
• This is the time period that elapses between the placing of order and
receiving of goods.
❐ Minimum Stock
• It is also known as buffer stock. It refers to the amount of stock that will
be needed to satisfy demand while waiting for delivery of stock during lead time.
❐ Maximum Stock
• The highest level of stock required for each item.
❐ Re-order Quantity
• The quantity of stock further orders should be placed.
❐ Economic Order Quantity
• The quantity to be ordered each time that provides best saving after
considering balances between costs of keeping and ordering.
❐ Re-order Level
• The level of stock that determines a further order should be placed.
10.3 Formula for Calculating Stock Levels
10.3.1 Reorder level
• Reorder Level = Maximum Usage X Maximum Lead Time
• For example, if a company has a daily maximum usage of 25 units and

it takes 10 days maximum lead time then the re-order level would be
• 25 units x 10 days = 250 units
• This implied that if stock falls as low as 250 units, a further order
should be made.
10.3.2 Minimum level
• Minimum Level = Reorder Level - Average usage x average

lead time
• For example, if on a daily average, 20 units are used and it takes a lead
time of 6 - 10 days, then the minimum level would be
• 250 units - (20 units x 6+10 days) = 90 units

2
• This implies that stock should be kept at a minimum of 90 units and not
less.
10.3.3 Economic Order Quantity

2 x Order x annual demand

Carrying cost per item per annum
For example, if it requires an ordering cost of $5 per order, carrying cost is 10%
each unit of stock, cost per unit is $100 and daily average usage is 20 units then
the EOQ would be :
2 x 2 x (20 x 365)
10% x $100
= 86 units
This implied that a company has the best saving with 86 units ordered each time.
10.3.4 Maximum Level
Maximum level = Reorder level + EOQ - Minimum usage x Minimum lead time
For example, with the data as obtained above where Reorder level = 250 units,
EOQ = 86 units and if minimum usage is 10 units per day with a lead time of 6 -
10 days, then the maximum level of stock would be
250 + 86 - (10 x 6) = 276 units
This implies that the company should not hold more than 276 units of stock.
10.3.5 Reorder Quantity
Reorder Quantity = Maximum stock - (Reorder-Level

- Minimum usage in minimum lead time)
Besides EOQ this is another method to determine the quantity of stock to order.
However, the company must first decide what is the maximum stock level it
should be. For example, if the company has decided that its maximum stock is
280 units, reorder level as calculated is 250 units, minimum usage is 10 units per
day with lead time of 6 - 10 days, then reorder quantity is
280 - (250 - (10 x 6)) = 90 units
10.3.6 Average Stock
Average stock = Minimum level + 1/2 reorder quantity
This formula determines the average quantity in stock on lead times. For
example, if the minimum level is 50 units and reorder quantity as calculated is
90 units, then the average stock is 50 + 1/2(90) = 95 units.
10.4 Exercises
84.
85. 1. Identify whether the following costs are variable, semi-variable or fixed costs.
pp) wages for machine operators
qq) carriage cost for raw material

rr) foremen's wages
ss) cost of raw materials
tt) royalties f
uu) storekeeper's wages in factory
vv) depreciation on production machinery
2. The stock card for a certain item of stock showed a balance at 31st December 1991
of
86. 100 units at $0.50 per unit.
Purchases for the month of January 1992:
January 8 : 30 units at $0.60 per unit

January 18 : 90 units at $0.70 per unit
Sales for the month of January 1992:
January 10 : 10 units
Show these entries on stock card (including values) under the FIFO, LIFO and
AVCO methods. Also calculate the gross profit if the sales price is $4.00 per unit
under all the three methods.
3. From the following data calculate the cost of raw materials issued using
87. Perpetual/Periodic style under
xvii) the FIFO method
xviii) the LIFO method
xix) the Average Cost methods
Month Receipts Month Issues (Units)

Jan 20@ 10.00 March 10
Feb 10@ 10.50 April 10
May 8@ 11.00 June 13
July 20@ 12.00
The goods were later on sold for $25 per unit. Calculate the gross profit under the three
methods separately.
4. Calculate REORDER LEVEL, MINIMUM and MAXIMUM LEVEL based on the

allowing information:
Average usage 4000 units per week Minimum Usage
3200 units per week Maximum usage
5200 units per week
Lead Time 10 - 14 units per week
EOQ 40000 units
88. 5. Calculate the following information using the formulae:

ww)Reorder level
xx) Reorder Quantity
yy) Minimum Level
zz) Average stock held
aaa) Maximum stock level 18000 units

Expected consumption per month Max 400 units
Min 160 units
Estimated delivery time Max 6 months
Min 2 months
89. 6. Tomboy Enterprises has recently finished a job and the following data
has been collected for the respective job. Calculate the prime costs.
Direct Materials $25.00
Direct Labour
Assembly 4 hours
Finishing 2 hours
Packing 2 hours
Machine Hours Finishing 3 hours
xx) The rate of payment of direct labour are:

Assembly $3.00 per hour
Finishing $4.00 per hour
Packing $5.00 per hour
7. Waveline Computer System (Pte) Ltd has the following costs :

90.
91. Analyst Programmers wages are $10.50 per hour, Overhead $4.00 per computer
hour. Recently a job for a company was done and it involved the following
costs/times : diskettes $2.00, Photocopying and Stationary $4.50, Programming and
computer hours 5 and 4 respectively.
Calculate the cost of the job and work out a selling price assuming that the firm has a
30% markup for profitability.
8. Draw up an operating statement from the following information:

92.
Revenue 500000
Purchases 30000
Returns outwards 200
Carriage 100
Royalties 1200
Depreciation :
Plant and Machinery 4000
Office Equipment 2000
Delivery Vans 3000
Shop Fittings 1500
Finance Costs :
Audit Fees 10000
Bank Interest 5000
Advertising 6000
Labour Costs :
Production wages 40000
Foreman's Wages 13000
Office Salaries 28000
Salesman Salaries 14000
Lighting and Heating :

Factory 5000
Offices 3000
Shop 2000
Rent and Rates :

Factory 7000
Offices 2000
93. Shop 1000
94. 9. Draw up an Operating Statement

from the following budgeted figures:
xxi) Revenue 400000

Materials :
Direct Materials 50000
Carriage inwards 1200
Carriage outwards 1500
Indirect Materials 2000
Wages and Salaries :
Direct labour 45000
Factory supervisor 25000
Foreman 10000
Office staff 12000
Sales force 10000
Patents 13000
Lighting and Heating :
Office 4000
Shop 1000
Others
Insurance for shop 1500
Loan interest 3000
CHAPTER 11: JOB COSTING - AN
ABSORPTION APPROACH
Chapter Objectives
⇒ direct labour cost and overhead absorption rate;
⇒ job cost card.
Introduction
In the previous chapter, students should have established sufficient understanding on

using the three methods to determine the cost of material taken from stock.
To perform job costing, it is not sufficient to know the materials cost. There are other cost
elements that must be taken into account.
This chapter will illustrate how to calculate direct labour cost and overheads absorption
rate. It will conclude with an example of job costing.
11.1 The Cost of Direct Labour
Direct Labour cost is defined as the cost incurred and paid to workers directly involved in
making a product.
This will involve recording the time taken by individual workers in producing the
product.
To calculate direct labour cost, it involves multiplying the hours worked to the hourly
wage rate paid to workers in that department.
For example, a manufacturing company has three departments involved in the production
of an item: Assembly, finishing and packing.
The hourly wage rates paid for these departments are:
$/Hour
Assembly 50
Finishing 20
Packing 10
Recently, the company has just received an order for product A. To produce product A, it
requires labour of 4 hours, 3 hours and 1 hour for assembly, finishing and packing
respectively.
To calculate the cost of direct labour :
Product A
Assembly : 50 x 4 $200
Finishing : 20 x 3 $ 60
Packing : 10 x 1 $ 10
Total direct Labour Cost $270
11.2 The Cost of Overheads

CS152 CHAPTER 11: JOB COSTING - AN ABSORPTION APPROACH
Overheads is defined as the indirect and fixed expenses which cannot be attributed to any
specific job. However, such cost should not be ignored in calculating the costs of a job
since it is incurred as part of the total costs.
It is therefore necessary that the company develop some ways of "absorbing" the cost of
overheads. One common approach is to absorb overhead costs on an hourly basis such as
labour hours or machine hours.
The choice of the hours selected to absorb the overheads depends very much on the
operational needs of the company. If the company is machine-oriented, absorbing
overheads on machine hours would be an appropriate choice. Otherwise, labour hours
would be selected instead.
It is not uncommon to see different departments involve in the completion of a job.

Therefore, it is necessary to calculate what proportion of overheads needs to be absorbed
by each department.
Before an example is used to illustrate overhead absorption, it is useful for students to

follow closely the steps.
1. Determine the basis used for apportionment for each overheads.

2. Apportionment of overheads to the different departments.
3. Calculate the total overheads for each department.
4. Decide on the basis of absorption. (Labour hours or machine hours)
5. Calculate the Hourly Absorption Rate for each department.
An example:
A company estimates that it has the following overheads for the coming year.
Rent and Rates $10,000

Lighting and Heating $ 5,000
Foremen's Wages $20,000
Depreciation $ 3,000
Canteen Costs $ 1,500
Other information relating to the three sections are :
Assembly Finishing Packing Total

Floor Area (m2) 3,000 5,000 2,000 10,000
Cost of Machine ($) 20,000 10,000 10,000 40,000
Use of Machine (Hours) 5,000 3,000 2,000 10,000
No. of Employees 10 6 4 20
11.2.1 Determining the Overhead Absorption Rate
Cost Step 1 Step 2a Step 2b Step2c Total

Basis Used Assembly Finishing Packing
Rent and rates Floor Area $3,000 $5,000 $2,000 $10,000
Lighting and Floor Area 1,500 2,500 1,000 5,000
Heating
Foreman’s wages Employees 10,000 6,000 4,000 20,000
Depreciation Cost of 1,500 750 750 3,000
machine
Canteen costs Employees 750 450 300 1,500
Step 3 16,750 14,700 8,050 39,500
Total:
Step 4: 5,000 3,000 2,000
Machine hours
Step 5: $3.35 / hr $4.90 / hr $4.03 / hr
Hourly overhead
absorption rate
This means that Assembly will be charged $3.35/hr, finishing $4.90/hr and Packing
$4.03/hr.
The charges will be in addition to materials cost and labour cost. Such charges are
intended to recover the overheads in the 3 departments.
Explanation:
Step 1. Decide on the basis of apportionment for each cost.
Step 2a. To obtain $3,000 in Assembly Rent and Rates:
Basis : floor area for assembly = 3000m2 / 10000m2

= 0.3
Rent and Rates cost = $10,000
Hence, assembly would absorb = 0.3 x $10,000
= $3,000
Step 2b. To obtain $2,500 in finishing Lighting and Heating:
Basis : Floor area for finishing = 5000m2/10000m2

= 0.5
Lighting and Heating Cost = $5,000
Hence, finishing would absorb = 0.5 x $5,000
= $2,500
Step 2c. To obtain $4,000 in Packing foremen's wages:

Basis : Employee for Packing = 4/20
= 0.2
Foremen's Wages = $20,000
Hence, Packing would absorb = 0.2 x $20,000
= $4,000
11.3 Job Costing
The total costs of a job could be calculated and recorded using a job cost card.
Example:
The following data concerning the job : JBOOT has been obtained:
Direct Materials : Assembly = $40

Finishing = $40
Packing = $32
= 112
Direct Labour : Hourly Wage Rate :
Assembly = $50
Finishing = $20
Packing = $10
Labour Hours Worked : Assembly =4

Finishing =3
Packing =1
Machine Hours used : Assembly =4

Finishing =3
Packing =2
Hourly overhead Absorption Rate :

Assembly = $3.35/hr
Finishing = $4.90/hr
Packing = $4.03/hr
Other costs :
Selling and Distribution = $5.10
Administration = $4.20
Profit mark-up required = $20

To calculate the total charges to customers, the following job cost card would be
used.
Job Cost Card
Job number : JB007 Special features :

Start Date: 30/6/xx Blue facie required
Completion Date: 30/7/xx
Customer Name and Address :

Informatics Holdings Ltd
Materials Labour Cost Overheads Total
Hrs Rate Total Hrs Rate Total

Assembly 40 4 50 200 4 3.35 13.40
Finishing 40 3 20 60 3 4.90 14.70
Packing 32 1 10 10 2 4.03 8.06
112 270 36.15 418.16
Total costs of job = $418.16

Selling and distribution = 5.10
Administration cost = 4.20
Total 427.46
Profit mark-up 20.00
Amount chargeable 447.46
In the example, the total costs of the job would be calculated as $427.46. The
total charges to customers would be $447.46.
In conclusion, with the job cost card and a clear understanding of the various
costs, the total costs of the job could be determine and the total charges to
customers could be calculated.
Such knowledge is deemed to be desirable to the management in ensuring that

not only all costs are covered but also to ensure the company earns its desirable
profit margin.
11.4 Exercises
95. 1. Tanamara Pte Ltd would like to determine the total cost incurred for its
direct labour. The following information is provided and it seeks your expertise to
calculate its direct labour costs for the three products. What would be Tanamara's
total direct labour costs incurred?
Department A : 20 workers @ $1.50/hour

Department B : 15 workers @ $6.20/hour
Department C : 5 workers @ $1.80/hour
Product A : Requires support from Department A and Department

B.
: Utilizes 10 man-hours for department A and 20 man-
hours for department B.
Product B : Uses 15 workers of Department A and 4 workers of
Department C.
: Uses 15 man-hours for Department A and 2 man-
hours for department C.
Product C : Requires support from department B and department
C.
: Utilizes 15 man-hours each for department B and 12
man-hours each for department C.
96.
97. 2. Kwee Lee estimates that they will have the following overheads for
their TV
98. Plant at Singapore:
Rent and Rates $12,000

Salaries 26,000
Depreciation 12,000
Insurance 4,000
Maintenance 16,000
Lighting 4,000
Canteen Costs 6,000
$80,000
The plant has three departments and the chief executive would like to calculate
an overhead absorption rate for each section:
Department Dept A Dept B Dept C Total

$ $ $
Floor area (sqm2) 10,000 10,000 5,000 25,000
Cost of equipment 50,000 160,000 20,000 130,000
Use of equipment 40,000 5,000 5,000 50,000
(in terms of hours)
No. of employees:
Supervisors 6 8 6 20
Operators 10 50 30 90
Labour hours:
Direct 15,000 90,000 50,000 155,000
Indirect 20,000 20,000 30,000 70,000
With the help of the supplied information to apportion costs between the
different sections and then calculate the hourly absorption rate for each
department separately.
99. 3. A production firm produces a wide range of products and it

uses the job cost card to determine the costs of its products produced.
Currently, the firm plans to produce Job Number: 1234 and it seeks your
expertise to calculate:
bbb) Cost of material used

ccc) Cost of Direct Labour
ddd) Overheads absorbed
eee) Total manufacturing cost
fff) Total Cost
ggg) Selling Price
To facilitate the understanding, you are required to present your answers

using a job cost card.
Information available:
Materials used Hours Kg Department Labour Overheads

Dongles $2/kg 10 10 A $4.20/hour $1.80/hour
Sprockets $5/kg 15 7 B $5.00/hour $2.10/hour
Other information:
- An additional 20% is added onto the manufacturing cost to cover the

cost of overheads in Selling and Distribution, and the selling price is
mark-up 30% on the total cost.
CHAPTER 12: MARGINAL COSTING: BREAK-
EVEN ANALYSIS
Chapter Objectives
⇒ what is break-even?
⇒ other facts concerning break-even.
Introduction
In the earlier chapters students are given description on the behaviour of costs and how
costs are classified.
Such knowledge is important in many aspects of costing and management. This chapter
will illustrate to students one of the applications : Break-even Analysis.
12.1 What is Break-even?
Many organizations, before the launch of any new product would conduct market
research to determine the market potential. One area of considerations is to determine the
number of units they can expect to sell and to make any profit.
Break even analysis is the technique used to enable management to quickly determine the
worthiness of launching the new product.
By break even, it refers to a situation whereby it requires management to be able to sell a

minimum number of units to ensure that all costs are covered. Henceforth, avoiding
making a loss inspite of no profit earned. The basic formula to determine the number of
units required to ensure at least a no-gain no-loss situation is:
Break-even = = x units
Looking at the formula, students would observe that total fixed costs and unit contribution
must be determined.
The term "unit contribution" simply means the unit selling price less the unit variable
costs.
Example :
Suppose a manufacturing firm: Sure-Succeed plans to launch a product X which is

estimated to sell at $20.00 each. The production of product X would cost the firm the
following :
Direct Materials $2/unit

Direct Labour $3/unit
Direct Expenses $5/unit
Fixed Costs $20,000
As a consultant employed by the manufacturing firm, you are to advise the management
on the following:
❐ The number of units needed to break-even.

CS152 CHAPTER 12: MARGINAL COSTING: BREAK-EVEN ANALYSIS
❐ The sales dollars required to break-even.
❐ Using a break-even chart as an alternative to illustrate your answers.

To answer the question, the following information must be determined.
Fixed Costs = $20,000

Variable Costs = $2 + $3 + $5 = $10/unit
Unit Selling price = $20/unit
Break-even formula = Total fixed cost

Unit contribution
hhh) Break-even (units) = 20,000

220 – 10
= 2,000 units
iii) Break-even ($) = 2,000 units x Selling price

= 2,000 x 20
= $40,000
c)
0 2000
Variable cost 0 x $10 2000 x $10
=$0 = $20,000
Unit : x
$:y $0 + $20,000 $20,000 + $20,000

Total cost = $20,000 = $40,000
= Variable cost + fixed cost
Sales 0 x $20 2,000 x $20

= $0 = $40,000
Given the x and y Coordinates:
Sales
Profit
Break-even
40,000 Losses
Total Cost
(2,000 , 40,000)
Fixed Cost
20,000
(0 , 20,000) (2,000 , 20,000)
(0,0) Units
2,000
Figure 12-1: Break-Even Chart

The break-even chart reflects an alternative method to calculate break-even. To break-

even, total sales must equal total costs.
As illustrated in the above break-even chart, for the manufacturing firm to break-even for
product X, it must sell at 2,000 units or to generate at least $40,000 of sales to ensure that
total costs are covered. This is reflected by the intersecting point where the Sales meet the
Total costs line.
12.1.1 What-if More than Break-even?
Very often than not, it is not too realistic for any organization to survive by only
breaking-even.
On a longer term basis, profits are expected for owners or shareholders who
invested their capital into the firm, they would expect a return on their capital
invested.
Under such circumstances, it is no longer feasible for any firm to cover only
their total costs. They would need to ensure that the expected profit are earned
and their shareholders deserved their return on capital employed (ROCE).
With further expectation, break-even would take an additional role.
New Break-even Formula:
Units Required = Fixed Cost + Profit or Fixed Cost + ROCE

Unit Contribution Unit Contribution
= x units
Example :
Supposing Sure-Succeed manufacturing firm, which produces product X, decides that it

expects an estimated profit of $20,000. Cost and sales figures remain the same. Calculate
the units required to be sold and the sales value.
jjj) Given: Profit expected = $20,000

Fixed Cost = $20,000
Unit Contribution = $20 - $10= $10
Units Required = 20,000 + 20,000

10
= 4,000 units
b) Sales Value = 4000 x $20
= $80,000
In this example, it implies that the manufacturing firm needs to sell 4,000 units or
generate $80,000 to cover the total costs to assure an estimated profit of $20,000 to the
shareholders.
12.2 Other Facets of Break-even
Break-even could be used in another approach to determine the level of profit/loss

sustained.
For instance, using the information given in example 1 and 2, Sure-Succeed

manufacturing firm estimated that it could sell 5,500 units of Product X. However, it is
concerned if this quantity of product X is going to be a lucrative business. How could this
concern be addressed?
In the previous example, it was calculated that the break-even units was 2,000 units.
If Sure-Succeed sells 5,500 units of product X, this imply that Sure-Succeed has
additional 3,500 units above its break-even. Any units above its break-even point imply
profit earned but if the converse is true, a loss would be incurred.
In this case, the profit earned would be:
Sales : 5,500 units

Less Break-even : 2,000 units
Margin of safety 3,500 units
Unit Contribution : $10
Profit earned : $35,000
In this situation, it was identified that the firm would earn a profit of $35,000. The
difference of 3,500 units between the sales level and break-even point is termed as the
Margin of Safety.
Margin of Safety reflects how close the management is to break-even. The smaller the
margin of safety, the firm will more likely be dangerously close to making a loss.
In conclusion, with a good understanding on break-even analysis, management would

have a better control to avoid situation of making any loss and ensuring the potential of
the new product before launching it in the market.
12.3 Exercises
100.
101.1. A leading computer firm in United Kingdom intends to produce a notebook for
102.marketing in Singapore. It estimates that the selling price per unit is S$4,000 and
the variable cost is S$2,000 per unit, the firm is having a fixed cost of $1,600,000.
From the information provided calculate the following:
kkk) The break-even point in terms of units.
lll) The break-even point in terms of dollars.
mmm) Draw a break-even chart/graph and indicate the break-even point, shade
the area of profit and the area of loss clearly on the graph.
nnn) If the variable costs go up by 10% recalculate the new break-even point
in terms of dollars and units. (Do not plot this one).
103.2. Alfa Technologies is considering whether to introduce a new product

and it has estimated that the item will spend $25 on direct materials, $15 dollars on
the direct labour and $40,000 of fixed costs. The firm wants to make a profit hence it
sets its price at $60 but on conducting survey it reflected that it can sell only 1400
units.
ooo) Calculate the break-even point.
ppp) Would the firm be wise to sell at this price?
qqq) If the price were to be reduced to $50 what would be the new break-
even point?
rrr) How many units need to be sold at the new price to make a profit of $10,000?
CHAPTER 13: MARGINAL COSTING:
OPERATING STATEMENTS
Chapter Objectives
⇒ what is marginal costing?
⇒ marginal costing and decision makings.
Introduction
In the earlier chapter on Break-even Analysis, students are introduced the term
"contribution".
Understanding contribution is important in another accounting technique called marginal

costing for decision making.
13.1 What is Marginal Costing?
Marginal costing assumes that fixed costs remain constant regardless of the output. So the
considerations for decision making lies with the marginal cost and sales.
13.2 Marginal Costing and Decision Makings
13.2.1 Decision on to Produce or not to Produce?
Sure-Succeed produces 3 products : X, Y and Z and their profit statements are as

follow :
X ($) Y ($) Z ($) Total ($)

Sales 10,000 20,000 30,000 60,000
Variable 6,000 3,000 4,000 13,000
Costs
Fixed 8,000 4,000 5,000 17,000
Costs
Total Costs 14,000 7,000 9,000 30,000
Profit / (4,000) 13,000 21,000 30,000
(Loss)
Looking at the loss for X, the management expressed concern that perhaps the
production for X should stop.
As a consultant, you are invited to advise the management should the firm
continue producing X or stop producing X.
To answer the question, student must understand that marginal costing assumes
that fixed cost remains constant regardless of the level of output. The decision on
whether to continue producing X lies on the contribution.
CS152 CHAPTER 13: MARGINAL COSTING: OPERATING STATEMENTS
Comparing the situation with and without X:
Situation with Product X:
X ($) Y ($) Z ($) Total ($)

Sales 100,000 20,000 30,000 60,000
Variable 6,000 3,000 4,000 13,000
Costs
Contribution 4,000 17,000 26,000 47,000
Fixed costs 17,000
Profit / 30,000
(Loss)
Situation without Product X:
X ($) Y ($) Total ($)

Sales 20,000 30,000 50,000
Variable Costs 3,000 4,000 7,000
Contribution 17,000 26,000 43,000
Fixed costs 17,000
Profit / (Loss) 26,000
Without product X, the firm has to forego the contribution of $4,000 from
product X while total fixed cost remains at $17,000.
This leads to a lower profit figure of $26,000 without product X. The firm
should thus be advised to continue producing X because it would earn a higher
total profit of $30,000.
13.2.2 Decision Whether to Produce or to Buy from Supplier?
Sure-Succeed is currently producing 10000 units of product X but a supplier :

Wholesale Pte Ltd offers to sell product X to Sure-Succeed at
$0.95/unit.
The firm is considering this offer as it would mean that it does not need to spend
time producing X. Once again, they approach you for your advice.
To answer this question, students need to compare the situation of producing X

or buying X from the supplier.
Producing X Buying X
Sales $10,000 $10,000
Variable Costs $6,000 $9,500
Contribution $4,000 $500
In this example, since producing product X offers a higher contribution,

it will be more advisable for Sure-Succeed to produce product X than to
accept Wholesale Pte Ltd's offer.
13.2.3 Decision on Whether to Accept an Additional Contract
Sure-Succeed is currently producing 2000 units of product Y. The

maximum utilization for product Y is 2500 units.
A customer, Abraham approached Sure-Succeed for a contract of 500

units of product Y and he is willing to pay Sure-Succeed at $8/unit.
Sure-Succeed would very much like to accept Abraham's offer but it is

hesitant also because it is worried that it could not have the capacity to
accept an additional 500 units. In addition, Sure-Succeed is also
concerned about the lower selling price of $8/unit.
Once again, as an advisor, you are asked to advise the management

whether Sure-Succeed should accept the additional contract.
To answer this question, a comparison of without the additional

contract or with the additional contract has to be taken into
consideration.
Without Contract With Contract

Sales 2,000 units 2,500 units
Variable $20,000 $2,400
costs
Contributio $3,000 $3,750
n
$17,000 $20,250
Working : (2000 units x $10) + (500 x $8) = $24000
By accepting the additional contract, Sure-Succeed would earn a much

higher contribution. Even though, the selling price for the additional
contract is only $8/unit, it does not incur any further increase in fixed
cost since Sure-Succeed is producing within the 2500 units of
maximum utilization. Moreover, the variable cost at $1.50/unit remains
and this would result in additional contribution of $6.50/unit ($8 -
$1.50).
Thus, it is advisable for Sure-Succeed to accept the additional contract.

13.3 Exercises
104.
105.1. Sure-Succeed was shocked to see that product A is making a loss and it
106. plans to drop the production for product A. As an advisor, you are to
give
107. your advice to Sure-Succeed to determine whether product A should be
108. terminated.
Information Available
Product A Product B Product C Total $

$ $ $
Sales 120,000 140,000 160,000 420,000
Variable
Costs:
Direct 100,000 100,000 75,000 275,000
Materials
Direct 10,000 10,000 25,000 45,000
Labour
Fixed Costs 15,000 14,000 30,000 59,000
Profit / (5,000) 16,000 30,000 41,000
(Loss)
2. Tanamara Pte Ltd produces product X at $6.50 each. The current capacity
109.Tanamara is producing is 2000 units for Product X at a selling price of
$7.00 each. On one occasion, Samurai Pte Ltd approached Tanamara and it
offers to produce product X for Tanamara. The charges incurred would be
$6.80 per unit. As an advisor, Tanamara approached you to determine
whether it should accept Samurai's offer.
110.
CHAPTER 14: BUDGETS AND BUDGETARY
CONTROL
Chapter Objectives
an example on budgeted profit and loss statement;
⇒ cash budget;
⇒ variance analysis.
Introduction
In the chapter on Break-even Analysis, it was known that the firm needs to estimate its
costs and selling prices. Thus, it is not uncommon to see firms carrying out various
exercises to predict its future costs and selling prices. Such exercises of predicting for
future is known as budgeting.
Budgeting is usually done with reference to the previous years' figures and trend. A few
of the common budgets prepared are budgeted profit/loss statement and cash budgets. It is
important that managers co-ordinate with one another when preparing the budgets so as to
ensure the interests of the overall organization.
An effective budget prepared is one that ensures control over expenditure and to indicate
any evasive action that can be planned. One good application of budgetary control is the
techniques known as variance analysis.
14.1 An Example on Budgeted Profit and Loss Statement
Imagine that the budgeting exercise has been carried out. Managers from the various
department met and submitted their estimates for the coming year. The estimates are :
Sales Department
Estimated Sales Revenue $500,000
Selling Overheads $30,000
Production Department
Estimated purchase of raw 30% of sales revenue
materials
Estimated direct labour 10% of sales revenue
Production overheads $10,000
Admiration Department
Personnel overheads $5,000
General office expenses $2,000
Canteen costs $1,000
Finance Department
Finance interest $1,000
Audit fees $4,000
Overheads and salaries $3,000
CS152 CHAPTER 14: BUDGETS AND BUDGETARY CONTROL
Consolidating all the departments' budgets, the following budgeted profit/loss statement
was prepared :
Budgeted Profit & Loss Statement

$ $ $
Sales Revenue 500,000
Direct Costs:
Purchase of raw 150,000
materials
Direct Labour 50,000
Prime Costs 200,000
Overheads:
Selling Overheads 30,000
Production Overheads 10,000
Personnel Overheads 5,000
General Office Expenses 2,000
Canteen Costs 1,000
Finance Interests 1,000
Audit Fees 4,000
Finance Overhead and 3,000
Salaries
56,000
Total Costs 256,000
Estimated Net Profit 244,000
The example has clearly indicated that if the firm could keep its estimated sales and cost
under control, it would generate an estimated net profit of $244,000. The reasons why
companies prepare budgeted profit and loss statements can be summarized as:
❐ to forecast expected income and expected expenditure
❐ to forecast expected profit or loss
❐ to allow the company to identify areas where savings could be made
❐ to allow the company to compare actual results with the budget to identify and
explain any deviations.
14.2 Cash Budget
One of the shortcoming of budgeted profit and loss statement is its inability to reflect the
flow of cash into and out of the business. Such shortcoming is overcome with the cash
budget.
Cash budget is another useful "tool" where it aids management in determining its cash
flow status. It reflects any possible cash that may be received that may have been used to
settle its cash payments. Any surplus or deficit would then be appropriately dealt with.
14.2.1 Cash Budget
Imagine the different departments have come together again to submit their
estimates for the coming year.
The estimates are:
Sales Department:
This department states that sales for the coming year would be as follow:
Dec Jan Feb Mar Apr May Jun July

Units 200 200 300 300 300 400 400 400
All the units are sold for $10 each. 90% of sales are on credit whereby debtors
pay one month after the month of sales. The remaining 10% are cash sales.
Purchases Department:
In order to fulfill the customers' orders, it is necessary for the department to

purchase the following quantities of goods.
Dec Jan Feb Mar Apr May Jun July

Units 50 50 60 60 60 70 70 70
All units are purchased at $5 each. Purchases are on credit and creditors are paid
one month after the purchase.
Other Departments:
In addition, the other departments also contributed their estimates for their
overheads.
111.
112.1. Wages will be $500 per month.
2. Overhead will be $100 per month.
3. Rent and Rates will be $150 per month for January to March and $200 per
month subsequently.
4. A new equipment will be bought in the month of March costing $900. This
will be paid for in 3 equal instalments in April, May and June.
5. Opening cash balance in January is $300.
113.
114.
Based on the estimates submitted by the various departments, prepare a cash
budget for the period of January to June. Analysing your budget, determine what
actions should the firm take if there is positive closing cash balance or if there is
negative closing cash balance.
Cash Budget for January to June

Jan Feb Mar Apr May June
Cash Sales 300 300 300 300 400 400
Debtors 1,800 1,800 2,700 2,700 2,700 3,600
Total Cash 2,000 2,100 3,000 3,000 3,100 4,000
Received
Purchases 250 250 300 300 300 350

Wages 500 500 500 500 500 500
Overheads 100 100 100 100 100 100
Rents and Rates 150 150 150 200 200 200
Purchase of new
Equipment - - - 300 300 300
Total Cost 1,000 1,000 1,050 1,400 1,400 1,450
Surplus / 1,000 1,100 1,950 1,600 1,700 2,550
(Deficit)
Opening Bal. 300 1,300 2,400 4,350 5,950 7,650
Bal. C/F 1,300 2,400 4,350 5,950 7,650 10,200
In the above example, it was observed that the period from January to June have
positive cash balance c/f. Also note that the closing cash balance would be the
opening cash balance for the next accounting period.
For positive cash balance, the management may like to consider investing in
short-term deposits. However, if the situation is conversed (negative cash
balance), management may have to arrange for overdraft with the bank.
With cash budget, the firm is able to "receive" prior warnings of any cash flow
problems or opportunities. Such warnings would allow the firm to have a
considerable period to make arrangements to avert any crisis or to better utilize
the cash balance.
14.3 Variance Analysis
With the budgets prepared, the firm can check whether the managers of different
departments performed as expected by comparing the budget figures with the
actual results. This practice involves variance analysis.
Whenever managers do not perform according to budget, they would be asked to

explain the reasons for the variances.
Therefore, variance analysis is a useful budgetary control technique used to

evaluate a firm's efficiency.
To perform variance analysis, a flexible budget has to be prepared. This is a

budget adjusted to the actual level of sales. Flexible budget shows what the
budgeted figures would have been at the actual level of sales.
14.3.1 An Example on Variance Analysis
Budgeted (10,000 Actual (11,000 units)

units)
Sales Revenue $500,000 $510,000
Direct Costs:
Purchases (Raw 15,000 16,000
Materials)
Direct Labour 50,000 51,000
Overheads:
Selling Overheads 30,000 32,000
Production Overheads 10,000 10,000
Personnel Overheads 5,000 5,000
General Office Expenses 2,000 2,000
Canteen Costs 1,000 1,000
Finance Interests 1,000 1,200
Audit Fees 4,000 4,000
Finance Overheads and 3,000 3,000
Salaries
Profit $244,000 $384,800
The above budgeted profit and loss statement was extracted from the previous
section : An example on Budgeted Profit and Loss Statement. At the end of the
year, the firm would measure its performance by comparing budget to actual
results.
However, an invalid comparison would have happened if the above budget is not
adjusted for the actual level of sales. There is a need for a like-to-like
comparison and this indicates a need to prepare the flexible budget.
The following is an illustration of how the figures can be compared using the
flexible budget and actual results. Take note that the last column shows the
variance amount with comments in brackets as "A" or "F". "F" stands for a
favourable variance and "A" stands for adverse.
14.3.2 An Example on Budgetary Control Worked Example

Budgeted Uni Flexible Actual Variance
(10,000 t Budget
units) Cos (11,000 units)
t
Sales $500,000 $50 $550,000 $510,00 $40,000(
0 A)
Direct Costs:
Purchases 15,000 1.5 16,500 16,000 500(F)
Direct Labour 50,000 5 55,000 51,000 4,000(F)
Overheads:
Selling 30,000 30,000 32,000 2,000(A)
Overheads
Production 10,000 10,000 10,000 -
Overheads
Personnel 5,000 5,000 5,000 -
Overheads
General Office 2,000 2,000 2,000 -
Expenses
Canteen Costs 1,000 1,000 1,000 -
Finance Interest 1,000 1,000 1,200 200(A)
Audit Fees 4,000 4,000 4,000 -
Finance 3,000 3,000 3,000 -
Overheads and
Salaries
Total Cost $121,000 $127,500 $125,20 $2,300(F)
0
Profit $379,000 $422,500 $384,80 $37,700(
0 A)
Take note that overhead costs are fixed and hence they will not vary with the
level of sales. As such, all the overhead figures remain consistent in flexible
budget. However, purchases of raw materials and direct labour are variable
costs. Therefore, they vary with the actual level of sales.
To perform variance analysis, statements must be clear that it is not always true
that when actual results is greater than budgeted figure, it is deemed as
favorable, students must identify that sales revenue and actual profits are
earnings of the company. The variance will be termed as favourable when actual
sales revenue and actual profits are greater than budgeted. This implies a
situation whereby the firm earns more than what it expected.
On the other hand, for cost items, the variance will be identified as adverse if the
actual costs are greater than budgeted. This implies a situation whereby the firm
overspend than it is expected.
Referring to the above example actual sales revenue is less than its expected
sales by $40,000. This indicates an adverse variance. On the other hand, the
actual costs incurred for purchasing the raw materials is less than what is
budgeted. This indicates a favourable variance as the firm spends lesser than it
expected.
This is not all for variance analysis. Very often, the managers are required to
explain any factors that lead to the variances.
Referring to the example again, some of the factors that may lead to the various
variances are:
Sales Variance : Reduction in selling price
Materials Variance : Reduction in materials wastage
Labour Variance : Improvement in labour productivity
Selling Overheads Variance : Increase in salesman commission
Finance Interest Variance : Increase in interest rate
In summary, knowing the technique Variance Analysis would enable the

management to be more efficient and effective in their planning and control.
14.4 Exercises
115.
116.1. A firm has come up with the following figures for their electronic components
plant
117. at Singapore :
Units Budget Figures Actual Figures
20,000 Units 21,500 Units
Sales 80,000 82,775
Direct Materials 10,000 11,825
Direct Labour 25,000 23,650
Direct Expenses 5,000 ,4945
Fixed Costs 12,000 12,900
Profit 28,000 29,455
118.
119.Flexible budget to be prepared at 21,500 units and state your reasons for the
different variances.
120.
2. Kwee Lin Pte(s) has come up with the following figures for their diskette
manufacturing division at Taiwan:
121.
Details Budget Figures Actual Figures
4,000 Units 4,000 Units
Revenue 30,000 32,500
Direct:
Materials 10,450 10,000
Labour 10,000 10,000
Fixed Overheads 3,000 3,500
Net Profit 6,550 9,000

122.
123.Simply calculate the different variances.
124.
125.3. You as the finance manager of a manufacturing firm is required to
present a cash budget for your forthcoming performance review meeting of your firm
for the period Jan to June.
sss) The opening balance of cash is $10,000.
ttt) Sales are 1000 units for the months starting from December up to July.
uuu) The selling price per product is $6.00.
vvv) Sales comprise of 75% as one month credit and 25% cash.
www) Direct Labour is paid $500 per month.
xxx) The firm buys goods from various suppliers as follows:
xxii) 500 units in November and December.
xxiii) 1,500 units for the remaining months, the purchase price is $2.00 per
unit
and it is paid after 60 days.
yyy) The office rent is paid every month @$200.

zzz) The corporate taxes are paid quarterly in advance @$4,000 p.a.
aaaa) Office expenses of $200 are incurred every month.

4. Prepare a sales, purchase budget and cash budget for six months starting from
Jan and ending June based on the information provided to you:
bbbb) Sales for the months of Dec to June shall be 1,000 units and each sold
for $20. Debtors are given one month's credit.
cccc) Purchases are made one month before they are sold and each unit cost
$2. Creditors are paid after two months. Purchases in November was 900 units.
dddd) Direct labour is paid $3 per unit purchased for converting the raw
materials and paid in the same month they are used.
eeee) Other costs are Factory Overheads $700 per month, Office expenses
$250 per month. Purchases of machinery $5,000 made in the month of February.
CHAPTER 15: COMPUTERIZED
ACCOUNTING SYSTEMS
Chapter Objectives
⇒ how a computerized accounting system will create problems for the auditors;
⇒ what are the control procedures necessary for a computerized accounting system;
⇒ understand the needs for computerized accounting system;
⇒ understand the accounting cycle in both the manual and computerized system;
⇒ identify the 2 common types of computerized accounting system : Integrated vs

stand-alone;
⇒ identify features to consider when selecting an accounting package;
⇒ understand the various accounting systems existing and used by the market;
⇒ understand how to use spreadsheets to handle accounting requirements;
⇒ understand by gaining hands-on experience on the various accounting packages :

their menus, their functions and their printouts.
Introduction
In the previous sections, students have acquired sufficient knowledge on financial

accounting and cost accounting. These topics are discussed more on the manual
accounting systems. However, given the keen competition in today's world market,
getting information faster than competitors becomes important. This would explain why
there is now so much emphasis for computerized accounting systems.
15.1 Auditing Computerized Accounting Systems
When firms are using computerized systems, the role of the auditor is basically the same
as that of a manual accounting system. The auditors have to report on the truth and
fairness of the accounts. However, there are problems that the auditors need to overcome,
especially when gathering audit evidence. Some of these problems are:
1. The loss of an audit trail - where the firm delete previous transactions in order to increase
storage space.
2. Source documents are not sorted into any order or they may be filed haphazardly.
3. It would be difficult to check which employee entered a particular data, unlike in a manual
system when we can recognize the handwriting.
4. Fraud can be easily committed since the computer may not query large transactions.
5. In order to carry out their task efficiently, the auditors need to acquire knowledge of computer
operations and system analysis.
6. It would be difficult to view data as they are stored on disk.
CS152 CHAPTER 15: COMPUTER ACCOUNTING SYSTEMS
15.2 Audit and Controls
In view of the above, there are various solution available to the auditor. As auditing a
computerized system will be different from a manual approach - the auditors will need to
concentrate more on the systems rather than on documentation. For testing the systems,
the auditors would use an audit test pack or computer assisted audit programs/technique.
The computer can be used to perform some of the audit tests such as:
❐ Dead tests
• Whereby a sample data that had already being processed is re-checked

and compare with original results.
❐ Live Tests
• A set of test data is created for processing and the results is compared to
a model answer.
As for documentation, the auditors can verify input by checking the serial numbering of
documents and validation checks. Auditors who have difficulty in auditing computerized
systems may also obtained procedures from books bought off the shelf. These books are
specially written for auditors. Finally, the main task is for the firm to practise computer
controls - these fall into Administrative controls, system development controls, and
procedural controls.
15.2.1 Administrative Controls
DP Manager
System Data Data Operators Library

and Programming Conversion Control
System Analysts Programmers
Figure 15-1: An organization chart of a typical DP department
Refer to the organization chart for a typical DP Department which shows the clear
division of duties in the department.
❐ No one person should be responsible for a complete transaction. This should apply to
system design and development especially at the operational level. This will reduce
the chances of fraud and also act as a check on people's work.
❐ Included in this area are operational controls. Only a few authorized personnel should
have access to the system. This can be done through the use of passwords - which
should be made difficult for other users to discover. It should be something that only
the user can make sense of. Car registration numbers are poor choice of passwords as
they can be easily discovered by other users and also should avoid names of wife,
children etc.
❐ An operations logbook should also be kept by the system. This logbook will record
the activities of the computer as well as the people who use the system.
❐ Another example of such control will be cases where transfer of funds over a certain
limit should require another password from a higher ranking manager.
❐ File controls is another area that should be implemented. The file librarian
should be a skilled and well trained person. There should be proper procedures for
issuing and returning of data files as well as program files. There should be proper
labelling and indexing for all files. The purpose of proper labelling is to minimize the
risk of issuing certain files to unauthorized personnel by mistake.
❐ Proper maintenance of files will also prevent unauthorized deletion/altering of

data on files or to prevent any accidental erasures.
❐ In addition there must be proper procedures set up for file reconstruction. The
system should call for files back up frequently and dumping hard copies.
Dumping ensures that information which is needed for audit trail purposes will
not be lost to overwriting (this is sometimes carried out due to lack of space).
❐ Sometimes accounts have to be reconstructed if computer records are lost or

damaged - so hard copies can be made available to ease the difficulty.
❐ Hardware security is another administrative control procedure for computerized

accounting system. The machines or equipment used by the system should be placed
in a separate room where only authorized personnel can have access. This can also be
reinforced by locking up the machines when not in operation.
❐ A logbook should be kept for those who go into the terminal room for the day.
❐ A maintenance contract should be drawn up to ensure that there is a constant

servicing of the machines - to prevent any shutdowns.
15.2.2 System Development Controls
When developing accounting systems, there must be procedures designed to

ensure that the system to be implemented will meet standards expected by the
auditors. Whenever, possible and especially when buying a new computerized
accounting system, the auditors should be consulted. The auditor's experience
may help in such areas as special printouts, dumping procedures or maintaining
the audit trail. It is easier to build in requirements at the design stage rather than
later. Therefore, system development control procedures have to be followed.
❐ First of all there must be standardization. Programs to be developed should

be properly documented to acceptable standards. There should be division
of
duties rather than one programmer writing out the whole suite of
programmes.
❐ The use of standards laid down by management would be the starting point
in the process. Such standards would be proper documentation of the system
being developed, including flow charts.
❐ Programs should not allow single entry to be entered into the accounts. The
process can proceed only until a double entry is made. The program would
not allow any entries made previously to be erased.
At all stages of the development cycle management must be kept informed and
their support solicited. The preparation of feasibility studies, the use of budget for
capital and revenue expenditure should be properly authorized.
There should be regular evaluation of performance to ensure that each project is

viable and cost effective.
❐ There should be thorough testing of programs before the system becomes

operational. This should include the use of "benchmark" to determine the
optimum time taken by a program. These "benchmark" can later be used to
check whether the programs have subsequently been tampered with.
❐ Proper training should be provided for staff involved in this system to

ensure that there is reduction in the risk of errors. This is important because
if funds are transferred in error, it would be difficult to retrieve it back.
When the new system is ready to run, there should be a planned implementation
programme. The new system should run concurrently with the old system so that
results can be validated - this is known as parallel run. This should carry on for
some time until it is absolutely certain that the new system can run correctly and
efficiently.
15.2.3 Procedural Controls
The other area for controls to be carried out would be the processing cycle -
these are known as procedural controls and will cover the day to day running of
the system.
❐ The first step would be the control of the input material which should be
practiced both by the user department as well as the DP department. When
sending documents for key punching (input to the computer) the user
department should number serially all the documents to be transmitted.
❐ There should be validation checks on the documents to ensure correct data

are fed into the system.
❐ When transmitting documents to the DP department there must be proper

authorization to certify that the correct type of documents are sent.
❐ It would also be necessary to record batch totals to ensure that all the
documents will be sent for processing.
❐ On receiving these input materials, the DP department should check the

batches to ensure contents are complete. A register should be kept, showing
when it was received and proper identification number allocated.
❐ There must be proper scheduling of work to ensure all inputs are keyed in
on time with procedures for checking data conversion.
❐ During processing there are other control practice that should be carried out.
Check digit verification would ensure the correct amounts are input.
❐ Other checks would be made on the size of the field and/or record.
Consistency checks, range tests on quantities or values should be practiced.
❐ There should be feasibility test on quantities, cash totals for balances and
control / record total checks.
❐ Checking should be made on the files used such as header labels for
identifying files, the use of trailer labels to ensure completeness of "read",
control totals to check on "arithmetic proof" in master files.
❐ In case of any unusual changes in values/totals, exception reports should be

made out.
❐ The next type of controls affects the output - which is implemented mainly
for user checks.
❐ All hard copies should be vetted for completeness of output and despatch to
relevant user department.
❐ Controls do not end at this stage. Both hard copy (printouts) electronic
materials (disks, diskettes and pages), and input documents need to be
stored
away safely.
❐ There must be an easy retrieval of all material in the future.
❐ Storage controls begin with source documents such as payment vouchers

and invoices etc. They should be retained and kept properly in a safe place.
❐ If a computer disk is damaged, then these source documents can be used to

recreate the files.
❐ The working diskettes should be backed up constantly to prevent any loss of

data and the back up copy should be kept in a safe place.
❐ There should be improved library facilities by using a skilled file librarian,

proper procedures for file control with adequate protection against dust,
humidity, magnetic fields etc.
❐ Disks should be kept in a secured locked room to prevent illegal access and
damage to the disks.
❐ There should be a minimum storage period before the materials can be

disposed off.
❐ Finally, for program, back up files must be kept secure and with access only
to authorized person.
❐ No programs can be altered without proper authorization and all changes

must be fully documented.
❐ Proper backup copies should be made and especially vital records would be
stored at a distance away from the premises.
15.3 Advantages of Computer Systems
Computerized accounting systems offer many advantages over manual system.
15.3.1 More Accuracy
Very often, when accounting data became voluminous, there is always a high
tendency for human errors to occur. By computerizing the accounting systems,
additions and entries are more accurate.
15.3.2 Speed and Volume
A computerized accounting system can provide information quicker than a

manual system.
The reason being it can overcome the problem of time consumed when done
manually. With computerized accounting system, a larger volume of transactions
can be handled due to its speed of processing.
15.3.3 Automatic Posting
With computerized accounting system, posting can be done automatically. This

allows enormous savings in time and ensuring that each and every entry is
posted accurately.
Errors such as double posting, posting to the wrong account, wrong entries and
wrong amount could be avoided.
15.3.4 Automatic Reports Preparation
Reports such as journals, ledgers, special reports and financial statements can be
generated automatically in a computerized accounting system when called for.
Such reports would definitely aid management in decision making.
15.3.5 Automatic Document Printing
Computerized accounting system can generate business documents such as

invoices, monthly statements for customers, payroll cheques and many others.
15.4 Comparison of the Accounting Cycle
Comparison of the accounting cycle in a manual system and in a computerized system.
Table 15-1:
Manual System Computerized System

1. Begin with account balances in 1. Same
the
Ledgers.
2. Post journal entries to the 2.Computer automatically posts
ledger from journals to ledgers.
accounts.
3. Enter trial balance on the 3. Computer prepares a trial
Worksheet and complete the balance
worksheet. and enter adjusting entries into
the computer.
4. With worksheet, prepare 4. Computer automatically

financial prepares
statements, journalise and post all.
the
adjusting entries and closing
entries.
5. Prepare post closing trial 5. Computer automatically
balance. prepares
it.
As observed from the above comparison, there is indeed no difference in the accounting
cycle regardless of whether it is processed in the manual system or computerized system.
The main difference lies in that computerized system could automate the process thereby
resulting in quicker information.
15.4.1 Account Classification
❐ In a manual system, account names are used to identify items involved in a

transaction. In a computerized system, the data is often classified by using
account codes which may be set up as follows:
Prefix - Main code - Suffix
Usually in a large computerized system.
❐ In a typical accounting system, there are four types of codes commonly

used:
• Sequential codes - usually numerical codes allocated in

sequence by the system
• Block codes - usually sequential codes allocated in block
numbers
• Mnemonic codes - alphanumeric codes allocated in a way that
is meaningful in name to the account which it refers
• Section codes - alphanumeric codes which refer to usually, a
product classification system
•
15.5 Integrated Packages versus Stand-alone Packages
An accounting package might have separate modules for:
❐ Invoicing
❐ Stock
❐ Sales Ledger
❐ Purchase Ledger
❐ Nominal Ledger
❐ Payroll
❐ Cash Book
❐ Job Costing
❐ Fixed Asset Register
❐ Report Generator
and so on.
Each module may be integrated with the others, so that data entered in one module will be
passed automatically to others where the data is of some relevance. Such accounting
package is known as the integrated package.
Integrated package would ensure that any update in one module would ensure an
automatic update in another.
However, in many situations, most firms would prefer the stand-alone packages. Reasons
being not all firms need all the modules in a single package. It would be both a waste of
money and resources if the modules are not used yet they are included in the integrated
package.
Stand-alone packages or division of ledgers have the advantages of restricting the

opportunity for fraud and allowing multi-users.
15.6 Computerized Accounting Systems and Audit Trail
With computerized accounting systems, certain inconveniences and difficulties would be

anticipated during audit trial.
One of the main problems is the difficulty to ascertain who to be accountable for errors
committed. There may be problem in identifying who to be held answerable: the person
who entered a particular transaction or the person who altered the details in an account.
This problem could be solved with logbooks.
Another problem is that data may have been deleted from the account if the transaction is
too old. But very often when performing audit trail, there is always possibility for auditors
to demand the old accounts to be checked. If the data has been deleted, audit trail would
be a troublesome process for the auditors. This may require the auditor to refer to the
various daybooks.
15.7 What to Consider in Selecting an Accounting Package?
To suit the specific needs of the users, when choosing an accounting package, the data
user should look at the following features of the package.
❐ Integration
• Determine the degree of integration between the various modules.
❐ Data Volumes and Master File Sizes
• Identify whether the system can handle the data volumes and the master
file sizes that the user will have.
❐ Sufficient Fixed Field length for Account Codes
• Identify if the accounting package has sufficient fixed field length for
the account codes.
❐ Reference Number
• Determine if the program allows more than one reference number for a
single transaction. For example, reference number for sales invoice, order and
job for a single transaction.
❐ Price Ranges
• Determine the currency accommodated and the minimum and

maximum price range.
❐ Discounts
• Determine if the system accommodates or deals with discounts that is

suitable for the company.
❐ Reports
• Determine if and what standard reports are produced by the system. If

these reports could be redesign by the users.
❐ User Friendly
• Determine if the system provide "help" facilities or/and menus. Are the
screens formatted clearly and easy to read?
❐ Speed
• Determine if the system is fast enough in its operation and to deal with
the transactions.
❐ Security
• Identify the various security features which the package offers to

prevent unauthorized access.
❐ System Documentation
• Determine if the system documentation for the user is well written and
readable. Also determine whether the operating manuals are easy to understand
and well indexed for easy reference.
❐ Expansion
• Determine if the system could expand according to the expansion plans

of the company.
❐ Multi-user Facility
• Determine if the system can support multi-users.
❐ Audit Trails
• Determine if the package provide adequate audit trails.
15.8 Configuration Features
Determine whether the system allows other configurations to the system. The system
configuration considerations would include:
❐ Company name and address
❐ Computer Hardware Configuration (Compatible model)
❐ Printer Hardware Configuration (Printer control codes)
❐ Operational Configuration (Account Codes)
❐ Page Format Configuration
❐ Tax Rates (GST / VAT)
❐ Alter User Table (Password to enter system)

15.9 Sales Ledger Package
The purpose of the sales ledger package is to maintain customer accounts and ensuring it
reflects accurate and updated information about the transactions made with the customers.
Similar to all computerized system, the sales ledger package works on the principle of:
The data of the sales ledger package are the details of the customers and it includes the
standing data (i.e. it will change infrequently) and the variable data.
Input Process Output
Typical standing data found in a sales ledger package include:
❐ Customer account number
❐ Customer name
❐ Address
❐ Credit Limit
❐ Account Sales Analysis Code
❐ Account Type
Typical items of variable data includes:
❐ Transaction Data
❐ Transaction Description
❐ Transaction Code
❐ Debits
❐ Credits
❐ Balance
Typical inputs into the sales ledger system involve amendment made to customer details,
insertion of new customers and deletion of old "non-active" customers. It also includes
any transaction data relating to invoicing, customer payments, credit notes and any
adjustment made to the debit or credit items.
The primary process involved in the sales ledger package is the modification made to the
amount outstanding on the customer's account.
Typical outputs in a computerized sales ledger package are:
❐ Day book listing
• A list of all transactions posted each day.
❐ Invoices
❐ Customers' Statements
❐ Aged Debtor Analysis
• A printout that shows the current balance and old balance outstanding
from the customers.
❐ Sales Analysis Reports
• A printout that analyses sales according to the sales analysis codes on

the sales ledger file.
❐ Debtors Reminder Letters
• Letters produced to chase late payers.
❐ Mailing lists of customers
❐ Lists of customers accounts
• A summary of all debtors' accounts held in the ledger.
❐ Examination of customers' Accounts
❐ Special Operations Logbook
15.10 Purchase Ledger Package
The purpose of the purchase ledger package is to maintain suppliers accounts and
ensuring it reflects accurate and updated information about all transactions made with
suppliers.
Similar to the Sales Ledger package, it works on the same principle of:
Input Process Output
The data of the Purchase Ledger Package are the details of the suppliers which includes
the standing data and the variable data.
Typical standing data found in a purchases ledger package include:
❐ Suppliers' account number
❐ Suppliers' Company Name
❐ Suppliers' address and contact details
❐ Credit details
❐ Bank details (e.g.: Method of Payment)
❐ Cash discounts applicable

Typical items of variable data include:
❐ Transaction date
❐ Transaction Description
❐ Transaction Code
❐ Debits
❐ Credits
❐ Balance
Typical inputs into the purchase ledger system involve details of purchases recorded on
invoices, details of returns to suppliers for which credit notes are received, payments to
suppliers and any adjustments.
The primary process for the purchase ledger package is the adjustment made to the
amounts outstanding on the supplier accounts.
A few of the typical outputs generated by the purchase ledger package are:
Lists of transactions posted (Daybook Listing)
❐ Analysis of expenditure for nominal ledger purposes
❐ List of creditors balances
❐ Copies of detailed creditors' accounts
❐ Details of payments such as remittance advises, cheque and credit transfer listings
❐ Other special reports for costing purposes, updating records about fixed assets and
comparison with budget
❐ Aged creditors' listing
❐ Mailing lists of supplier
15.11 Payroll Package
The purpose of a payroll package is to compute the gross wages and salaries of
employees and produce payslips, cheque and/or listings sent to various banks instructing
them to make payments.
The payroll system would carry out the above tasks by "looking" at how much employees
should receive, how they should receive and when should they be paid. It must calculate
tax to deduct, any national insurance deductions, CPF contributions, savings, loan
repayments, profit sharing allocated, bonus given, overtime claims etc. that are connected
with employees' pay.
The data of the payroll package will consist of the standing and variable data of
individual employee's record.
The standing data of the employee will include:
❐ Personal details
❐ Rate of pay
❐ Details of deductions
❐ Department
The variable data of the employee will include:
❐ Gross pay to date
❐ Tax to date
❐ CPF contributions
❐ Net Pay
❐ Overtime
❐ Commission etc.
The typical inputs into the payroll system include all records that determine the
employees' final pay packets. This may be time sheets, clock cards etc.
The primary action involved in processing a payroll is determining the employee's gross
pay, performing calculation and implementing various deductions or additions in order to
find net pay.
A few of the typical outputs in a payroll system are:
❐ Payslips
❐ Payroll Summary
❐ Payroll Analysis of deductions and all details for costing purposes
❐ Coin analysis, cheque, credit transform forms
❐ Magnetic, cassette or floppy disk with payment details for despatch to the bank and
payment through the BACS (Bankers Automated Clearing System)
❐ Cheques (if paid individually)
❐ End of year taxation documents
❐ Employee details
15.12 Nominal Ledger Package
The nominal ledger summarizes the financial affairs of a business. It contains the details
of assets, liabilities and capital, income and expenditure and profit or loss.
Postings of the computerized nominal ledger depend on whether the accounting system is
integrated or not.
If the system is integrated, data is put into the relevant nominal ledger accounts and
updated. But if it is not integrated then the output from the stand-alone package would
have to be input into the nominal ledger through journal entries.
Similar to the manual accounting system, the typical outputs or printouts of the
computerized nominal ledger system include:
❐ Profit and loss account

❐ Balance Sheet
❐ Trial Balance
❐ Examination of accounts details
❐ List of accounts
❐ Daybooks/Journals
Regardless of whether the system is integrated or not, the data required by the nominal
ledger package to update any relevant ledger accounts includes:
❐ Date
❐ Description
❐ Amount
❐ Account Codes
15.13 Stock Control Systems
The purpose of a stock control system is to track the movements and balances of different
categories of stock. A good stock control system should reduce the working capital
otherwise tied up in stock.
The data found in the file of stock control system include:
❐ Stock number
❐ Stock description
❐ Standard cost
❐ Quantity in stock
Typical inputs into the stock control system include goods received notes, issues to
production, production to finished goods store, despatch notes and any adjustment entries.
A good stock control system would be able to process the input data quickly so as to
minimize warehouse stock holding, achieve optimum distribution of available stock to
retail outlets and generates reports quickly and accurately.
A few typical outputs generated from the stock control include:
❐ Stock Daybook
• Daybook that shows details of all items of stock that are issued,
ordered, reserved and received during the period.
❐ Stock Lists
• This printout provides a lists of all items currently in stock. With the list
is the description, prices and analysis codes of each item.
❐ Stock Movement Reports

• An important report that shows what quantity of stock for each item has
been received and issued. This report would then allow management to identify
slow-moving stock, analyses the movements of the stock in order to produce
projected movements for future months and identify future stock requirements.
❐ Stock Levels and Availability
• This report details information on items of stock that are currently

reserved, on order, are available and sold. It also reflects on the minimum level
required for each item of stock and indicates stock that has fallen below the
minimum level.
❐ Stock Price List
• A printout on the prices of each item of stock sent to customers.
❐ Stock Valuation
• This report shows the total value for each item held in stock and the
total value of all stock by adopting one of the methods used for valuation: FIFO,
LIFO or AVCO.
❐ Outstanding Orders Report
• Reorder Report
Often than not, the stock system is often linked to the purchases and/or sales system. As
such, other inputs/outputs are necessary and they include:
Inputs:
❐ Changes in reorder levels, quantities etc.
❐ Orders placed with suppliers
❐ Customers orders
Notification of despatch to customers.
Outputs:
❐ Purchase order or reorder schedules
❐ Overdue purchase order
❐ Production requirements
❐ Unmatched customer orders over a predetermined age.
Finally, it is worth for management to continue performing physical stock counts. This
would enable differences to be identified so that wastage, pilferage could be determined
and to allow the stock files to be corrected.
15.14 Spreadsheets
Spreadsheets are integrated software programs that could be used to solve accounting
problems. Typical accounting applications on spreadsheets would include budgets,
depreciation schedules, debt amortization schedules, cost-volume profit analysis, stock

control, job costing, forecasting and variance analysis.
Spreadsheets like Lotus 1-2-3 is organized into a matrix of rows labelled by alphabets and
columns labelled by numbers. The intersection of a row and a column is known as the cell
would contain numbers, text or formulae. If a formulae is used, the spreadsheet will carry
out any calculations required and any figures adjusted for would automatically be
recalculated. It also includes sophisticated graphics capabilities which are especially
useful for management presentations.
An example on how spreadsheet could be used to handle variance analysis is given

below. However, students are advised to allow themselves enough exposures of the
software. Nothing could be as practical as having hands-on experience with the software
to understand the wonders of spreadsheets.
1 A B C D E F G H
2 Budgeted Actual Variances
3 1,000 1,200
4 Units Units
5 $ $
6 Sales 100,000 120,00 20,000
0
7 Cost of goods 600,000 72,000 12,000
sold
8 40,000 48,000 8,000
9 Gross Profit
10
11 Expenses:
12 Salaries 22,500 27,000 4,500
13 Rent 4,000 4,800 800
14 Depreciation 2,500 3,000 500
15 Utilities 2,000 2,400 400
16 Interest 1,000 1,200 200
17 Total Expense 32,000 38,400 6,400
18
19 Net Profit 8,000 9,600 1,600
20
1 A B C D E F G H
2 Budgeted Actual Variances
3 1,000 1,200
4 Units Units
5 $ $
6 Sales 100,000 120,00 20,000
0
7 Cost of goods 600,000 72,000 12,000
sold
8 +D6-D7 +F6- +F9-D9
F7
9 Gross Profit
10
11 Expenses:
12 Salaries 22,500 +C12 / +C12-
D3*F3 E12
13 Rent 4,000 +C13 / +C13-
D3*F3 E13
14 Depreciation 2,500 +C14 / +C14-
D3*F3 E14
15 Utilities 2,000 +C14 / +C15-
D6*F3 E15
16 Interest 1,000 +C16 / +C16-
D7*F3 E16
17 Total Expense @SUM( @SU +C17-
C12.C16) M(E12 E17
.E16)
18
19 Net Profit =D9-D17 +F9- +F19-

F17 D19
20
15.15 Exercises
126.
127.1. Describe five advantages of using computerized accounting system.
2. Under what situations should end-users select integrated accounting packages rather
than stand-alone packages?
3. What are some of the difficulties encountered when performing audit trail in a
computerized accounting systems?
4. Name six considerations when selecting an accounting package.
5. Identify the inputs, process and outputs for the following accounting packages:
ffff) Sales Ledger
gggg) Purchases Ledger
hhhh) Payroll
iiii) Nominal Ledger
jjjj) Stock Control
128.
129.6. Design the main menu for the following accounting packages:
kkkk) Sales Ledger
llll) Purchases Ledger
mmmm) Payroll
nnnn) Nominal Ledger
130.
131.7. Explain what is spreadsheet and identify some of its uses.
132.8. Using a spreadsheet program which you are familiar with, solve these
accounting problems.
oooo)
Budget Actual
100,000 units 120,000 units
$ $
Sales Revenue 800,000 900,000
Materials 200,000 300,000

Labour 160,000 170,000
Production 100,000 110,000

Overheads
Selling Overheads 45,000 48,000

Admin. Overheads 35,000 38,000
Profit 260,000 234,000

pppp) Prepare a cash budget from the following for the six months January to
June:
- Opening Balance $5,000.00.
- Sales are 500 units per month for the months December, January, February
and March, and 2500 units for subsequent months.
- Selling per unit is $500.00. 20% of sales are for cash and the remainder are
on credit; debtors pay in one month.
- Purchases for materials are bought one month before sales and they are paid
one month after sales.
- Rent is 10% of sales of that month.
- is 15% of total receipts of that month.
- A machine is going to be purchased in March for $3000.00 and would be
paid in 3 monthly equal instalments.

CS-152 Computerized Accounting

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CS-152 Computerized Accounting

Uploaded by

Copyright:

Available Formats

CS-152

⇒ what do we mean by "Accounting"?;

⇒ accounting and "Stewardship";

⇒ qualities required of Accounting Information;

⇒ accounting as Business Information;

⇒ who needs the information?;

⇒ how does the Accountant satisfy all these people?

Whenever there is responsibility, there is also accountability. Just as a politician (in a

1.1 Accounting and "Stewardship"

1.2 Qualities Required of Accounting Information

❐ unambiguousness (sound presentation)

1.3 Accounting as Business Information

1.3.1 What does Accounting Information Tell Us?

⇒ Below are the broad categories of the specific information that

❐ whether or not the business continues to be profitable;

❐ what dividends it can afford to pay;

❐ what funds are available from it for other investments or expansion, or

❐ a background against which alternatives for the future direction of the

1.4 Who Needs the Information?

❐ Look into every detailed aspect of operations within the organization as an

⇒ The Directors of a Company are accountable to the Shareholders for

1.4.2 Proprietor / Partners / Owners / Shareholders

⇒ ❐ the sole proprietor (in a one-man business) and

❐ Partners (for a partnership).

1.4.3 Creditors / Suppliers

"Creditor" is a broad term. The Oxford Dictionary defines it simply as "someone

❐ Suppliers of goods and services to whom money is owing in the normal

These are in two sub-categories:.

A mortgage is an instrument giving the lender security over an asset of the

1.4.4 Debtors / Customers

1.4.5 Employees and Trade Unions

Of greatest interest as a bargaining point for such organizations is the profit

Sometimes the downfall of a business can be attributed to the shortsightedness of

1.4.6 Government and Economists

Company results, particularly those of industry leaders, are a good indicator to

Local authorities are interested in financial information for measuring the

1.4.7 The General Public

1.4.8 How does the Accountant Satisfy all these People?

There is much Accounting Information that can be classified as "Confidential" or

1.5 Accounting Today

2. Differentiate between internal and external users of accounting information. Outline

⇒ book keeping and accounting;

⇒ terms used in the financial position;

⇒ presentation of the financial position;

⇒ accounting concepts and conventions.

2.1 Book Keeping and Accounting

❐ Stage 1 - Book keeping

2.2 Financial Position

❐ fixed assets and

2.3 Presentation of Financial Position

The Balance Sheet

3. 1. Name of the firm,

Assets = Capital + Liabilities

2.3.1 Illustration of Changes in the Financial Position

Jimmy Lim (Balance Sheet)

As at 1st June 1993

2.4 Accounting Concepts and Conventions

Profit Figures when no Accounting Rules are followed :

Employees Government Owners Lenders

2.4.1 Business Entity Concept

2.4.2 Going Concern Concept

2.4.3 Cost Concept

2.4.4 Dual Aspect Concept