FINANCIAL ACCOUNTING| BBAW2103

BUSINESS AND ADMINISTRATION

JANUARY 2016

BBAW2103

FINANCIAL ACCOUNTING

MATRICULATION NO : 891016145928001
IDENTITY CARD NO. : 891016-14-5928
TELEPHONE NO. : 016-333 6704
E-MAIL : losni.m@maybank.com.my
LEARNING CENTRE : SHAH ALAM LEARNING CENTRE
 FINANCIAL ACCOUNTING | BBAW2103

TABLE OF CONTENT

No Title Page

1. (a) Weaknesses of Using The Assumption of Monetary 3-4

(b) Principal of Income Recognition 5

2. (a) The Steps Involved in The Accounting Cycle 6-7

(b) ‘Drawings’ and how it is treated in accounting 8

3. Journal Entries 9 - 11

4. (a) Prepare the adjusting entries 12 - 15

(b) Prepare the adjusted trial balance 16

5. References 17
1(a) Discuss the weaknesses of using the assumption of monetary unit in accounting reporting?

Monetary Unit Assumption – This assumption states that information in the financial statements must be
expressed in monetary units. The reason is that economic activity is expressed in monetary unit, and thus, it
makes sense to apply the same basis for accounting purposes. Monetary units are relevant, universally
available, and understandable. Using the neighbourhood coffeehouse as an example, the fundamental value of
the best coffee server cannot be valued in the financial statements, regardless of how many customers frequent

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the coffeehouse due to this individual. The inherent value of this person cannot be quantified in the financial
statements as an asset.

The monetary unit assumption also states that a stable unit of currency is to be used as the unit of
record. In the United States, the US Dollar is typically the currency of choice. Important to note, accounting
ignores inflation or deflation and assumes that US Dollar remains reasonably stable. For instance, no
adjustments are necessary when adding 1990 dollars to 2010 dollars, unless economic conditions change
dramatically (e.g. hyperinflation). Discussed below the weaknesses of using the assumption of monetary unit
in accounting reporting.

Poor Real Estate Market. Broad economic conditions and local real estate market fundamentals
represent significant challenges in Greenfield, reflecting a larger trend throughout the United States associated
with widespread jobs losses, failing consumer confidence, and reduced household spending. Lease rates at
retail centers have fallen by 30 to 40 percent across the country, while vacancy rates have skyrocketed. These
trends are apparent in Greenfield and the entire South Monterey County Region (Dewey, J., & Bentley, A.F.
(1949).

Financial Feasibility. Achieving lease rates that are high enough to offset the cost of construction and
development will likely be challenging, given broader economic fundamentals and a weak real estate market.
Current lease rates in Greenfield range from approximately $6.00 to $16.00 per square foot per year. To be
financially feasible, the Walnut Avenue shopping center would need to command lease rates closer to $20.00
to $22.00 per square foot, which is unlikely in the current market but could be fostered by luring one or more
quality anchor tenants to catalyze subsequent development and leasing activity.

Current Population and Socio-Economics. The current population in Greenfield is fairly small at
18,000 residents. This population is characterized by some bad socioeconomic conditions, such as high
unemployment, high poverty rates, and low education levels, as compared to the rest of Monterey County and
California overall.

Lack of City Identity. Greenfield is not known as a retail center and lacks a particular notoriety or
distinction as a locale. Although on its face, this may be considered a “weakness,” it also presents an
opportunity for Greenfield to carve out an identity without having negative perceptions or preconceived

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notions to contend with. Other nearby cities have begun to market themselves as tourist magnets, wine
destinations, and emerging centers for agricultural innovation, a trend that Greenfield can work to capitalize
on.

Uncertainty exists in assumptions that should be made for the type of development, development
capacity, and build out timeframe for the project site. Based on the General Plan, the project site has nearly
700,000 square feet of commercial development capacity that almost certainly would not be constructed
within the 20 year planning horizon for the General Plan or the 2030 base year for the City’s traffic model.
The City’s 2030 traffic model assumes only about 220,000 square feet of retail development capacity for the
project site.

1(b). Discuss the principal of income recognition in accounting?

Revenue recognition principle tells that revenue is to be recognized only when the rewards and benefits
associated with the items sold or service provided is transferred, where the amount can be estimated reliability
and when the amount is recoverable.

The revenue recognition principle states that revenue should be recognized and recorded when it is
realized or realizable and when it is earned. In other words, companies shouldn't wait until revenue is actually

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collected to record it in their books. Revenue should be recorded when the business has earned the revenue.
This is a key concept in the accrual basis of accounting because revenue can be recorded without actually
being received (R. Gray, D. Owen and C. Adams, 1996).

Revenues are realized or realizable when a company exchanges goods or services for cash or other
assets. So if a company enters into a transaction to sell inventory to a customer, the revenue is realizable. A
specific amount of cash is identified in the transaction. The revenue is not recorded, however, until it is
earned. In this case, the retailer would not earn the revenue until it transfers the ownership of the inventory to
the customer.

There are three main exceptions to the revenue recognition principle. Some manufacturers may
recognize revenue during the production process. This is common in long-term construction and defense
contracts that take years to complete. The revenue in these cases is considered earned at various stages
of job completion.

Some companies recognize revenue after the manufacturing process but before the sale actually takes
place. Mining, oil, and agricultural companies use this system because the goods are marketable and
effectively sold as soon as they are mined. The last exception to the revenue recognition principle is
companies that recognize revenue when the cash is actually received. This is a form of cash basis accounting
and is most commonly found in installment sales.

For example Charlie’s Retail, Inc. sells clothing from its retail outlets. A customer purchases a shirt on
June 15th and pays for it on a credit card. Charlie’s processes the credit card but does not actually receive the
cash until July. The credit card purchase is treated the same as cash because it is a claim to cash, so the
revenue should be recorded in June when it was realized and earned.

2(a). Elaborate the steps involved in the accounting cycle?

Accounting is a process which is repetitive every period to report the performance and financial position of an
organisation. It starts with recognising and recording business transactions and ends with a complete set of
financial statements. This whole process is known as accounting cycle which consist of identifying business
transaction, analysing transaction, journalising transaction, posting transaction to ledger accounts, preparing

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trial balance, preparing adjusting entries at the end of period, preparing financial adjustment and closing
temporary accounts.  

The accounting process starts with identifying and analyzing business transactions and events. Not all
transactions and events are entered into the accounting system. Only those that pertain to the business entity
are included in the process. For example, a personal loan made by the owner that does not have anything to do
with the business entity is not accounted for.

According to Wicker, A.W. (1979) Recording in the Journals is a journal is a book – paper or
electronic – in which transactions are recorded. Business transactions are recorded using the double-entry
bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and
one credited). To simplify the recording process, special journals are often used for transactions that recur
frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record
those that cannot be entered in the special books.

Posting to the Ledger. Also known as Books of Final Entry, the ledger is a collection of accounts that
shows the changes made to each account as a result of past transactions, and their current balances. After the
posting all transactions to the ledger, the balances of each account can now be determined. For example, all
journal entry debits and credits made to Cash would be transferred into the Cash account in the ledger. We
will be able to calculate the increases and decreases in cash; thus, the ending balance of Cash can be
determined.

A trial balance is prepared to test the equality of the debits and credits. All account balances are
extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit
balances are also added. Total debits should be equal to total credits. When errors are discovered, correcting
entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is
only test the equality of total debits and total credits and not to determine the correctness of accounting
records.

Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the
accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income
may have been earned but not entered in the books. Adjusting entries are made for accrual of income, accrual
of expenses, deferrals (income method or liability method), prepayments (asset method or expense method),
depreciation, and allowances (Spencer, C., 2002).

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An adjusted trial balance may be prepared after adjusting entries are made and before the financial
statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made.

Financial Statements. When the accounts are already up-to-date and equality between the debits and credits
have been tested, the financial statements can now be prepared. The financial statements are the end-products
of an accounting system (Clive M.J. Warren, 2014).

Closing Entries. Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare
the system for the next accounting period. Temporary accounts include income, expense, and
withdrawal accounts. These items are measured periodically. The accounts are closed to a summary account
(usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing
entries are made only for temporary accounts. Real or permanent accounts, balance sheet accounts, are not
closed (Williams J. R. 1998).

2(b). Explain what is the meant by ‘Drawings’ and how it is treated in accounting?

The drawing account is an accounting record used in a business organized as a sole proprietorship or
a partnership, in which is recorded all distributions made to the owners of the business. They are, in effect,
"drawing" funds from the business (hence the name). The drawing account is intended to track distributions to
owners in a single year, after which it is closed out (with a credit) and the balance is transferred to the owners'

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equity account (with a debit). The drawing account is then used again in the next year to track distributions in
the following year. This means that the drawing account is a temporary account, rather than a permanent
account.

It is useful to create a schedule from the drawing account, showing the detail for and summary of
distributions made to each partner in the business, so that the appropriate final distributions can be made at the
end of the year to ensure that each partner receives his or her correct share of the earnings of the business, in
accordance with the terms contained within the partnership agreement. This is particularly important if there
is a risk of disputes over the amount of funds distributed amongst the partners (Harold Averkamp, 2003).

ABC Partnership distributes RM5, 000 per month to each of its two partners, and records this
transaction with a credit to the cash account of RM10, 000 and a debit to the drawing account of RM10, 000.
By the end of the year, this has resulted in a total draw of RM120, 000 from the partnership. The accountant
transfers this balance to the owners' equity account with a RM120, 000 credit to the drawing account and a
RM120, 000 debit to the owners' equity account. The accounting records will show the following
bookkeeping entries for the drawings accounting.

Account Debit Credit

Drawings Account 120,000
Cash 120, 000
Total 120, 000 120, 000

Figure 1: Journal Entry for Drawings Accounting

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business
are always equal to the total liabilities plus equity of the business. This is true at any time and applies to each
transaction.

3. The transactions of GB Bhd for the month of December are as follows

No Date (December 2015) Transactions

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Paid insurance premium of RM10,000 for coverage against

1 1
losses due to fire for a period of 36 months.

Purchased equipment on credit from ROCK Bhd. totalling

2 5
RM5,000.

Paid salary of RM4,500 to temporary staff for the first two

3 23
weeks of December.

Prepare the journal entries for all the above transactions.

Transaction 1: Paid insurance premium for 36 months totalling RM10,000.

Analysis 1 and 2 :
Accounts involved and effects of
transaction
Analysis 3: Rule of debit and credit
Prepaid insurance account (asset) increased by RM10, 000. Cash
account (asset) reduced by RM10, 000.
Prepaid insurance account (asset) increased by RM10, 000: debit
Cash account (asset) reduced : credit

Journal entry:

Date Account and Description Reference Debit (RM) Credit (RM)

Dec 1 Prepaid Insurance L15 10,000

Cash L11 10,000

(Paid insurance premium for 36

months)

Journal 1: General Journal for Transaction 1

Transaction 2: Purchased office equipment on credit for RM5, 000.

Analysis 1 and 2
: Office equipment account (asset) increased by RM5, 000.
Accounts involved and effects of Accounts payable (liability) increased by RM5, 000.
transaction

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Office equipment account (asset) increased by RM5, 000: debit

Analysis 3: Rule of debit and credit
Accounts payable (liability) increased: credit

Journal entry:

Date Account and Description Reference Debit (RM) Credit (RM)

Dec 5 Office equipment L18 5, 000

Accounts payable L21 10,000

(Purchased office
equipment on credit)

Journal 2: General Journal for Transaction 2

Transaction 3: Paid salary of temporary staff for the first two weeks od December totalling RM4, 500.

Analysis 1 and 2: Salary expenses account (expenses) increased by RM4, 500.

Accounts involved and effects of Cash account (asset) decreased by RM4, 500.
transaction

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Salary expenses account (expenses) increased by: debit

Analysis 3: Rule of debit and credit
Cash account (asset) decreased : credit

Journal entry:

Date Account and Description Reference Debit (RM) Credit (RM)

Dec 23 Salary expenses L51 4, 500

Cash L11 4, 500

(Purchased office
equipment on credit)

Journal 3: General Journal for Transaction 3

4. KNCB Bhd. prepared the following unadjusted trial balance on 31 December 2015 for its first year of operation:

Debit (RM) Credit (RM)

Cash 31,050

Accounts receivable 202,500

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Supplies 48,600

Motor vehicles 1,023,300

Account payable 47,250

Unearned revenue 54,000

Capital 702,000

Drawings 40,500

Revenue earned 1,221,750

Salary expense 283,500

Petrol expense 24,300

Rent expense 72,000

Insurance expense 144,000

Utilities expense 155,250

Total 2,025,000 2,025,000

An analysis of the accounts shows the following:

i. Supplies on hand on 31 December were RM10, 800.

At the end of the accounting period, the supplies on hand are counted and the movement
recorded as an expense item in the income statement.

Suppose in the above example, the beginning supplies on hand were 48,600 and the ending
supplies on hand were 10, 800 then the supplies expense for the period would be calculated as
follows:

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Supplies expense = Beginning supplies on hand + Purchases (account payable) –

Ending supplies on hand

Supplies expense = 48, 600 + 47, 250 – 10, 800

Supplies expense = 85, 050

ii. Depreciation on motor vehicles was estimated to be RM36, 900

Item: motor vehicle

Purchase date: 1/10/2015
Cost: RM1, 023, 300

Purchase cost of RM1, 023, 300 – estimated salvage value of RM36, 900

= Depreciable asset cost of 986, 400

iii. Unbilled revenue on 31 December was RM15, 975

Dr Accrued Income / Receivable (202, 500 – 15, 975 = 186, 525)

Cr Revenue Earned (1, 221, 750 + 15, 975) = 1, 237, 725

iv. The amount of unearned revenue in the above balance represents all the advanced
payments received from customers during the year for booking services. Sixty percent of
the services have been provided by the end of the year.

RM54, 000 x 60% = 32, 400

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v. Unpaid bills on utilities on 31 December amounted to RM5,400

For example, if Company ABC received three utility bills (gas, electricity, water) for the period
from March 21 to April 20 (31 days) totaling $31,000, the expense accrual for the 11 days
would be calculated as follows:

Dec-Jan Bills  x 11
Dec Accrual =  31 days
days

Dec Accrual =  RM155, 250 x 11 days = 55, 088

31days

= 155, 250 – 55, 088 = 100, 161DR

Cr Accounts payable = 47, 250 + 5, 400 = 52, 600

4(a) Prepare the adjusting entries for the above transactions at 31 December 2015

Debit (RM) Credit (RM)

Cash 31,050

Accounts receivable 186, 525

Supplies 85, 050

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Motor vehicles 986, 400

Account payable 52, 650

Unearned revenue 32, 400

Capital 702,000

Drawings 40,500

Revenue earned 1, 237, 725

Salary expense 283,500

Petrol expense 24,300

Rent expense 72,000

Insurance expense 144,000

Utilities expense 100, 161

Top-up expenses 6,489

Total 1, 992, 375 1, 992, 375

4(b) Prepare the adjusted trial balance as at 31 December 2015 for KNCB Bhd.

Debit (RM) (+) Credit (RM) (-) Balance

Cash 31,050 31,050

Accounts receivable 186, 525 217, 575

Supplies 85, 050 302, 625

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Motor vehicles 986, 400 1, 289, 025

Account payable 52, 650 1, 236, 375

Unearned revenue 32, 400 1, 268, 775

Capital 702,000 566, 775

Drawings 40,500 607, 275

Revenue earned 1, 237, 725 -630, 450

Salary expense 283,500 -346,950

Petrol expense 24,300 -322, 650

Rent expense 72,000 -250, 650

Insurance expense 144,000 -106, 650

Utilities expense 100, 161 -6, 489

Top-up expenses 6,489 0

Total 1, 992, 375 1, 992, 375 0

7.0 Reference

Sources of Website

 www.intuit.com.my/Accounting-Software

Sources of Books

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 Clive M.J. Warren, (2014) "Financial Feasibility Studies for Property Development: Theory and Practice",
Property Management, Vol. 32 Iss: 4, pp.362 - 363 Vincent Powell. S, “The Malaysian Standard Form of
The Building Contract”, Malaysia Law Journal.

 R. Gray, D. Owen and C. Adams, Accounting and Accountability: Changes and Challenges in Corporate
Social and Environmental Reporting, Prentice Hall, 1996.

 Dixon, J., & Durrheim, K. (2000). Displacing place-identity: A discursive approach to locating self and
other. British Journal of Social Psychology, 39, 27-44.

 Easthope, H. (2004). A place called home. Housing, Theory and Society, 21, 128-138.

 Wicker, A.W. (1979). An Introduction to Ecological Psychology. Monterey, CA: Brooks/Cole.

Sources from Online

 Open University Portal

 eForum on OUM Portal
 OUM Email

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