FA Part-2 BS 45-1

BALANCE SHEET
Part 2
1
List of contents
1. Introduction of the balance sheet
2. Accounting for assets
3. Accounting for liabilities
2
1. Introduction of the balance sheet
• Nature and purpose of a balance sheet

• Elements of balance sheet: definition, recognition
criteria
• Classification of balance sheet’s elements
• Formats for Balance sheets
• Interpreting the Balance sheet
3
Nature and Purpose of a Balance Sheet
• The purpose of the balance sheet is to set out the

financial position of a business at a particular point
in time
• It gives a snap shot of the assets, liabilities and
equity position of the entity at a particular point in
time
• It sets out the assets of the entity on the one hand,
and the claims against it on the other
4
Elements of Balance sheet
• Assets
• Liabilities
• Owners’ equity
5
Assets
What is an asset?
6
Assets
Definition:
Asset: (VAS 1): “A resource controlled
by the entity as a result of past events,
and from which economic benefits are
expected to flow to the entity”
7
Assets (cont’d)
The main identifying characteristics from definition of
an asset are:
• Expected future economic benefit (or service
potential)
• Which may arise from use by the entity OR from
hire or sale
• The entity has an exclusive right to control the
benefit
• The benefit must arise from some past transaction or
event
• Not something that will become an asset in the
future
8
Assets (cont’d) – recognition criteria
An item that meets the definition of an asset should be
recognised if
• It is probable that any expected future economic benefit
associated with the item will flow to the entity
• It should be more, rather than less, likely that the expected
benefit will be received by the entity
• The asset has a cost or value that can be measured with
reliability
• E.g. customer loyalty may be valuable to the business but
impossible to quantify, so will not be recorded as an asset
9
Exercise 1
• State which of the following items could appear as an
asset on the balance sheet of business A. Explain your
reasoning in each case
a. $1,000 owing to business A by a customer who will never be
able to pay
b. The purchase of a license from business B giving business A the
right to produce a product designed by B. Production of this new
product is expected to increase profits over the period in which
business A holds the license
c. The hiring by business A of a new marketing director who is
confidently expected to increase profits by at least 30% over the
next three years
d. The purchase by business A of a machine which will save
$10,000 per annum. It is currently being used by business A but
it has been acquired on credit and is not yet fully paid for 10
Assets (cont’d)
Some examples of items that appear as assets in a
statement of financial position include:
• Land and buildings (Premises)
• Machinery and equipment
• Fixtures and fittings
• Patents and trademarks
• Inventories
• Debtors – those who owe us money
• Investments
Assets may be either tangible (items with a physical substance)
or intangible (no physical substance e.g. patents)
11
Claims Against the Assets
There are essentially two types of claims against the
assets of an entity:
• External claims - known as liabilities
• Internal claims - labelled owners’ equity,
equity, or capital
Owners’ equity - The claim of the owner(s) on the
assets of the entity
12
Liabilities
Definition:
Liability: (VAS 1): “A present
obligation of the entity arising from past
events, the settlement of which is
expected to result in an outflow from
the entity of resources embodying
economic benefits”
13
Liabilities (cont’d)
The identifying characteristics of a liability are:
• It is a present obligation (not a future one)
• It is expected to result in an outflow of resources from
the entity
• The obligation arises from some past transaction or
event
• It is more likely than not that an outflow of resources
will occur
• The liability must be capable of reliable measurement
in monetary terms
14
Exercise 2
• State which of the following items could appear as a
liability on the balance sheet of a business. Explain your
reasoning in each case
a. $2,000 owing to business B for the satisfactory supply of goods
during the past month
b. Magazine subscription worth $27,400 have been received in
advance by a publisher
c. The business has guaranteed a manager’s personal loan from a
bank of $100,000. The manager has maintained the account in
good order and $79,000 us currently owing
d. There is a legal claim against the business for negligence over
faulty workmanship. It is probable the business will settle out of
court for $50,000
15
Liabilities (cont’d)
Some examples of items that appear as liabilities
in a statement of financial position include:
• Creditors (or Accounts Payable)
• Staff entitlements (Provision for annual
leave)
• Loans (such as from a bank)
• Rent received in advance (or similar items)
16
Owners’ Equity (OE, or ‘Equity)
Definition:
• The claim of the owner(s) against the entity
• VAS 1 define equity as the “residual interest in

the assets of the entity after deducting all its
liabilities.”
(Hint: It is what would be left over after all
the liabilities had been settled from the
assets.)
17
Owners’ Equity (cont’d)
On the statement of financial position, there are
two additional parts of the owner’s equity in
addition to the contributed capital:
• Retained Earnings - represents profits
left in the business by the owners
• Reserves - represent ‘special purpose’
owners’ equity accounts
Hint: Reserves represent ownership interests in the
assets, not the assets themselves. Reserves are not
separate deposits of cash available for other
purposes. 18
Exercise 3
• Access to any published financial reports, identify
the names of other reserve accounts
19
The Classification of Assets
Assets are normally categorised as either current
or non-current
Current assets are all of the following:
• Are held for sale or consumption in the normal
course of business
• Are expected to be sold within the next year
• Are held primarily for trading
• Are cash or near equivalents to cash
Include inventory, debtors and cash

20
Classification of Assets (cont’d)
VAS 21 ‘Presentation of Financial Statements’
requires assets which meet any of these criteria to be
classified as current assets:
i.the asset is expected to be realised in, or is held for
sale or consumption in, the normal course of the
enterprise’s operating cycle; or
ii.the asset is held primarily for trading purposes or for
the short-term and expected to be realised within twelve
months of the balance sheet date; or
iii.the asset is cash or a cash equivalent asset which is
not restricted in its use.
21
The circulating nature of current assets
Inventories
(stock)
Trade
Cash receivables
(debtors)
22
Classification of Assets (cont’d)
requires assets to be classified as non-current if they do
not satisfy any of the criteria for being classified as
current (see previous slide)
Non-Current assets are therefore:
• Held for the purpose of generating wealth, rather than for
resale
• May be seen as the tools of the business
• Normally held on a continuing basis for a minimum period of
one year
Hint: The same type of asset may be classified
differently dependent on the nature of the business
23
Classification of Liabilities
Liabilities are also normally categorised

as either current or non-current
24
Classification of Liabilities (cont’d)

requires liabilities which meet any of these criteria
to be classified as current liabilities :
i. The liability is expected to be settled in the

normal course of the enterprise’s operating cycle; or
ii. The liability is due to be settled within twelve
months of the balance sheet date.
25
Classification of Liabilities (cont’d)
requires liabilities to be classified as non-current if
they do not satisfy any of the criteria for being
classified as current (previous slide)
Non-Current liabilities are essentially therefore

those amounts due to other parties which are not
liable for repayment within the next 12 months
26
Classification of Assets and Liabilities

also permits assets and liabilities to be classified
according to their order of liquidity (receipt or
payment)
This alternative “liquidity classification” may be

used if it provides more relevant and reliable
information e.g. for banks, which do not have an
operating cycle as such
27
Classification of Owners’ Equity
Owners’ equity is normally classified in three

separate categories:
1) Owners’ equity contributed
2) Reserves
3) Retained earnings
It is common to combine categories 2 and 3 into

‘other reserves’ with sub-categories (a)
retained earnings and (b) other reserves
28
Formats for Balance Sheets
Contrast the alternative balance sheet formats
Current
assets
+ Non-current
assets = Current
liabilities + Non-current
liabilities + Owners’
equity
Figure 4.1 The Horizontal layout and entity approach

The equation for the horizontal form of balance sheet layout
Current Non-current Current Non-current Owners’

assets + assets - liabilities - liabilities = equity
Figure 4.2 The Vertical layout and proprietary approach

The equation for the vertical form of balance sheet layout
29
Interpreting the Balance Sheet
The balance sheet provides useful insights into the

financing and investment activities of a business. In
particular, the following aspects can be examined:
• The liquidity of the business
• The mix of assets held by the business
• The financial structure of the business
30
Questions
1. What are the main characteristics of assets from an
accounting perspective
2. Do all accounting transactions affect the balance
sheet?
3. Valuable resources of a business are sometimes not
included in its balance sheet assets. Why does this
occur? Can you provide examples (about 3
examples)
4. Claims against the business assets are of two types.
What are they? Provide examples of each. Discuss
the key differences between these two categories of
claims.
31
2. Accounting for assets
a. Cash and cash equivalents

b. Account Receivables
c. Inventory
d. Tangible fixed assets
32
• Are currency, bank deposits and various marketable
securities that can be converted into cash on short
notice merely by contacting a bank or broker
• Cash includes cash on hand and cash in banks.
• Cash equivalents: highly liquid investments that can
be converted into a specific amount of cash
• Typically have maturities of 3 months or less when
purchased
33
Journal entries for cash
•Cash receipt from sales, from collecting debts…
Dr ac cash on hand/ in banks
Cr revenue/ account receivables
•Cash disbursed for purchase inventory, services or
paying for creditor…
Dr inventory, expense acc/ account payables
Cr ac Cash on hand/ in bank
34
Journal entries for cash – examples
1.Softbyte provides $3,500 of programming services for
customers. Cash of $1,500 is received from customers,
and the balance of $2,000 is billed on account.
2.Softbyte purchases computer equipment for $7000
cash.
3.Softbyte pays its $250 Asian Financial Times
advertising bill in cash
4.Softbyte pay for expenses in August: store rent $600,
salaries of employees $900 and utilities $200.
35
• Receivables are amounts due from individual and
other entities. They are claims that are expected to
be collected in cash.
• Accounts receivable are amounts owed by
customers on account.
• They result from the sale of goods and services.
• Payment discounts offering for early payment
should be recognized as financial expense
36
Journal entries for account receivables
•To record an account receivable increased from sale
of goods or rendering of services
Dr Ac 131 – Trade receivable
Cr Ac 511 – Revenue
Cr Ac 3331 – VAT collected (if any)
•To record cash received from customer, decreasing
account receivables
Dr ac 112/111
Cr ac 131
37
Accounting for bad debts
• Allowance method is applied:
• Estimating uncollectable accounts at the end of each
period
Dr Bad Debts expense (ac 642)
Cr Allowance for Doubtful Debts (ac 229)
• When a specific account is written off
Dr Allowance for Doubtful Debts (ac 229)
Cr Account Receivables (ac 131, 138..)
38
c. Inventory
• Definition
• Classification
• Inventory accounting systems
• Inventory costing methods
• Accounting for inventories
39
Definition
• Definition from VAS 2 “Inventories”: an asset
which is
• held for sale in the ordinary course of business;
• in the process of production for such sale; or
• in the form of materials or supplies to be
consumed in the production process or in the
rendering of services.
40
Classification
• Classification of inventories:
• Goods purchased for sale: goods in stock, goods in transit,
consigned goods, goods sent for processing;
• Finished products in stock and consigned finished
products;
• Unfinished products: uncompleted products and completed
products not yet going through the procedures for being
put into stores of finished products (work in process);
• Raw materials, materials, tools and instruments in stock,
sent for processing.
• Costs of unfinished services.
41
Why is Inventory Control Important?
Inventory is a significant asset and for many
companies the largest asset.
Inventory is central to the main activity of
merchandising and manufacturing
companies.
Mistakes in determining inventory cost can
cause critical errors in financial statements.
Inventory must be protected from external
risks ( such as fire and theft) and internal
fraud by employees.
42
Effect of Inventory Errors on
Financial Statements
LIABILITIES
Merchandise ASSETS STOCK-
Inventory HOLDERS’
EQUITY
Net Income
Cost of COSTS & REVENUES

Merchandise Sold EXPENSES
If merchandise inventory is . . . . . . . overstated

Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Total stockholders’ equity is . . . . . overstated
43
Effect of Inventory Errors on
Financial Statements
If merchandise inventory is . . . . . . . understated

Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . . understated
Ending owner’s equity is . . . . . . . . . understated
44
Perpetual vs. Periodic Methods of Accounting
Perpetual Method
•Inventory records are updated after each purchase or
sale
• Inventory accounts are used to record the balance and
the moving of goods
• Costs of goods sold/used are calculated based on units
of goods sold/used and unit cost assigned to those units
45
Perpetual vs. Periodic Methods of Accounting
Periodic Method
• Inventory records are updated periodically based on
physical inventory counts
•Inventory accounts are only used to reflect the balance of
goods, the moving of goods during the period is recorded
in purchase account
• Costs of goods sold/used are calculated by taking cost of
goods available for sale/use less cost of ending inventory
•Cost of ending inventory are determined by taking the
units of ending inventory (found by physical count) and
unit cost assigned to those units
46
Principles of inventories
• Cost: Inventories are determined at cost
• Prudence: Where the net realizable value
is lower than cost, inventories are
measured at the net realizable value
• Consistency: Inventory costing methods
should be applied consistently
47
Net realizable value
Net realizable value is the estimated selling

price in the ordinary course of business less
the estimated costs of completion and the
estimated costs necessary to make the sale
48
Initial measurement
• Inventories are initially measured at cost
• The cost of inventories should comprise all costs
of purchase, costs of conversion and other costs
incurred in bringing inventories to their present
location and condition
49
Initial measurement
• Inventories are initially measured at cost
• The cost of purchase comprises the purchase price,
non – reimbursable taxes and duties, and
transportation, handling and other costs directly
attributable to the purchase.
• Trade discounts and purchase returns and
allowances are deducted from the costs of purchase
50
Non- reimbursable taxes and duties
• Customs duties
• Excise duties
• VAT (in case the entity calculating VAT under
direct method or the inventories are used for
activities free from VAT)
51
Trade discounts
A trade discount is the decrease of

the quoted price offered to the buyer
for their large orders
52
Purchases Returns and Allowances
A purchases return involves actually

returning merchandise that is
damaged or does not meet the
specifications of the order.
When the defective or incorrect

merchandise is kept by the buyer and
the vendor makes a price adjustment,
this is a purchases allowance.
53
Cost of Goods Purchased
 Cost of inventory purchased (invoice price- excluded
VAT):
Less:
Purchase returns and allowances
Trade discounts
Plus:
Non-refundable taxes and duties
Transportation, handling costs…
54
Cost of Goods Purchased
Purchased 100 units of materials A on credit
from Alden Company: 22,000,000 dong,
including 2,000,000 dong of VAT.
Transportation costs paid by cash: 500,000
dong. All materials are brought to the store.
What is the cost of this amount of materials at
time of recognition?
55
Inventory costing methods
• Used for calculating the value of materials and
tools at the time of being issued from the store
• Four costing methods available
• Specific identification
• Weighted average
• First – in, first- out (FIFO)
56
Specific Identification Method
Being used mainly for items of inventory that
differ from unit to unit, such as used cars
This method tracks the actual physical flow of
the good. Each item of inventory is marked,
tagged or coded with its “specific” unit cost
This method is possible when a business has a
limited variety of high-unit-cost items that can
be clearly identified
57
Weighted average method
The weighted average method assumes that the
goods available for sale/use have the same
(average) cost per unit.
Under this method, the cost of goods available
for sale/use is allocated on the basis of the
weighted – average unit cost.
58
Cost of Units of Weighted-

goods = goods * average
sold/used sold/used unit cost
59
Cost of
Cost of goods
beginning + purchased
goods
Weighted
-average =
unit cost Units of Units of
beginning + goods
goods purchased
60
First – in, first - out
The FIFO method assumes that the earliest
goods purchased are the first to be sold/used.
Under this method, the costs of the earliest
goods purchased are the first to be recognized as
cost of goods sold/used
61
Accounting for inventories
• Source documents
• Accounts used
• Journal entries for some basic transactions
62
Source documents
Receiving Materials/ goods
Report
No. 196 received are inspected
by the Receiving
Department. Once
inspected, a receiving
report is prepared
showing the quantity
received and its
condition.
63
Source documents
Receiving
Report Invoice
No. 196
The receiving report and the invoice are used

to record the receipt of the merchandise and
to control the payment.
64
Accounts used
 Acc 151 - Goods in transit
 Acc 152 – Materials
 Acc 153 – Tools and supplies
 Acc 156 – Merchandising goods
 Acc 133 – Deductible VAT
 Acc 331 – Account payable
 Acc 111, 112 – Cash on hand, in bank
 Acc 621,627,641,642 – Expenses
 Acc 242 – Prepaid expenses
 … 65
Account 151 “Goods in transit”
 Value of goods owned by the  Value of goods in transit which
entity in transit at the end of the is received by the entity
period
 Transferring the beginning
 Value of goods in transit at the balance to acc 611
end of the period transferred
from acc 611
Balance
Account 152 “Materials”
 Cost of materials increased by  Cost of materials decreased by
 Receiving (from purchase,  Issuing for use in business
production…) activities…
 Revaluation  Deducting purchase returns
and allowances, trade
 Stock- taking
discounts
Cost of materials inventory
 Revaluation
at the end of the period
transferred from acc 611  Stock – taking
 Transferring the beginning
balance to acc 611
Balance: cost of materials

at a point in time
Account 611 “Purchase”
 Receiving the beginning  Transferring materials, tools
balance of acc 151,152,153 inventory, goods in transit at the
end of the period to 152, 153,151
 Cost of materials, tools
increased during the period Cost of materials and tools
used for different purposes
during the period Revaluation
Acc 6111: Materials and tools purchase

Subsidiary accounts:
Acc 6112: Goods purchase
Common transactions
i. Materials, tools and supplies and goods received by
purchase
i. Goods in transit
ii. Materials issued for use in business activities
iii. Tools issued for use in business activities
iv. Goods for sales
69
i. Materials, tools and supplies and goods
received by purchase
• Source documents: purchase invoices and receiving
notes:
• Journal entries
• Dr acc 152/153/156/611 – cost of materials received
• Dr acc 133 – deductible VAT (if any)
• Cr acc 111, 112 – total amount paid
• Cr acc 331 – total amount payable
70
received by purchase - Example:
• Purchased 100 units of materials A on credit from
Alden Company: 22,000,000 dong, including
2,000,000 dong of VAT. Transportation costs paid
by cash: 500,000 dong. All materials are brought to
the store (both receiving notes and invoice are
received by accountant)
• Using the perpetual system of accounting, provide
the journal entry for the above transactions
71
• If VAT is deductible then
Journal entry
• Dr acc 152 20,000,000
• Dr acc 133 2,000,000
• Cr acc 331 22,000,000
(payable to Alden Co.,)
and
– Dr acc 152 500,000
• Cr acc 111 500,000
72
• If VAT is not deductible then
Journal entry
• Dr acc 152 22,000,000
• Cr acc 331 22,000,000
and
– Dr acc 152 500,000
• Cr acc 111 500,000
73
received by purchase - Goods in transit
• Source documents: purchase invoices only
• Journal entry (made at the end of the period)
• Dr acc 151/611 – Value of goods in transit
• Cr acc 331 – total amount payable
74
received by purchase - Goods in transit
• Whenever the accountant receives the receiving
note of this purchase, then the following journal
entry is made (perpetual method):
• Dr acc 152, 153, 156 – Value of materials and tools
received
• Cr acc 151 – value of materials and tools in
transit
75
received by purchase - Goods in transit -
Example
• Purchased 100 units of materials A on credit from
Alden Company: 22,000,000 dong, including
2,000,000 dong of VAT according to the invoice
dated Sep 15. At the end of the month, the
accountant has not received the receiving note of
this purchase Suppose VAT is deductible.
• Using the perpetual system of accounting, provide
the journal entry for the above transactions
76
received by purchase Goods in transit -
Example
Journal entry on Sep 30:
• Dr acc 151 20,000,000
• Dr acc 133 2,000,000
• Cr acc 331 22,000,000
77
received by purchase Goods in transit -
Example
• Suppose on Oct 2, receiving note of this purchase
is received by accountant
• Journal entry on Oct 2:
• Dr acc 152 20,000,000
• Cr acc 151 20,000,000
78
• Source documents: Goods issuing notes

• Journal entry (perpetual method) :
• Dr acc 621,627,641,642… – cost of materials issued
• Cr acc 152 – Cost of materials issued
79
Example
• Issuing 15,000,000 dong for direct use in
production, 2,000,000 for use in sales department
• Dr acc 621 15,000,000
• Dr acc 641 2,000,000
• Cr acc 152 17,000,000
80

• Dr acc 621,627,641,642… – cost of tools issued – if it is
small
• Dr acc 242 – if it is quite large and needed to allocate
for more than 1 period
• Cr acc 153 – Cost of materials issued
81
Example
• Issuing 100 tools with the value of 15,000,000
dong for use in production department. These tools
have the useful life of 12 months
• Provide the journal entry for the above transaction
if
• The accounting period is 1 month
• The accounting period is 1 year
82
Example
• If the accounting period is 1 month, then
• The journal entry (perpetual method) made on the issued
day
• Dr acc 242 15,000,000
• Cr acc 153 15,000,000
• At the end of each month from the issued month, an
adjusting entry is made to allocate the value of tools issued
to the expense of the period
• Dr acc 627 1,250,000
• Cr acc 242 1,250,000
83
Example
• If the accounting period is 1 year, then
• The journal entry (perpetual method) made on the issued
day
• Dr acc 627 15,000,000
• Cr acc 153 15,000,000
84
iv. Goods for sales

• Dr acc 632 – cost of goods sold
• Cr acc 156 – Cost of goods issued
85
d. Tangible fixed assets
• Definition
• Classification
• Recognition criteria
• Measurement
• Accounting for tangible fixed assets
86
Definitions
Tangible fixed assets are assets with physical

substance that are held by an enterprise for
use in the production of business which
satisfy the recognition criteria of tangible
fixed assets.
87
Classification of tangible fixed assets
• Buildings, structures
• Machinery and equipment
• Means of transport, transmitters
• Management equipment and devices
• Perennial trees, working and/or product animals
• Other tangible fixed assets
88
Recognition criteria
a) It is probable that future economic benefits
associated with the asset will flow to the enterprise
b) The cost of the asset to the enterprise can be
measured reliably
c) The estimated useful life is greater than one year
d) It meets the value criteria under the prevailing
regulations
89
Measurement of fixed assets
• Principles of valuing fixed assets

• Initial Measurement
• Measurement subsequent to initial recognition
90
Principles of valuing fixed assets
• Cost: Fixed assets are determined at cost
• Consistency: Depreciation methods
should be applied consistently
91
Initial measurement
• Fixed assets are initially measured at cost
• The cost of an item of purchased tangible fixed assets
should comprise its purchase price (any trade discount,
purchase returns and allowances are deducted at the
purchase price), including non – refundable purchase
taxes, and any directly attributable costs of bringing the
asset to working condition for its intended use
92
Cost of Acquiring Fixed Assets Excludes:
 Mistakes in installation
 Damage during
unpacking and installing
 Fines for not obtaining
proper permits from
government agencies
 Other abnormal expenses
93
Initial measurement
• Fixed assets are initially measured at cost
• The cost of a self – constructed or self –
manufactured asset is the actual construction or
product cost plus installing and running test
costs
94
Example
Cactus Ltd acquires some printing machinery on
credit. The amount payable to the manufacturer is
$88,000 (including $8,000 VAT), plus additional
$2,000 for delivery. Some modifications amount to
$7,000 (including $2,000 of materials, $3,500 of
wages payable, d $1,500 of depreciation of
machinery) are needed to made before the
machinery can be used. An additional amount of
$2,000 is paid by cash in bank for installation.
 What is the cost of the machinery?
95
Measurement subsequent to initial
recognition
• After initial recognition, fixed assets should
be measured based on its cost, accumulated
depreciation and carrying amount
• Carrying amount is the amount at which an
asset is recognized in the balance sheet after
deducting any accumulated depreciation thereon
Carrying amount = Cost – accumulated depreciation
96
Accounting for fixed assets
• Source documents
• Accounts used
• Accounting for fixed assets:
a. Increase
b. Depreciation
c. Disposals
97
Source documents
Fixed assets This document is
delivery prepared when the asset
and receipt
is brought to place and
notes
ready to use. It can be
attached by invoices and
other documents showing
all the expenses incurred
relating to the bringing
the asset to the working
location and condition 98
Source documents
This document is
Fixed assets
disposal prepared when the asset
minutes is disposed by retirement
or sale
99
Accounts used
 Acc 211 - Tangible fixed assets
 Acc 213 – Intangible fixed assets
 Acc 214 – Accumulated depreciation
 Acc 133 – Deductible VAT
 Acc 331 – Account payable
 Acc 111, 112 – Cash on hand, in bank
 Acc 621,627,641,642 …– Expenses
 Acc 811, 711
 … 100
a. Accounting for increase of fixed assets
• Assets increased by purchase
• Journal entry (when fixed assets delivery and receipt notes are
received)
• Dr acc 211 – Cost of tangible fixed asset purchased
• Cr acc 331 – amount payable to the seller
• Cr acc 111, 112 – amount paid to the seller
• Cr acc 333 – taxes payable (import duty, excise
duty, other tax on property)
• Cr acc….
101
Example
Cactus Ltd acquires some printing machinery on
credit. The amount payable to the manufacturer is
$88,000 (including $8,000 VAT), plus additional
$2,000 for delivery. Some modifications amount
to $7,000 (including $2,000 of materials, $3,500
of wages payable, d $1,500 of depreciation of
machinery) are needed to made before the
machinery can be used. An additional amount of
$2,000 is paid by cash in bank for installation.
 Provide the journal entry for the above
transactions 102
Example
• If VAT is deductible
• Dr acc 211 91,000
• Dr acc 133 8,000
• Cr acc 331 90,000
• Cr acc 152 2,000
• Cr acc 334 3,500
• Cr acc 214 1,500
• Cr acc 112 2,000
103
Example
• If VAT is not deductible
• Dr acc 211 99,000
• Cr acc 331 90,000
• Cr acc 152 2,000
• Cr acc 334 3,500
• Cr acc 214 1,500
• Cr acc 112 2,000
104
b. Accounting for depreciation of fixed assets
• Nature of depreciation
• Depreciation methods
• Straight – line method
• Units – of – production
• Declining balance
• Accounting for depreciation
105
Nature of Depreciation
All fixed assets except land lose their capacity
to provide services. This loss of productive
capacity is recognized as Depreciation Expense.
Depreciation is the systematic allocation of the

depreciable amount of an asset over its useful life
106
Nature of Depreciation
Physical depreciation occurs from wear and tear

while in use and from the action of the weather.
Functional depreciation occurs when a fixed asset is

no longer able to provide services at the level for
which it was intended, e.g., personal computer.
107
Depreciation Expense Factors
Initial Cost - Residual Value = Depreciable Cost
Useful Life
Periodic Depreciation
Expense
108
Depreciation Expense Factors
• Residual amount is the net amount which the
enterprise expects to obtain for an asset at the end of its
useful life after deducting the expected cost of disposal
• Useful life is the period of time in which the asset
brings benefits to the enterprise (can be expressed in
terms of the time period over which the asset is
expected to be available for use or the number of units
of production expected to be obtained from the asset)
109
Depreciation method
• Straight – line method: depreciation is the same
for each year of an asset’s useful life
• It is necessary to determine depreciable
cost
• Depreciable cost is divided by the asset’s
useful life to determine the annual
depreciation expense
110
Straight-Line Method
Cost – estimated residual value

Estimated life
= Annual depreciation
111
Example
Original Cost.....………….. $24,000

Estimated Life in years….. 5 years
Estimated Life in hours….. 10,000
Estimated Residual Value... $2,000
112
$24,000 – $2,000
5 years
= $4,400 annual depreciation
113
The straight-line method is widely used by
firms because it is simple and it provides a
reasonable transfer of cost to periodic
expenses if the asset is used about the
same from period to period.
114
Depreciation method
• Units – of- production: useful life is expressed in terms
of the total units of production or use expected from the
asset, rather than as a time period
• The total units of production for the entire useful life are
estimated
• Determining the depreciation cost per unit by taking
depreciable cost divided by these units
• The annual depreciation expense is determined by taking the
depreciation cost per unit and the units of production during
the year
115
Units-of-Production Method
Cost – estimated residual value

Estimated life in units, hours, etc.
= Depreciation per unit, hour, etc.
116
$24,000 – $2,000
10,000 hours
= Depreciation
= $2.20per
perunit,
hourhour, etc.
117
• The units-of-production method is more appropriate
than the straight-line method when the amount of use
of a fixed asset varies from year to year.
• This method is ideally suited to factory machinery but
not nearly as popular as the straight – line method
because it is often difficult to make a reasonable
estimate of total production
118
Depreciation method
• Declining - balance: produces a decreasing annual
depreciation expense over the asset’s useful life.
• The periodic depreciation is based on a reducing carrying
amount of the asset
• Annual depreciation expense is computed by multiplying the
carrying amount at the beginning of the year by the reducing
balance depreciation rate
• The depreciation rate remains constant from year to year (as
twice as straight – line rate), but the carrying amount to which
the rate is applied declines each year.
119
Declining-Balance Method
• This method is compatible with a systematic allocation
of the asset’s economic benefits: the higher
depreciation expense in early years is matched with the
higher benefits received in these years
• This method is recommended for an asset that is
expected to be more productive in the first haft of its
useful life or some assets which lose usefulness rapidly
because of obsolescence
120
Accounting for depreciation
• Account used: 214 – accumulated
depreciation
• Adjusting entry (made at the end of the
period)
• Dr acc 627,641,642,241 – depreciation expense
• Cr acc 214 – depreciation amount for the
period
121
c. Accounting for Fixed Asset Disposals
When fixed assets lose their usefulness they may be
disposed of in one of the following ways:
1. discarded,
2. sold, or
3. traded (exchanged) for similar assets.
Required entries will vary with type of disposition
and circumstances, but the following entries will
always be necessary:
An asset account must be credited to remove the asset
from the ledger, and the related Accumulated
Depreciation account must be debited to remove it’s
balance from the ledger.
122
Discarding Fixed Assets
• Journal entry to remove the asset from the ledger:
• Dr acc 214 – accumulated depreciation
• Dr acc 811 – remaining carrying amount (if any)
• Cr acc 211, 213 – cost of asset
• Expenses or income relating to discarding assets are
recorded to acc 811 and 711 respectively
Discarding Fixed Assets - example
A piece of equipment
acquired at a cost of
$25,000 is fully
depreciated. On February
14, the equipment is
discarded.
Discarding Fixed Assets
• Dr acc 214 – 25,000
• Cr ac 211 - 25,000
Sale of Fixed Assets
When fixed assets are sold, the owner may
break even, sustain a loss, or realize a gain.
1. If the sale price is equal to book value, there
will be no gain or loss.
2. If the sale price is less than book value, there
will be a loss equal to the difference.
3. If the sale price is more than book value,
there will be a gain equal to the difference.
Gain or loss will be reported in the income
statement as Other Income or Other Loss.
Sale of Fixed Assets
• Dr acc 214 – accumulated depreciation
• Dr acc 811 – carrying amount (if any)
• Cr acc 211, 213 – cost of asset
• Journal entry to record the income from sales
• Dr acc 131, 111, 112 – total amount receivable or received
• Cr acc 711 - sale price without VAT
• Cr acc 3331 – output VAT
• Journal entry to record the expense relating to sales
• Dr acc 811 – expenses incurred
• Cr acc 331, 111, 112… total amount payable or paid
Sale of Fixed Assets - Example
• Equipment acquired at cost of $10,000 had a
balance of accumulated depreciation of $7,000.
The equipment is sold for $3,300 cash in bank
(including $300 output VAT).
Sale of Fixed Assets - Example
– Dr acc 214 – 7,000
– Dr acc 811 – 3,000
• Cr acc 211 – 10,000
• Journal entry to record the income from sales
– Dr acc 112 – 3,300
• Cr acc 711 - 3,000
• Cr acc 3331 – 300
2. Accounting for liabilities
a. Account payables
b. Accrued liabilities
c. Tax payable
d. Unearned revenue
e. Loans (short – term and long – term)
f. Bond payables
(referring to textbook: part 2 – chapter 7)
130
Part 2
The end
131

FA Part-2 BS 45-1

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BALANCE SHEET

• Nature and purpose of a balance sheet

• The purpose of the balance sheet is to set out the

• VAS 1 define equity as the “residual interest in

Include inventory, debtors and cash

Liabilities are also normally categorised

VAS 21 ‘Presentation of Financial Statements’

i. The liability is expected to be settled in the

Non-Current liabilities are essentially therefore

VAS 21 ‘Presentation of Financial Statements’

This alternative “liquidity classification” may be

Owners’ equity is normally classified in three

It is common to combine categories 2 and 3 into

Figure 4.1 The Horizontal layout and entity approach

Current Non-current Current Non-current Owners’

Figure 4.2 The Vertical layout and proprietary approach

The balance sheet provides useful insights into the

a. Cash and cash equivalents

Cost of COSTS & REVENUES

If merchandise inventory is . . . . . . . overstated

If merchandise inventory is . . . . . . . understated

Net realizable value is the estimated selling

A trade discount is the decrease of

A purchases return involves actually

When the defective or incorrect

Cost of Units of Weighted-

The receiving report and the invoice are used

Balance: cost of materials

Acc 6111: Materials and tools purchase

• Source documents: Goods issuing notes

• Source documents: Goods issuing notes

• Source documents: Goods issuing notes

Tangible fixed assets are assets with physical

• Principles of valuing fixed assets

Carrying amount = Cost – accumulated depreciation

Depreciation is the systematic allocation of the

Physical depreciation occurs from wear and tear

Functional depreciation occurs when a fixed asset is

Initial Cost - Residual Value = Depreciable Cost

Cost – estimated residual value

Original Cost.....………….. $24,000

Cost – estimated residual value

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