Accounting For Managers-CCLEC - SG

Centre for Customs & Excise Studies (CCES) CCLEC
Accounting for Managers
Study Guide
© Centre for Customs & Excise Studies, University of Canberra, 2009

First prepared in February 2009
Published by the Centre for Customs & Excise Studies
University of Canberra ACT 2601
AUSTRALIA
The Centre for Customs and Excise Studies (CCES), University of Canberra has
developed an academic program leading to an Executive Diploma in Customs
Management for member countries of the Caribbean Customs Law Enforcement
Council (CCLEC).
The program which is to be followed over a period of one year, entails the
following subjects;
Customs Management I
Customs & Excise Audit
Revised Kyoto Convention I
Intelligence Management in the CCLEC Region
Managing Operational Activities
The study requirement for each subject is 30 hrs through a combination of face to
face and online learning.
Materials development team

Author: Stephen Muller, 2009
Graphic Design: Peter Delgado 2009
Desktop Publishing: Alan Murray, 2009
Copyrighted materials reproduced herein are used under the provisions of the Copyright
Act 1968 as amended, or as a result of application to the copyright holder.
While every effort has been made to contact copyright holders (when relevant), in the
event of accidental infringement, the University of Canberra will be pleased to come to a
suitable arrangement with the rightful owner.
No part of this publication may be reproduced, stored in a retrieval system or transmitted
in any form or by any means electronic, mechanical, photocopying, recording, or
otherwise without prior permission.
This learning package, including its online components, is provided solely for the purpose
of private study and must not be copied or resold or used by anyone not enrolled in the
subject.
Centre for Customs & Excise Studies, CCLEC

2
Introduction
Contents
Introduction ...........................................................................................6
Topic 1 .................................................................................................10
Accounting cycles ................................................................................................... 10
Outcomes ............................................................................................................... 11
The role of accounting ....................................................................................... 11
Financial accounting ............................................................................................... 11
Management accounting ........................................................................................ 12
Auditors................................................................................................................... 12
Customs.................................................................................................................. 12
The cycle of accounting information.................................................................... 13
Journals .................................................................................................................. 14
Ledgers.................................................................................................................. 16
Summary ................................................................................................................ 17
Purchasing & Revenue Cycles...........................................................18

Purchasing .............................................................................................................. 18
The purchasing department.................................................................................... 18
Receipt of purchases .............................................................................................. 19
Delivery of goods .................................................................................................... 21
Sales ....................................................................................................................... 21
Sample documents .............................................................................................. 22
Summary ................................................................................................................ 28
Inventory Control Systems.................................................................29

Outcomes ............................................................................................................... 29
Inventory ................................................................................................................. 29
Valuing inventory .................................................................................................... 29
Computation of Overheads.................................................................................... 30
Inventory & Profit .................................................................................................... 31
Controlling inventory ........................................................................................... 31
Inventory methods .................................................................................................. 31
Which inventory is sold first? ............................................................................... 32
Production lines ...................................................................................................... 33
Summary ................................................................................................................ 33
Topic 2 .................................................................................................34
Financial Statements .............................................................................................. 34
Classifying items.................................................................................35
Introduction ............................................................................................................. 35
Definitions of each classification.......................................................................... 35
Assets ..................................................................................................................... 35
Liabilities ................................................................................................................. 35
Owners' or shareholders’ equity ............................................................................. 35
Revenue ................................................................................................................. 35
Expenses ................................................................................................................ 35
Capital..................................................................................................................... 36
The profit and loss statement ..........................................................37

The Balance Sheet ..............................................................................38

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Dividends ................................................................................................................ 40
Owners’ equity and profit ...................................................................................... 40
Debits and credits ...............................................................................42
Maths with debits & credits ..................................................................................... 43
Journal entries ....................................................................................44

Ledger entries .....................................................................................44
Trial Balance........................................................................................47
Financial Statements ..........................................................................47
Profit & Loss/Balance Sheets Examples.............................................................. 49
Conclusion.............................................................................................................. 53
Topic 3 .................................................................................................54
Customs Issues ...................................................................................................... 54
Foreign Currency Transactions .........................................................55

Overview ................................................................................................................. 55
Exchange rate movements........................................................................... 55
Paying for overseas goods ................................................................................. 56
Methods for financing imports/exports.................................................................... 57
Other documents .................................................................................................... 62
Summary ................................................................................................................ 63
Customs valuation ..............................................................................64

Outcomes ............................................................................................................... 64
Accounting standards ........................................................................................... 64
Transaction Value................................................................................................... 64
Other valuation methods......................................................................................... 65
Computed Value ..................................................................................................... 66
Reconciling the difference between accounting and Customs valuations ............. 66
Note: There are no readings for this subject.

4
Introduction

5
Introduction
Introduction
Financial and management accounting documents and reports are frequently encountered
by Customs and Excise officers, particularly those working in audit and investigation
areas. This course introduces students to the fundamental principles and applications of
financial and management accounting in a context tailored to the Customs and Excise
Environment. Customs-specific examples and case studies are used where applicable. In
addition to providing students with a thorough grounding in the conceptual basis of
accounting and basic applications, this course examines relevant higher-level accounting
issues in detail. This course includes an examination of:
fundamental concepts of accounting
recording transactions (including understanding debits and credits)
detailed examination of accounting for inventory for both financial and
management accounting purposes (including job and process costing)
accounting for transactions denominated in foreign currency
accounting for 'hedge' transactions and the resulting effect on inventory
valuation
relationship between and preparation of key financial statements
creative accounting' methods and their relevance to Customs & Excise
basic financial statement analysis.
Accounting provides a picture of a business in financial terms. As with most
areas, accounting has its own jargon that can be difficult for non-accountants to
understand. All occupations, including Customs, have their own shorthand way of
describing things and here you will learn some of the language that accountants and
financial managers use. You will also learn about those areas in accounting that are
relevant to the work of the Australian Customs Service.
Accountants record information in many different forms, including journals,
ledgers, trial balances and financial statements. The reason for all these different ways of
recording information is that each method has a different purpose. This will be
covered in more detail later.
The information that accountants record is summarised in different ways for
different purposes. But it is important to realise that you can always work back through
the accounting system and find out exactly what is hidden in every summarised figure. In
fact, this is exactly what the external auditors of a business do when they come in to audit
it. They choose a sample of the transactions of the business and track them through
the accounting information system. This is called an audit trail.
An auditor should be able to trace any transaction of a business from the time it occurs
through to the time it is recorded in the company's balance sheet or profit and loss
statement. They should also be able to trace any transaction back the other way from the
balance sheet or profit and loss statement back to when it originally occurred.
Companies are required by law to maintain complete accounting records and this means
that they must maintain sufficient records for the auditors to follow the audit trail.
In this course, we will focus on the beginning of the audit trail. We are going to
look at the source documents that a company should maintain as a record of any
transactions it undertakes. Since accounting information is summarised and since the
external auditors only look at a sample of the transactions of a business, there is a
problem: how can we be sure that the accounting information is correct?
Before we answer that question, let's consider a hypothetical situation. Assume you
buy a lot of small articles at the local shopping mall and you have a cash register docket
that lists your purchases. At the end of each week, you record the totals of your cash

7
register dockets into a computer file and add them up to see how much you have spent.
Maybe someone else, such as your spouse, discovers an error. Mistakes do happen.
We all know that. You may say that it was lucky that your spouse noticed the
error. Maybe the error was so small that it was not really worth worrying about.
The situation with companies is not so very different. Sometimes auditors find errors
and sometimes they miss them. But having an auditor check a company's accounting
information increases the chances that any mistakes will be picked up. Sometimes
auditors find a little mistake and decide that it is so small that it is not really worth
worrying about. To use the jargon of accounting, they say that it is not material.
When auditors are going to check the accounting information of a company, it can be
helpful for them if they have some idea of how good (or how bad) the accounts are likely
to be. This will give them some indication of how stringent they have to be in their
checking. One way they can get some idea of how reliable a company's
accounting system is likely to be is by looking at the company's internal
controls. These are the internal procedures that a company maintains as a safeguard
against fraud and error. Some controls are designed to prevent problems from
occurring. Other controls are designed to detect problems that have occurred. We
will be looking at the area of internal controls in this course.
One area of a business where there will be lots of controls is inventory. For a
supermarket, inventory means the goods on the shelves ready for sale. For a
manufacturing business, it is more complex. Apart from having finished goods ready
for sale, they may have raw materials ready for use in production and partly finished
goods. They categories also form part of their inventory.
More and more businesses buy and sell internationally. In this course, we will look at
how businesses cope with exchange rate fluctuations in their accounting system.
We will also look at how payments are made internationally. If a business buys
goods from France and has to pay for the purchase using the Euro, the exchange rate
between your country’s currency and the Euro will determine how much is to be paid.
But exchange rates move on a daily basis.
One of the difficulties for Customs is that the accounting system of a company is not
designed to provide you with the information you want. It is designed for the company
and it is incidental that it also meets your requirements. Company accounting
systems have to meet a lot of accounting rules which are law. These rules are not the
same as the rules for Customs' purposes. This means that there is sometimes a
mismatch between what is recorded in a company's accounting system and the
information you need for Customs purposes. The information you require will always be
available somewhere in the accounting system, but unless you know what to ask for, you
may have trouble finding it. One of the reasons it is important to know something
about how companies do their accounting is because you then know what information
to ask for when you are trying to match Customs requirements with the accounting
information that is available in an accounting system.
During the course we will look at some financial information for two
hypothetical companies and we will see what it tells us about those companies.
You will also examine some of the ‘tricks of the trade’ – how easily accounting
information can be manipulated (both intentionally and accidentally). You
see that profits can turn into losses, assets and expenses, can magically appear and
disappear, and all of this is done legally and meets all the laws about accounting
information. Most accountants are honest and most businesses will attempt to keep their
accounts in a truthful and honest way.

8
Introduction
Conclusion
Accounting records have been found in our earliest civilisations and the
importance of keeping records of business transactions has always been realized. Some of
our earliest written records are accounting records.
In many respects, what we do in accounting today does not differ significantly from
those early times although transactions are more complex and we now use computers to
record much of our information. So accounting is a strange mix of old and new. It is as
important today as it ever was. It is also as interesting because if you can understand the
accounting records of a business, you can visualise a picture of the entire business and its
operations.

9
Topic 1
Accounting cycles
Topic 1: Accounting Cycles
Outcomes
At the conclusion of this topic, you will be able to:
describe the role of accounting in an organisation
e x p l a i n w h y a c c o u n t i n g i n f o r m a t i o n i s important for Customs
detail why accounting does not always provide an or gani sat ion the
i nf or mation requir ed under Customs law
describe the accounting cycles.
This topic introduces you to the importance of accounting information in a
business. Not a day goes by without you having some contact with an accounting
information system. Every time you buy something and receive a receipt to record
your purchase, every time you use a credit card or examine your bank statement, you
are coming into contact with accounting information. Businesses rely heavily on
accounting information. It provides the record of the business and gives information
which can be used for planning and control of the business.
The role of accounting

Accounting provides financial information about an organisation. Without money,
businesses cannot operate for long and the aim of most businesses is to make money.
Accounting information provides a picture of a business' finances, showing how
much it costs to run and how much it is making. If a business is to operate
profitably, it will need to be well managed. This involves planning. Feedback is needed
to ensure that plans are being carried out properly and to give managers enough
information to be able to make changes to their plans if circumstances change.
Accounting also provides financial information for both planning and feedback
purposes.
Key Point
Accounting limitation
Accounting is one tool available for running a business, but it does not provide
information which cannot be measured in dollars and cents. Sometimes, non-
financial information can be very important. For example, from accounting
information, a coat manufacturer would be able to determine the cost of producing
lime green plastic coats and the profit from selling them, but it would not tell the
manufacturer why the coats are not selling. The manufacturer would need another
source of information to determine that lime green plastic coats are not in fashion.
Accountants split accounting information into management accounting and
financial accounting. The split is important.
Financial accounting
Financial accounting provides general accounting information. For most
companies, the users of this information will be its owners (called
shareholders) and those who have lent money to the business (called creditors)
who want to ensure that they will be repaid and therefore want to know that the
company is sound financially. For a company that trades its shares on a Stock Exchange,
its financial statements, which are found in the annual report of the company, are the
main output of the financial accounting system. There are rules governing the way
that this accounting information is recorded and there are rules governing what is
disclosed and the format in way it is disclosed. These rules are law so companies must
follow them.

11
Management accounting
Management accounting provides the internal information that managers need to run a
company. This information is not publicly available. It is prepared for very specific
purposes i.e. to allow managers to make decisions and do a better job of managing. Each
company will have different requirements and different decisions will need to be
made about each company at different times. So there is a lot of flexibility in
the area of management accounting. The point to remember is that there is no set
of rules that governs what is reported to management or how it is reported, although
there are some common practices that most companies will tend to adopt.
Example
Management accounting
A furniture manufacturer and a maker of ladies' blouses will both need to know how
large their production runs should be; will both need to know how much raw
material to use, how many employees to use and the profit margin they need to set to
cover all costs and make a profit. However, the specific details will vary for each
business.
Companies need to have an accounting information system which can meet both
their financial and management accounting requirements.
Auditors
One group that needs special mention in relationship to companies is the external
auditors. External auditors are required by law to form an opinion as to whether the
financial statements of a company fairly represent the transactions of that company. They
are not looking for good or bad management. A company can be badly run but still
maintain financial statements that are a true reflection of the business' transactions. It will
get a good (or clean, as it is called) audit report. A company can be extremely well
managed but its financial statements do not represent the transactions of the
business properly. It will not get a clean audit report. The external auditors are not
looking for fraud, although they must notify management if they find a fraud in the
course of doing their audit. They are only trying to form an opinion, as required by law.
Customs
You will notice that meeting the needs of Customs has not yet been mentioned. Although
companies need to be able to generate the information that is required for Customs and
taxation purposes, because they have a legal obligation to meet their requirements under
Customs and Tax law, this information is not usually kept in the day to day accounting
information system in the forms required for Customs purposes. It must be converted
into the appropriate form by the company's accountant. In most large
companies, it is more cost effective to pay an accounting firm to prepare the
company's tax return; it is only in smaller companies that the company accountant tends
to prepare this information. This is because the preparation of a company's taxation
return, in particular requires specialist knowledge of the taxation laws.
As you know, companies prepare self-assessments of both the obligation to pay company
tax and their obligation to pay Customs duties. This represents a major change in the way
that governments view companies and their managers. It views them as inherently honest.
In the past, when everything was checked and double-checked, taxpayers were viewed
as inherently dishonest. But this created an enormous workload for government
checking all details and it was not justified by the number and size of the mistakes
and deliberate miscalculations that they found.

12
Now, most modern Customs administrations audit selected companies to determine

whether they have correctly stated their obligation to pay duty or maintained
their Customs or Excise warehouse operations in accordance with the law. The
difficulty with this is that it means that Customs officers need to understand
company accounting practices and this can vary from company to company.
This course is designed to help you understand the differences between what companies
record and what you need to find for Customs purposes. The reason there is a difference
is that companies are required to record their accounting information in the way
set out in the Corporations Law, which means they have to keep their accounting
records in a way consistent with the requirements of accounting standards. Companies
do not have a choice about this - it is the law and is mandatory.
Companies are required to compile assessments or declarations for Customs
purposes but they are not required to keep their accounting system specifically for
Customs purposes.
The cycle of accounting information

Figure 1
Accountancy
Flow
Source: CCES
In accounting, it is important that everything can be verified. Verification can occur by

each transaction being documented in full when it occurs. So, if a business buys raw
materials there will be written documentation relating to the purchase. Similarly, if the
business sells goods, written documentation of the sale is available. Under taxation
law and now days Customs law, these documents must all be kept and filed. This
is part of maintaining an audit trail that Customs officers can follow.

13
The documents that record transactions when they first occur (whether they are sales,
purchases, loans or some other t ype of trans action) are called source
documents. If you are trying to work out what has happened in a company's financial
records, you know that you can trace back every transaction until you reach the source
document that originally generated that transaction.
The main details that are given on each source document are recorded in the journals of a
company.
Key Point
Journal
A journal is a list of the transactions of a business in chronological order.
So the first transaction of the day is the first one to be recorded, the second
transaction of the day is the second to be recorded and so on.
Sometimes this has to be altered slightly for practical reasons. Think of a large
department store where sales are continually occurring at different counters
throughout the store. How could you identify the exact order of each transaction?
Perhaps you could look at the time which is given on the cash register receipt. But
does it really matter whether one transaction happened two seconds before another? In
this case, the copy of the cash register receipt which is maintained by the department
store for each cash register becomes what is called a special journal. At the end of
the day (and sometimes more frequently, depending on the number of transactions and
their dollar amount), summarised totals of the transactions will be compiled and
recorded in the business' general journal. If we really wanted to, we could take one of
these summarised entries and reconcile it to the detailed list from the cash register, so we
have maintained the audit trail.
Key Point
Source documents
There is nothing in accounting that cannot be followed back through the accounting
system to a source document, which is the proof that the transaction originally
occurred.
But what if someone fraudulently completed other source documents to make it appear
that there had been transactions? This is where internal controls come in. They should
minimise the chance of this type of thing happening. Internal controls are such an
important area that we will consider them as a topic by themselves.
Journals
Businesses can maintain whatever journals they want to. In the days when all accounting
systems were manual rather than computerised, some common practices developed
about journals. Most businesses kept five different journals. These were:
1. a cash payments journal
2. a cash receipts journal
3. a purchases journal
4. a sales journal
5. a general journal
Whenever the business spent cash, it entered details in the cash payments
journal. This meant that there was a current record at all times of the amount of cash that
had been paid out to run the business. Cash payments could cover all sorts of things,

14
such as wages, electricity costs, petrol costs and office supplies. The important feature of
these transactions was that the cash had actually been paid at the time of the transaction.
The cash receipts journal was where any transactions were recorded where cash had
been received by the business. Cash sales, cash paid by creditors or any other cash that
came into the business was recorded here, so there was an ongoing record of the
cash that a business had at any particular time. By comparing the totals of the cash
receipts and cash payments journals, it was possible for managers to know how much
cash they had available to them at any time.
Just as the cash receipts and cash payments journals are related since they both deal with
cash, the purchases journal and sales journal are also related as they both deal with
credit.
Businesses use accrual accounting systems. This simply means that they record credit
transactions. In other words, if a sale is made and the business is not paid the money
for the sale immediately, but that money is due to be paid later, under an accrual
accounting system, the fact that the business is owed money will be recorded. So the
transaction occurs when the sale is made, even though the money has not yet been
received. Under a cash accounting system, the business would not record that a sale
had been made until the cash payment for that sale had been received.
Similarly, if a business makes a purchase and does not pay for it immediately but puts it
on credit, then under an accrual accounting system, the transaction would be recorded
at that time and the business would record that it has made a purchase but has an
obligation to pay for that purchase in the future. Under a cash accounting system, the
business would not record a purchase until the cash was paid for that purchase.
Many Governments have now moved from a cash based to an accrual based accounting
system.
The sales journal records credit sales only. From a Customs viewpoint, most
international sales will be recorded here as they are usually made on a credit basis.
The purchases journal records credit purchases only. Again, from a Customs
viewpoint, most international purchases will be recorded here as they are usually
made on a credit basis.
If a transaction cannot be recorded in any of the other journals, it is recorded in the
general journal.
Many businesses still maintain these different journals as part of their normal business
practices. They are not required by law, although the law does state that companies need
to maintain proper accounting records. Most computerised accounting packages give
companies the option of continuing with this type of split of their journal entries,
although some businesses choose to simply record everything in a general journal.
Journals have one major limitation. If we are trying to find out about anything other than
the balance of our cash or the amount of any credit that the business owes or that is owed
to the business, it can take a lengthy search through every journal entry. For example,
assume that a business constructs yachts and it purchases all the component parts to make
the vessels. If the managers of the business wanted to know whether how much of a
certain component they had in stock so they could decide whether to re-order an item,
they would have to search every journal entry looking for previous purchases of the
item and through every journal entry showing usage in construction. As you can imagine,
this would be time consuming. It would also mean that managers would be unlikely to
have current knowledge about the state of their stock. Fortunately, there is an easier way.

15
Ledgers
The details of the transactions that have been recorded in journals are now
recorded again, in a different format, in ledgers. Accountants talk about posting
transactions to ledger accounts. What they mean is that they maintain separate details for
each type of item. Like items are grouped together for ready reference. For each type of
item, there is a separate ledger account, which is really just a fancy list written in
accounting shorthand of debits and credits. Some of the common types of ledger
accounts which most businesses maintain include cash, accounts receivable (also called
debtors or sundry debtors; this is a list of money that a business is owed), accounts
payable (also called creditors or sundry creditors; this is a list of money that the
business owes third parties), vehicles, land, buildings, plant and equipment,
wages, mortgage, and sales.
Figure 2
Ledger
Source:
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At any given time, managers could find out the exact balance of any item
connected with the business by looking at the balance of the relevant ledger account. For
many of the ledger accounts, your common sense will tell you what should be in them.
The cash account shows cash that comes into the business, from whatever source,
and cash that is paid out by the business, for whatever reason, so the balance is
the actual cash on hand. Accounts payable shows amounts you owe less any
payments you make off the amounts you owe, so the balance will be what is left of what
you owe at any given time.
The accounts receivable account shows what third parties owe the business less what they
have paid off what they owed.
Companies are required by law to work out the balance of all their ledger accounts once a
year (more often if they are public companies, which mean they trade their shares
on the Stock Exchange). They do this by listing all the final balances of the ledger
accounts in a trial balance, which is a list of ledger account totals. These totals form the
basis for the financial statements of the business. Three different accounting
reports, each one highlighting a different feature of the business, make up the
financial statements. The three statements are called the statement of profit and loss,
balance sheet and statement of cash flows.
So the accounting cycle starts with a transaction generating a source document.
Details of this document are recorded in a journal. This information is posted to a

16
ledger account. The balance of the ledger account will form part of the company's trial
balance and the trial balance will form the basis for the company's financial statements.
All this might seem like an incredible amount of work for each transaction,
particularly when we see that each entry is cross-referenced. But in the days when
all accounting was done by hand, not by computers, this system made a lot of sense.
Instead of more recording leading to more errors, it led to less because separate
people did each part of the recording process, and they checked the previous
person's work along the way. Also, when a lot of people are involved in a process, it is a
lot harder to organise them to collude and perpetrate a fraud because the more people
involved in a secret, the less chance it will remain a secret.
Computerised accounting systems simplify the recording process. A keyboard operator
can key in the details of the initial transaction and with the press of a key, the transaction
automatically appears in the journal, ledgers, and an updated trial balance and financial
statements can be printed out. This has reduced the tedious side of accounting but it has
caused problems too. The main problems are that only one person is needed to enter
data and if that person makes a mistake (either by accident or deliberately), there are no
longer other people who are likely to detect it. The external auditors also may not find
it. The increased use of computerised accounting systems has made the need for good
internal controls all the more important.
Summary
Accounting provides a picture about what has happened in a business.
Accountants can also provide budgeted information to allow for future planning.
Companies produce both financial accounting and management accounting information.
These two sub-sets of accounting information have different purposes; financial
information is external information that a company provides about itself but management
accounting is internal information that it keeps confidential.
Customs officers have the power to access both types of accounting information. That is
why it is important that they understand the different rules (or lack of rules) that
control what information company's record for financial or management accounting
purposes. The same recording cycle is used by all companies to record their
financial information. The cycle goes from transaction to source document, to
journals, to ledgers, to trial balance, to financial statements. Each part of the
cycle summarises accounting information in a slightly different way. However, it
is always possible to trace any transaction from its source document through to
where it appears in the financial statements or back from the financial statements
through to its original source document. This is called maintaining an audit trail.
Activity 1
Customs audits
1. The external auditors have just finished their audit and have given the
company a good audit report. The Customs post clearance auditors arrive
shortly after. During their audit, Customs finds a number of valuation
irregularities in the company's self-assessment for Customs purposes.
Explain why the external auditors could say that there were no problems yet the
Customs auditors could find problems.
2. You are reviewing the computerised movement of goods into and out of a Customs
warehouse at the proprietor’s premises. The company’s accountant is
uncooperative in explaining the system. How would you overcome this difficulty?
Please post your answers in the Moodle Activity 1 Forum Page.

17
Purchasing & Revenue Cycles

We are now going to look at the flow of accounting information in a business from the
time it purchases inputs of production until it sells its goods and earns revenue. We will
be examining examples of the documentation that you can expect to see as part of the
accounting system.
Purchasing
Businesses purchase all sorts of things. They buy raw materials which are then used
to manufacture other goods which they then sell. They buy labour and the payment for
labour is called wages or salary. Labour may provide physical skills, such as assembling
goods, or intellectual skills, such as providing legal advice, or a combination of both.
There should be supporting documentation for all purchases. This is part of
maintaining an audit trail and also a control device. Businesses need to control who can
and who cannot make purchases on behalf of a firm. If anyone associated with
a business could make purchases, there would be a control risk – dishonest personnel
could order goods on behalf of the firm and keep them for themselves or goods could be
overstocked tying up the company’s assets in inventory that is waiting for use in
production. That is an inefficient use of the firm's money. Businesses need to carefully
plan the amount of raw materials they have in stock at any particular time.
The purchasing department

The way that most firms minimise the control risks associated with purchasing is by
maintaining a separate purchasing department. All purchases must be made by this
department or at least, they must authorise all purchases.
However, they will not know how much of any item needs to be purchased. If we
continue with our example of purchasing raw materials, the production manager should
be able to make an assessment about the timing and amount of raw materials
required. The production manager will then complete a Purchase Requisition,
which is a document requesting a purchase.
A purchase requisition gives the date of the requisition, details of the items
requested and details of which part of the business has generated the purchase
request.

18
Figure 3
Purchase
requisition
Source:
<http://ww
w.vanilabiz.
com/images
/purchase_r
equisition.j
pg>
The items requested must be identified through description, a stock code, by

weight, size or some other distinguishing feature.
The other point to note about purchase requisitions is that they are consecutively
numbered. You can see in Figure 3 above the number is prefixed with a year (2006). In a
large company, the numbering system may incorporate a way of identifying which
department or division within the organisation has generated the purchase requisition.
Other firms may have a code for each area of the firm.
Often there are two copies of a purchase requisition:
the first copy will be forwarded to the purchasing department
a copy will be maintained in the area requesting the purchase.
The purchasing department will generate a purchase order based on the details in the
purchase requisition. A purchase order is a written request to purchase goods (or services)
from another organisation. There are usually at least two copies of a purchase order:
the original is sent to the organisation with whom the order is being placed
the purchasing department will retain a copy on file.
Every purchase order, therefore, should have a matching purchase requisition. These
days, many orders are placed by telephone or using the internet.
Receipt of purchases
Many companies will have a delivery area where goods are received. As goods are
delivered, they will sign for them (as evidence of delivery and recept), record that the
goods have arrived and place them into the business' store-room or warehouse. There will
be a delivery docket with the goods. Sometimes, it will be a copy of the form that the
delivery staff has signed. This docket may be filed in the delivery area or it may be sent
back to the purchasing department so they can mark off the goods as having been
received.

19
It is unusual for goods to be delivered to the purchasing department. That is

because doing so would create a control risk. The purchasing department's staff
should order goods not receipt them as having been delivered.
One of the fundamental rules about maintaining good control is to separate duties where
possible. We have already seen two instances of this:
firstly, the person who generates the purchase requisition was not the
person who placed the purchase order
secondly, the person who receipted goods as received was not the person who
placed the order for those goods.
Customs uses the same principle – normally the officer who checks the declaration is not
the person who collects the duty.
Once the goods are received, they become inventory. Inventory will be dealt with as a
separate topic because there are a lot of control issues that are specific to this area, and
because the valuation of inventory is such an important area for Customs.
Depending on the type of business, different things will happen to purchased goods.
Businesses such as supermarkets buy from wholesalers then sell the purchases at retail
level. Businesses such as Boeing use the parts they buy to manufacture planes.
Businesses such as a sugar refinery turn the cane sugar they purchase into different
products before they sell it. So some inventory may be sold in the same form in which
it was purchased - other purchases may be substantially different by the time they are
sold. Some goods are sold at retail level and others are sold at wholesale level. Despite
all these differences, there is one thing that most sales have in common: all sales
generate similar sales documentation.
When a business makes a sale, accountants say that it has earned revenue. It does not
matter whether the buyer pays cash for the goods at the time of sale or whether it is a
credit sale. Under an accrual accounting system, revenue is recorded at the time of
sale irrespective of whether the cash for the sale is received at that time of not.
Whenever a business makes a sale, it should give the buyer some sort of sales
docket which gives the date of the sale, itemises the goods sold, the selling price and
gives the seller's details.
The company that makes the sale will keep a corresponding record of the sale,
sometimes in the form of a copy of the sales docket. With electronic cash
registers, the details of a sale are automatically recorded in the company's records, so that
a printed copy of the sales details is given to the customer but the seller's copy is stored
electronically.
The difference between the selling price of goods and the price those goods have cost the
seller to manufacture or buy in for resale is the profit on the goods. Accountants call this
difference the gross profit or gross margin. This difference represents the mark-up on
goods from their cost price.
Example
Gross Profit
If a retailer buys chairs for $50 each from the wholesaler and sells them for $150 each,
then the gross margin or gross profit on each chair would be $100. There would be a
200% mark-up on the cost price of the chairs.

20
Delivery of goods
It is common practice in most businesses for the seller to arrange delivery of goods to the
buyer. Of course, the cost of delivery (or freight) may be factored in to the selling price of
the goods or may be paid separately by the buyer. Freight may be sent by road, rail, air or
sea.
There is some special terminology that you are likely to see on delivery dockets and
invoices – most will be familiar to Customs officers. These terms are CIF and FOB. The
term CIF stands for costs, insurance, freight. It will be followed by the name of a
destination, perhaps a port or an airport for example, CIF Singapore. When you see this,
it means that the quoted price includes insurance, handling and freight charges up to the
given port. So these costs are included in the seller's price. It is also used in contracts and
invoices for the sale of goods where the seller's obligations include the shipment of the
goods and payment of freight and insurance.
The term FOB stands for free on board; for example, FOB Hong Kong. If you see this, it
means that the price that the seller is charging includes delivery at the seller's expense to
the location specified. At that location, title to the goods (or ownership) passes from the
seller to the buyer. A full list of these abbreviations is listed in the International Chamber
of Commerce’s ÍNCOTERMS 2000 (see ICC web page:
<http://www.iccwbo.org/incoterms/id3045/index.html >).
Sales
When goods are purchased, they are placed into inventory. When they are sold, they
are taken out of inventory. Manufacturing firms maintain inventory of:
raw materials, which are items they have bought for use in production but have
not yet used
work in progress (for partially finished goods). These goods do have a value, as
they can be finished and then eventually sold to bring in revenue
completed goods awaiting sale.
Inventory is valued at its cost price. This may be what it has cost the firm to buy it in,
or what it has cost to make. Calculating the exact cost of manufacture is not as simple
as it sounds. It is easy to know how much raw materials and labour has gone into making
an item. It is not so easy to know what proportion of the other costs that businesses incur
should be apportioned and allocated to the cost of the item. For example, if a business
makes computers, the factory in which they are made has overheads such as:
heating
lighting
maintenance costs on the building
the salaries of support staff, including the office administration and
secretarial staff.
The important point for you to know is that when businesses purchase items, they record
those items at the purchase price. This is also called the cost price or the historical cost
of the goods. Accountants say that they use an historical cost accounting system.
What they mean by this is that goods are recorded at cost price. This is used because
it is verifiable; there is a source document that proves that they paid a certain cost for a
certain item.
Goods continue to be recorded at cost price while they are in the firm's inventory. In a
manufacturing firm, even if they are partially completed, they will be recorded at
cost price. The cost of partially completed goods is the cost of the raw materials, labour

21
and any ancillary costs or overheads that have gone into the goods to get them to their
partially completed state.
Even when goods are ready for sale and are sitting in the finished goods inventory of the
company, they are still recorded at cost price. In a manufacturing firm, this is the cost to
the company of making the goods.
It is only when goods are sold that they leave the firm's inventory. At that time, the
firm will recognise that the inventory has decreased by the cost price of the goods. It
will recognise that there has been a sale by whatever the sale price of the goods was.
The difference between the cost price and the sales (or selling) price is the gross
profit or gross margin and represents the profit margin to the firm on the sale of those
goods.
Activity 2
Purchasing
1. Why do many companies maintain a separate purchasing department?
2. A company buys 100 heaters for resale at retail level. The heaters cost $60
each from the wholesaler. After the company buys the heaters but before it has
sold any, the wholesaler notifies the retailer that in future, heaters will cost $70
each. One week after the retailer buys the heaters, there is an unexpected cold
snap. The retailer sells all the heaters for $100 each. At what price will each
heater be recorded in the retail company's books? When each heater is sold,
what will the gross profit on that heater be?
Sample documents
Following are some sample documents you may come across in the area of
purchasing and revenue.
Figure 4
Confirm-
ation of
Order
TO: John Reason, Liquor Imports, Mermaid Beach, Hamilton

FROM: D. Miller
DATE: 1st July, 2009
1 CONTAINER HOLDING 66 BARRELS 3 YO BLENDED SCOTCH

WHISKY
We are pleased to confirm that your order for 66 barrels of 3 YO blend is
being shipped on container vessel ‘Victoria’ which is due to sail on 30th June ETA
Hamiton, Bermuda, 15 August approximately.

22
About Figure 4:
Liquor Imports, a firm in Bermuda, is buying Scotch whisky from William Grant and
Sons International, a distillery in Scotland. Mr Miller represents the Scottish
distillery and Mr Reason represents the buyer in Bermuda.
Mr Miller has contacted Mr Reason to advise that the whisky is about to be shipped from
Scotland to Bermuda. It is 1 July 2009.
The order is for 66 barrels of blended Scotch whisky that is over three years old and at
full strength. It will be shipped to Bermuda on the vessel Victoria. The vessel sails to
Hamilton.
Figure 5
Invoice
Liquor Imports
Mermaid Beach 5 June 2009
Hamilton INVOICE
Invoice Date: 5 June Order No. 5999 Client Order No.
2009 09/025
Shipping Marks: Import Licence No.
PRODUCE OF SCOTLAND
BLENDED SCOTCH WHISKY Vessel: From:
LABRADOR LIQUOR W/SALE Victoria Felixstowe
LIQUOR IMPORTS, HAMILTON
Quantity Description of Goods
ONE CONTAINER MSCU 2268668-8 holding:
66 barrels BLENDED SCOTCH WHISKY over three years
old at full strength
8,709.9 Litres of Alcohol at £2.00 per re-gauged Litre of
alcohol, cost of coopered cask included, lying Grant’s Girvan
17,419.80
Distillery
Insurance 14.06
Specifications, Attendance, Documentation & Certificates 198.75
£ 17,632.61
FREIGHT: FORWARD/COLLECT
‘We hereby certify the above invoice to be true and
correct and the whisky to be of Scottish origin’
YÜtáxÜ W `v UxtÇ
FRASER DEAN INC.
75 DAYS CREDIT
Terms: OPEN ACCOUNT – FUNDS TO BE TRANSFERRED BY SWIFT ON TO:
BANQUE NATIONALE DE PARIS (LUXG) S.A., LUXEMBURG Payment Due
In favour of: FRAZER DEAN INC – sterling A/c 63-111400 19th August 2008
Shipping Rotation & Units Contents Ullage Proof Weight Measur
Numbers Case/cask Nos. ements
09/0233 1-66 Bulk Litres 69.6% T.C.F.
12471 1.004
PAYMENT DUE:
19 August 2009

23
About Figure 5:
The Victoria is due to sail from Felixstowe in Scotland on 30 June 2009 and its estimated
date of arrival in Hamilton is 15 August 2009. The whisky is in a single container and
can be identified by its number, which is MSCU 228668-8.
You will see that William Grant and Sons uses a firm named Fraser Dean Inc. to handle
the export. This is a company that specialises in handling the export of Scotch whisky to
all parts of the world from Scottish distilleries. It may well be that Fraser Dean Inc. is
a separate company that is a subsidiary of William Grant and Sons (or both these
companies could be subsidiaries or another company). From the documents, we
cannot tell whether there is a link between the exporting firm and the distillery.
You will notice that the exporters have an address in Panama. This means that the
company is incorporated in Panama (registered in Panama under Panama law). In case
you are wondering why a firm that exports whisky from Scottish distilleries would be set
up in Panama, not Scotland, it is because Panama is a tax haven. You will find that
there are lots of businesses set up in places you would not think of as being hubs of
international business – like Panama, the Cayman Islands and Lichtenstein. Businesses
pay tax in the country in which they are incorporated and some countries charge little
or no company tax, or have special tax concessions for certain types of business, making
them attractive to companies trying to legally minimise tax.
You can get a lot of information from an invoice:
this is a wholesale not a retail transaction
the number of litres of whisky that is being shipped is 8,709.9 litres. You
may wonder why it would not be a nice round number like 8,710 litres.
Alcohol volumes (like petrol) alter slightly with temperature. There are
internationally agreed rules about the temperature at which the alcohol will
be stated and the volume is calculated and stated at that temperature even if the
alcohol is actually at a different temperature. This has to be done so that the cost
per litre can be calculated
the cost is £2 per litre and the number of litres being shipped has been regauged
or calculated at the standard agreed temperature
the bulk litres is also given
the Scotch is from a coopered cask. Coopers make the large wooden casks or
barrels for alcohol. These days, many casks are metal but since in this case a
coopered cask is used, it is probably referring to the traditional wooden cask
the casks containing the Scotch to be shipped is presently in one of
William Grant's Distilleries at Girvan. Notice that the term ‘lying’ is used. It is
quite common to talk of goods lying in a place. It simply means it is stored there
Fraser Dean Inc. has added its costs to the price of the Scotch and has
given Liquor Imports the total cost
there is a certification that the whisky is real Scottish whisky, not an imitation
this is order number 5999 that Fraser Dean Inc. has exported but it appears to be
the 25th export this year to Liquor Imports
payment has to be made within 75 days of placing the order. The payment is due
by 19 August 2009 so you know that there should be documents placing an
order 75 days before that
payment is to be made directly to Fraser Dean Inc's account, which suggests
that Liquor Imports is a regular customer (open account). They will take
what is owed to them and transfer the rest to William Grant and Sons. The

24
deposit must be made in pounds sterling (the word sterling is specified) and
Fraser dean's account number is given
Notice where the bank account is held. Fraser Dean is an export firm
operating in Scotland, registered as a company in Panama and keeping an
account in Luxembourg. This is likely to be for tax reasons too. Fraser
Dean banks with the Banque Nationale de Paris branch in Luxemburg. It is
likely be that the Luxemburg operations of the bank are actually set up as a
company separate from the main Banque Nationale de Paris, even though they
use the same name. This separation of the Luxembourg bank operations is to take
advantage of the different tax rates between France, the home of the Banque
Nationale de Paris, and Luxemburg
The money is to be transferred by SWIFT. We will look at SWIFT in more detail
when we consider foreign currency translation. This is referring to Liquor
Imports arranging with its Australian bank to transfer the money directly into
Fraser Dean's account.
Figure 6
Certificate
of Age
To the officer of Customs & Excise GIRIVAN
I/We WM. GRANT AND SONS DISTILLERS LTD

Of THE GIRVAN DISTILLERY
GIRVAN, AYRSHIRE, SCOTLAND
Declare that the spirits contained in the undermentioned SIXTY SIX packages, which were/will be
Delivered for exportation to BERMUDA on the TWENTY EIGTH day of JUNE 2009.
(1) are of the age shown in column 5;

(2) have been stored in wood in warehouse in this country for a period shown in column 6 below.
Particulars of Spirits Exported
(Unused spaces to be ruled through)
Description of spirits No. & Marks & numbers of Litres of Age Period of
description packages Alcohol storage in wood
(1) of packages (3) (4) (5) (6)
(2)
BLENDED SCOTCH ROT. 080233 8709.9 3/6/01 OVER 3
WHISKY MSCU 228668/8 YEARS
NOS. 1 TO 66
I/We request a certification accordingly.
Signature: ………]Éçvx \ÇzÜtÅ……………. Date: 28the June 2009.

(duly authorised person)

25
About Figure 6:
The Certificate of Age has been stamped by Her Majesty's Customs and Excise,
so there is not dispute about the type of goods being shipped. The Scotch meets
legislative requirements as to storage.
Figure 7
Certificate
of
Insurance
Vessel: From: Insured Value (currency)

Victoria Motherwell/Felixstowe £19,400.00
Via: To: Nineteen Thousand Four Hundred
Hamilton, Bermuda Pounds
Marks and Numbers:
PRODUCE OF SCOTLAND
BLENDED SCOTCH WHISKY
LABRADOR LIQUOR WHOLESALE PTY
1 CONTAINER BULK SCOTCH WHISKY

(66 BARRELS 3 YEARS OLD MG/MB BLENDED WHISKY)
About Figure 7:
The goods are insured with Lloyd's of London. Insurers such as Lloyd's divide large
insurance contracts into smaller parcels and smaller insurance brokers take on a parcel
each. This is called re-insurance and they do it to minimise their risk. The re-insurers are
not specified in the insurance contract but we can tell that this contract is re-insured
because it refers to underwriters and they are the re-insurers. If William Grant and Sons
has cause to make an insurance claim, for example, if the container was destroyed and the
goods were lost, then William Grant would claim from Lloyd's and Lloyd's would claim
from the re-insurers or underwriters.
We also know that a firm named Holmwood Insurance Brokers arranged this insurance
contract on behalf of Lloyd's. If there was any litigation over this insurance
contract (in other words, if there was a claim and it ended up in court), this could be
important because Holmwood could end up in court as a party to any legal action if it
has misrepresented the nature of the insurance contract in any way, either to Lloyd's
or William Grant and Sons.
Notice that the amount for which the goods are insured is not the exact same
amount as the amount in the invoice. It is common for the insurance to be 0.5 to

26
1% higher. In very small print at the bottom of the contract, you can read what the
cargo is and is not insured for. Variations to this may make you suspicious of the
declared Customs value.
Another name appears on the insurance certificate (and the Invoice) — Labrador Liquor
Wholesale Pty. This is a separate company although it is clearly linked to William Grant
and Sons in some way. Since the whisky is at the Girvan distillery, it is likely that the
distillery is set up as a separate company under the name of Labrador Liquor Wholesale
Pty.
Figure 8
Packing
List/
specific-
ations
About Figure 8:
The specifications take four pages. You will see each of the 66 casks in the container
is detailed. Each cask is numbered and its contents are specified, including the
temperature at which the weights are measured and the date they were filled. Back at the
distillery, there should be matching records showing what was filled and which casks at
the distillery the whisky came from.
At the bottom of each page of the specifications (which just means detailed
contents), the total for the page, the carried forward total from previous pages
(abbreviated to c/f) and the cumulative grand total appear.

27
Figure 9 Re; Order 5999 – yours 09/025 8 July 2009

Packing Dear Sirs,
List
We have pleasure in enclosing the under mentioned documents covering one
containing holding 66 barrels of BLENDED SCOTCH WHISKY over three years old
th
shipped on container vessel ‘Victoria’ ex Felixstowe due Hamilton around 15 August
2009.
(a) three invoices
(b) 1 Certificate of Age in duplicate
(c) 1 Certificate of Insurance in duplicate
(d) 1 specification/packing list
(e) 2 original bills of lading
TH
TERMS: OPEN ACCOUNT 75 DAYS CREDIT - PAYMENT DUE 19
AUGUST 2009
FUNDS TO BE TRANSFERRED – SEE DUE DATE.
To Bank Nationale de Paris (LUXG) SA, Luxemburg
In favour of: -Sterling Account 63-111400
We trust the consignment is received safely and would assure you always of our best
intentions.
`tÜç ] YÜtáxÜ
About Figure 9:
The final letter details all the documents that are being forwarded to Liquor Imports. You
can cross-check the order numbers, the payment details and terms of payment, and find
out what documents should exist from this letter.
Summary
When firms buy or make goods for resale, they record them at historical cost as part
of inventory. When those goods are sold, the selling price is compared with the cost
price to determine the profit margin on those goods. Firms maintain strict controls over
their purchases because this is an area where there is a high control risk. This is why
many companies have a separate purchasing department. It is also why most firms
have strict rules about the procedures for ordering goods, including the supporting
documentation for purchases.

28
Inventory Control Systems

Outcomes
define inventory
explain the importance of inventory control and how it is controlled
be aware of difficulties involved in inventory control.
Inventory
Most businesses are set up to make a profit. This profit is made by selling goods or
services, but in this topic, we will focus on businesses that sell goods, not services. Some
services that are commonly sold are legal advice, accounting advice, education/training,
dental and medical services.
Businesses can sell goods that they have made or that they have acquired for resale. The
goods for sale are referred to as inventory until they are sold. What firms regard as
inventory will vary depending on the nature of the business. A solicitor's office will
regard all its legal stationery as inventory yet a car manufacturer may not regard its
stationery as part of its inventory, although it will regard its car parts as inventory.
Valuing inventory
The general rule that applies to all assets including inventory is that the cost of the asset is
the sum of all of the historical costs incurred in getting the asset ready for its final use.
For inventory the final use is sale. Therefore, all of the costs incurred in getting the
inventory ready for sale are part of the cost of the inventory. For a merchandising firm
some of the costs which would be included in the cost of inventory are:
purchase price
inwards freight
Customs duties
other taxes such as GST or VAT paid to get the goods into store
purchasing department costs
The cost of the inventory is the FIS (free in store) cost plus the purchasing department
costs. Some companies will not record the purchasing department costs in the cost of the
inventory because the purchasing department costs are trivial amounts compared with the
cost of the inventory.
Any costs incurred after the inventory is ready for sale are not included in the costs of the
inventory. For a merchandising company, some of the costs which would be excluded
from the cost of the inventory are:
advertising and marketing
outwards freight
sales department costs
If a company manufactures items itself, they enter the accounting system at the cost of
manufacturing them. This will include the cost of any raw materials used to make them,
any labour and overheads such as lighting, heating and depreciation on manufacturing
machinery, which have been associated with them.

29
Example
Valuing manufactured goods
Accountants talk about overhead being allocated to goods. What they mean is that a
certain proportion of each overhead cost has been divided among each item produced.
So if the electricity bill for a quarter is $10,000 and the firm produces 10,000 items in
that time, they may allocate $1 of electricity costs to each item. So the value of the
manufactured item may be:
raw materials $30
labour cost $60
overheads $1
total cost price or historical cost $91
The allocation of overhead will always be a little arbitrary as there will always be a need
to make value judgements in this area. This is why two accountants, given the one set of
data for a firm, could come up with two different sets of figures for the cost price of
manufacturing the same one item - they have allocated the overhead in a different way to
different items. This is a most important point to understand about accounting: even
though accountants use numbers, which you may think of as being precise, very little is
precise in accounting.
If a business buys goods for resale, it is easy to determine the historical cost; it is the cost
of buying the goods because that is the historical cost when they entered the accounting
system. If a business has to pay freight or cartage inwards as part of the cost of acquiring
inventory, these costs will become part of the cost of the inventory. In fact, accountants
go even further; any costs associated with getting the inventory ready for resale will be
considered part of the historical cost of that inventory. For example, if a property
developer buys land on which there is an old building, and has to pay to have the building
demolished before re-building can commence, the developer will value the inventory of
the new building as the cost of the land, plus the cost of demolishing the old building,
plus the cost of building the new premises.
Computation of Overheads
Computing overheads is the biggest problem in inventory valuation. Entire university
units are devoted to studying a variety of overhead computation methods and comparing
the advantages and disadvantages of the methods. This unit provides a superficial
examination of overhead computation.
Overheads are comprised of all the costs associated with manufacturing which are not
directly attributed to a job. Some costs such as raw materials and labour can be cost
effectively recorded against individual jobs. These are called direct costs.
Some other costs can be recorded against individual jobs but the cost of doing so is too
great to make it worthwhile. Examples include lubricating oil for machines, minor
supplies such as rivets, etc. The feature of these type of costs is that their cost per job is
trivial. While these costs could be included in the direct costs, it is more cost effective to
include these costs in overheads.
Other costs cannot be recorded against individual jobs. Examples include supervisory
labour, rent of the factory, depreciation and maintenance of machinery. While these costs
relate to manufacturing in general, it is not possible to develop a causal relationship
between the cost and the manufacture of an individual job. Manufacturing overhead
includes these types of costs.

30
Overhead costs are totalled and divided by a selected activity base so they can be
allocated to individual jobs. A commonly used activity base is the number of labour
hours.
Example
Overheads
The total overheads for the Al-Baghli Manufacturing for October 2009 are $100,000.
The total number of labour hours used in October 2009 is 2,000. Job number 858 used
12 labour hours. How much overhead is to be applied to job 858?
Inventory & Profit

When businesses sell inventory, they sell to make a profit. If a retailer of beds had bought
a bed for $120 and sold it for $180, the profit on that bed would be $60.
We have previously stated that the cost price or historical cost of the inventory can vary
according to the amount of overhead allocated to it. The amount of profit that is
recognised on the sale of an item will vary according to the difference between the item's
cost price and its selling price. But we have just said that the cost price may vary. This
means that the profit may also vary.
Key Point
Profit
Profit is not a fixed and absolute thing in accounting but may vary according to the
value that has been given to the inventory.
Controlling inventory
Businesses need to maintain good control over their inventory because if they are losing
inventory through employee theft, for example, they are missing out on potential profit.
The best way to know what items a business has in its inventory is to do a stock-take. The
first issue about stock-takes is that it can take a lot of time and so it is not feasible for
most businesses to do it regularly. The second thing is that there is no point in doing a
stock-take unless a business knows how much stock or inventory should be here – this
information is sourced from the accounting records.
Businesses need to keep control of the amount that goes into inventory and the amount
that is sold (which is the amount that is taken out of inventory). If inventory is controlled
at these points, when a regular stock-take is done, the amount on hand (or still in stock)
should be the difference between the opening stock less what it has sold. If these amounts
do not tally, and goods have not deteriorated, evaporated or otherwise been damaged,
then they must have been stolen or the documentation is faulty.
Inventory methods
It is important that businesses know what inventory they have on hand (in stock) or
whether some is missing. You may think that identifying inventory is an easy matter; you
simply keep a record of what you put into your inventory. In practice, it is rarely that
simple.
There are three different methods that businesses use to determine how much inventory
they have.

31
Specific identification
Large, individual items can be specifically identified when they become part of inventory.
A naval dockyard can specifically identify different ships. However, it would not be able
to specifically identify all the nuts, bolts and rivets used on those ships. The advantage of
specific identification is that it makes it easy to keep control of large items where it is
easy to identify them individually.
Perpetual inventory
Under this method, inventory is not recorded in such a level of detail as it is with specific
identification. For example, a hardware store may sell a drill, and while they will need to
know that it was a particular type of power drill by a particular manufacturer, if they had
a number of that type of power drill in stock, it may not matter exactly which one of the
power drills of that type was sold.
When this is the situation, and the specific individual goods cannot be identified (which is
the case with all the nails that a hardware store sells). This is often used by supermarkets
and is used in conjunction with bar coding.
The goods are recorded as part of a group in the inventory on arrival and as the goods are
sold the cash register system automatically deducts the goods from the inventory, records
what the goods have been sold for and matches this against the historical cost of the
goods so there is an instant record of the profit.
Periodic inventory
This method has merit when businesses are dealing with inventory involving thousands of
items such as nuts or nails. They may be bought by weight so the exact number is
unknown, or they may be purchased in packs with a specific number in each pack.
When the nails are acquired by the retailer, they will not be recorded as inventory. This is
a fundamental difference between this method and the other methods. Instead, the retailer
will record the cost of the nails as one of the expenses of the business.
The retailer will not keep an ongoing record that matches the cost price of any s sold with
the selling price of nails sold, so it will not be possible to get an up to date record of profit
on the sale of nails at any given time. The retailer will only know the profit at the end of
the year when a stock-take is conducted. At that time, the retailer will calculate that the
difference between whatever stock was on hand at the start of the year plus whatever
stock has been purchased during the year, and whatever stock is on hand at the end of the
year, must be the amount of stock that was sold during the year. The only weakness with
this method is that the retailer cannot tell if stock has been pilfered.
This method made a lot of sense when all accounting records had to written by hand and
the time involved in matching the cost price of each sale with its selling price and
recording this at the time of each sale did not really justify the effort it took. But now that
goods can be identified by bar coding and all the information about the cost and the
selling price can be brought up by computer every time goods are scanned at a check-out,
periodic inventory is becoming less popular and is being replaced once again by perpetual
inventory.
Which inventory is sold first?

When supermarkets sell milk, they want to sell their oldest milk first so they should rotate
their stock so customers buy the oldest milk first. There are other goods where it does not
matter that the oldest one is sold first. An example is stationery. It does not deteriorate
over time so it does not matter whether the oldest or newest stationery is sold first.

32
When businesses are determining the profit they make on goods they sell, they need to
know the cost price of the goods to match it against the selling price. But sometimes, they
cannot work out the cost price exactly because they cannot know whether older or newer
goods are being sold from their stock of goods, especially where the historical cost has
changed over time.
Accountants make assumptions about the order in which items are sold from stock.
Different assumptions are allowable in different countries. The most common assumption
is that the oldest stock is sold first. This is often referred to as FIFO (First in/first out).
The other common method used is to take the average price of all the goods in stock and
assume that every item sold has a cost price of that average price. Accountants know
these methods may not exactly reflect the true situation. There is no rule in accounting
that requires accountants to make assumptions that reflect reality, although most
accountants will choose the method that they think is most suitable for the circumstances.
Production lines
One problem area involving inventory is production lines where there is a continuous
flow of goods. An example is cigarette manufacturing or wine bottling in Excise
factories. The difficulty for accountants is knowing exactly how many goods are in
inventory when the amount is constantly changing. Sometimes, goods are changed
considerably as they go through the production process.
Accountants deal with these situations by estimating the number of units that have been
produced.
Summary
In this topic, you have been introduced to the problems of inventory control. As you have
seen, this area raises special problems. Businesses need to know how much inventory
they have on hand. They count items as they enter inventory and as they leave it, and do
regular stock-takes to ensure that nothing has happened to the inventory when it is in
stock. Most businesses will also have rules about who can and who cannot have access to
its inventory.
It is important that businesses know exactly what is in their inventory because they earn
profit by selling inventory. The amount of profit on sale of inventory is the difference
between the cost price of the inventory and its selling price. Sometimes, accountants must
estimate the cost price. This can happen because they need to make assumptions about the
order in which goods are sold from inventory or because the goods are produced as a
continuous flow, which means that at any given time, there will be goods that are
complete but there will also be partially completed goods.
Activity 3
Inventory
At what points do businesses control inventory? What problems arise in the control of
inventory?
Please record your answers in your personal notebook.

33
Topic 2
Financial Statements
Topic 2: Financial Statements
Classifying items
Introduction
This topic introduces the main classification categories for financial information. After
completing this topic you will be able to classify simple items as assets, liabilities,
revenue, expenses or capital.
In accounting, we divide everything into 3 classifications:
assets
liabilities
owners' equity (also called Shareholders' equity)
Owners' equity is subdivided into 4 classifications:
revenue
expenses
capital
dividends
If it does not fit into one of those classifications, it does not get recorded in the
accounting system. You need to be able to classify items into the groups given above.
Definitions of each classification

Assets
Assets are economic resources controlled by a business that are expected to benefit future
operations. Items such as cash, money owed to the business (called debtors), goods held
for sale (called inventory), equipment, vehicles, land, buildings and investments are
examples of assets.
Liabilities
Liabilities are obligations of the business; the claims of creditors against the assets of the
business. Items such as money owed to suppliers (called creditors) and money owed to
the bank are examples of liabilities
Owners' or shareholders’ equity

Owners' equity (also called Shareholders' equity) is the excess of assets over liabilities;
the amount of an owner's net investment in the business plus profits from successful
operations which the business has retained. This category shows the value (worth) of the
business to its owners.
Revenue
Revenue shows increases in owners' equity other than capital. Revenue usually comes
from the proceeds of goods sold or services provided by a business.
Expenses
Expenses show decreases in owners' equity other than dividends. Expenses usually
comprise items such as the cost of goods sold and services used up in the process of
obtaining revenue.

35
Capital
Capital shows increases in owners' equity from contributions of funds by the owners.
Dividends - decreases in owners' equity from distributions of funds to the owners
Activity 4
Classification
1. Classify the following items as revenue, expenses, assets, liabilities or capital
a) cash
b) sales
c) mortgage on company premises
d) debtors (also called accounts receivable)
e) rent paid in advance
f) electricity
g) J. Jones capital
h) loan from a finance company
i) wages
j) company vehicle
k) workers’ tools/equipment
l) stationery
2. What are the types of transactions which can affect the balance of owners' equity?
3. In your own words, describe the following terms and give an example of each:
a) asset
b) liability
c) revenue
d) expense
There are two things which the owner of every business wants to know:
Is my business making a profit?
Is my business making me wealthier?
The profit and loss statement and balance sheet answer these questions.

36
The profit and loss statement

Figure 10
Profit & Loss
Statement
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We have already said that there are 6 classifications of items in accounting. Only 2 of
those classifications are concerned with items which are connected with the direct
operations of the business - revenue and expenses.
The profit and loss statement nets these items off to show how well a business has done
from its operations. The profit and loss statement simply says ‘This is what we earned
from operating our business and this is how much it cost us to earn it.’
How do we determine profit?
Being technical for a moment, we describe profit as the difference between capital (or
owners' equity) at the beginning of a period and capital (or owners' equity) at the end of
the period (assuming zero consumption).
Therefore, profit is the net change of all additions to and subtractions from
owners' equity over a period.
We define revenues to be increases in owners' equity in a period (except from
transactions with owners).
We define expenses to be decreases in owners' equity in a period (except from
transactions with owners). We can use the following equation:
Profit = Revenue - Expenses
Income and profit are synonyms. A loss is a negative profit.
If revenue is greater than expenses, the business makes a profit (income). If revenue is
less than expenses, the business does not make a profit, it makes a loss.
Profit and loss statements are usually prepared on an annual basis, usually for
company tax purposes. They show how profitable the operations of a business have
been for the past year. Thus, at the top of the profit and loss statement, it will say what
period of time it covers. For instance, if it says ‘for the year ended 30 June 2009’, you

37
know that it is showing how much profit (or loss) from operations was earned in the
twelve month period 1 July 2008 to 30 June 2009.
The Balance Sheet

Figure 11
Balance
Sheet
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Accountants usually say that the balance sheet gives the accounting equation. This
equation is:
Assets - Liabilities = Owners Equity
often rearranged to:
Assets = Liabilities + Owners' Equity
This equation is true at all times.
If assets increase, either liabilities or owners' equity must also increase by the same
amount.
Every transaction the firm enters that changes its assets, liabilities or owners' equity must
have another component to it which will maintain the equality of the equation.
Because owners' equity can be divided into capital, dividends, expenses and
revenue, the accounting equation becomes:
Assets + Expenses + Dividends = Liabilities + Capital + Revenue
which is a statement of everything that can happen to a business and contains all the 6
classifications.
If we play around a bit with this equation it is the same as:
Assets = Liabilities + Capital - Dividends + (Revenue - Expenses)
We have already said that Revenue - Expenses = Profit, so now we can write the
accounting equation as:

38
Assets = Liabilities + Capital - Dividends + Profit

We have previously said that owners' equity represents the value of the business to its
owners. If the business is earning a profit, it will be worth more to the owners. If
the business is making a loss, it will be worth less.
So profit increases owners' equity and losses decrease owners' equity. This means that
profit is part of owners' equity. If owners' equity increases, then the value of the business
has increased. If owners' equity decreases, then the value of the business has decreased.
Every transaction has two components - this is called the principle of duality or dual
aspect. This is the basis of double entry bookkeeping, which we will come to shortly.
The idea is that every time there is a transaction, it has a double sided effect within
the business itself.
Here are some examples to show you how this works:
Example 1
If a business pays $12,000 cash for a vehicle, the value of its vehicles goes up by
$12,000 but its cash goes down by $12,000.
If we put this into the accounting equation:
Assets = Liabilities+ Owners' Equity
Vehicles + $12,000
Cash ($12,000)1
Assets have gone up by $12,000 and down by $12,000 so the equation is still
balanced. Since there has been no change to owners' equity, the owner is no
better (or worse) off following this transaction.
1
Note that we put brackets around negative numbers in accounting. This is so there is no mistaking them. It is a
lot easier to read ($12,000) than -$12,000.

39
Example 2
The owner of a business contributes $2,000 to start up the business.

Capital +$2,000
Cash +$2,000
Cash has gone up by $2,000 and owners' equity has gone up by $2,000. Since
owners' equity has increased by $2,000, this transaction has made the owner better
off. The value of the business has increased by $2,000.
You may wonder how the owner can be better off when the owner contributed the
$2,000. Surely the owner is personally $2,000 worse off but the business is
$2,000 better off so effectively the owner is no better off. This illustrates an
important principle of accounting: the business is always treated as separate from its
owner – it is a separate legal entity.
Example 3
The business owes $5,000 to the bank for a loan and it repays the loan in full.
Loan ($5,000)
Cash ($5,000)
The liability to repay the loan has decreased by $5,000 and the business' cash has
decreased by $5,000. The accounting equation is therefore still in balance. The owner
is no better (or worse) of since there has not been a change to owners' equity.
Dividends
Dividends are distributions to the owners of a company (its shareholders). If a
business is not set up as a company, distributions to the owners are
called drawings.
Dividends are not an expense. They are known as appropriations. An
appropriation is a use of profit.
Owners’ equity and profit

Owners' equity can change in one of three ways:
the owners can contribute more funds (capital)
funds can be distributed to the owners (dividends)

40
the firm can earn profits.

The relationship between these three items is as follows:
Opening owners' equity

+ Contributions of capital
+ Profit
- Dividends
= Closing owners' equity
Contributions of capital and dividends are transactions with the owners and are excluded
from the definitions of revenues and expenses.
Activity 5
Classification
1. What is the difference between a profit and loss statement and a balance sheet?
2. Using an example, explain how every transaction has at least two effects on the
accounting equation.
3. What effect will each of these transactions have on assets, liabilities, revenue,
expenses and capital of the business? The first transaction has been analysed for
you.
Ali contributed $4,000 to establish an accounting business.
Increase capital by $4,000
Increase cash by $4,000
a) Bought office equipment for $500 cash
b) Received $1,000 cash for accounting services provided to a client.
c) Provided accounting services valued at $2,000. Billed the client for
these services.
d) Paid electricity bill of $60
e) Bought office stationery $40
f) Bought office equipment for $200 on credit
g) Paid $50 off the amount owed for office equipment
h) Received $2,000 owed for accounting services previously provided
i) Withdrew $100 for owner's personal use.

41
Activity 6
Classification
1. Analyse the effect of each of these transactions on the accounting
equation (Assets = Liabilities + Owners' Equity).
a) Ali wins $50,000 and places $20,000 of the money in a special business bank
account to set up an accountancy service
b) Buys equipment $5,000
c) Gives accountancy advice and receives $8000
d) Pays water bill $40
e) Advertises in newspaper $20. Ali expects to receive at least $400 in new business
from the advertisement
f) Hires a casual assistant
g) Buys computer for use in the business for $500 paid now and $4000 on credit
h) Completes documentation and bills clients $9000
i) Pays wages to casual staff $300
j) Receives money from client $9000.
Please record your answers in your personal notebook.
Debits and credits

In accounting, we use the terms debit and credit to explain increases and
decreases in different types of items.
Debit comes from the Latin meaning ‘to receive’ and credit comes from the Latin
meaning ‘to give’.
When dealing with assets, when you receive an asset you will debit the asset and when
you give an asset you will credit the asset. The debit and credit terminology developed
before negative numbers were developed. If we were to develop accounting now we
would not use debits and credits but would use positive and negative numbers2. Debits
and credits allow the recording of transactions without the use of negative numbers.
As we have already said, every transaction has two parts to it. This was the
principle of duality or dual aspect.
If we return to the accounting equation:
Assets + Expenses + Dividends = Liabilities + Capital + Revenue
If we increase an item on the left hand side (assets, expenses or dividends) we debit
that item and if we reduce an item on the left hand side we credit that item.
The rule reverses on the other side of the equals sign.
If we increase an item on the right hand side (liabilities, capital or revenue) we credit
that item and if we reduce an item on the right hand side we debit that item.
2
Because computers do not understand debits and credits they can record transactions using positive and negative numbers

42
Every transaction has a debit side to it and a credit side to it. If we increase an asset
(a debit) then we must decrease another asset (a credit), decrease an expense or dividend
(a credit) or increase a liability, capital or revenue (a credit).
Because there are always the two sides to every transaction, we call this method of
recording double entry bookkeeping. It is a self-checking system because the debits
must always equal the credits. Debits and credits are opposites of each other.
Example 4
Land worth $100,000 is bought by a business.
The business has paid cash for the land so its cash has decreased by $100,000.
There is only one transaction here - the purchase of land.
But there are two aspects to the transaction:
increase in land (increase in an asset)

decrease in cash (decrease in an asset)
The business has given cash to receive the land.
An increase in an asset is a debit. A decrease in an asset is a credit.
There is something else to notice about this example. One transaction led to a
debit and a credit. So funds in equals funds out, even though both parts of this
transaction led to a "plus" and a "minus" to assets.
Maths with debits & credits

We denote whether an amount is a debit amount or credit amount by placing the
abbreviation Dr or Cr after the number. 500 Dr means a debit amount of 500.
Debits and credits behave like positive and negative numbers when they are added.
500 Dr + 600 Dr = 1,100 Dr
500 Cr + 300 Cr = 800 Cr
700 Dr + 400 Cr = 300 Dr
900 Cr + 200 Dr = 700 Cr
300 Dr + 500 Cr = 200 Cr
600 Cr + 900 Dr = 300 Dr
Activity 7
Debits and Credits
1. What is meant by double entry book-keeping?
2. Would the following accounts have a debit or credit balance?
a) Cash
b) Land
c) Accounts receivable
d) Accounts payable
e) Wages
f) Electricity expense.

43
Journal entries
Further to the brief outline covered in Topic 1, journals record transactions in the order
they occur. When a computerised system is used, the computer automatically transfers the
information from the source documents to the journal and then the ledger and then to the
trial balance and then to the financial statements.
Example 5
Journal entries
On 1 November 2009, the owner contributes a vehicle valued at $50,000 to the
business. On 2 November 2009, the business buys office supplies for $500 cash.
1/11/09 Dr Vehicles 50,000

Cr Capital 50,000
2/11/09 Dr Office Supplies 500

Cr Cash 500
There are a few things to notice about these entries:

they are listed in chronological order
each entry gives the debit then the credit side of the transaction
Credits are indented from debits. Debits are written to the left and credits
are written more to the right.
the amount of the transaction is recorded twice - firstly as a debit then as a credit
Some journal entries also contain the following:
a column where you can write a reference to a source document (e.g.
purchase order, invoice)
a short description of the transaction. This is given at the end of each journal
entry. For the first entry in the example, we would write:
1/11/09 Dr Vehicles 50,000
Cr 50,000
Capital
(Vehicle contributed by owner)
Ledger entries
The problem with journal entries is that it is difficult to keep track of different
account balances. The ledger enables us to keep track of each specific account. A
separate ledger account is maintained for each individual asset, liability, revenue
item, expense or owners' equity item. The information is listed according to
whether it is a debit or a credit. At the end of the accounting period (usually one
year), all information for a particular account can be easily summarised to give a
total for that item.
Since businesses have many different types of accounts, they will set up an index so each
account has its own distinctive number and accounts may be easily found. When

44
businesses number accounts they usually start asset accounts with the number 1,
liability accounts with the number 2, capital accounts with the number 3, revenue
accounts with the number 4, and expense accounts with the number 5.
Example 6
Ledger entries
On 1/10/09, an owner contributes $5,000 to his car repair business. On 2/10/09, the
business buys a computer which costs $2,000. On 3/10/09, the electricity bill of $60 is
paid. On 4/10/09, a customer pays $100 for a car service. On 5/10/09, a customer pays
$80 for car inspection.
The journal entries to record these transactions would be:

1/10/09 Dr Cash 5,000
Cr Capital 5,000
2/10/09 Dr Equipment 2,000

Cr Cash 2,000
3/10/09 Dr Electricity 60
Cr Cash 60
4/10/09 Dr Cash 100

Cr Sales revenue 100
5/10/09 Dr Cash 80
Cr Sales revenue 80
Even from such a short example, it is not easy to know the balance of cash or sales
revenue. And it is hard to have to look down all the transactions to work out what each
balance should be. With a ledger, we can easily work out the balance of each item.
You keep a ledger for every type of account you use. In this example, we will
need ledger accounts for:
cash
capital
equipment
electricity
sales revenue
The number of ledger accounts is determined by the level of detail required in the
information produced by the accounting system. In this example there are two asset
accounts: cash and equipment. If we did not need information on the composition of the
assets but only on the aggregate amount of assets then one asset account would
suffice.
The first transaction, on 1/10/09, will lead to an entry in the ledger accounts
of cash and capital. In the ledger, as with the journal entries, debits are written
on the left and credits are written on the right.
To record the debit of $5,000 to the cash account, we go to the cash ledger and
enter $5,000 on the debit (left hand) side. As a cross reference, so we can see at a
glance where that $5,000 has come from, we also write the opposite title. In this

45
case, we write "capital" so it is easy to see that the debit of $5,000 has come from
capital (i.e. a contribution by the owners).
Cash
1/10/09 Capital $5,000
To record the credit of $5,000 to the capital account, we go to the capital ledger and enter
$5,000 on the credit (right hand) side. As a cross reference, so we can see at a glance
where that $5,000 has come from, we also write the opposite title. In this case, we write
‘cash’ so it is easy to see that the credit of $5,000 has come from cash being paid by the
owners to the business.
Capital
1/10/09 Cash $5,000
Here are all the ledgers written in full
Cash
1/10/09 Capital $5,000 2/10/09 Equipment $2,000
4/10/09 Sales Revenue $100 3/10/09 Electricity $60
5/10/09 Sales Revenue $80
Capital
1/10/09 Cash $5,000
Equipment
2/10/09 Cash $2,000
Electricity
3/10/09 Cash $60
Sales Revenue
4/10/09 Cash $100
3/10/09 Cash $80
To balance the cash account
Cash
1/10/09 Capital $5,000 2/10/09 Equipment $2,000
4/10/09 Sales Revenue $100 3/10/09 Electricity $60
5/10/09 Sales Revenue $80 Balance carried down $3,120
$5,180 $5,180
Balance brought down $3,120
This shows that the amount of cash which came into the business was $5,180. It came in
from contributions from the owner (capital) and selling services (sales revenue).
Payments were made to buy equipment and to pay the electricity bill. After the payments,
the business was left with cash of $3,120. Since the balance brought down is a debit, this
shows that the business has earned more cash than it has spent during this period of time.

46
If the balance had been a credit, the business would have spent more cash than it had, and
would need a bank overdraft to tide it over until more cash came in.
Trial Balance
After all of the transactions have been posted and the accounts have been balanced
the next step is to extract the financial statements. Before going to this step an error
checking procedure called the trial balance is used.
All the accounts in the ledger are listed down the page with their balances written in one of
two columns. Debit balances in the left column. Credit balances in the right column.
The total of the debit column must be equal to the total of the credit column. If they are
not equal an error has been made.
The trial balance will only detect some types of errors. Errors such as recording
transactions in the wrong accounts, not recording a transaction or recording a transaction
twice will not be detected in the trial balance.
Example 7
Trial Balance
Trial Balance as at a specified date:
Account Dr Cr
Cash 2,500
Car 6,000
Bank Loan 2,000
Capital 5,000
Sales Revenue 4,000
Wages Expense 1,500
Dividend 1,000
Total 11,000 11,000
The financial statements can be produced after you are sure the trial balance is correct.
The assets, liabilities, capital and retained profits are recorded in the balance sheet.
The revenues, expenses and dividends are recorded in the profit and loss statement.
Each statement must contain:
the name of the statement
the name of the entity
the date(s) to which the statement refers.
Sample financial statements follow:

47
Example 8
Company X
Profit and Loss Statement for period
ending 31 December 2009
Sales Revenue 4,000
less Expenses
Wages Expense 1,500
Net Profit 2,500
less Dividends 1,000
Retained Profits 1,500
Company X
Balance Sheet at 31 December 2009
Assets
Cash 2,500
Car 6,000
Total Assets 8,500
Liabilities
Bank Loan 2,000
Net Assets 6,500
Shareholders’ Equity
Capital 5,000
Retained Profits 1,500
Total Shareholders’ Equity 6,500

48
Profit & Loss/Balance Sheets Examples

Here is some data taken from the annual reports of two companies. Examine the
statements to find areas we have talked about in this module. Total figures in some rows
have been omitted to make the documents simpler.
Better Foods Ltd
Profit and Loss Statements for years ended 30 June
2004 2005 2006 2007 2008

Gross Sales $10,505 $11,500 $12,818 $14,024 $15,627
Less Sales Returns $16 $18 $29 $38 $53
Net Sales
Other Revenue $48 $59 $68 $75 $86
Total Revenue
Less Cost of Goods Sold $7,328 $7,997 $9,023 $9,341 $10,568
Gross Profit
Less Expenses
Wages Expense $2,193 $2,388 $2,458 $3,159 $3,268
Rent Expense $547 $584 $679 $821 $1,078
Depreciation Expense $106 $121 $141 $158 $185
Interest Expense $7 $25 $25 $31 $41
Other Expenses $81 $83 $118 $123 $132
Total Expenses
Net Profit Before Tax
Less Income Tax Expense $104 $94 $108 $127 $149
Net Profit After. Tax
Opening Retained Profits -$552 -$381 -$254 -$96 $42
Profits Available for
Appropriation
Less Dividends $- $122 $147 $163 $179
Closing Retained Profits

49
Better Foods Ltd

Balance Sheets as at 30 June
2004 2005 2006 2007 2008
Current Assets
Cash $115 $126 $141 $154 $171
Accounts Receivable $179 $196 $218 $238 $266
Prepayments $20 $21 $30 $31 $33
Inventory $948 $1,017 $1,154 $1,210 $1,329
Investments $27 $29 $32 $34 $38
Total Current Assets
Non-Current Assets
Plant & Equipment $424 $520 $649 $758 $944
Property $444 $483 $500 $486 $604
Intangibles $- $- $200 $190 $180
Total Non-Current Assets
Total Assets
Current Liabilities
Accounts Payable $1,175 $1,101 $1,293 $1,141 $1,398
Wages Payable $83 $91 $93 $120 $124
Tax Payable $102 $92 $106 $124 $146
Dividends Payable $- $122 $147 $163 $179
Total Current Liabilities
Borrowings $165 $200 $310 $399 $470
Provisions $12 $14 $16 $19 $22
Total Non-Current
Liabilities
Total Liabilities
Net Assets
Shareholders' Equity
Capital $1,000 $1,025 $1,055 $1,094 $1,124
Retained Profits -$381 -$254 -$96 $42 $102
Total Shareholders' Equity

50
Big Food Company Ltd

Profit and Loss Statements years ended 30 June
2004 2005 2006 2007 2008
Gross Sales $15,227 $15,985 $16,873 $18,253 $19,314

Less Sales Returns $59 $64 $71 $78 $89
Net Sales
Other Revenue $488 $473 $1,358 $567 $1,188
Total Revenue
Less Cost of Goods Sold $11,539 $11,983 $12,130 $13,237 $13,731
Gross Profit
Less Expenses
Wages Expense $2,634 $2,840 $3,605 $3,759 $4,131
Rent Expense $273 $280 $468 $482 $651
Depreciation Expense $311 $328 $352 $346 $374
Interest Expense $53 $65 $138 $147 $120
Other Expenses $264 $286 $892 $371 $856
Total Expenses
Net Profit Before Tax
Less Income Tax Expense $170 $188 $152 $120 $161
Net Profit After Tax
Opening Retained Profits $1,870 $2,566 $2,698 $1,848 $1,901
Profits Available for
Appropriation
Less Dividends $284 $293 $1,273 $227 $250
Closing Retained Profits

51
Big Food Company Ltd

Balance Sheets as at 30 June
2004 2005 2006 2007 2008
Current Assets
Cash $145 $152 $161 $184
Accounts Receivable $492 $483 $471 $464 $335
Prepayments $38 $94 $68 $120 $50
Inventory $2,121 $2,105 $2,230 $2,325 $2,524
Investments $59 $64 $83 $71 $52
Total Current Assets
Non-Current Assets
Plant & Equipment $1,865 $1,982 $2,023 $2,079 $2,138
Property $822 $1,359 $877 $1,194 $776
Intangibles $693 $671 $655 $647 $638
Total Non-Current Assets
Total Assets
Current Liabilities
Accounts Payable $1,395 $1,458 $1,154 $1,525 $1,633
Wages Payable $151 $186 $196 $222 $210
Tax Payable $165 $182 $147 $116 $156
Dividends Payable $284 $293 $573 $227 $250
Total Current
Liabilities
Non-Current
Liabilities
Borrowings $520 $845 $1,797 $1,959 $1,326
Provisions $476 $571 $274 $573 $606
Total Non-Current
Liabilities
Total Liabilities
Net Assets
Shareholders'
Equity
Capital $678 $677 $579 $547 $572
Retained Profits $2,566 $2,698 $1,848 $1,901 $1,944
Total Shareholders'
Equity
You will notice that the cost of goods sold and the inventory appear in the
financial statements. Gross sales are the total sales made by the company. Sales returns
occur if a purchaser returns goods because they are faulty or otherwise unsuitable. Net
sales is the difference between gross sales and sale returns. When you see the word ‘net’
in accounting, it means that something has been subtracted from the total. ‘Gross’ means
that nothing has been subtracted from the total.

52
One of the current assets is inventory. This is an important asset for both the companies.
When that inventory is sold, it becomes part of the cost of goods sold. You cannot tell
whether the firms use perpetual or periodic accounting from the financial statements.
These firms operate the same type of business and are competitors. Compare the
figures provided for the two companies. Which one do you think is bigger? If you were
an investor, which one would you choose to invest in? Here is a hint. Look at the
increases in assets over time. If liabilities are increasing at a more rapid rate than
assets, then the company is not doing so well. Look at the profit margin, which is the
difference between net sales and cost of goods sold. Are the companies managing to
make as good a profit on the various items they sell? Are the other expenses increasing
so rapidly that these are chewing up profit? Once you start to look, you may be
surprised at how much you can work out for yourself just by examining the financial
information and applying common sense.
Conclusion
Accounting is a language. It is the language of money. Like all languages, it is a way of
communicating. And like all languages, it depends who is translating it. For instance, a
Malay speaker may miss many of the nuances of English in translation. Yet this is
the very problem that Customs administrations face when they look at the financial
information of companies. Accountants have used one language, or set of rules, to
compile accounting information but Customs needs to translate it into a different
language to meet its requirements.
Activity 8
Inventory
What does the following extract from a company’s financial statements tell you about
the value of its inventory for accounting purposes and Customs purposes?
Inventory ($’000) 2007 2008

At cost
Raw materials 48,333 52,855
Work in progress 28,540 33,157
Finished goods 161,759 186,147
Other stock 2,015 3,661
240,647 275,820
At net realisable value

Raw materials 3,341 6,321
Work in progress 867 1,883
Finished goods 11,128 18,725
15,336 26,929
255,983 302,749

53
Topic 3
Customs Issues
Topic 1: Accounting cycles
Foreign Currency Transactions

Overview
In this topic we will be looking at how payments are made in foreign currencies, how
money is transferred overseas to make these payments and introduces exchange rate
movements.
explain why there are exchange rate movements
identify how international payments are made
explain how financial institutions settle international payments.
Introduction
In the last 25 years massive changes have occurred to world financial systems. Banking
Foreign Exchange controls were removed in many countries, foreign banks were allowed
to operate internally and residents were allowed to have foreign currency for the first
time. With the advance of technology, the use of credit cards and other electronic forms
of payment were commonly used rather than cash. In the business area, more firms
started to buy and sell directly in foreign markets. As part of the changes to the financial
system, more currencies were floated rather than having Government fixed rates of
exchange so that a country’s currency value comparative to the value of other currencies
changed each day. This meant that exchange rate movements and the methods of
international settlement became very important to Australian businesses. This topic will
introduce you to the complexities of this area.
Exchange rate movements

One of the areas that economists are concerned with is what makes exchange rates move.
Since this is a course on accounting, not economics, we will not be going into this
complex area in detail. However, it is important that we do briefly cover exchange rates
so that some of the accounting issues in the area of international settlements makes sense.
Basically, exchange rates move because of supply and demand. The principles behind
supply and demand are very simple. When an item is in demand, but the supply of it is
limited, then it can be sold at a high price. If the item is readily available, people will not
be prepared to pay so high a price. Exactly the same thing happens with money.
Example
Inventory
Let us assume that Thai silk clothing becomes the fashion in Country X. Everybody in
Country X wants to buy Thai silk clothing to wear. So importers start buying Thai silk
clothing from Thailand. The Thai currency is the baht, and the sellers of Thai clothing
in Thailand will want to be paid in baht. As you know, it is not common for foreigners
to have baht at their disposal so they will need to sell some of their currency and buy
Thai baht. This means that the demand for Thai baht will increase. The supply of Thai
baht has not increased so the price for Thai baht will rise. Although the real world is
far more complex, the exchange rates change on the basis of supply and demand, as
outlined above.
Movements in the US dollar or Euro are in response to the demand for US dollars or
Euro. To measure this, we use a benchmark or standard as a guideline. We compare the

55
demand for US dollars with the demand for the currencies of US’s main trading partners.
It is, as you can imagine, a complex procedure.
Paying for overseas goods

One of the benefits of technology is that it has made it a lot easier to buy and sell goods
overseas. So let us look very briefly at what is involved in importing and exporting goods
– figure 12 below shows what happens.
Figure 12
Import-
Export
Procedure
Source:
www.export
911.com
1. Seller and Buyer conclude a sales contract, with method of payment usually by letter of
credit (documentary credit).
2. Buyer applies to his issuing bank, usually in Buyer’s country, for letter of credit in favour
of Seller (beneficiary).
3. Issuing bank requests another bank, usually a correspondent bank in Seller’s country, to
advise, and usually to confirm, the credit.
4. Advising bank, usually in Seller’s country, forwards letter of credit to Seller informing
about the terms and conditions of credit.
5. If credit terms and conditions conform to sales contract, Seller prepares goods and
documentation, and arranges delivery of goods to carrier.
6. Seller presents documents evidencing the shipment and draft (bill of exchange) to paying,
accepting or negotiating bank named in the credit (the advising bank usually), or any bank
willing to negotiate under the terms of credit.
7. Bank examines the documents and draft for compliance with credit terms. If complied with,
bank will pay, accept or negotiate.
8. Bank, if other than the issuing bank, sends the documents and draft to the issuing bank.
9. Bank examines the documents and draft for compliance with credit terms. If complied with,
Seller’s draft is honoured.
10. Documents release to Buyer after payment or on other terms agreed between the bank and

56
the Buyer.
11. Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the
goods or the delivery order.
Methods for financing imports/exports

Several methods for financing sales can be identified and there may be additional
variations. Methods we will discuss are:
electronic funds transfer
open account sales
payment in Advance
Documentary Collection
Documentary Letters of Credit.
Electronic Funds Transfer
Most people would be familiar with electronic funds transfer or EFT. This method
involves a series of discrete transactions starting with the order from the originator
through the chain of facilitating banks to the beneficiary’s account. It also involves
remission of funds or other form of settlement between the banks, utilising wire transfer
systems and clearing houses such as SWIFT.
Weaknesses in this method include the need to clarify any bank conditions imposed to
protect the banks against the risk of an ineffective electronic transfer (for example,
relating to evidence of identity) in the contract of sale.
One variation of this can be inter-bank transfers. Let us assume that a company buys
goods from India, so those goods have to be paid for in rupees. If the company happened
to have a bank account in an Indian bank, in rupees, it could write a cheque from that
bank. But it is unlikely that an overseas company would have such an account. Perhaps
the company's local bank has an arrangement with an Indian bank so that the company

57
can arrange for its bank to make an inter-bank transfer and the Indian bank will draw a
cheque in rupees on behalf of the company. One problem that may occur is that exchange
rates between the US dollar and the Indian Rupee can move unfavourably between the
time the goods were ordered and the time they are actually paid for, meaning that the
company ends up paying more than it planned for.
Case Study
SWIFT
Many international transactions involve SWIFT. Its full name is the Society for
Source: < Worldwide Interbank Financial Telecommunications and is a non-profit organisation
http://www.s with headquarters in Brussels, Belgium. It provides rapid electronic transmission of
wift.com> foreign exchange payments requests from one member to another. It uses a dedicated
computer network, encrypted data with a high level of additional security and there is
a global standard about how data is transmitted. SWIFT is owned by its members and
it currently has about 5000 members in over 200 countries, moving approximately
15 million transfers per day.
Sales on Open Account

An open account sale allows a buyer the advantage of a period of credit between the time
the goods are ordered and despatched or the service provided and the time when payment
is made into the seller’s account. In other words, it is geared towards the buyer at the
expense of the seller and will normally occur only after the buyer and seller have
established a sound and trusting relationship between each other.
Example
Under a contract of sale the seller gives the buyer 180 days credit. The price that the
buyer has to pay for this privilege is the contract value plus 6%. The buyer can get a
return on the cargo quickly which effectively is the equivalent of putting the seller’s
money on deposit in the buyer’s bank. The buyer might be in a country with high
interest rates, (say 20%), and the seller’s bank rate is 4%. The buyer will have the
money on deposit for 180 days; the seller will borrow for the same period. The seller
therefore incurs 2% or half of the annual rate. The buyer earns 10% being half of his
annual rate. The practical effect of this scenario is that the seller pays 2% to the bank
and nets a profit of 4% (contract margin minus interest), while the buyer pays 6% to
the seller and increases profit by 4% (interest gained minus contract margin). Another
way of looking at this scenario is that it is equal to getting the product on the shelf for
8% less than a competitor’s price.
Payment in Advance
This is the opposite of what we have just discussed because all the risk now falls on the
buyer. It might be acceptable if the seller is internationally known and reputable or where
there has been a long-standing commercial relationship between buyer and seller, but the
buyer is at risk if the seller doesn’t perform their obligations.
Documentary Collection
The documentary collection process, in essence, deals with a written commitment to pay.
In simple language, it can be described as a formalised I.O.U. Looking at the following
everyday example helps to illustrate what is involved. Imagine an office situation
between two colleagues:
colleague A needs money. Colleague B knows that A needs this money. In a
considerate gesture, B approaches A and offers to lend him money on the proviso

58
that A signs an I.O.U. agreeing to pay him back at the end of the month. A thanks
B, signs and accepts the money.
A needs money. B has not noticed this. A approaches B and requests a loan, stating
he will sign an I.O.U. for the loan amount. B agrees and the transaction takes place.
In the two examples above, one I.O.U. was initiated by the colleague giving the money,
and the other was initiated by the one accepting the money.
In documentary collections, the process is similar, where it is either initiated by the seller,
or it is initiated by the buyer. Under this method of payment the seller uses the
international banking system to ‘collect’ payment from the buyer. The simple example
used above is known as a clean collection. In a documentary collection banks are more
involved in the transaction.
It is called a documentary collection because the seller requires its bank to forward key
documents relating to the transaction (the transport documents) to the buyer via a
correspondent bank. The buyer has to make payment either in money (a sight bill of
exchange), a term bill of exchange (on which payment can later be demanded) or via its own
bank before it will receive the documents such as the transport document which enables it to
take possession of the goods.
Figure 13
Bill of
Exchange.
Source;
<http://ww
w.lingnan.n
et/courses/t
rade1/samp
le>
Documentary Collection is universally recognised but bank charges still erode the buyer’s
and seller’s profits and there are still delays in the movement of the paperwork. The
difficulty with the collection system is that it does not provide the seller with any
assurance from a reputable entity such as a bank that, in return for despatching the goods,
for performing or part performing a contract for the supply of a service, it will receive
payment. There are limited options open to the seller if the buyer defaults. There is also
normally a delay between shipment of the goods or the supply of a service and payment
through the collection system. This is where documentary letters of credit come in.
Documentary Letters of Credit
Documentary letters of credit are the most widely-used mechanism for effecting
payments required in respect of international transactions and operate on the premise that
certain key documents relating to the transaction are treated as representing the goods. In
essence, banking practice developed around the commercial practice of treating a marine
bill of lading as representing possessory title to the goods. Because it could be negotiable,
a bank could pay the purchase price on behalf of the buyer against the tender of the

59
transport and related documents endorsed in blank or endorsed to the bank as the
consignee.
Today it is commonly the case that the transport document is endorsed in blank which
allows the bank to complete that part on instructions from the buyer once it is guaranteed
payment. The buyer is named in the transport document as ‘notify party’. The bank pays
the purchase price to the seller on behalf of the buyer once the seller signs over
nominated documents which establish that goods of the contract description have been
despatched as required under the contract of sale; these are usually:
a commercial invoice
an Insurance certificate
the transport document.
In order to generate the transport document, the seller must first send the cargo. He then
generates the required documents for the bank. Generally speaking, the worst case is
when payment is only arranged upon the documents arriving at the buyer’s bank. This
payment may be a sight transaction (immediate payment) or it may be at some future
point (a term transaction). A key issue, therefore, is determining what will trigger
payment. This impacts on what transport documents are ‘acceptable’ or how these
documents are addressed.
Documentary letters of credit are universally recognised but bank charges erode the
buyer’s and seller’s profits. Understandably, the exact demands placed by the banks on
the accuracy of the documents results in the slow movement of paperwork. Detention and
demurrage charges are also not uncommon. Consequently, and normally with the passage
of time, the buyer and seller will wish to move away from the restrictions of the
documentary credit system, possibly to an open account system.
In Figure 14 below you will see the documents that must be produced as evidence of
shipment of the consignment and the conditions that apply before payment is made.

60
Figure 14
Letter of
Credit.
Source;
<http://ww
w.unzco.co
m/basicguid
e/figure13.h
tml>
Of course there are other methods of paying for goods that are outside the traditional
banking system. These days international travellers can withdraw cash in a local currency
from Automatic Teller machines (ATMs) using their credit card. The amounts appear on
the credit card statement converted back into the national currency. Apart from being
handy for personal travel, some businesses also use this method to pay a deposit when
travelling overseas. It is not uncommon for the amount paid overseas on credit card not to
be shown on a commercial invoice covering the shipment of goods. This reduces the
Customs value and is fraudulent. The only way this fraud will be uncovered is through
the sighting of the credit card statement or an examination of the ledger at the importer’s
premises.

61
Other documents
In many countries travellers must declare currency and other negotiable instruments such
as traveller’s cheques when passing through Customs. The limit varies from country to
country and while it is not illegal to take the currency out of the country it is illegal not to
declare it is in your possession. In Australia the amount is $10,000.
There are economic reasons for this; if masses of currency were leaving a country, it
could upset the economic management within that country. Also, the Bureau of Statistics
and the Reserve or Central Bank compiles details of money flows as part of the financial
management of the country, so that appropriate policies are set. In addition it is also used
as a factor to control the flow of illegal money obtained criminally through tax evasion ,
drug importations and other criminal enterprises.
While banking systems are relatively free in many countries, Central Banks sometimes
limit the amount of currency that can leave the country as part of their policy. An
example is Papua New Guinea (PNG) (see Figure 15 below).
Figure 15 shows the currency is for kina, which is the PNG currency, to be converted into
Australian dollars (abbreviated to AUD) and to be paid into a National Bank account in
Rockhampton. It is coming out of an account held at the Pacific Place branch of the ANZ
Bank in PNG. The person who is doing this transfer is William Dodgey and he says that it
is a payment for his children under family maintenance. Notice that the bank branch code
is given at the bottom of the page.

62
Figure 15
Exchange
Control
document.
Summary
National borders no longer limit businesses, however, if businesses are going to buy and
sell in other countries, they will seek to minimise adverse exchange rate fluctuations and
be able to transfer money internationally with ease. A complex system of international
financing has developed to facilitate the international transfer of money and to minimise
foreign exchange risk.
Activity 9
Foreign Exchange
In the Customs context, how could you under-value goods where the commercial invoice
and letter of credit agree in value? Where could Customs find evidence of such under
valuation?

63
Customs valuation
Outcomes
There is a difference between the valuation rules that are used for Customs
purposes and those that are used for accounting purposes. In this topic, we will look at
why there is a difference and how Customs officers can reconcile that difference. At the
conclusion of this topic you will be able to:
describe the sources of the valuation rules in accounting and for Customs purpose
explain the difference between valuation for accounting purposes and valuation
for Customs purposes
explain how Customs officers can reconcile the difference between valuation for
accounting purposes and valuation for Customs purposes.
Accounting standards
Accounting information is classified as specific purpose or general purpose information.
Specific purpose accounting information is prepared in a particular format to meet
the specific needs of a specific user or group of users. Examples of this are a company's
tax return or the accounting information it provides to a bank with which it seeks a loan.
The information that it prepares for management to make decisions about the internal
running of the company, and the information prepared to meet obligations under the
Customs legislation are other examples of specific purpose information.
Other accounting information is referred to as general purpose reporting. It is general
information provided by a company to anyone who may have an interest in the company.
When companies record accounting information in their records, they follow the
accounting standards for general purpose reporting.
Key Point
Accounting standards
The accounting standards, or rules of accounting, only cover general purpose reporting.
They do not cover specific purpose reporting, such as reporting for Customs.
Specific purpose information must be collected separately by a company. Larger
companies may set up their accounting information system to make this specific
information easy to collect but they are not obliged to do so.
The rules or standards that companies use to record financial information are not
necessarily the same rules that are used for valuation purposes by Customs. One major
area of difference involves inventory valuation. It is important that you know how
accountants value inventory so that you can reconcile this with the valuation
methods used by Customs.
Transaction Value
Accounting and Customs valuations are based on transaction value. However, there are
some differences in interpretation of transaction value.
The transaction value for accounting is the FIS value plus any purchasing department
costs.
While for customs purposes the transaction value may be disregarded when the vendor
and purchaser are related parties, the transaction value is unlikely to be disregarded for
accounting purposes even if the parties are related.

64
The foreign currency translation date for accounting is the date the contract becomes non-
cancellable (however many companies use the date the invoice is received). The date of
export is not used as the translation date for accounting.
Assists
Assists is customs jargon for goods or services provided to the vendor at below a fair
market price which will cause the price of the imported goods to be below market price.
This term is not used in accounting. For customs purposes, the value of assists is added to
the transaction value of the imported goods.
For accounting purposes, the assist will be treated as a separate transaction. The value of
the assist will not be included in the cost of inventory and must be located by Customs
officers in the accounting records.
Royalties and Licence fees
The question of the dutiability or otherwise or royalty payments and licence fees is
complex and will generally have to be examined on a case-by-case basis, with special
reference to any agreements between the parties to a transaction. Broadly, the position is
that licence fees and royalty payments, including those for patents, trademarks and
copyrights, are dutiable and when determining the Customs transaction value of goods
and such payments must, if not already included therein, be added to the price paid or
payable. However, for the additions to be made, two main conditions must be satisfied,
viz:
the payments must relate to the goods being valued, and
the buyer must pay them, either directly or indirectly, as a condition of sale, of the
goods being valued.
Charges for the right to reproduce the imported goods
The charges for the right to reproduce the imported goods in the country of importation
must not be added to the price actually paid or payable for the imported goods in
determining the Customs value.
Royalty for the right to distribute or resell the imported goods
Payments made by the buyer for the right to distribute or resell the imported goods must
be added to the price actually paid or payable for the imported goods only if such
payments are a condition of the sale for export to the country of importation of the
imported goods.
Royalty payments included in the purchase price and paid to the vendor, will be included
in the cost of inventory. As indicated above, these royalties will normally be dutiable and
Customs will want them included in the Customs Value.
Royalty payments which are not included in the purchase price but are paid on the
subsequent sale of the goods in Australia will not be included in the cost of inventory.
These royalty payments will be recorded as an expense when the payment is made and
subject to the conditions outlined above may or may not be required to be added to the
Customs Value.
Other valuation methods

If the transaction value cannot be determined, Customs will use other valuation methods
(identical goods, similar goods, deductive value, computed value or fall-back value). For
accounting, if the transaction value cannot be determined, a transaction will not be
recorded.

65
Deductive values
Deductive values are not used in accounting for valuing inventory. However accounting
techniques may be used to determine the costs added to the goods after they were
exported to Australia.
For accounting purposes, the costs that will be added to the goods after export and
included in the cost of the inventory include:
costs of transportation, insurance and import costs
labour costs for assembling or processing the product until it is ready for sale
raw material costs for any materials added in assembly or processing until it is
ready for sale
overhead costs associated with the assembly or processing until it is ready for sale
Costs incurred after export which will not be included in the cost of inventory include
costs of packing and delivery to the customer
selling costs
overhead costs associated with selling and delivery
Computed Value
Computed value relies on the producer's accounting records to determine the value. As
the producer will be domiciled in a country other than your country, the accounting
techniques used by the producer may be different to those used locally. While the
Australian accounting standard which covers inventory (AASB 1019) is compatible with
the international accounting standard which covers inventory (1AS 2), not all countries
comply with international accounting standards.
Reconciling the difference between accounting and Customs

valuations
There is no simple way of reconciling the difference between the way that accounting
values inventory and the way that Customs values inventory. By tracing an entry back
through the accounting system to its source documentation, it may be possible to get a
further break-down of prices. However, this is not always the case. Where a company has
bought goods from elsewhere, all extra costs or discounts may already be incorporated
into the purchase price. It is important to ask whether there were any additional revenue
or expense items that were recorded by the company that relate to the purchase, because
this will give information about discounts and subsidies. You should not expect all the
items you think should be part of inventory to be included in the transaction value of
inventory by accountants.
Also, it is important to remember that just because accountants are classifying items in a
way that differs from Customs treatment of those items does not means that a company is
trying to hide information; it is simply that accountants are using the rules that the
Corporations Law requires them to use and these rules, known as the accounting
standards, are not compatible with the rules that a Customs officer would use to value
transactions.

66
Activity 10
Customs investigation
You are a Customs investigation officer who has been asked to verify whether a
particular company is carrying out fraudulent activities. It is suspected that the company
is:
1. having invoices under-valued and is making two payments for consignments
through different banks to one supplier
2. arranging with another supplier for extra goods to be included in containerised
consignments without being invoiced.
What areas of the Financial and Management accounts would you examine to find
evidence of such activities?

67

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Accounting for Managers

© Centre for Customs & Excise Studies, University of Canberra, 2009

Materials development team

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Purchasing & Revenue Cycles...........................................................18

Inventory Control Systems.................................................................29

The profit and loss statement ..........................................................37

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Journal entries ....................................................................................44

Foreign Currency Transactions .........................................................55

Customs valuation ..............................................................................64

Note: There are no readings for this subject.

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The role of accounting

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Now, most modern Customs administrations audit selected companies to determine

The cycle of accounting information

In accounting, it is important that everything can be verified. Verification can occur by

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Centre for Customs & Excise Studies, CCLEC

Centre for Customs & Excise Studies, CCLEC

Centre for Customs & Excise Studies, CCLEC

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Purchasing & Revenue Cycles

The purchasing department

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The items requested must be identified through description, a stock code, by

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It is unusual for goods to be delivered to the purchasing department. That is

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Centre for Customs & Excise Studies, CCLEC

TO: John Reason, Liquor Imports, Mermaid Beach, Hamilton

1 CONTAINER HOLDING 66 BARRELS 3 YO BLENDED SCOTCH

Centre for Customs & Excise Studies, CCLEC

Centre for Customs & Excise Studies, CCLEC

Centre for Customs & Excise Studies, CCLEC

To the officer of Customs & Excise GIRIVAN

I/We WM. GRANT AND SONS DISTILLERS LTD

(1) are of the age shown in column 5;

I/We request a certification accordingly.

Signature: ………]Éçvx \ÇzÜtÅ……………. Date: 28the June 2009.

Centre for Customs & Excise Studies, CCLEC

Vessel: From: Insured Value (currency)

1 CONTAINER BULK SCOTCH WHISKY

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Figure 9 Re; Order 5999 – yours 09/025 8 July 2009

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Inventory Control Systems

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Inventory & Profit

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Which inventory is sold first?

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Definitions of each classification