Question 1 JA Enterprise
1.1 Five Classes
When John Austin are recording entries, he must know the 5 classes used in accounting. It includes asset, liability, owner’s equity, revenue and expense.
• Asset
Asset refers to every valuables belong by a person or a business entity. It can divided by two parts: individual and organisation assets. Individual assets is used by personal such as cars or residential flat; organisation assets is used by business such as factory building or plant and machinery.
Assets also can divided by 4 types:
1. Tangible assets- have material or physical, assets can be seen and touched, example: cash, inventory, buildings or vehicle.
2. Intangible assets- no physical form but has value, example: copyrights, franchises, trademarks or patents.
3. Current assets- used in short period time, it can expect to be converted into cash. Example: cash in hand, inventory, accounts receivable, cash at bank.
4. Non-current assets- fixed assets, used in long term with intention and not simply resell them. Example: buildings, machines or vehicle.
• Liability
Liabilities refers to a business entity have financial obligations to transfer cash or resources to another entity. It can divided by 2 types:
1. Current Liability – business have obligations to pay off debts within a year from the reporting date. Example: accounts payable or bank overdraft.
2. Non-current Liability- business have obligations to settle debts after a year from the reporting date. Example: bank loan or term loan.
• Owner’s Equity
Owner’s equity is net assets of the entity. It can claimed by the owner of a company business to the assets of the business. Owner’s investment and drawings will affect the profit and loss of the business. Investment is owner invested capital into the business such as transfer their own cash to business’s bank account. Drawings is owner withdrawal cash or assets of business to personal use.
Owner’s equity = Assets – Liabilities
For example: JA Enterprise have cash at bank RM 17,400 and loan from bank RM 13,000.
Assets RM 17,400 – liabilities RM 13,000 = Owner’s equity RM 4,400
When revenue exceed expenses and owner’s equity increase, business will earn profit; when expenses exceed revenue and owner’s equity decrease, business will loss.
• Revenue
Revenue is a business occurs transaction or events during the operation period and causes an increase in the ownership interest. Business earned income in the normal trading activities period likes sales product and services. Other income is earn money from outsides activities, not the core’s business activities, such as rental received or interest received.
• Expense
Expenses is a business occurs transaction or events during the operation period and causes a decrease in the ownership interest. Expenses includes salaries and wages, rental expanses, insurance expenses or others.
1.3 Account processing
When John Austin start to prepare financial statement of his business, he should follow the accounting process.
Step 1 Collecting and analysis documents. John Austin should collect and analysis document of his business (section 1.4).
Step 2 Posting in journal. John Austin should post those transaction to the related journal (section 1.5).
Step 3 Prepare ledger account. John Austin should post or transfer those transaction in leger account (section 1.6).
Step 4 Trial Balance. John Austin should prepare trial balance of his business (section 1.7).
Step 5 Adjustment entries. John Austin should adjust those transaction such as depreciation in ledger account (section 1.6).
Step 6 Adjusted trial balance. After adjustment entries, John Austin should transfer those account in adjusted trial balance (section 1.8).
Step 7 Preparation of financial statement. John Austin use adjusted trial balance to do financial statement of his business (section 1.9).
Step 8 Post closing entries. John Austin should close those account and bring balance c/d to next period.
Step 9 Post closing trial balance.
1.4 Source document
This is the source document of JA Enterprise. It related by supplier, customer, bank or loan. John Austin need to record these transaction into journal and ledger entries.
1. Purchases order
– Purchases order is a document of buyer send a written authorization to seller to order goods or services, it includes types, price, quantities and terms or the goods. Purchases order creates a contract between buyer and seller or supplier, it is legally binding.
2. Sales Order
– Sales order is a written commercial document issued by seller to buyer, including the details of dates, time and mode of delivery. Purpose of sales order is confirm the sales to buyer, it issued before the delivery
3. Delivery Note
– When seller or exporter transport goods to buyer, they will give delivery note to buyer. Buyer sign the copy document of delivery note then give back to seller as a proof of delivery. Document includes the number of product specifications, delivery date, and may also include the address and bank information. But does not include the price of the product.
4. Invoice
– Invoice also called a bill. Its purposes is seller request buyer to payment, list includes goods or service, price, discount, taxes and total due. It also includes invoice number, credit information, salesperson’s name and sales program. For example, if buyer paying within 10 days, they will able to get discount. Invoice can help seller to control inventory and expected future income.
5. Debit Note
– Debit Note is issued by buyer. When buyer returns goods to seller, they send a debit note to inform the quantity and amount of the return goods, and requesting to return of money. It is usually used to returns goods on credit.
6. Credit Note
– Credit note is issued by seller. When seller received the goods of returns, they send a credit note to inform buyer no need to pay for them. It is also use to express if the goods are damaged, incorrect or incomplete.
7. Statement of account
– Seller send statement of account to buyer to show the details of report during a time period, including unpaid invoice in the beginning, invoice number, date, total amount of each invoice, payment date, payment amount, and the remaining balance. Purpose of the statement is to remind buyer that have not yet been paid the sales on credit to seller.
8. Remittance Advice
– Buyer issued the remittance advice to seller to inform that they have paid their invoice. Item of remittance advices includes text notes, invoice number and invoice amount.
9. Cheque
– Information of cheque includes payee’s name, date, amount in words, amount in numbers and drawer’s signature. Write a cheque should be attention some matters, if cheque making a mistake, the cheque will be unusable. For example, payee’s name must be full names and appear on their bank account such as “Eugene Wu”; dates should include day, month and year, drawer can write a date in future, so payee will cash it until that date. Period of validity of cheque only six months; amount in words must be written full amount and followed by the word ‘ONLY”; enter amounts of numbers in the small box on right hand side and includes currency unit; and drawer’s signature in the bottom right hand corner of the cheque.
10. Receipt
– Receipt is a document of seller issued to buyer to prove they already paid for an item, list includes goods or service, price, discount, credit, taxes, payment method and total amount paid.
11. Deposit slip
– Deposit slip issued by bank to account holder when they save money into their bank account.
*post journal entries to related ledger account.
a) Purchases Journal (Purchases Day Book)
Record all the credit purchases transaction.
b) Sales Journal (Sales Day Book)
Record all the credit sales transaction. Trade discount is offer to buyer to attract them buy large-quantity goods, this entry no need to double entry, only deducted from the list price in sales journal.
c) Return Outwards Journal (Purchases Returns Journal / Returns Outwards Day Book)
Record all the returns transaction to suppliers.
d) Returns Inwards Journal (Sales Returns Journal / Returns Inwards Day Book)
Record all the returns transaction from customer.
e) Cash Book
Cash Book have three column includes discount allowed or discount received, cash and bank column. Cash discount includes discount allowed and discount received. Discount allowed is given to customer; discount received is given discount to business by supplier.
f) General Journal
Record all the transaction in general journal except the transaction in the specialty journal. For example, purchase or sales non-current assets likes equipment on credit; bad debt; adjustments the transaction in the ledger account; drawings assets or others.
John Austin also need to record the adjusted transaction in journal entries and prepare the adjusted trial balance
1.6 Ledger
Ledger is a T-accounts. All the journal entries should follow chronological sequence then post and transfer to the individual ledger account. Types of ledger includes sales ledger, purchases ledger and general ledger. Types of account consist of real account, personal account and nominal account.
Each transaction required double entry in at least two account. Debit amount must be equal to credit amount.
a) Sales Ledger
Sales ledger is a personal account, it record the credit customer transaction from sales journal.
b) Purchases Ledger
Purchases ledger is a personal account, it record the credit suppliers transaction from purchases journal.
c) General ledger
It is includes real account (cash, building or furniture) and nominal account (cost of goods sold, expenses or sales).
All the trial balance and financial statement should include 3 headings: name of the business, statement’s title and date or period of the statement.
1.7 Trial Balance
Purpose of preparing trial balance is ensure total debit (includes assets, expenses and drawings) and total credit (includes revenue, liabilities and capital) balance are equal. Trial balance prepared in the end of specific accounting period.
1.8 Adjusted Trial Balance
Purpose of adjusted trial balance is to provide equality from both total debit and credit balances after adjustment. Adjusted trial balance is a basis for preparation the financial statement.
1.9 Financial Statement
Financial statement can representation the financial position and financial performance of the business. John Austin can use the financial statement to make economic decisions.
• Statement of Comprehensive Income
Prepared Statement of Comprehensive Income by expenses and revenue from the adjusted trial balance account. John Austin use this statement to calculate profit and loss of his business, and report the financial performance in the period.
• Statement of Financial Position
Using assets, liabilities and equity account from adjusted trial balance to prepare Statement of Financial Position. John Austin use this statement to determine liquidity, solvency and future viability of JA Enterprise continuing operations.