Hac 1001 Notes

Basic Hotel Accounting
TOPIC 1: THE PRINCIPLES OF ACCOUNTING
THE ACCOUNTING EQUATION AND THE BALANCE SHEET
1. Accounting equation
• Firms that set up and start trading need resources.
• In the first place the owner of the business will supply all of the resources.
• Thus the equation is;
Resources in the business = Resources supplied by the owner
• CAPITAL is the amount of the resources supplied by the owner.

• ASSET is the actual resources that are in the business.
ASSET = CAPITAL
• Usually, however someone other than the owner has supplied some of the asset.
• LIABILITIES are the name given to the amount owing to this person for these assets.
ASSET = CAPITAL + LIABILITIES
• It can be seen that the two sides of the equation will have the same totals.
• This is because we are dealing with the same thing from two different points of view.
Resources: What they are = Resources: Who supplied them

( Assets) (Capital +Liabilities)
• It is a fact that the totals of each side will always equal one another and that this will always be true no matter how many
transactions there may be.
• Asset consist of property of all kinds such as buildings, machinery, stock of goods and motors vehicles, debts owes by
customer and amount of money in the bank.
• Liabilities consist of money owing for goods supplied to the firm and for expenses.
• Capital is often called the owner equity or net worth.
2. The balance sheet and the effects of business transaction.

• Accounting equation is expressed in a financial statement called the balances sheet.
• Example of business transaction and the effect to the balance sheet;
a. The introduction of capital

On 1 May 2007, B Blake started in business and put RM 5,000 into a bank account for the business, the balance sheet would
appear:
Asset: Cash at bank 5,000 Capital 5,000
B.Blake balance sheet as at 1 May 2007
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b. The purchase of an asset by Cheque

On 3 May 2007 Blake buys furniture for RM3, 000.The effect of this transaction is that the cash at the bank is reduced and a
new asset, called fixtures appears.
Asset
Furniture 3,000 Capital 5,000
Cash at bank 2,000
5,000 5,000
c. The purchased of an asset and the incurring of a liability.

On 6 may 2007, Blake buys some goods for RM500 from D Smith and agrees to pay for them some times within the next
two weeks. There is now a new asset, stock of goods and there is also a new liability because Blake owes money to D Smith
for the goods. A person to whom money is owed for goods is known as creditors.

Asset Capital and liabilities
Cash at bank 2,000 Creditor 500
Stock of goods 500
5,500 5,500
d. Sales of an asset on credit

On 10 May 2007, good that has cost RM 100 were sold to J.Brown for the same amount, the money to be paid later. These
mean a reduction in the stock of goods and there will now be a new asset. A person who owes money to a firm is known as
debtor. The balance sheet now appears as:

Stock of goods 400
Debtor 100
5,500 5,500
e. Sale of an asset for immediate payment

On 13 May 2007 goods that have cost RM 50 were sold to D.Daley for the same amount, Daley paying for them immediately
by cheque. Here one asset, stock of goods, is reduced, while another asset, cash at bank, is increased. The balance sheet now
appears thus:
Stock of goods 350
Debtor 100
5,500 5,500
d. The payment of the liabilities.

On 15 may 2007, Blake pays a cheque for RM 200 to D.Smith in part payment of the amount owing. The asset of cash at
bank is therefore reduced, and the liability to the creditor is also reduced. The balance sheet now appears thus:

Stock of goods 350
2
Debtor 100
5,300 5,300
e. Collection of an asset
On 31 May 2007, J.Brown, who owes Blakes RM 100, makes a part payment of RM 75 by cheque. The effect is to reduce
one asset, debtors, and to increase another asset, cash at bank. This results in a balance sheet as followed;

Stock of goods 350
Debtor 25
5,300 5,300
3. Equality of the accounting equation

• It can be seen that every transaction has affected two items. Sometimes it has changed two assets by reducing one and
increasing the other.
Example of transaction Effect

1. Buy goods on credit Increase asset (Stock of good) Increase liability ( Creditor)
2. Buy good by cheque Increase asset (Stock of good) Decrease asset (Bank)
3. Pay creditor by cheque Decrease asset (Bank) Decrease liability (Creditors)
4. Owner pay more capital into the
Increase asset ( Bank) Increased capital
bank
5.Owner take money out of the
business bank account for his own Decrease asset (Bank) Decreased Capital
use
6. Owner pay creditor from private
Decreased liability (Creditor) Increase capital
money outside the firm
4. Alternative form of balance sheet presentation
Horizontal format
B.Blake balance sheet as at _________
Furniture XXX Capital XXX
Cash at bank XXX Creditor XXX
Stock of goods XXX
Debtor XXX
XXXX XXXX
Vertical format
B.Blake balance sheet as at _________
RM RM RM
Fixed asset
Fixtures 3,000
Current assets
Stock 350
Debtors 25
Cash at bank 1,925 2,300
Less: Current liabilities

Creditor 300 300
Net current assets 2,000

5,000
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Financed by:
Capital 5,000
Exercises
1.1. Examine the following table and complete the gaps:
Assets Liabilities Capital
RM RM RM
(a) 34,282 7,909 ?
(b) 276,303 ? 213,817
(c) ? 6,181 70,919
(d) ? 109,625 877,138
(e) 88,489 ? 78,224
(f) 456,066 51,163 ?
1.2. Examine the following table and complete the gaps:

Assets Liabilities Capital
RM RM RM
(a) ? 59,997 604,337
(b) 346,512 ? 293,555
(c) 47,707 ? 42,438
(d) 108,129 11,151 ?
(e) 515,164 77,352 ?
(f) ? 19,928 179,352
1.3. Determine which are asset and which are liabilities from the following list:
(a) Computer equipment

(b) Stock of goods
(c) Loan from H.Barlow.
(d) Motor vehicles
(e) What we owes for advertising materials
(f) Bank balance
1.4. Which of the following are assets and which are liabilities?
(a) Premises
(b) Debtors
(c) Cash in hand
(d) Creditor
(e) Loan from finance company
(f) Owing to bank
(g) Machinery
(h) Motor Vehicles
1.5. State which of the following are shown under the wrong heading for Murphy’s business:
Assets Liabilities
Cash in hand Money owing to bank
Creditors Debtors
Premises Stock of goods
Motors Vehicles
Loan from C.Shaw
1.6. Which of the following are shown under the wrong heading?
Assets Liabilities
Cash in hand Machinery
Computer equipment Motor vehicles
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Creditors Loan from W.Barlow
Capital
Stock of goods
1.7. Ann Wood decides to open a retail shop selling greeting card and gifts. Her uncle lends her RM 30,000 to help her with
financial the venture. Ann buys shop premises costing RM 50,000, a motor vehicles for RM 10,000 and stock of goods for
RM 5,000. Ann did not pay for her stock of goods in full and stills owes RM 2, 100 to her supplier in respect of them. After
the event described above and before she starts trading, Ann has RM 100 cash in hand and RM 7,000 cash at the bank.
You are required to calculate the amount of capital that Ann invested in her business.
1.8. T. Charles starts a business. Before he actually starts to sell anything, he buys fixtures costing RM2, 000, a motor vehicles
for RM 5,000 and stock of goods for RM3, 500. Although he has paid in full for the fixtures and the motor vehicles, he still
owes RM1, 400 for some of the goods. J. Preston has lent him RM3, 000. Charles, after the above, has RM2, 800 in the
business bank account and RM100 cash in hand.
You are required to calculate his capital.
1.9. Draw up T Lymer’s balance sheet, using the vertical presentation method from the following information as at 31 December
2007:
RM
Capital 34,823
Delivery van 12,000
Debtors 10,892
Office furniture 8,640
Stock of goods 4,220
Cash at bank 11,722
Creditors 12,651
1.10.Draw up A .Pennington’s balance sheet as at 31 march 2008 from the following information:
RM
Premises 50,000
Plant and machinery 26,500
Debtors 28,790
Creditor 32,320
Bank overdraft 3,625
Stock 21,000
Cash in hand 35
Capital 90,380
THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL
1. Nature of transaction
• Various events changed two items in the balance sheet. Event which result in such changes are known as
transactions.
• This mean that if the proprietor of a business asks the price of some goods but does not buy them, then
there is no transaction since no balance sheet item will have changed.
2. The double entry system

• Every transaction effect two items.
• For each transaction, a book-keeping entry will have to be made to show an increase of that item, and another entry to
show the increase or decrease of the other item.
• Transactions that have occurred are entered in a set of accounts. An account is a place in our books where all the
information referring to a particular asset, liability or the capital, is entered.
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Account for double entry.
• Each account should be shown on a separate page. The left-hand side of each page is called the debit side while the right-
hand side is called the credit side.
Title of account written here

Date Details RM Date Details RM
Left-hand side of the page Right hand side of the page

This is the debit sides This is the credit side
4. Rules for double entry

• Double entry mean that every transaction affects two things and should therefore, be entered twice: Debit side and once on
the credit side.
• The order in which items are entered does not matter, first using the “IN” and “OUT” principle.
• A debit entry is always an asset and expenses. A credit entry is a liability, capital or income.
• To increase or decrease assets, liabilities or capital the double entry rules are as follow:
Account To record Entry in the account

An increase Debit
Asset
A decrease Credit
An increase Credit
Liabilities
A decrease Debit
An increase Credit
Capital
A decrease Debit
5. T account.
• The types of account that are going to be demonstrated are known as T account. This is because the accounts are in the shape of
a T.
Accounts title is here
Debit side Credit side
Exercises
2.1. Complete the following table showing which accounts are to be credited and which to be debited.
Account to Account to
be debited be credited
(a) Bought motor van for cash
(b) Bought office machinery on credit from J. Grant & Son
(C) Introduced capital in cash
(d) A debtor, J. Beach, Pays us by cheque
( e) Paid a creditor, A. Barrett, in cash
2.2. Complete the following table showing which accounts are to be credited and which to be debited.
(a) Bought motor lorry for cash
(b) Paid creditor, T.Lake, by cheque
(C) Repaid P.Lagan’s loan by cash
(d) Sold lorry for cash
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( e) Bought office machinery on credit from Ultra LTD
(f) A debtor, A Hill, Pays us by Cash
(g) A debtor, J. Cross, pays us by cheque
(h) Proprietor puts a further amount into the business by cheque
(i) A loan of RM200 in cash is received from L.Lowe
(j) Paid a creditor, D.Lord, by cash
2.3. Write up the asset and liability and capital accounts to record the following transactions in the records of G.Powell.
2008
July 1 Started business with RM 2,500 in the bank.
July 2 Bought office furniture by cheque, RM 150.
July 3 Bought machinery RM 750 on credit from Planers Ltd.
July 5 Bought a second-hand van paying by cheque , RM 600.
July 8 Sold some of the office furniture- not suitable for the firm-for RM 60 on credit to J.Walker & Son.
July 15 Paid the amount owing to Planers Ltd, RM 750, by cheque.
July 23 Received the amount due from J.Walker, RM 60, in cash.
July 31 Bought more machinery by cheque, RM 280.
2.4. You are required to open the asset, liabilities and capital accounts and record the following transaction for June 2008 in the
records of C.Williams.
2008
June 1 Started business with RM 2,000 in cash
June 2 Paid RM 1,800 of the opening cash into a bank account for the business
June 5 Bought office furniture on credit from Betta-Built Ltd for RM120
June 8 Bought a motor van paying by cheque RM950
June 12 Bought works machinery from Evan & Son on credit RM560
June 18 Returned faulty office furniture costing RM 62 to Betta-Built Ltd
June 25 Sold some of the works machinery for RM75 cash
June 26 Paid amount owing to Betta-Built Ltd, RM58 by cheque
June 28 Took RM100 out of the bank and put it in the cash till
June 30 J.Smith lent us RM500-giving us the money by cheque
2.5. Write up the asset, capital and liability accounts in the books of C.Walsh to record the following transactions.
2007
June 1 Started a business with RM5,000 in the bank
June 2 Bought a motor van , paying by cheque RM1,200
June 5 Bought office fixtures RM 400 on credit from Young Ltd
June 8 Bought motor van on credit from Super Motors RM800
June 12 Took RM100 out of the bank and put it into the cash till
June 15 Bought office fixtures paying by cash RM 60
June 19 Paid super Motors a cheque for RM800
June 21 A loan of RM1,000 cash in received from J.Jarvis
June 25 Paid RM800of the cash in hand into the bank account
June 30 Bought more office fixtures, paying by cheque RM300
THE DOUBLE ENTRY SYSTEM FOR THE ASSET OF STOCK
1. Stock movement
• A business, on any particular date, will normally have goods which have been bought previously and
have not yet been sold.
• These unsold goods are known as the business “stock” of goods. The stock of goods in a business is
therefore constantly changing because some of it is bought, some of it is sold, and some is returned to the supplier and some
of it returned by the firm’s customers.
• To keep a check on the movement of stock, an account is opened for each type of dealing in goods. Thus
we will have the following account.
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Account Reason
Purchases account For the purchased of goods
Sales account For the sales of goods
Returns Inwards account For goods returned to the firm by it customers
Returns Outwards Account For goods returned by the firm to it customers
• As stock is an asset, and these four accounts are all connected with these assets, the double entry rules are those used for
asset.
Example of entry;
a. Purchase of stock on credit.

On 1 August 2004, goods costing RM165 are bought on credit from D.Henry.
Thus effect of the transaction:
(i) The asset of stock is increased. An increased in an asset needs a debit entry in an account. In this case it is the purchases
movement, so that the account must be the purchase account.
(ii) There is an increase in a liability. This is the liability of the firm to D.Henry because the goods supplied have not yet been
paid for. An increase in a liability needs a credit entry, and so in order to enter this part of the transaction credit entry is made
in D.Henry’s account.
Dr Purchase Account Cr
2004 Rm 2004 Rm
Aug 1 D Henry 165
Dr D.Henry Account Cr
2004 Rm 2004 Rm
Aug 1 Purchases 165
b. Purchases of stock for cash

On 2 August 204, goods costing RM220 were bought, cash being paid for them immediately.
(i) The asset of stock is increase. Thus debit entry wills be needed. The movement of stock is that of a purchase, so that it is the
purchase account which needs debiting.
(ii) The asset of cash is decreased. To reduce an asset a credit entry is called for, and the asset is that of cash so that the Cash
Account needs crediting.
Purchase Account
Dr Cr
2004 Rm 2004 Rm
Aug 2 Cash 220
Cash Account
Dr Cr
2004 Rm 2004 Rm
Aug 2 Purchases 220
c. Sales of stock on credit

On 2 August 2004, a business sold goods on credit for RM250 to K.Leach.
(i) An asset account is increased. This is the account showing that K.Leach is a debtor for the goods. The increase in the asset of
debtors requires a debit and the debtor is K.Leach, so that the account concerned is that of K.Leach.
(ii) The asset of stock is decrease. A credit entry to reduce an asset is needed. The movement of stock is that of ‘sale” and so the
account credited is the sales account.
Dr K.Leach Account Cr
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2004 Rm 2004 Rm
Aug 3 Sales 250
Dr Sales Account Cr
2004 Rm 2004 Rm
Aug 3 K.Leach 250
d. Sales of stock on cash
On 4 August 2004, goods are sold for RM55, the cash for them being paid immediately.
(i) The asset of cash is increase. A debit in the cash account is needed to show this.
(ii) The asset of stock is reduced. The reduction of an asset required a credit and he movement of stock is represented by ‘Sales.
So the entry needed is a credit in the Sales Account.
Dr Cash Account Cr
2004 Rm 2004 Rm
Aug 4 Sales 55
Dr Sales Account Cr
2004 Rm 2004 Rm
Aug 3 Cash 55
2. Returns inwards
• Represent goods sold which have subsequently been returned by a customer.
• Reason ;
i. The good sent to the customer are of the incorrect size, colour or model.
ii. The goods have been damaged in transit.
iii. The goods are of poor quality.
• Example illustration:
On 5 August 2004, goods which had previously been sold to F.Lowe for RM29 have been returned by him.
(i) The asset of stock was increased by the goods returned. A debit representing an increase of an asset is needed, and this time
the movement of stock is that of ‘Returns inwards’. The entry required therefore is a debit in the return inwards account.
(ii) An asset is decreased. The debt of F.Lowe to the firm is now reducing, and to record this credit is required in F.Lowe’s
account.
Dr Return inwards Account Cr

2004 Rm 2004 Rm
Aug 5 F.Lowe 29
Dr F.Lowe Account Cr
2004 Rm 2004 Rm
Aug 5 Return inwards 29
3. Returns outwards
• Represent goods which were purchased, and are now being returned to the supplier.
• Example illustration;
On 6 August 2004, goods previously bought for RM96 are returned by the firm to K.Howe.
(i) The liability of the firm to K.Howe is decrease by the value of the goods return to him. The decreased in a liability needs a
debit, this time in the K.Howe Account.
(ii) The asset of stock is decreased by the goods sent out. A credit representing a reduction in an asset is needed, and the
movement of stock is that of ‘Returns Outwards’, so that the entry will be a credit in the returns outwards account.
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Dr K.Howe Account Cr
2004 Rm 2004 Rm
Aug 6 Returns outwards 96
Dr Return Outwards Account Cr

2004 Rm 2004 Rm
Aug 6 K.Howe 96
Exercises
3.1. You are to write up the following in the books of account:
2004
July 1 Started a business with Rm500 cash
July 3 Bought good for cash Rm85
July 7 Bought goods on credit for Rm116 from E. Morgan
July 10 Sold good for cash Rm42
July 14 Returned goods to E.Morgan Rm28
July 18 Bought goods on credit Rm98 from A.Moses
July 21 Return good to A.Moses Rm19
July 24 Sold to A.knight Rm55 on credit
July 25 Paid E.Morgan’s account by cash Rm88
July 31 A.knight paid us his account in cash Rm55
3.2. You are to enter the following in the account needed:

2006
Aug 1 Started a business with Rm1,000 cash
Aug 2 Paid Rm900 of the opening cash into the bank
Aug 4 Bought goods on credit for Rm78 from S.Holmes
Aug 5 Bought a motor van by cheque Rm500
Aug 7 Bought goods for cash Rm55
Aug 10 Sold goods on credit Rm98 to D. More
Aug 12 Return goods to S. Holmes , Rm18
Aug 19 Sold goods for cash, Rm28
Aug 22 Bought fixtures on credit from Kingston equipment Co. Rm150
Aug 24 D.Watson lent us Rm100, paying us the money by cheque
Aug 29 We paid S.Holmes his account by cheque, Rm60
Aug 31 We paid Kingston Equipment Co. by cheque, Rm150
THE DOUBLE ENTRY SYSTEM FOR EXPENSES AND REVENUES
1. The nature of profit and loss

• Profit means the amount by which revenues are greater than expenses for a set of transactions.
• Revenues mean the sales value of goods and services that have been supplied to customers.
• Expenses mean the values of all the assets that have been used up to obtain those revenues.
• It could also be possible that our expenses may exceed our revenues for a set of transaction. In this case the result is a loss.
2. The effect of profit and loss on capital
• Profit will increased capital, in the other hand loss will decrease capital.
• Formula
Assets – Liabilities = Capital
• Example;
On 1 January the asset and liabilities of a firm are:
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Asset: Fixtures Rm10, 000, stock Rm7, 000, Cash at the bank Rm3, 000.
Liabilities: Creditors Rm2, 000.
Capital = [10,000 + 7,000 + 3,000] – 2,000

= 18,000
During January the whole of the Rm7, 000 is sold for Rm11, 000 cash. On 31 January the assets and liabilities have becomes:
Asset: Fixtures Rm10, 000, stock Nil, Cash at the bank Rm14, 000.
Liabilities: Creditors Rm2, 000.
Old Capital + Profit = New capital
18,000 + 4,000 = 22,000
• It can be seen that capital has increased from Rm18, 000 to Rm22, 000 = Rm4, 000 increase because the Rm7, 000 stocks was sold
for Rm11, 000, a profit of Rm4, 000.
• Profit will be made when goods are sold at more than cost price, while the opposite will mean a loss.
3. Profit or loss and………...
Expenses
• Other than the cost of goods, a firm also incurs other expenses such as rent, salaries, wages, telephone cost, and motor expenses and
so on.
• Separate accounts are opened for each type of expenses.
• Expenses involve expenditure by the firm and therefore should be debit entries.
• Effect of transaction;
a. A rent of Rm20 is paid in cash.

• The total of the expenses of rent is increase. As expense entries are shown as debits, and the expenses is rent, so the
action required is the debiting of the Rent Account
• The asset of cash is decreased. This means crediting the Cash Account to show the decreased of the asset.
• Sometimes the owner of the business will want to take cash out of the business for his or her private use and this known as
drawings.
• Any money taken out as drawing will reduce capital.
b. On 25 August 2006 a proprietor takes Rm50 cash out of her business for her own use.
Dr Cash Account Cr
2006 Rm 2006 Rm
Aug 25 Drawing 50
Dr Drawing account Cr
2006 Rm 2006 Rm
Aug 25 Cash 50
Revenues
• Separate accounts also opened for each type of revenues.
• Example of revenues are rent received, commission received, bank interest and so on.
• Effect of transaction;
a. On 5 June 2006 it is decided that part of the firm’s premises are not need at the moment. The firm lets someone else use the
space over and receives rent of Rm140 by cheque.
• The asset of the bank is increased. This means debiting the bank account to show the increase of the asset.
• The total of the revenue of rent received is increased. The action required is the crediting of the rent received
account.
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Exercises
4.1. Complete the following table:
(a) Paid rent by cash
(b) Paid for goods by cash
(C) Received by cheque a refund of rates already paid
(d) Paid general expenses by cheque
( e) Received commission in cash
(f) Goods returns by us to T.Jones
(g) Goods sold for cash
(h) Bought office fixtures by cash
(i) Paid wages by cash
(j) Took cash out of business for private use.
4.2. You are required to enter the following transactions in the double entry accounts of B.Cartwright.
2005
Jan 1 Started business with Rm20, 000 capitals, which were deposited in the bank.
Jan 3 Paid rent for premises by cheque, Rm1,000
Jan 4 Bought goods on credit from M.Parkin for Rm580
Jan 4 Purchased motor van for Rm5,000, paying by cheque
Jan 5 Cash sales of Rm1, 005.
Jan 10 Paid motor expenses in cash, Rm75.
Jan 12 Paid wages in cash, Rm120.
Jan 17 Bought goods on credit from M.Parkin, Rm670
Jan 19 Paid insurance by cheque, Rm220
Jan 25 Sold goods for Rm800, payment being received as a cheque, which was banked immediately
Jan 31 Paid wages in cash, Rm135, and electricity by cheque, Rm78
4.3. You are required to enter the following transactions, completing the double entry in the records of K.Walsh for the month of July
2006.
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2006
July 1 Started in business with Rm8,000 in the bank
July 2 Paid rent for premises by cheque, Rm375
July 3 Bought shop fitting for Rm800 paid by cheque
July 5 Bought goods on credit from A Jackson, Rm450; D.Hill Rm675; and E.Frudd, Rm1,490
July 6 Paid insurance by cheque Rm130
July 7 Bought motor van for Rm5,000 on credit from High Lane Motors
July 11 Cash sales of Rm1,500
July 13 Paid for printing and stationery by cheque, Rm120
July 15 Paid wages in cash Rm200
July 18 Bought goods from A.Jackson, Rm890, on credit
July 21 Cash sales Rm780
July 25 Paid motors expenses Rm89 by cash
July 30 Paid High Lane Motors, Rm5,000
July 31 Paid wages in cash Rm300, and stationery, Rm45 in cash.
TOPIC 2: BALANCING OF ACCOUNT
1. Account for debtors.

a. Where debtor have paid their account.
• We have record the transactions in the books by mean of debit and credit entries. T the end of each period, we will have
to look at each account to see what is shown by the entries.
• This is because we want to know how many our customers us for goods we have sold to them.
Example;
Dr K Tandy Account Cr
2005 Rm 2005 Rm
Aug 1 Sales 144 Aug 22 Bank 144
• During the month of August we sold a total of Rm444 in goods to Tandy and have been paid a total of Rm444 by him.
• At the close of business at the end of August he therefore owes us nothing: his account can be closed off on 31 August
2005 by inserting the total of each side, as follow;
Dr K Tandy Account Cr
2005 Rm 2005 Rm
444 444
b. Where debtors still owes for goods.

• Some of our customers are likely still to owe us something at the end of a month. In this cases, the totals each side would
not equal each other.
Example;
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Dr D Knight Account Cr
2005 Rm 2005 Rm
Aug 15 Sales 206
Aug 30 Sales 118
• If you add the figures, you will see that the debit side up to Rm482 and the credit side add up to Rm158. Thus the
different is Rm324.
• We want to close off the account for August, but showing that Knight owes us Rm324. If he owes Rm324 at closed off
business on 31 August 2005, then he will still owe us that same figures when the business open on 1 September 2005.
• Thus we should balance the account.
D Knight Account
Dr Cr
2005 Rm 2005 Rm
Aug 15 Sales 206 Aug 31 Balance carries down (c/d) 324
Aug 30 Sales 118
482 482
Sep 1 Balance brought down (b/d) 324
2. Account for creditors.

• The same principles apply when the balances are carried down to the credit side.
Example;
E William Account
Dr Cr
2005 Rm 2005 Rm
Aug 21 Bank 100 Aug 2 Purchases 248
Aug 31 Balance c/d 264 Aug 18 Purchases 116
364 364
Sep 1 Balance b/d 264
Exercises
5.1 Enter the following items in the necessary debtors and creditors accounts only; do not write up other accounts. Then balance down
each personal account at the end of the month.
2008
May 1 Sales on credit to H Harvey Rm690, N Morgan Rm153, J Lindo Rm420
May 4 Sales on credit to L.Master Rm418, H Harvey Rm66
May 10 Return inward from H Harvey m40, J Lindo Rm20
May 18 N Morgan paid us by cheque Rm153
May 20 J Lindo paid us Rm400 by cheque
May 24 H Harvey paid us Rm300 by cash
May 31 Sales on credit to L Masters Rm203
5.2 Enter the following in the personal accounts only; do not write up the other accounts. Then balance down each personal account at
the end of the month.
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2008
June 1 Purchase on credit from J Young Rm458, L Williams Rm120, G Norman Rm708
June 3 Purchase on credit from L Williams Rm77, T Harris Rm880
June 10 We return goods to G Norman Rm22, J Young Rm55
June 15 Purchases on credit from J Young Rm80
June 19 We paid T Harris by cheque Rm880
June 28 We paid J Young by cash Rm250
June 30 We return goods to L William Rm17
THE TRIAL BALANCE
1. Total debit balance =Total credit balance

• All the items recoded in all the account on the debit side should equal in total all the items recorded on the credit side of the books.
• To see whether the two total equal , usually known as seeing whether the two side of the book is ‘balance’, a trial balance may be
drawn up at the end of a period.
• Form of trial balance could be drawn up by listing all the accounts and adding together all the debit entries, at the same time adding
together all the credit entries.
Trial balance as on 31 may 2004

Dr Cr
Rm Rm
Purchases 309
Sales 255
Return inward 16
Return outward 15
A Lyon & Son 141
M Spencer 29
Cash 57
411 411
2. The uses of the trial balance.
• To check that the books ‘balance’, that every debit entry has been accompanied by a credit entry.
• To ascertain the amount of the errors, should one or more have been made, and make necessary corrections.
• As a basis from which the final account of a business are prepared, i.e. the trading account, the profit and loss account and
the balance sheet.
3. Trial balance and errors
• With some errors, the trial balance will still balance. For example, a credit sale of Rm87nwhich has been incorrectly entered
in both the sales account and the debtor’s account as Rm78. Since both the debit entry and the credit entry are of the same
amount, then this will not effect the agreement of the total in the trial balance.
• Some errors, however, mean that the totals in the trial balance will not agree. An instance could be where a payment of rent
of Rm200 by cheque has been entered on the credit side of the bank account, but has been completely omitted from the rent
account. Here a credit entry was not accompanied by a debit entry for this transaction and thus the trial balance will not agree.
Exercises
6.1 You are required to enter the following details for the month of May 2004, balance the account off and extract a trial balance as at
31 May 2004.
15
2004
May 1 Started in business with capital of Rm2,500, which was paid into the bank
May 2 Bought goods on credit from the following: D Ellis Rm540; C Mendez Rm87; K Gibson Rm76
May 4 Sold goods on credit to ; C Bailey Rm430; B Hughes Rm62; H Spencer Rm176
May 6 Paid rent by cash Rm120
May 8 Sold goods for cash Rm500
May 9 C Bailey paid us Rm250 by cheque on account
May10 H Spencer paid us Rm150 on account by cheque
May 12 We paid the following by cheque ; K Gibson Rm76, D Ellis Rm370 on account
May 15 Bought stationery for cash Rm60
May 18 Bought goods on credit from; D Ellis Rm145; C Mendez Rm234
May 25 Sold goods on credit to : C Bailey Rm90; B Hughes Rm110 ; H Spencer Rm128
May 31 Paid C Mendez Rm87 by cheque
6.2 Correct and balance the following trial balance.
Trial balance of P.Brown as at 31 May 2006

Dr Cr
Rm Rm
Capital 20,000
Drawings 7,000
General expenses 500
Sales 38,500
Purchases 29,000
Debtors 6,800
Creditors 9,000
Bank balance (Dr) 15,100
Cash 200
Plant and equipment 5,000
Heating and lighting 1,500
Rent 2,400
6.3 Reconstruct the trial balance after making the necessary corrections.
Trial balance of S Hingston as at 30 June 2005

Dr Cr
Rm Rm
Capital 19,956
Sales 119,439
Stationery 1,200
General expenses 2,745
Motor expenses 4,476
Cash at bank 1,950
Stock 1 July 2004 7,668
Wages and salaries 9,492
Rent and rates 10,500
Office equipment 6,000
Purchases 81,753
Heating and lighting 2,208
Rent received 2,139
Debtors 10,353
Drawings 4,200
16
Creditors 10,230
Motor vehicles 7,500
Interest received 1,725
Insurance 3,444
153,489 153,489
6.4 From the following list of balances, prepare a trial balance as at 31 December 2004 for Miss Anita Hall.
Dr
Rm
Plant and Machinery 21,450
Motor Vehicles 26,000
Premises 80,000
Wages 42,840
Purchases 119,856
Sales 179,744
Rent received 3,360
Telephone, printing and stationery 3,600
Creditors 27,200
Debtors 30,440
Bank overdraft 2,216
Capital 131,250
Drawings 10,680
Lighting and heating 2,960
AN INTRODUCTION TO THE TRADING AND PROFIT AND LOSS ACCOUNT
1. Purposes of the trading and profit and loss account.

• The main reason why people set up a business is to make profits of course; if they are not successful they will incur losses. To
calculate how much profit or loss has been made over a period of time, a trading and profit and loss account is prepared.
• The main purpose of a trading and profit and loss account is for the owners to see how profitably the business is being run.
2. Uses of the trading and profit and loss account

• The comparison of the result achieved with those of past periods.
• Trading and profit and loss account can be presented in vertical or horizontal format.
3. Preparation of a trading and profit and loss account.

• Before drawing up a trading and profit and loss account, the trial balance should be first obtain because it contain all the
information needed.
• Example of trading profit and loss account.
B.Swift trading and profit and loss account for the year ended 31 December 2005
Rm Rm
Sales XXXX
Less; Cost of good sold
Opening stock XXX Trading
Purchases XXX Account
XXXX
Closing stock XXX
XXXX
Gross profit XXXX
Lees: Expenses
Rent XXX
Lighting XXX
General expenses XXX
Net profit XXXX
17
Profit and
Loss
Account
a. To calculate gross profit
Sales – Cost of goods Sold = Gross profit
b. To calculate net profit

Gross profit – Expenses = Net profit
Exercises
7.1 From the following trial balance of W.Worth, who has been trading for one year, you are required to draw up a trading and profit
and loss account for the year ended 30 June 2004.
Trial balance as at 30 June 2004

Dr Cr
Rm Rm
Sales 28,794
Purchases 23,803
Rent and rates 854
Lighting expenses 422
Salaries and wages 3,164
Insurance 105
Shop building 50,000
Shop fixtures 1,000
Debtors 3,166
Trade expenses 506
Creditors 1,206
Cash at bank 3,847
Drawings 2,400
Motors Vans 5,500
Motors running expenses 1,133
Capitals 65,900
95,900 95,900
Stock at 30 June 2004 was Rm4, 166
7.2 From the following trial balance of F Chaplin, draw up a trading and profit and loss account for the year ended 31 December
2008. She has been in business for one year only.
Trial balance as at 31 December 2008

Dr Cr
Rm Rm
Rent and rates 400
Motor expenses 735
Salaries 3,560
Insurance 392
Purchases 18,385
Sales 26,815
Creditors 5,160
Debtors 4,090
Premises 20,000
18
Cash at bank 1,375
Cash in hand 25
Capital 24,347
Drawings 4,350
56,322 56,322
Stock at 31 December 2008 was Rm4, 960.
THE BALANCE SHEET
1. Contents of the balance sheet

• Balance sheet contents details of assets, capital and liabilities.
2. Drawing up a balance sheet.
B. Swift Balance sheet as at 31 December 2005

Rm Rm
Fixed asset
Fixtures and fitting XXXXX
Current asset
Stock XXX
Debtors XXX
Cash at bank XXX
Cash in hand XXX XXXXX
Less: Current liabilities

Creditors XXXX
Net current asset XXXXX
Long term liabilities
Long term loan XXX
Net asset XXXXX
Finance by:
Capital XXXXX
These two sides must be balance/equal
Net profit XXXXX
XXXXX
Drawing XXXXX 3. No double entry in balance sheets
XXXXX • A balance sheet is not part of the double entry.
4. Balance sheet layout
a. Assets
• The first section is assets; assets are shown under two heading, namely fixed asset and current assets.
• Asset are called fixed assets when they:
- are of long life
- are to be used in the business
- Were not bought only for the purposes of resale.
• Example; building, machinery, motors vehicles, fixtures and fittings, etc.

• Current assets are cash in hand, cash at bank, items held for resale at a profit, or items that have a short life.
b. Liabilities
• Liabilities are categories under two heading;
i. Current liabilities.
- Liabilities due for repayment in the short term. Examples of current liabilities are; bank overdraft, trade creditors,
and sundry creditors.
- Current liabilities are deducted from current asset.
19
ii.Long term liabilities.

- Liabilities not due for repayment in the short term. Examples of long term liabilities loan and mortgages.
- Long term liabilities deducted after the net current assets.
c. Capital account.
• This is the proprietor’s or partner account with the business.
Capital account
Rm Rm
Balance b/d X
Add: Cash introduced X
Net profit fir the period X
Less: Drawing X
Net loss for the period X X
X
Exercises
8.1 Complete exercise 7.1 by drawing up a balance sheet as at 30 June 2004 for C Worth.
8.2 Complete exercise 7.2 by drawing up a balance sheet as at 31 December 2008 for F Chaplin.
FURTHER CONSIDERATION REGARDING FINAL ACCOUNT
1. Carriage inwards
• Carriage (the cost of transport of goods) into a firm is called carriage inwards.
• When you buy goods, the cost of carriage inward may either be included as part of the price, or else the firm may have to
pay separately for it.
• To keep the cost of buying goods shown on the same basis, carriage inwards is always added to the purchases costing the
trading account.
2. Carriage outwards
• Carriage from a firm out of its customer is called carriage outwards.
• This is always treated as an expense to be transferred to the debit of the profit and loss account.
3. Final account
• The term final account is used to describe the final figures of a period of account, and comprise the trading and profit and loss
account, the balance sheets.
4. Other expenses in the trading account.

• The cost of putting goods into a saleable condition should be charged in the trading account.
20
5. Treatment of return inwards and return outwards in final account.
• When a business buys and sells goods, it is very probable that some of the goods will turn out to be either faulty or
unsuitable.
• A large number of firms will return such goods to their suppliers (returns outwards), and will have goods returned to them by
their customers (return inwards).
• Return inwards should be deducted from ‘sales’
• Return outwards should be deducted from ‘purchases’
6. Loses
• For all kinds of reasons, such as poor trading conditions, bad management, or unexpected increases in expenses, the business
may trade at a loss for a given period.
Exercises
9.1 From the following details draw up the trading account for the year ended 31 December 2007.
Rm
Carriage inwards 670
Sales 38,742
Purchases 26,409
Stock of goods: 1 January 2007 6,924
31 December 2007 7,489
9.2 The following details for the years ended 31 March 2008 are available. Draw up a trading account for the year.
Rm
Stocks: 31 March 2007 16,492
31 March 2008 18,504
Purchases 36,905
Carriage inwards 1,122
Sales 54,600
9.3 Draw up the trading and profit and loss account for the year ended 31 December 2006, in respect of T. Mann, from the following
details.
Rm
Returns inwards 490
Returns outwards 560
Purchases 31,000
Sales 52,790
31 December 2006 4,230
Carriage inwards 1,700
Rent 1,460
Carriage outwards 790
9.4 A trading and profit and loss account for the year ended 31 December 2008 is to be drawn up for K Lake from the following:
Rm
Returns inwards 1,500
21
Returns outwards 1,580
Purchases 64,570
Sales 99,500
31 December 2008 17,360
Rent 1,750
Sundry expenses 360
9.5 From the following trial balance of S Makin, draw up a trading and profit and loss account for the year ended 30 September 2006,
and balance sheet as at that date.
Rm Rm
Stock 1 October 2005 2,368
Return inwards 205
Return outwards 322
Purchases 11,874
Sales 18,600
Rent and rates 304
Insurance 78
Motor expenses 664
Office expenses 216
Lighting and heating expenses 166
Premises 15,000
Fixtures and fitting 350
Debtors 3,896
Creditors 1,731
Cash at bank 482
Drawing 1,200
Capitals 22,636
43,289 43,289
Stock at 30 September 2006 was RM2, 946

9.6 The following is the trial balance of J Smailes as at 31 March 2007. Draw up a set of final account for the year ended 31 March
2007.
Rm Rm
Stock 1 April 2006 18,160
Sales 92,340
Purchases 69,185
Carriage outwards 1,570
Return outwards 640
Rent and rates 3,015
Communication expenses 624
Commission payables 216
Insurance 405
Sundry expenses 318
Buildings 20,000
Debtors 14,320
Creditors 8,160
Fixtures 2,850
22
Cash at bank 2,970
Cash in hand 115
Loan from K Ball 10,000
Drawings 7,620
Capital 40,888
152,028 152,028
Stock at 31 March 2007 was Rm22, 390
TOPIC 3: THE DIVISION OF THE LEDGER
1. Book of original entry

• Book in which we record transaction first of all.
• Sales will be entered in one book, purchases in another book, cash in another book, and so on.
2. Types of books of original entry

• Sales day book – for credit sales
• Purchases day book – for credit purchases
• Returns inwards day book – for return inwards
• Returns outwards day book – for return outwards
• Cash book – for receipt and payment of cash
• General journal – for other items
3. The ledger
• The book of original entry lists the transaction but do not show the effect of the transaction on the account.
• A separate ledger will be kept for different types of transaction;
a. Sales ledger – contain the record of customers personal account.
b. Purchases ledger – contain the record of supplier personal account.
23
c. General ledger – contain the remaining double entry account such as expenses, fixed assets, capital
account.
4. Types of accounts
• Some people describe all accounts as personal accounts or as impersonal accounts. There are, in
fact, four distinct types of account;
a. Personal accounts – for debtors and creditors.
Impersonal account – all other accounts, divided between real account and nominal account.
c. Real accounts – account in which property recorded, examples is being buildings, machinery,
fixtures and stock.
d. Nominal account – account in which expenses, income and capital are recorded.
TWO - COLUMN CASH BOOK

• Cash book consist of the cash account and the bank account put together in one book.
• In the cash book, the debit column for cash is put next to the debit column for bank. The credit
column for cash is put next to the credit for bank.
Dr Cash Book Cr
Date Particulars Cash Bank Date Particulars Cash Bank
Exercises
10.1 Write up a two column cash book from the following details, and balance off as at the end of the month.
2005
May 1 Started business with capital in cash Rm100
May 3 F Lake lent us Rm500, paying by cheque
May 4 We paid B Mckanzie by cheque Rm65
May 5 Cash sales Rm98
May 7 N Miller paid us by cheque Rm62
May 9 We paid B Burton in cash Rm22
May 11 Cash sales paid direct into the bank Rm53
May 15 G Moore paid us in cash Rm65
May 16 We took Rm50 out of the cash till and paid it into the bank account
May 19 We repaid FLlake RM100 by cheque
May 26 Paid motor expenses by cheque Rm12
May 30 Withdrew Rm100 cash from the bank for business use
May 31 Paid wages in cash Rm97
10.2 A two – column cash book are to be written up from the following, carrying the balance down to the following month.
2004
Jan 1 Started business with Rm4,000 in the bank
Jan 2 Paid for fixtures by cheque Rm660
Jan 4 Cash sales Rm225; paid rent by cash Rm140
Jan 6 T Thomas paid us by cheque Rm188
Jan 8 Cash sales paid direct into the bank Rm308
Jan 10 J King paid us in cash Rm300
Jan 12 Paid wages in cash Rm275
Jan 14 J Walter lent us Rm500 paying by cheque
Jan 15 Withdrew Rm200 from the bank for business use
Jan 20 Bought stationery paying by cash Rm60
Jan 22 We paid J French by cheque Rm166
Jan 28 Cash drawing Rm100
Jan 30 J Scott paid us by cheque Rm277
Jan 31 Cash sales Rm66
10.3 write up a two column cash book from the following
24
2006
Nov 1 Balance brought forward form last month: Cash Rm105 : Bank Rm2,164
Nov 2 Cash sales Rm605
Nov 3 Took Rm500 out of the cash till and paid it into the bank
Nov 4 J Mathew paid us by cheque Rm217
Nov 5 We paid for postage stamps in cash Rm60
Nov 6 Bought office equipment by cheque Rm189
Nov 7 We paid J Lucas by cheque Rm50
Nov 9 Received rates refund by cheque Rm72
Nov 11 Withdrew Rm 250 from the bank for business used
Nov 12 Paid wages in cash Rm239
Nov 14 Paid motor expenses by cheque Rm57
Nov 16 L Levy lent us Rm200 in cash
Nov 20 R Norman paid us by cheque Rm112
Nov 28 We paid general expenses in cash Rm22
Nov 30 Paid insurance by cheque Rm74
CASH DISCOUNT AND THE THREE COLUMN CASH BOOK
• The amount of the reduction of the sum to be paid is known as a ‘Cash discount’. Cash discount refers to the allowance given
for quick payment. It is still called cash discount even if the account is paid by cheque.
1. Discount allowed and discount received

• Discount allowed – cash discount allowed by a firms to it customer when they pay their account quickly.
• Discount received – cash discount received by a firm from its suppliers when it pays their account quickly.
• Discount received are entered in the discount column on the credit side of the cash book, and discount allowed in the discount
column on the debit side of the cash book.
2. Bank overdraft and the cash book

• A firm may borrow money from a bank by mean of a bank overdraft, this mean that the firm is allowed to pay more out of
the bank account, by paying out cheque, than the total amount place in the account.
• When the account is overdrawn, the firm owes money to the bank and so the account is a liability and the balance becomes a
credit ones.
Dr Cash book Cr
Date Particular Discount Cash Bank Date Particular Discount Cash Bank
Exercises
11.1 Enter up a three – column cash book from the details following. Balance off at the end of the month, and show the relevant
discount accounts as they would appear in the general ledger.
2004
May 1 Started a business with Rm6,000 in the bank
May 1 Bought fixtures paying by cheque Rm950
May 2 Bought goods paying by cheque Rm1,240
May 3 Cash sales Rm407
May 4 Paid rent in cash Rm200
May 5 N Morgan paid us his account of Rm220 by a cheque for Rm210, we allowed him Rm10 discount.
May 7 Paid S Thomson & co Rm80 owing to them by means of a cheque Rm76, they allowed us Rm4 discount
May 9 We received a cheque for Rm380 from S Cooper, discount having been allowed Rm20
May 12 Paid rates by cheque Rm410
May 14 L Curtis pays us a cheque for Rm115
May 16 Paid M Monroe his account of Rm120 by cash Rm114, having deducted Rm6 cash discount
May 20 P Exeter paid us a cheque for Rm78, having deducted Rm2 cash discount
25
11.2 From the following details, write up a three column cash book, balance off at the end of the month, and show the relevant
discount accounts as they would appear in the general ledger.
2003
Mar 1 Balance brought forward :
Cash in hand Rm211
Cash at bank Rm3,984
Mar 2 We paid each of the following account by cheque, in case we deducted a 5 percent discount: T Adams Rm80;
C Bibby Rm260; D Clarke Rm440
Mar 4 C Potts pays us a cheque for Rm98
Mar 6 Cash sales paid direct into the bank Rm49
Mar 7 Paid insurance by cash Rm65
Mar 9 The following person pay us their account by cheque, in each cash they deducted a discount of 2 ½ percent : R
Smiley Rm160, J Turner Rm640, R Pimlott Rm520,
Mar 12 Paid motors expenses by cash Rm100
Mar 18 Cash sales Rm98
Mar 21 Paid salaries by cheque Rm120
Mar 23 Paid rent by cash Rm60
Mar 28 Received a cheque for Rm500 being a loan from R Godfrey
Mar 31 Paid for stationery by cheque Rm27
TOPIC 4: THE JOURNAL AND POSTING
THE SALES DAY BOOK AND SALES LEDGER
1. Cash sales
• When good were paid for immediately by cash, there is no need to enter these sales in the sales day book.
2. Credit sales
• For each credit sales the selling firm will send a document to the buyer showing full details of the goods sold and the price of
the goods.
• This document is known as an invoice, and to the seller it is known as a sales invoice.
3. Entering credit sales into the sales day book
• There is no need to show details of the goods sold in the sales day book.
Example:
Sales Day Books
2005 Invoice no Amount
(RM)
26
Sep 1 D Poole & Co 16554 560
Sep 8 T Cockburn 16555 1,640
Sep 28 C Carter 16556 220
Sep 30 D Stevens & Co 16557 1,100
3,520
4. Posting credit sales to the sales ledger.

• Sales ledger is used for recording credit sales transaction.
• Credit sales are posted to the debit of each customer’s account in the sales ledger.
• At the end of each period, the total of the credit sales is posted to the credit of the sales account in the general ledger.
Sales Day Books

(RM)
Sep 1 D Poole & Co 16554 560
Sep 8 T Cockburn 16555 1,640
Sep 28 C Carter 16556 220
Sep 30 D Stevens & Co 16557 1,100
3,520
Sales ledger
D Poole & Co account
Dr Cr
2005 Rm 2005 Rm
Sep 1 Sales 560
T Cockburn account
Dr Cr
2005 Rm 2005 Rm
Sep 8 Sales 1,640
C Carter account
Dr Cr
2005 Rm 2005 Rm
Sep 28 Sales 220
D Stevens & Co account

Dr Cr
2005 Rm 2005 Rm
Sep 30 Sales 1,100
General ledger
Sales account
Dr Cr
2005 Rm 2005 Rm
Sep 30 Credit sales for the month 3,520
5. Trade discount
• A reduction (Discount), called a trade discount is given to traders who buy many goods from us, and traders who buy only a
few items from us.
Example:
Trader A
Rental price 200
Less: Trader discount 50 (20%)
27
Price to be paid by customer 150
6. Trade discount and cash discount

• As the trade discount is simply a way of calculating sales price, no entry for a trade discount should be made in the double
entry record or in the sales day book.
• Cash discount is given for prompt payment, and do not affect the amount of balance on the personal accounts. There are
therefore parts of the double entry accounting.
• To compare cash discount and trade discount;
1. Trade discounts are not shown in double accounts.
2. Cash discounts are shown in double entry account.
Exercises
12.1 You are to enter up the sales day book from the following details. Post the items to the relevant accounts in the sales ledger and
then show the transfer to the sales account in the general ledger.
2006 RM
Mar 1 Credit sales to J Gordon 187
Mar 3 Credit sales to G Abraham 166
Mar 6 Credit sales to V White 12
Mar 10 Credit sales to J Gordon 55
Mar 17 Credit sales to F Williams 289
Mar 19 Credit sale to C Richard 66
Mar 27 Credit sales to V Wood 28
Mar 31 Credit sales to L Simes 78
12.2 Enter up the sales day book from the following, and then post the items to the relevant account in the sales ledger. Show the
transfer to the sales account in the general ledger.
2006 RM
May 1 Credit sales to J Johnson 305
May 3 Credit sales to T Royes 164
May 5 Credit sales to B Howe 45
May 7 Credit sales to M Lee 100
May 16 Credit sales to J Jakes 308
May 23 Credit sale to A Vinden 212
May 30 Credit sales to J Samuels 1,296
THE PURCHASES DAY BOOK AND PURCHASES LEDGER
1. Purchase orders
• When a business or organization decides to buy goods or engage the services of another company, it usually issues a
purchase order.
• Each purchase order is normally raised by the customer’s purchasing office and then sent to the suppliers.
2. Entering into the purchases day book

• From the purchase invoices for bought on credit, the purchaser enter the details in his purchases day book.
• There is no need to show details of the goods bought in the purchases day book.
• The purchase day book is often known also as the purchases book or the purchases journal.
Example
Purchases Day Books
(RM)
Sep 2 R Simpsom 9/101 670
28
Sep 8 B Hamilton 9/102 1,380
Sep 19 C Brown 9/103 120
Sep 30 K Gabriel 9/104 510
2,680
3. Posting credit purchases to the purchases ledger.

• The double entry are as follow;
1. The credit purchases are posted one by one, to the credit of each supplier’s account in the purchases ledger.
2. At the end of each period, the total of the credit purchases is posted to the debit of the purchases account in the
general ledger.
Purchases Day Books

(RM)
Sep 2 R Simpsom 9/101 670
Sep 8 B Hamilton 9/102 1,380
Sep 19 C Brown 9/103 120
Sep 30 K Gabriel 9/104 510
2,680
Purchases ledger
R Simpson account
Dr Cr
2005 Rm 2005 Rm
Sep 2 Purchases 670
B Hamilton account
Dr Cr
2005 Rm 2005 Rm
Sep 8 Purchases 1,380
C Brown account
Dr Cr
2005 Rm 2005 Rm
Sep 19 Purchases 120
K Gabriel account
Dr Cr
2005 Rm 2005 Rm
Sep 30 Purchases 510
General ledger
Purchases account
Dr Cr
2005 Rm 2005 Rm
Sep 30 Credit purchases for the month 2,680
Exercises
13.1 B Mann has the following purchases for the month of May 2004:
2004
May 1 From K King: 4 radio at Rm30 each, 3 music centre at Rm160 each. Less 25 percent trade discount.
May 3 From A Bell: 2 washing machines at Rm200 each, 5 vacuum cleaners at Rm60 each, 2 dish dryer at
Rm150 each. Less 20 percent trade discount.
May 15 From J Key: 1 music’s centers at Rm30 each, 2 washing machine at Rm250 each. Less 25 percent
trade discount.
May 20 From B Powel: radios at Rm70 each, less 33 ½ percent trade discount.
May 30 From B Lewis: 4 dish dryers at Rm200 each, less 20 percent trade discount.
29
Required;
(a) Enter up the purchases day book for the month.
(b) Transfer the total to the purchases account.
13.2 A Rowland has the following purchases for the month of June 2009:
2005
Mar 1 Bought from Smith stores: silk Rm40, cotton Rm80, all less 25 per cent trade discount.
Mar 8 Sold to A Grandly: Linen goods Rm28, woolen items Rm44, cotton goods Rm120.No trade discount.
Mar 15 Sold to A Henry: silk Rm36, linen Rm144, cotton gods Rm120, all less 20 percent trade discount.
Mar 23 Bought from K Kelly: cotton Rm88, linen Rm52, all less 20 percent trade discount.
Mar 24 Sold to D Sangster : linen goods Rm42, cotton Rm48, less 10 percent trade discount.
Mar 31 Bought from J Hamilton: linen goods, Rm270 less 33 1/3 percent trade discount.
THE RETURNS DAY BOOKS
1. Return inwards and credit notes

• Customer may return goods to the supplier if they are faulty, damaged or not suitable for their requirements, where the
consignment is incomplete when compared with the delivery notes, or where an overcharge has been made.
• When this happen, supplier will make an allowance to correct the situation.
• Since customer will have been sent an invoice at the same time as the good were delivered, they will be in debt to the
supplier for the value of the goods.
• When supplier makes an allowance for goods that have been returned or a reduction in price has been agreed, the supplier
will issue credit note to the customer.
• It is called a credit note since the customer’s account will be credited with the amount of the allowance, thereby showing a
reduction in the amount owed by the customer.
• The procedures involving credit note is necessary so that the various books of account that are maintained by the supplier and
customer do, in fact, reflect the correct amount owed.
2. Return inward day book.

• Credit notes are listed in a return inwards day book. This is then used for posting the items as follows:
Sales ledger – credit the amount of credit notes, one by one, to the account of the customers in the sales ledger.
- General ledger – at the end of the period the total of the returned inward day book is posted to the debit
of the return inward account.
3. Returns outwards and debits notes.

• If supplier agreed, good bought previously may be returned. When this happen, a debit note is sent to the supplies giving
detail of the goods and the reason for their return.
4. Returns outwards day book.

• Debit note are listed in the return outwards day book. This is then used for posting the items, as follows:
- Purchase ledger – debit amount of debits notes, one by one to the account of the supplier in the purchases ledger.
- General ledger – at the end of the period, the total of the return outwards day book is posted, to the credit
of the return outwards account.
Exercises
14.1 On 30 April 2008, the balance in the sales and purchase ledger of a particular company were as follows: Debtors – C Cooks:
K King Rm560: AB Ltd Rm40: Creditors – S Todd Rm120: W Mears Rm520: K Fisher Rm280.
The following are transaction for May 2008:
2008
May 2 Sold good on credit to K King RM119
May 4 Bought good n credit from S Todd Rm200
May 6 C Cook paid us the balance on his account by cheque less cash discount of 5 per cent.
May 8 We return good Rm40 to W Mears
30
May 11 Sold good on credit to AB ltd Rm99
May 14 Sold good on credit to K King Rm720
May 15 AB Ltd return good to us Rm19
May 17 Bought good on credit from T Jay Rm142
May 19 We paid W Mears the balance in his account by cheque, less 5 per cent cash discount
May 20 Bought goods on credit from K Fisher Rm180
May 22 We returned good to K Fisher Rm49
May 24 K King returned good to us Rm39
May 27 K King paid his account in full, less 5 per cent discount, by cheque
May 28 We paid S Todd’s account by cash less 5 percent cash discount.
Write up the following for May 2008:

Sales day book.
(b) Purchase day book.
(c) Return inward day book.
(d) Return outward day book.
(e) Sales ledger.
(f) Purchase ledger.
(g) All necessary account in the general ledger.
TOPIC 5: DEPRECIATION OF FIXED ASSETS AND ADJUSTMENT FOR FINAL ACCOUNT
METHODS OF DEPRECIATION
1. Depreciation of fixed asset.

• Fixed asset are those asset of material value that are:
a. of long life
b. to be use in the business
c. Not bought with the intention of being resold.
• Fixed asset such as machinery, motor vehicle, fixtures and even building do not last forever. If the
amount receive (if any) on disposal is deducted form the cost of buying them, the differences is called depreciation.
2. Depreciation as an expense
• Depreciation then, is the part of the original cost of a fixed asset consumed during its period of use by a firm. It is an expense
for service consumed, in the same way as expenses for items such as wages, rent, or electricity.
31
• Since depreciation is an expense, it will have to be charged to the profit and loss account and will, therefore, reduce net
profit.
• The only difference between the cost of depreciation for a motor vehicle and the cost of petrol for the motor vehicle is that
the petrol cost is used up in day or two, whereas the cost of depreciation for the motor vehicle is spread over several years.
3. Cause of depreciation.
• The principle cause of depreciation are:
a. Physical deterioration
- Wear and tear when motor vehicle or machinery are used, they eventually wear out;
- Erosion, rut, rot and decay Land may be eroded or wasted away by the action of wind, rain, sun or the
other element of nature. Similarly the metal in motor vehicles or machinery will rust away. Wood will rot
eventually. Decay is a process, which will be present due to the element of nature and the lack of proper attention.
b. Economic factor
- Obsolescence. This is the process of becoming out of date.
- Inadequacy. This arise when an assets is no longer used because of the growth and change in the size of
the firm.
c. The time factors.
- These are asset that have a legal life fixed in term of years. For instance, you may agree to rent some buildings for
ten year. Such an agreement is normally called lease. When a lease expired, it is worth nothing to you as it has
finished ; whether you paid for the lease is now of no value.
4. Land and building

• It was contended that, as property value tended to rise instead of fall, it was inappropriate to charge depreciation.
5. Methods of calculating depreciation charges

• The two main methods for calculating depreciation charges are the straight line method and reducing balance method.
a. Straight Line Method
- By this method, sometimes also called the fixed installment method, the number of years of used is
estimated. The cost is then divided by the number of years, to give the depreciation charge each year.
- For instance, if a lorry was bought for Rm22,000 and we thought we will keep it for four years and then
sell it for Rm2,000, the depreciation to be charge would be:
Cost(Rm22,000)- Disposal value(M2,000) = Rm20,000

Number of years used (4 years) 4 years
= RM 5, 000 depreciation each year for four years.
- if after the four years, the lorry would have no disposal value, the charge for depreciation would have
been:
Cost(Rm22,000) = Rm22,000
Number of years used (4 years) 4 years
= Rm5, 500 depreciation for four years.
b. Reducing Balance Method

- By this method fixed percentage for deprecation is deducted from the cost in the first year. In the second
or later year the same percentage is taken of the reduced balance. This method is also known as the diminishing
balance method.
- For instance, if machine is bought for Rm10, 000 and depreciation to be charged at 20 percent, the
calculation for the first three years would be as followed.
Rm
Cost 10,00
0
First year; depreciation (20% of Rm10,000) 2,000
32
8,000
Second year; depreciation (20% of Rm8,000) 1,600
6,400
Third year; depreciation (20% of Rm6,400) 1,280
Net book value at the end of the third year 5,120
- Net book value means the cost of fixed asset with depreciation deducted.
Exercises
15.1 D Sanky, a manufacturer, purchase a lathe for the sum of Rm4, 000. It has an estimated life of five years and a scrap value of
RM500. Sanky is not certain whether he should use the ‘straight line’ or the ‘reducing balance’ basis for the purpose of
calculating depreciation on the machine.
You are required to calculate the depreciation on the lathe using both methods, showing clearly the balance remaining in the lathe
account at the end of each of the five years for each method. Assume 40 percent per annum is to be used for the reducing balance
method, and make your calculations to the nearest Rm.
15.2 A machine cost Rm12, 500. It will be kept for four years and then sold for estimated figures of Rm5, 120. Show the calculation
of the figures for depreciation for each of the four year using straight line method, and the reducing balance method. For reducing
balance method use the depreciation rate of 20 per cent.
15.3 A motor vehicle cost Rm6, 400. It will be kept for five years and then sold for scrap for Rm200. Calculate the depreciation for
each year using the reducing balance method, using a depreciation rate of 50 per cent, and the straight line method.
BAD DEBTS AND PROVISION FOR BAD DEBTS
1. Bad debts
• If a firm finds that it is impossible to collect a debt, then that debt should be written off as a bad debt.
• This could happen if the debtor is suffering a loss in the business, or may even have gone bankrupt and is thus unable to pay
the debt. A bad debt is therefore, an expense on the firm that is owed the money.
Example;
We sold goods Rm50 to k Leeming on 5 January 2005, but that firm becomes bankrupt. On 16 February 2005 we sold Rm240
goods to T Young. Young manage to pay Rm200 on 17 May 2005, but it become obvious that he would never be able to pay the
final Rm40.
Accounting entries:
Accounting entries Explanation

Debit: Bad Debt account To transfer the amount of unpaid debt to the bad debt account.
Credit: Debtor account To reduce the liability of the debtors who is unable to settle the debt.
Debit: Profit and loss account To record the amount of bad debt of the period concern.
Credit: Bad debt account To transfer the amount of bad debt to profit and loss account.
The account would appear as follow;

Dr K Leeming Account Cr
2005 Rm 2005 Rm
Jan 5 Sales 5 Dec 31 Bad Debts 50
0
Dr T Young Account Cr
2005 Rm 2005 Rm
Feb 16 Sales 24 May 17 Cash 20
33
0 0
Dec 31 Bad Debts 40
24 24
0 0
Dr Bad debts Account Cr

2005 Rm 2005 Rm
Dec 31 K Lee 5 Dec 31 Profit and Loss a/c 90
0
Dec 31 T Young 4
0
9 90
0
Profit and loss account for the year ended 31 December 2005 (extract)
RM RM
Gross profit XXX
Expenses
Bad debts 90 90
2. Provision for bad debts / doubtful debts

• Why provision are needed, When we are drawing up our financial statements, we want to achieve the following objective:
i. To charge as an expense in the profit and loss account for that year an amount representing debts that
will never be paid.
ii. To show in the balance sheet a debtors figure as close as possible to the true value of debtors at the
balance sheets date.
• Debts declared bad are usually debts that have existed for same times, perhaps even from
earlier accounting periods.
• However for debts that have not been paid by the year end which may not have owed for so
long, it is difficult to determine which of them will be bad debts.
• In this case, this possibility need to be provided for in the current period, otherwise both the
debtors balance reported in the balance sheets and the profit reported in the profit and loss account will almost certainly be
overstated.
• It is impossible to determine with absolute accuracy at the year end what the true amount is in
respect of debtors who will never pay their accounts.
• In order to arrive at a figure for doubtful debts, a business must first consider that some
debtors will never paid any of the amount they owed, while other will paid a part of the amount owing only, leaving the
remainder permanently unpaid.
3. Provision for doubtful debts: estimating provision

• The estimates of provision for bad debts can be made thus:
i. By looking into each debts, and estimating which one will be bad debts.
ii. By estimating, on the basis of experience, what percentage of the debts will result in bad debts?
• It is well known that the longer a debt owes, the more likely it will become a bad debt.
• Some firms draw up an aging debtor’s schedule, showing how long debts have been owed. Older debtors need
higher percentage estimates of bad debts than newer debtors.
4. Accounting entries for provision for bad debts

• When decision has been taken as to the amount of provision to be made, then the accounting entries needed for the provision
relate to the year in which provision is first made, as follows:
i. Debit : profit and lost account with the amount of provision
ii. Credit: provision for bad debts account.
34
Example: As at 31 December 2003, the debtors figure for a firms amounted to RM10, 000 after writing off RM422 of
definite bad debts. It is estimated that 2 per cents of debts will prove to be bad debts, and it is decided to make a provision for
these.
Profit and loss account for the year ended 31 December 2003 (extract)
RM RM
Gross profit XXX
Expenses
Bad debts 422
Provision for bad debts 200 622
Dr Provision for bad debts account Cr

2003 Rm 2003 Rm
Dec 31 Balance c/d 20 Dec 31 Profit and Loss a/c 20
0 0
2004
Jan 1 Balance d/c 20
0
• In the balance sheet, the balance on the provision for bad debts will be deducted from the total of debtors; Thus
Balance sheet (extracts) 31 December 2003

RM RM
Current asset
Debtors 10,000
Less: provision for bad debts 200 9,800
5. Increasing the provisions

Example: at the end f the following year, on 30 December 2004, the bad debts provision needed to be increased because the
provision could be kept at 2 percent but the debtors had risen to Rm12, 000.
The double entry will be:
Debit: Profit and loss account

Credit: Provision for bad debt account
And the relevant accounts will look as set out below.
Profit and loss account for the year ended 31 December 2004
RM RM
Gross profit
Less: Expenses
Bad debts 884
Provision for bad debts 40 924

2004 Rm 2004 Rm
Dec 31 Balance c/d 24 Jan 1 Balance b/d 20
0 0
Dec 31 Profit and loss account 40
24 24
0 0
2005
Jan Balance b/d 24
0

RM RM
35
Current asset
Debtors 12,000
6. Reducing the provision

• The provision is shown in credit balance. To reduce it, we would need a debit entry in the provision account.
Example: On 31 December 2005 the debtors figure have fallen to RM10, 500 but the provision remained at 2 per cent. As
the provision had previously been RM240, it now needs a reduction of RM30. Bad debts of RM616 had already been
written off during the year and are not included in the debtors’ figure of RM10, 500.
The double entry is:
Debit: Provision for bad debts account

Credit: Profit and loss account
And the relevant account looks thus:
Profit and loss account for the year ended 31 December 2005
RM RM
Gross profit xxx
Add: Reduction in provision for bad debt 30
xxx
Less: Expenses
Bad debts 616

2005 Rm 2005 Rm
Dec 31 Profit and loss account 30 Jan 1 Balance b/d 24
0
Dec 31 Balance c/d 21
0
24 24
0 0
2006
Jan 1 Balance b/d 21
0

RM RM
Current asset
Debtors 10,500
Exercises
16.1 Data Computer Services commences in business on 1 January 2004, and during its first year of trading the following debts
are found to be bad and the firm decided to write them off as bad:
2004
April 30 H Gordon RM1,110
August 31 D Bellamy Ltd RM 640
October 31 J Alderton RM120
On 31 December 2004, the schedule of remaining debtor, amounting in total to RM68, 500, is examined, and it is decided to make a
provision for bad debts of RM2, 200.
36
You are required to show:
a) The bad debts account and the provision for bad debts account.
b) The charge to the profit and loss account
c) The relevant extract fro the balance sheet as at 31 December 2004
16.2 A business has always made a provision for bad debts at the rates of 5 percent of debtors. On 1 January 2003 the provision
for this, brought forward from the previous year, amounted to RM2, 600. During the year to 31 December 2003 the bad debts
written off amounted to RM540. On 31 December 2003 the remaining debtors totaled RM62, 000 and the usual provision for
bad debts is to be made.
You are to show:

a) the bad debts account for the year ended 31 December 2003
b) the provision for bad debts account for the year
c) an extract from the profit and loss account for the year
d) the relevant extract from the balance sheet as at 31 December 2003
16.3 A business started trading on 1 January 2006. During the two years ended 31 December 2006 and 2007, the following debts
were written off to the bad debts account on the dates stated:
31 August 2006 W Best RM85

30 September 2006 S Avon RM140
28 February 2007 L J Friend RM180
31 August 2007 N Kelly RM60
30 November 2007 A Oliver RM250
On 31 December 2006 there had been a total of debtors remaining of RM40, 500, and it was decided to make a provision for
doubtful debts of RM550. On 31 December 2007 there had been a total of debtors remaining of RM47, 300, and it was
decided to make a provision for doubtful debts of RM600.
You are required to show:

a) The bad debts account and the provision for bad debts account for each of the two years.
b) The relevant extract from the balance sheet as at 31 December 2006 and 2007
OTHER ADJUSTMENT FOR FINAL ACCOUNT
1. Adjustment needed for expenses owing or paid in advance.

• Not all business pay their rent exactly on time and, indeed, some businesses prefer to pay for their rent in advance.
Example: A firm rent their premises for RM1, 200 per year. Firm A pay RM1, 000 during the year and owes RM200 rent at
the end of the year.
o Rent expenses used up during the year = RM1,200

o Rent actually paid in the year = RM1,000
Firm B pays RM1, 300 during the year, including RM100 in advance for the following year.
o Rent expense used up during the year = RM1,200

o Rent actually paid for in the year = RM1, 300.
• A profit and loss account for the 12 month needs 12 months’ rent as an expense (RM1, 200). That mean that in the above
two example the double entry accounts will have to be adjust.
2. Accrued expenses (Owing expenses)

• Those expenses incurred but not yet paid or recorded in the accounts. Item such as interest, rent and salaries can be accrued
expenses.
• At the end of the accounting period, an adjusting entry should be made to recognize those expenses, which, have accrued but
have not yet been recorded.
37
Example: Assume accounting period ends on 31 December every year. On 1 December 2006, AB Enterprise hired Encik Dollah
as a part-time salesman. The agreed salary was Rm1, 200 monthly payable on the fifth of the following month. Payment
for the first month was made on 5 January 2007. To ensure that the January salary is reflected in the accounts, an
adjusting entry is necessary on 31 December 2006.
On 31 December 2006, adjusting entry for accrued expense is as follows:

Date Particular RM RM
Dec 31 DR Salary account 1,200
CR Accrued account 1,200
The accounts show the following ledger:

Dr Accrued salary account Cr
2006 Rm 2006 Rm
Dec 31 Salaries expense 1,20
0
Dr Salaries expense account Cr

2006 Rm 2006 Rm
Dec 31 Accrued salaries 1,20
0
• The correct amount of salaries expense to be charged to the year 2006 income statement is RM1, 200. Notice that the liability
of RM1, 200 has been recognized. This amount is represented by a credit balance in the accrued salaries account and would
be shown in the balance sheet under the heading of current liabilities.
• At the end of the accounting period, the expenses account is closed and related amount is transferred to the income statement.
3. Accrued or unrecorded Revenue

• Refer to any revenue which has been earned during the period but which has not been recorded prior to the closing date.
• An adjusting entry is required at the end of the accounting period to record the revenue, which has been earned during the
period, and to show that asset exists at the balance sheet date.
Example: Assume that AB enterprise is a publishing business, which receives 12 months’ subscription for a magazine its
produces. On 31 December 2006, the business send a reminder to a customer who is late in making payment for the 12
months’ subscriptions, which amount to RM8,000. To ensure that the subscription revenue that has been earned is
reflected in the account, an adjusting entry is necessary on 31 December 2006.
On 30 December 2006, adjusting entry for accrued revenue is as follow:

Date Particular RM RM
Dec 31 DR Accrued subscription revenues 8,000
CR Subscription revenues 8,000
( to record accrued subscription revenue which has been earned)
The accounts show the following ledger:

Dr Accrued Subscription Revenues account Cr
2006 Rm 2006 Rm
Dec 31 Subscription revenue 8,000
Dr Subscription revenue account Cr

2006 Rm 2006 Rm
Dec 31 Accrued Subscription 8,00
0
38
• At the end of the accounting period, the income account is closed and related amount is transferred to the income statement.
• The correct amount of subscription revenue to be credited to the year 2006 income statement is Rm8, 000.
• Notice that an asset of Rm8, 000 has been recognize. This amount is representing by the debit balance in the accrued
subscription revenue account and would be shown in the balance sheet under the heading of current asset.
4. Prepaid Expenses
• Expenses paid in advance where payment is made to cover future period as well. Such as expenses has been paid during the
current accounting period but will not be incurred until the next accounting period.
• Typical items that often are required to be paid in advance are insurance, rent, and road tax and office supplies.
• The portion that is used up in the current period will be treated as an expense on that period. The portion that is not used is
allocated t expense in the accounting period in which the services or the supplies are used.
• Adjusting entry is needed to ensure that only part of the payment, which related to the current period, should be matched
against revenue of the related period and no items of expenses that related to future period be recognize in the current income
statement.
Example: Assume that the accounting period ends on 31 December every year. AB Enterprise pays Rm4, 800 for one year
insurance premium beginning on 1 April 2006. This payment is recorded as a debit entry of RM4, 800 to the insurance
expense account and a credit entry to the bank account. The amount paid is treated as an expense on the date of
payment.
Dr Prepaid insurance account Cr

2006 Rm 2006 Rm
Dec 31 Insurance expense 1,200 Dec 31 Balance c/d 2,40
0
Dr Insurance expense account Cr

2006 Rm 2006 Rm
April 1 Bank 4,80 Dec 31 Prepaid insurance 1,20
0 0
Income statement 3,60
0
• From the above it shows that the correct amount of insurance expense to be charged to the year 2006 income statement is
RM3, 600.
• Notice that an asset of RM1, 200 has been recognized. This amount is represented by a debit balance in the prepaid insurance
account and would be shown in the balance sheet under the heading of current asset.
5. Prepaid or unearned Revenues

• Revenues received in advance. Customer may pay in advance for service to be rendered in a later accounting period.
• For accounting purpose, amount collected in advance, do not represent revenue because these amount have not yet been
earned and as such they are not realized yet in the current accounting period.
• At the end of the accounting period, adjusting entry is mad to ensure that part of the revenues, which relates to the current
period, are recognized.
Example: Assume accounting period end on 31 December every year. On 1 November 2006, AB enterprise agreed to act as
consultant for a monthly fee of RM1, 00 and received a 6 month consultancy fees on the same date. The amount received
of RM6, 000 would be recorded as a debit to bank account and a credit to the consultancy fees account.
Dr Prepaid consultancy Fees (Liability) Cr

2006 Rm 2006 Rm
Dec 31 Balance c/d 4,000 Dec 31 Consultancy fees 4,00
0
Dr Consultancy fees Cr
39
2006 Rm 2006 Rm
Dec 31 Prepaid consultancy fees 4,00 Nov 1 Bank 6,00
0 0
Income statement 2,00
0
• From the above, it shows that the correct amount of consultancy fees to be credited to the year 2006 income statement is
RM2, 000.
• Notice that a liability of RM4, 000 has been recognized. This amount is represented by a credit balance in the prepaid
consultancy fees account and would be shown in the balance sheet under the heading of current liabilities.
Exercise
17.1 The financial year of H Samberg ended on 31 December 2008. Show the ledger account for the following items including the
balance transferred to the necessary part of the final accounts, and the balance carried down to 2009.
a. Motor expenses: paid in 2008 RM744; owing at 31 December 2008 RM28.

b. Insurance: paid in 2008 RM420; prepaid as at 31 December 2008 RM35.
c. Stationery: paid during 2008 RM1, 800; owing as at 31 December 2007 RM250; owing as at 31 December 2008 RM490.
d. Rent: paid during 2008 RM950; prepaid as at 31 December 2007 RM220; prepaid as at 31 December 2008 RM290.
e. Samberg sub-let part of the premises. Receives RM550 during the year ended 31 December 2008. The tenant owed Samberg
RM180 on 30 December 2007 and RM210 on 31 December 2008.
17.2 The following balances were part of the trial balance of C Cane on 31 December 2008.
Dr(RM) Cr(RM)
Stock 1 January 2008 2,050
Sales 18,590
Purchases 11,170
Rent 640
Wages and salary 2,140
Insurance 590
Bad debts 270
Telephone 300
On 31 December 2008 you ascertain that:

a. The rent for four months of 2009, RM160, has been paid in 2008.
b. RM290 owes for wages and salaries.
c. Insurance has been prepaid RM190
d. A telephone bill of RM110 is owed
e. Stock is valued at RM3, 910.
Draw up Cane’s trading and profit and loss account for the year ended 31 December 2008.
17.3 From the following trial balance of J Sears, a store owner, prepare a trading and profit and loss account for the year ended 31
December 2007 and a balance sheet as at that date, taking into consideration the adjustment shown below:
Trial balance as at 31 December 2007 Dr(RM) Cr(RM)

Sales 80,000
Purchases 70,000
Return inward 1,000
Return outward 1,240
Stock at 1 January 2007 20,000
Provision for bad debts 160
40
Telephone 200
Store fittings 8,000
Motor Van 6,00
Debtors and creditor 1,960 1,400
Bad debts 40
Capital 35,800
Bank Balance 600
Drawings 3,600
118,600 118,600
Adjustments:
a. Closing stock at 31 December 2007 is RM24, 000.
b. Accrued wages RM450
c. Telephone prepaid RM20
d. Provision for bad debts to be increase to 10 per cent of debtors.
e. Depreciation on store fittings RM800 and motor van RM1, 200.
TOPIC 6: THE ANALYTICAL PETTY CASH BOOK AND THE IMPREST SYSTEM
1. Division of the cash book

• In almost any firm there will be many small cash payment to be made. It would be an advantage if the record of these
payments could be kept separate from the main cash book.
• Where separate book is kept, it is known as a petty cash book.
Illustration 1
2004 RM
Sep 1 The cashier gave RM600 as float to the petty cashier
Payment out of petty cash during September
Sep 2 Petrol 63
Sep 3 K Long-traveling expenses 32
Sep 3 Postage 24
Sep 4 D Campell-travelling expenses 21
Sep 7 Cleaning expenses 15
Sep 9 Petrol 19
Sep 12 K Lee- traveling expenses 30
Sep 14 Petrol 35
Sep 15 L Waites – refund: sales ledger account overpaid 50
Sep 18 Petrol 24
Sep 20 Postage 28
Sep 24 H Wood – traveling expenses 75
Sep 27 Settlement of K Young’s account in the purchase ledger 33
Sep 29 Postage 22
Oct 1 The cashier reimbursed the petty cashier the amount spent in the month.
PETTY CASH BOOK
41
Motor
Voucher Staff Ledger
Receipt Folio Date Detail Total expense Postage Cleaning
No traveling Account
s
RM 2004
600 Sep 1 Cash
Sep 2 Petrol 1 63 63
Sep 3 K long 2 32 32
Sep 3 Postage 3 24 24
Sep 4 D Campbell 4 21 21
Sep 7 Cleaning 5 15 15
Sep 12 K Lee 7 30 30
Sep 15 L Waites 9 50 50
Sep 24 H Wood 14 75 75
Sep 27 K young 15 33 33
505
141 158 74 49 83
Sep 30 Balance c/d 95
600 600
75 Oct 1 Balance b/d
505 Oct 1 Cash
2. The imprest system

• Imprest system is where the cashier gives the petty cashier enough cash to meet the needs of the following period.
• At the end of the period, the cashier finds out the amount equal to that spent. The petty cash in hand should then be equal to
the original amount with which the period was started.
• It may necessary to increase the fixed sum, often called the cash float, to be held at the start of each period.
Exercises
18.1 Enter the following transactions in a petty cash book that has analysis columns for motor expenses, postage and stationery,
cleaning, sundry expenses, and a ledger column. This is to be kept on the imprest system, the amount spent to be reimbursed on
the last of each month. The opening petty cash float is Rm1, 000.
200
6
May 1 Cleaning 36
May 3 Speedy garage- petrol 24
May 4 Postage stamp 55
May 5 Envelope 17
May 6 Poison license 18
May 8 Unique garage – petrol 57
May 9 Corner garage – petrol 64
May 11 Postage stamps 58
May 12 F Lee – ledger account 99
May 13 H Norman – Ledger account 44
May 15 Sweeping brush (cleaning) 23
May 16 Bends garage – petrol 77
May 17 K King – stationery 65
May 19 Driving license 11
May 21 C Hope – ledger account 72
May 25 Cleaning 68
42
May 27 License for guar dog 12
May 28 Guard dog – food 29
May 31 Corner garage – petrol 54
18.2 Write up a petty cash book with analysis columns for office expenses, motor expenses, cleaning expenses and casual labor. The
cash float brought down is RM500 and the amount spent is reimbursed on 30 June. Show the balance carried down to 1 July.
200
7
June 1 H Sangster – casual labor 13
June 2 Letterhaeding 22
June 2 Unique motors - motor repair 30
June 3 Cleaning material 16
June 6 Envelope 14
June 8 Petrol 28
June 11 J Hogan – casual labor 15
June 12 Paper- clip 12
June 12 Mrs Bell – cleaner 27
June 14 Petrol 11
June 16 Computer disks 31
June 16 Petrol 29
June 21 Motor vehicle repair 50
June 22 T Cooke – casual labor 21
June 23 Mrs Bell - cleaner 10
June 24 P King – casual labor 19
June 25 Stationery 27
June 26 Flat cars – motor repairs 21
June 29 Petrol 12
June 30 J Young – casual labor 16
ACCOUNTING ERRORS AND THEIR EFFECT ON ACCOUNTING RECORDS
1. Trial balance agreement and errors

• Classification of errors:
a. Errors not affecting trial balance agreement.
• These error results in the same amount of debit being entered as there are credits, or no entry being made either on
the debit or the credit side. This mean that the trial balance will still balance evens thought errors have been made in
the account.
b. Errors affecting trial balance agreement

• These error results in the total of the debit columns in the trial balance not being the same as the total of the
credit columns.
2. Types of errors not affecting trial balance agreement.

a. Errors of commission
• Arise when a correct amount is entered in the books, but in the wrong person’s account.
Example 1: D Long paid us RM50 by cheque on 18 May 2005. The transaction is correctly entered in the cash
book, but it was entered by mistake in the account for D Longman. This means that there had been both a
debit of RM50 and a credit of RM50.
Entry:
Dr D Longman account Cr
2005 Rm 2005 Rm
May 18 Bank 50
Correction entry:
Dr D Longman account Cr
43
2005 Rm 2005 Rm
May 31 D long: error correction 50 May 18 Bank 50
Dr D Long Cr
2005 Rm 2005 Rm
May 31 Cash entered in error in D Longman’s
account 50
b. Errors of principle
• A transaction is entered in the wrong type of account. For instance, the purchase of a fixed asset should be
debited to a fixed asset account. If in error it is debited to an expenses account, then it has been entered in the wrong
type of account.
Example 2: The purchase of a motor car for RM5, 500 by cheque on 14 May 2005 has been debited in error to a
motor expenses account. In the cash book it is shown correctly. This means that there has been both a
debit of RM5, 500 and a credit of RM5, 500.
Entry:
Dr Motor expenses account Cr
2005 Rm 2005 Rm
May 14 Bank 5,500
Correction entry:
Dr Motor Expenses Account Cr
2005 Rm 2005 Rm
May 14 Bank 5,500 May 31 Motor car error correction 5,50
0
Dr Motor Car account Cr

2005 Rm 2005 Rm
May 31 Bank: entered originally in motor
expenses 5,500
c. Error of original entry

• Occur where an original amount is incorrect and is then entered in double entry.
Example 3: Sales of RM150 to T Higgins on 13 May 2005 have been entered as both a debit and a debit of RM130.
Entry:
Dr T Higgins Account Cr
2005 Rm 2005 Rm
May 13 Sales 130
Dr Sales account Cr
2005 Rm 2005 Rm
May 31 Sales Journal 130
Correction entry:
Dr T Higgins Account Cr
2005 Rm 2005 Rm
May 13 Sales 130
May 31 Sales: Error 20
Dr Sales account Cr
2005 Rm 2005 Rm
May 31 Sales Journal 130
May 31 T Higgins: error corrected 20
44
d. Error of omission
• Where transactions are not entered in the book at all.
Example 4: We purchase good from T Hope for RM250 on 13 May 2005 but did not enter the transaction in the
account. So there were nil debits and nil credit.
Correction entry:
Dr Purchase account Cr
2005 Rm 2005 Rm
May 13 T Hope: error corrected 250
Dr T Hope account Cr
2005 Rm 2005 Rm
May 31 Purchases: error corrected 250
e. Compensating error
• When errors in total for both the debit and credit side compensate or cancel each other.
Example 5: let us take a case where incorrect totals had purchase of RM7, 900 and sales of RM9, 900. The purchases
journal adds up to be RM100 too much. In the same period, the sales journal also adds up to be RM100 too
much.
Entry:
Dr Purchase account Cr
2005 Rm 2005 Rm
May 13 Purchases 7,900
Dr Sales account Cr
2005 Rm 2005 Rm
May 31 Sales 9,90
0
Correction entry:
Dr Purchases account Cr
2005 Rm 2005 Rm
May 13 Purchases 7,900 May 31 The journal: error corected 100
Dr Sales account Cr
2005 Rm 2005 Rm
May 31 The journal: Error corrected 100 May 31 Sales 9,90
0
f. Complete reversal of entries.

• This error is where the correct amounts are entered in the correct account, but each item is shown on the
wrong side of each account.
Example 6: We paid a cheque for RM200 on 28 May 2005 to D Charles. We have entered it as follows in accounts with
the letter (A). There has therefore been both a debit and a credit of RM200.
Entry:
Dr Cash Book (A) Cr
2005 Rm 2005 Rm
May 28 D Charles 200
Dr D Charles account (A) Cr

2005 Rm 2005 Rm
45
May 28 Bank 200
Correction entry:
Dr Cash Book (B) Cr
2005 Rm 2005 Rm
May 28 D Charles 200
Dr D Charles (B) Cr
2005 Rm 2005 Rm
May 28 bank 200
Exercises
19.1 Show the journal entry necessary to correct the following errors:
a. A Sale of goods RM678 to J Harkness had been entered in J Harker’s account.

b. The purchase of a machine on credit from L Pearson for RM4, 390 had been completely omitted from our books.
c. The purchase of a motor vehicle for RM3, 800 had been entered in error in the motor expenses account.
d. A sale of RM221 to E Fletcher had been entered in the book - both debit and credit – as RM212.
e. Commission received RM257 had been entered in error in the sales account.
19.2 Elaine Rowe extracted the following balances from her books on 31 May 2008:
RM
Equipment 9,752
Sales 15,863
Purchases 7,590
Sales return 426
Purchase return 674
Creditors 2,095
Drawings 1,420
Debtors 3,738
Bank overdraft 372
Capital 5,314
A short time later the following errors were discovered.
a. A sales invoice for RM392 has not been entered in the sales day book.
b. A cheque of RM545, receive from a customer, has not been recorded in the books.
c. An invoice for RM196, receive from a supplier, has been entered in the account twice.
d. Elaine Rowe has taken RM150 by cheque for her own use, but no entries have been made in the account.
You are required to prepare a trial balance as at 31 may 2008 after considering the above information.
SUSPENSE ACCOUNT AND ERRORS
1. Errors and the trial balance.

• Trial balance may not balance because of the following possibility:
a. Incorrect additions in any account.
b. Making an entry on only one side of the accounts.
c. Entering a different amount on the debit side from the amount on the credit side.
2. Suspense account.
• We should try a very hard to find errors immediately when the trial balance totals are not equal.
• When they cannot be found, the trial balance totals should be made to agree with each other by inserting the
amount of the difference between the two sides in a suspense account.
46
Example:
Trial Balance as at 31 December 2005

RM RM
Total after all the account been listed 100,000 99,960
Suspense account 40
• To make the two totals the same, a figure of Rm40 for the suspense account has been shown on the credit side. A suspense
account is opened and the RM40 difference is also shown there o the credit side.
Dr Suspense account Cr
2005 Rm 2005 Rm
Dec 31 Different per trial balance 40
3. Suspense account and the balance sheet.

• If the errors are not found before the final accounts are prepared, the suspense account balance will be included in the balance
sheet.
• Where the balance is a credit balance, it should be included under current liabilities on the balance sheet. When the balance is
a debit balance, it should be shown under current assets on the balance sheet.
4. Correction of errors.
• When errors are found, they must be corrected using double entry. Each correction must be described by an entry in the
journal.
Example 1: One error only.

Assume that the errors of RM40 is found in the following year on 31 March 2006, the errors being that the sales
account was under cast by RM40.
Action taken:
• Debit the suspense account to close it.
• Credit sales account to show items were it should have been.
2006 Rm 2005 Rm
Mar 31 Sales 40 Dec 31 Different per trial balance 40
Dr Sales account Cr
2006 Rm 2006 Rm
Dec 31 Suspense 40
Example 2: More than 1 error

A trial balance at 31 December 2007 show a difference of RM77, being a shortage on the debit side. A suspense account is
opened, and the difference of RM77 is entered on the debit side of the account. On 28 February all the errors from the
previous year were found.
a. A cheque of RM150 paid to L.Kent had been correctly entered in the cash book, but had not been entered in Kent’s
account.
b. The purchases account has been under cast by RM20.
c. A cheque of RM93 received from K Sand has been correctly entered in the cash book but has not been entered in Sand
account.
These three errors have result in a net error of RM77 shown by a debit of RM77 on the debit side of the suspense account.
Dr L Kent account Cr
2008 Rm 2008 Rm
Feb 28 Suspense (a) 150
47
Dr Purchases account Cr
2008 Rm 2008 Rm
Feb 28 Suspense (b) 20
Dr K Sand account Cr
2008 Rm 2008 Rm
Feb 28 Suspense ( c ) 93
2008 Rm 2008 Rm
Jan 1 Balance b/d 77 Feb 28 L Kent ( a) 150
Feb 28 K Sand ( c ) 93 Feb 28 Purchases (b) 20
170 17
0
Exercises
20.1 On 31 March 2005 the following items are to be corrected via the journal. Show the corrections.
a. T.Thomas, a customer, had paid us a cheque for RM900 to settle his debts. The cheque has now been returned to us marked
‘Dishonored’.
b. We had allowed C Charles, a debtor, a cash discount of RM35. Because of a dispute with her, we had now disallowed the cash
discount.
c. Office equipment bought for Rm6, 000 has been debited to motor vehicles account.
d. The copy sales invoice of sales to J Graham RM715 was lost, and therefore was completely omitted form our books.
e. Cash drawings of RM210 have been correctly entered in the cash book but have been credited to the wages account.
20.2 On 31 December 2004, your bookkeeper extracted a trial balance that fail to agree by RM330, being a shortage on the credit side
of the trial balance. A suspense account was opened for the difference.
In January 2005 the following errors made I 2004 were found.
i. Sales day book has been under cast by Rm100.

ii. Sales of RM250 to K Hart had been debited in errors to K Hartley’s account.
iii. Rent account had been under cast by RM 70.
iv. Discount received account had been under cast by RM300.
v. The sales of motor vehicles at net book value had been credited in errors to sales account RM360.
Required:
a. Show the journal entry necessary to correct the errors.
b. Draw up the suspense account after the error described have been corrected
c. If the net profit have previously been calculated at RM7, 900 for the year ended 31 December 2004, show the calculation of
the corrected net profit.
CONTROL ACCOUNT
1. Need for control account

• When all accounts were kept in one ledger, a trial balance could be drawn up as a test of the arithmetical accuracy of the
account. It must be remember that certain errors were not reveal by such a trial balance.
• We have to check every item in every ledger. What is required is a type of trial balance for each ledger, and this requirement
is met by the control account.
2. Principle of control account

• If the opening balance of an account is known, together with the information of the additions and deductions entered in the
account, the closing balance can be calculated.
3. Information for control account

48
• The following tables show where information is obtained from in order to draw up control accounts.
Sales ledger control Sources

1. Opening debtors List of debtors’ balance drawn up at the end of the previous period.
2. Credit sales Total from sales journal.
3. Return inwards Total of return inwards journal.
4. Cheque receives Cash book: Bank Column on received side. All transaction of credit purchased
extracted.
5. Cash received Cash book: Cash column on received side. All transaction of cash sales
extracted.
6. Discount allowed Total of discount allowed column in the cash book.
7. Closing debtors List of debtors’ balances drawn up at the end of the period.
Purchases Ledger Control Sources

1. Opening Creditor List of creditors’ balances drawn up at the end of the previous period.
2. Credit Purchases Total from purchases journal
3. Return Outward Total of return outward journal
4. Cheque paid Cash Book: Bank column on payment side. All transaction of credit
purchases extracted.
5. Cash paid Cash book: Cash column on payment side. All transaction of cash
purchases extracted.
6. Discount received Total of discount received column in the cash book.
7. Closing creditors List of creditors’ balances drawn up at the end of the period.
Exercises
21.1 You are required to prepare a sales ledger control account from the following:
2004 RM
May 1 Sales ledger balances 4,560
Total of entry for may:
Sales day book 10,870
Return inward day book 460
Cheque and cash received form customers 9,615
Discount allowed 305
May 30 Sales ledger balances 5,050
21.2 You are to prepare a sales ledger control account from the following. Deduce the closing figure for the sales ledger balance as at
31 March 2008.
2008 RM
Mar 1 Sales ledger balances 6,708
Totals for March:
Discount allowed 300
Cash and cheque received from debtors 8,970
Sales day book 11,500
Bad debts written off 115
Return inwards day book 210
Mar 31 Sales ledger balances ?
21.3 Draw up a purchases ledger control account form the following:
2002 RM
June 1 Purchases ledger balances 3,890
Total for June:
Purchases day book 5,640
Return outward day book 315
49
Cash and cheque paid to creditors 5,230
Discount received 110
June 31 Purchases ledger balances ?
VALUE ADDED TAX
1. Introduction
• Value added tax (VAT) is a tax on turnover, not on profit. It is describe as an indirect tax, and ultimately the tax is paid by
the final consumer of the goods or services.
• The rate of VAT is decided by parliament through the finance acts, which are passed each year after the budget.
2. VAT system work
Example: A toymaker manufactures toys from scarf of material, and sell them to a wholesaler for RM200 plus VAT. The
wholesaler sales these toys to a chain of retailers for RM300 plus VAT, who in turn retail the toys in their shops for
RM400 plus VAT.
(I) The toymaker account for VAT as follows:

Net (RM) VAT (RM)
@ 17.5%
Sales of toys 200 35
Cost 0 00
VAT payable 35
(II) The wholesaler account for VAT as follow:

Net (RM) VAT (RM)
@ 17.5%
Sales of toys 300 52.50
Cost 200 35.00
VAT payable 17.50
(III) The retailer account for VAT as follows:

Net (RM) VAT (RM)
@ 17.5%
Sales of toys 400 70.00
Cost 300 52.50
VAT payable 17.50
3. Vat included in gross amount

• To find the gross amount of VAT that has been added to the net amount , a formula capable of being used with any rate
of VAT is:
% rate of Vat
X Gross amount = VAT in RM
100 + % rate of VAT
Example: Suppose that gross amount of sales was RM940.00 and the rate of VAT was 17.5 per cent. Finding the amount of
VAT and the net amount before VAT was added using the formula yields:
17.5
X 940
100 + 17.5
17.5
X 940
117.50
= 140
50
Exercises
22.1 Comart Supplies Ltd recently purchased from Ace Import Ltd 10 printer originally priced at RM200 each. A 10 percent trade
discount was negotiated, together with a 5 percent cash discount if payment was made within 14 days. Calculate the
following:
a. the total of the trade discount

b. the total of the cash discount
c. the total of the VAT
22.2 A manufacturer sales a product to a wholesaler for RM200 plus VAT of RM35. The wholesaler sells the same product to a
retailer fro RM280 plus VAT of RM49. The retailer then sells the product to a customer for RM320 plus VAT of RM56.
What is the amount of VAT collectable?
TOPIC 7: SINGLE ENTRY AND INCOMPLETE RECORD
1. Why does double entry sometime is not use?

• For every small shopkeeper, market stall or other small business to keep it books using a full double entry system would
not be practical.
• A large number of the owner of such firm would not know how to write up a double entry records, even if they want to.
• It is more likely that they would enter details of a transaction once only, using a single entry system. Many of them
would fail to record every transaction, resulting n incomplete records.
• However despite many small business not having any need for accounting record, most do have to prepare financial
statement or at least calculate their sales or profit once a year.
2. Profit as an increase in capital.

a. identifying profit when opening and closing capital are known.
• Profit can be found by subtracting capital at the start of the period from that at the end of the period.
b. identify when you only have a list of the opening and closing asset and liabilities.
• Using statement of affairs to calculate the amount of profit. Statement of affair is a balance sheet, but it is used when
you are dealing with incomplete record.
51
Exercises
23.1 F Lee starts in business on 1 January 2002 with RM35, 00 in a bank account. Unfortunately he did not keep proper books of
account.
He forces to submit a calculation of profit for the year ended31 December 2003 to the inspector of tax. He ascertain that at 31
December 2002 he had stock valued at cost RM6,200, a van which has cost RM6,400 during the year and which had
depreciated during the year by RM1,600, debtors of RM15,200, expenses prepaid of RM310, a bank balance of RM33,490, a
cash balance RM270, trade creditors RM7,100 and expenses owing RM640.
His drawings were: Cash RM400 per week for 50 weeks, cheque payments RM870.
Draw up statement to show the profit or loss for the year.
23.2 Ivor Clue is a magician. He has conjures up the following result form his non-existent accounting records.
Fees are equal to 5 times his direct cost.
At any given times his stock equal one week’s direct costs.
He defines a month as four weeks.
His stocks at both 31 May and 30 June were valued at RM500.
Required:
Calculate his fees and profit for the month of June.
23.3 The following is the summary of Jane’s bank account for the year ended 31 December 2002.
RM RM
Balance 1.1.2002 4,100 Payment to creditors for goods 67,360
Receipt from debtors 91,190 Rent 3,950
Balance 31.12.2002 6,300 Insurance 1,470
Sundry expenses 610
Drawings 28,200
101,590 101,590
All of the business taking have been paid into the bank with the exception of RM17, 400. Out of this Jane has paid wages of
RM11, 260, drawing of rM1, 200 and purchase of goods RM4, 940.
The following additional information is available:
31.12.200 31.12.200
1 2
Stock 10,800 12,200
Creditors for goods 12,700 14,100
Debtors for goods 21,200 19,800
Insurance prepaid 420 440
Rent owing 390 -
Fixtures at valuation 1,800 1,600
You are to draw up a set of financial statement for the year ended 31 December 2002. Show all of your working.
TOPIC 8: HOTEL EXPENSES ACCOUNTING
• In the accounting terminology, expense is an income statement account representing the cost of items consumed in the
process of generating revenue (ex. Cost of Goods Sold) or that expires due to the passage of time (ex. Depreciation Expense).
• Expense cannot be mixed with expenditure. For, Expenditure represents the purchase amount (whether paid in cash or
credited with the Accounts Payable) of a certain asset.
• According to the matching principle, all expenses must be recorded in the same accounting period as the revenue that they
helped to generate.
• In the hotel industry, expenses are divided into two main categories:
a. Direct Expenses:
• These are the expenses that vary with the level of production. For example, in the Food and Beverage
department, the Cost of Food Sales is a direct expense.
b. Indirect Expenses:
52
• These are the expenses that do not vary with the level of production, or variable costs that can not be feasibly
distributed to various Financial Reporting Centers. In the hotel industry, indirect expenses are, hence, divided into
two different categories:
i. Fixed Charges:
• For, these very expenses are incurred for the benefit of the hotel as a whole not for the benefit of each
single department.
• To illustrate, if a hotel insures itself against fire, theft and burglary, and one day some valuable
equipment has been stolen, from any department whatsoever, the insurance company will indemnify the
hotel.
ii. Undistributed Expenses:

• Examples might include electricity, energy, and water expenses. For, usually the hotel receives a total
energy bill to be paid. In the old days, some hotels went for allocating this amount according to certain
factors (ex. Surface, Department Usage)
• However, this practice proved to be misleading, since it might under-allocate energy expenses for some
departments and over-allocate it for others. Nowadays, most of the hotels decide not to allocate such
expenses any more. Rather, hotels report such expenses in separate schedules.
1. Typical Hotel Departments:

• Rooms Division Department:
- It is the place where guests receive several kinds of services ranging from reservation, registration, to
checkout and settlement of their accounts. This department typically compromises a Rooms Division
manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform
service personnel.
- This department typically compromises a Rooms Division manager, an assistant manager(s), registration
clerks, cashiers, mail and information clerk, and uniform service personnel.
- The various types of Rooms Division department direct expenses include:
a. Commission’s expenses: This account includes payments by the hotel to authorized agents that
bring room business to the hotel. Usually at the end of each month, hotels sit with these agents in
order to reconcile their monthly sales figures and authorize commission payment (usually in the
form of a percentage of room revenue).
b. Reservation expenses: This expense account represents any payment to various agents
contracting to bring potential room revenue business to the hotel. These agents might have the
form of Central Reservation Offices (Whether affiliate or non-affiliate), Intersell agencie.
c. Contract cleaning expenses: This expense account represents payment to contracting outside
cleaning agencies. Some hotels (especially small and middle size hotels) might opt for contract
cleaning because of its attractive financial implications. If this is the case, these hotels might not
be forced to have a housekeeping department, or might keep housekeeping staff to minimum.
Such expenses should be determined in light of the contract signed between both parties (i.e. the
hotel from one side and the cleaning company from the other.)
d. Laundry and dry cleaning expenses: This cost applies to outside laundry and dry cleaning costs
for the Rooms Division department. In most of the cases, such contracts are signed to benefit more
than one revenue generator. In this case, the Rooms Division department shall report the laundry
and dry cleaning expenses related only to the Rooms Division department.
e. Guest transportation expenses: These expenses include the cost of transporting guests from and
to the hotel via various means of transportation (ex: Mini-buses, buses, limousines…). If the guest
transportation's volume business, staff, and costs are significantly high, then a separate department
might be established.
f. Linen expenses: This specific expense account includes the allocation of a portion of linen
expenditure for a specific period of time. This practice goes along with one of the accounting
principles: the matching principle. Some sub-accounts of linen expense might be: Towels
expenses, Facecloth expenses, Blankets expenses, Sheets expenses, Pillow expenses.
g. Guest supplies expenses: This account includes the various guest supplies provided free of
charge to guests in their rooms. Some sub-accounts of guest supplies expenses might include:
Newspaper expenses Guest stationary expenses Shoe cloth expenses

Coffee expenses Writing supplies Toilet requisites expenses
53
expenses
Flowers expenses Hangers expenses Matches expenses
Ice expenses Candy expenses
h. Cleaning supplies expenses: Such an account includes the cost of Rooms Division's cleaning
supplies. Some sub-accounts of guest supplies expenses might include:
Brooms expenses Soaps and polishes cleaning cloths expenses

expenses
Mops expenses Cleaning chemicals Dusters expenses
expenses
Brushes expenses Insecticides expenses Dustpans expenses
Pail expenses cleaning accessories Disinfectants expenses
expense
i. Printing and stationary expenses: This expense account includes printed formats (ex: virgin
registration records, reservation records, guest folios…), office supplies (ex: pens, pencils,
rubbers, erasers…), printed manuals and guidelines for the use of the Rooms Division employees.
Some sub-accounts of printing and stationary expenses might include:
Binders expenses Floor plans expenses Pencils and Pens expenses

Vouchers expenses Rack card expenses Reports expenses
Desk pad expenses Envelopes expenses
Folio expenses Ink expenses
j. Uniforms expenses: This expense account includes the allocation of a portion of uniforms asset (if
the hotel purchases uniforms) for a certain period of time along with the expense of repairing, and
cleaning them. If the hotel rents uniforms rather than purchasing them, then the uniform expense
shall include the renting cost, usually predetermined in light of the contract linking the hotel and
the uniform renting company.
• Food & Beverage Department: This department is responsible for the preparation and service of food and beverage to guests.
It compromises the kitchen, restaurants, bars, and any premise in which Food and Beverage is served.
• Telephone Department: This department is responsible to handle guest communication. This might be insured through
connecting guests to desired locations, whether in-house, local or long distance calls. Moreover, this department is usually
composed of a chief operator, supervisors, operators, and messengers. Last, with the automation revolution affecting right
now most hotels, it became possible to separate calls of guests and communication handled by hotel employees, therefore,
making it possible to have the telephone department as a minor revenue generating department. For, prior to automation, the
separation of cost of calls was not possible and hence the telephone department might show frequently a loss since telephone
direct costs are overstated.
• Administrative & General Department: Actually looking at any hotel organization chart, Administrative and General
Department (referred usually as A&G) does not exist. It is however a financial reporting centers including executives of the
Hotel (ex: General Manager, Assistant General Managers…) and other employees involved with executive and financial
activities (ex: Accounting personnel, resident Manager, Accounts Receivable clerks, Night Auditors…). Moreover, if there is
staff in the hotel not included in departments due to low business volume not justifying the establishment of a department,
they might be included under the A& G department (ex. Data Processing Staff, Transportation Staff, and Personnel Staff…).
• Marketing Department: This department is composed of a marketing manager, marketing assistant managers responsible for
sales, convention, public relations, and advertising functions, along with marketing personnel. This department is a cost
center that indirectly supports revenue generators in their sole aim of generating hotel revenue. This can be insured, for
example, through large group reservations, hence maximizing room revenue, or buffet, conference, and catering opportunities
brought by this very department hence maximizing room revenue, F& B revenue, and the hotel revenue as a whole.
• Property, Operation and Maintenance (POM): Concerned with the appearance and physical condition of the building, the
repair and maintenance of equipment, and rubbish removal. Some positions of this department might include POM manager,
POM assistant manager(s), electricians, plumbers, gardeners, painters, and interior design specialists.
• Data Processing Department: This special department might be established in hotels operating under the fully automated
system. Moreover, such hotels should have significant investment in computer equipment and staff to justify the
54
establishment of a single department. If these conditions do not exist, than the Data Processing functions would be financially
grouped under Administrative & General Department.
• Human Resources Department: Similar to Data Processing Department, if the Dollar Amount and Staff incurred for
employees' hiring, screening, interviewing, selecting, recruiting, and Training is significant, than a Human Resources
Department may be established. Otherwise, Human Resources functions would be financially grouped under Administrative
& General Department
• Guest Transportation Department: If the Dollar Amount and Number of Staff employed in the transportation of Guests is
significant, a separate Department might be established. Otherwise, guest transportation staff would be grouped under Rooms
Division Department.
2. Financial Reporting Centers:

A Financial Reporting Center is an area of responsibility for which separate Cost Information must be collected
Might be classified as Revenue Centers, Support Centers, and Other Financial Reporting Centers
1. Revenue Centers ⇒ Generate Revenue through sales of Products and/or Services to Guests
• Rooms
• Food and Beverage
• Telephone
• Gift Shops
• Garage and Parking
• Other Operated Departments
• Rentals and other Income
2. Support Centers ⇒ those departments that have minimal Guest Contact and do not produce Sales. Yet, they do provide services to
Revenue Centers, which, in turn, provide Services to Guests
• Administrative & General
• Marketing
• Property Operation and Maintenance
• Data Processing
• Human Resources
3. Other Financial Reporting Centers ⇒ include Energy Costs and Fixed Charges (Rent Expense, Property Taxes, Insurance Expense,
Interest Expense, Depreciation and Amortization Expenses)
 Each Financial Reporting Center should be assigned an Identification Number. To illustrate, consider the following Example:
Financial Reporting Center Identification Number

Rooms 11
Food and Beverage 15
Telephone 17
Administrative & General 31
Marketing 36
Property Operation and Maintenance 38
Energy Costs 41
Fixed Charges 51
 Furthermore, each Account should be assigned an Identification Number. Hotels commonly opt for either the Five-Digit (xx-xxx)
or Eight-Digit Account Numbering Systems (xx-xxx-xxx)
3. Responsibility Accounting:
Aim ⇒ provides Financial Information useful in evaluating the effectiveness of Managers and Department Heads. That's why only
Direct Expenses should be charged to Specific Departments
1. Expenses ⇒ include the day-to-day Costs of Operating the Business, the Expired Costs of Assets through Depreciation and
Amortization, and the "write-off" of pre-paid items. Expenses are classified as Direct expenses (Cost of Sales and Operating
Expenses), Indirect Expenses (Fixed Charges and Undistributed Expenses) and Income Taxes
a) Direct Expenses ⇒ they are Costs incurred solely for the benefit of a particular Department
55
• Cost of Sales
• Payroll Expenses
• Payroll-related Expenses
• Operating Supplies
• China, Glassware, Silver, and Linen
• Laundry and Dry Cleaning
b) Indirect Expenses ⇒ They are incurred for the benefit of the Hotel as a whole, and cannot be identified with any particular
Department
• Property Insurance |
• Interest Expense |
• Property Taxes | ⇒ FIXED CHARGES
• Rent Expense |
• Depreciation and Amortization |
• Marketing Expense |
• Administrative & General Expenses |⇒ UNDISTRIBUTED EXPENSES
• Property Operations and Maintenance |
• Energy Costs |
c) Income Taxes ⇒ it is neither a Direct Expense, nor an Indirect Expense. It should appear as a separate Line Item on a Hotel's
Summary Income Statement
2-Departmental Expense Accounting:

Separate Expenses versus one Lump-sum Amount of Expenses
4. Payroll and Payroll-related Expenses:
1. Salaries and Wages (Payroll Expense) ⇒ Includes Salaries, Wages, Overtime Pay, and any Employee Bonuses and Commissions
2. Employee Benefits ⇒ Include Vacation and Holiday Pay
3. Payroll Taxes ⇒ Includes Social Security Taxes (Employer's Portion)
4. Employee Meals ⇒ Includes the Cost of Food furnished to Employees as a Convenience to the Employer
5. Worker's Compensation Insurance ⇒ Includes the Expense of Worker's Compensation Insurance
6. Employee Group Plans ⇒ Includes Life and Health Insurance, and Other Forms of Employee Group-plan Fringe Benefits
56

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Basic Hotel Accounting

TOPIC 1: THE PRINCIPLES OF ACCOUNTING

THE ACCOUNTING EQUATION AND THE BALANCE SHEET

Resources in the business = Resources supplied by the owner

• CAPITAL is the amount of the resources supplied by the owner.

ASSET = CAPITAL + LIABILITIES

Resources: What they are = Resources: Who supplied them

2. The balance sheet and the effects of business transaction.

a. The introduction of capital

Asset: Cash at bank 5,000 Capital 5,000

B.Blake balance sheet as at 1 May 2007

b. The purchase of an asset by Cheque

c. The purchased of an asset and the incurring of a liability.

B.Blake balance sheet as at 6 May 2007

d. Sales of an asset on credit

B.Blake balance sheet as at 10 May 2007

e. Sale of an asset for immediate payment

d. The payment of the liabilities.

B.Blake balance sheet as at 15 May 2007

B.Blake balance sheet as at 31 May 2007

3. Equality of the accounting equation

Example of transaction Effect

4. Alternative form of balance sheet presentation

Less: Current liabilities

Net current assets 2,000

1.2. Examine the following table and complete the gaps:

(a) Computer equipment

You are required to calculate his capital.

THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL

2. The double entry system

Title of account written here

Left-hand side of the page Right hand side of the page

4. Rules for double entry

Account To record Entry in the account

THE DOUBLE ENTRY SYSTEM FOR THE ASSET OF STOCK

a. Purchase of stock on credit.

b. Purchases of stock for cash

c. Sales of stock on credit

Dr Return inwards Account Cr

Dr Return Outwards Account Cr

3.2. You are to enter the following in the account needed:

THE DOUBLE ENTRY SYSTEM FOR EXPENSES AND REVENUES

1. The nature of profit and loss

Assets – Liabilities = Capital

Capital = [10,000 + 7,000 + 3,000] – 2,000

3. Profit or loss and………...

a. A rent of Rm20 is paid in cash.

TOPIC 2: BALANCING OF ACCOUNT

1. Account for debtors.

b. Where debtors still owes for goods.

2. Account for creditors.

THE TRIAL BALANCE

1. Total debit balance =Total credit balance

Trial balance as on 31 may 2004

3. Trial balance and errors

6.2 Correct and balance the following trial balance.

Trial balance of P.Brown as at 31 May 2006

Trial balance of S Hingston as at 30 June 2005

AN INTRODUCTION TO THE TRADING AND PROFIT AND LOSS ACCOUNT