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CHAPTERONE:ACCOUNTI
NGFORMERCHANDI
ZINGI
NVENTORI
ES
Def i
niti
on:
I
nv entori
esar easseti
temshel df orsal
ei ntheordinar
ycourseofbusi nessorgoods
thatwi l
lbeusedorconsumedi ntheproducti
onofgoodst obesold.
Amer chandisi
ngconcern,ordi
naril
ypurchasesit
smer chandi
seinaf ormr eadyforsal
e.
I
tr eportsthecostassi
gnedt ounsoldunitsl
eftonhandasmer chandiseinventor
y.Only
onei nventoryaccount
,Mer chandiseInvent
ory,appearsinthef i
nancialstatementsi
n
thecur r
entporti
onofbalancesheet .
.

I
nvent
oryCl
assi
fi
cat
ion

I
nvent
oryconsist
sof :
1.Fini
shedgoodshel df orsalei
ntheordinarycourseofbusiness.
2.Goodshel dorconsumedi ntheproducti
onoffinishedgoods.
I
nvent
orycontr
olisi
mpor tantfor:
1.Ensuringavai
labil
i
tyofi nvent
oryi
tems
2.Preventi
ngexcessiveaccumul ati
onofinventor
yi tems

INVENTORYSYSTEMS
Companies use one oftwo ty
pes ofsy stems f
ormai
ntai
ning accur
atei
nvent
ory
recor
ds—theperpetual
syst
em ortheper
iodicsyst
em

Per
pet
ualSy stem
 P er
petual i
nvent
orysyst
em updatesi
nventoryaccountsaft
ereachpur
chaseor
sale.
  Inventorysubsi
diar
yledgeri
supdatedaftereachtransact
ion.
 Inventoryquanti
ti
esareupdatedconti
nuously.

Theaccount i
ngfeaturesofaper petual i
nventor
ysy stem areasfoll
ows.
1)Pur chasesofmer chandi seforr esaleorrawmat eri
alsf
orproducti
onar edebi
ted
toInventoryratherthant oPur chases.
2)Fr eight-
in,purchase r etur
ns and al lowances,and pur chase discount
s are
recordedinInventoryr atherthaninsepar ateaccounts.
3)Costofgoodssol disr ecognizedf oreachsal ebydebitingtheaccount,Costof
GoodsSol d,andcr editingInventory.
4)I nventoryis a cont r
olaccountt hati s supported bya subsidiaryledgerof
i
ndi vi
dualinventoryrecor ds.Thesubsi diaryrecordsshow thequant i
tyandcost
ofeacht ypeofi nventoryonhand.

Per
iodi
cInv
ent
orysy
stem

 Periodi cinv
entorysy st
em r ecordsinvent
orypurchaseorsal ein" Purchases"
account .
 "Pur chases"accounti supdat edconti
nuously
,howev er
,"I
nventory"accounti s
updat edonaper i
odicbasis,attheendofeachaccount i
ngperiod(e.g.
,mont hl
y,
quar terl
y)
 Inv entorysubsidiar
yl edgeri s notupdated aft
ereach purchase orsal e of
i
nv ent or
y.
 Invent or
yquantit
iesarenotupdat edconti
nuously
.

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 I
nvent
oryquanti
ti
esareupdat
edonaper i
odicbasi
s.
 Whenfinanci
alst
atement
sareprepar
ed,thecompanyt akesaphy
sicalcountof
i
nvent
orybycounti
ngquanti
ti
esofmerchandiseonhand.

I
nvent
orySy
stemsCompar
ison

Per
petualmethod Peri
odi
cMethod
 Purchases ar e debi t
ed t o inv entor
y  Pur
chasesaredebi
tedt
opurchaseaccount
account
 Freighti
n,purchasereturnandallowance,  Frei
ghti n,purchaser eturnand al
lowance,
and pur chase di
scountarer ecorded in and pur chase discount ar erecorded i
n
i
nv entor
yaccount respecti
veaccount.
 Debi tcosts of goods sold and cr edi
t Cost of goods sol d i s computed onl
y
i
nv entor
yaccountforeachsale periodi
call
y:
COGAS
- Endingi nventory
COGS

Per
pet
ualv
s.Per
iodi
cInv
ent
orySy
stem Jour
nal
Ent
ri
es

A.TheSaleandPurchaseofProducts
Exampl
e:(Uni
tcosti
sheldconstanttoav
oidt
henecessi
tyofausi
ngacostf
low
assumpti
on)

Beginni
nginv
entor
y 100uni
ts@ Br
6=Br600
Purchases 900unit
s@ Br6=Br
5,400
Sal
es 600uni
ts@ Br
12=Br7,200
Endinginv
entor
y 400uni
ts@ Br6=Br
2,400

PerpetualInventorySy stem | PeriodicInventorySyst

em
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1.Beginninginv entor
y100uni t
satBr 6
I
nventoryaccountshowsBr 600in InventoryaccountshowsBr 600
i
nventory. ininventory
.

2.Purchaseof900unitsatBr6peruni
t
I
nv ent
ory 5,
400 Pur
chase 5,
400
Acc.Pay
able 5,400 Acc.Pay
abl
e 5,
400

3.Sal
eof600uni
tsatasel
l
ingpr
iceofBr
12peruni
t

Account
srecei
vabl
e 7,
200 Accountsrecei
vabl
e 7,
200
Sales 7,
200 Sales
7,
200
CostofGoodsSold 3,
600
Invent
ory 3,
600 Noent
ry

3.End-
of-
peri
odentr
yfori
nvent
oryadj
ust
ment
Noentr
yneeded. I
nvent
ory
(Endi
ng) 2,
400
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Theendi
ngbal
anceofi
nvent
ory CostofGoodsSol d 3,
600
showsBr2,
400. Purchases
5,
400
Inventor
y(begi
nning)
600

B.CostofGoodsSol di naPer i
odicInvent orySy st
em
Theinvent
oryaccounti naper iodi
cinv entorysy st
em keepsitsbeginni
ngbalanceunt i
l
theendofperi
odadj ust mentt othephy sicalinventor
ycount.Ther
efore,
aseparat ecost
ofgoodssoldcalculat i
oni snecessary.Thef ol
l
owi ngcal
cul
at i
onshowst hecalculat
ion
fort
heprecedi
ngexampl e.
Beginni
ngI nventory 600
NetPur chases 5,400
--
---
--
GoodsAv ailableforSale 6,000
Endi
ngI nv entory 2,400
---
---
-
CostofGoodsSol d 3,600
=======

C.Pur
chaseRet
urnsandAl
lowancesandPur
chaseDi
scount
s

"
Pur
chases"
:hasanor
mal
debi
tbal
ancesi
ncei
trepl
acest
hedebi
tto"
Inv
ent
ory
".

I
thast wocont raaccount sknownas" PurchaseDi scount s"( PurchaseDiscount)and
"PurchaseRet urnsandAl l
owances"( PurchaseR&A)t hatr educei ttodetermine" Net
Purchases".Thebal anceoft hesetwocont raaccount sisacr edi
tbecause" Purchases"
i
sadebi t.Thef ol
lowi ngent r
iesill
ust
ratepur chaser eturnsanddi scountsinperpetual
andper i
odicinventor ysystems:
Perpet ualInventorySystem | Per iodicI nv entorySy stem
-
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1.SYRCompanyr eturnedBr 600ofdamagedmer chandi seandr eceiv
edapr i
ce
reducti
onallowanceofBr 100ont hepor ti
onoft hemer chandi setheyret
ained.
Accountpay able 700 Accountpay able 700
I
nvent ory 700 Pur chaseR&A
700

2. I
naprevi
oustransact
ion,
SYRpur
chasedmerchandiseonaccountatacostof
Br1,
000.Thecreditt
ermswere2/
10,n/30.SYRpaidfort
hemer chandi
sewi
thi
n
thedi
scountperi
od.

Accountpayabl
e 1,
000 Accountpayable 1,
000
I
nventory 20 PurchaseDiscount
Cash 980 20
Cash 980

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D.Sal
esRet
urnsandAl
lowancesandSal
esDi
scount
s

 Sal
eshavetwocontr
aaccountsknownas"Sal
esDi
scount
s"and"
Sal
esRet
urns
andAl
lowances"(
Sal
esR&A)thatr
educei
t.

 Thenor
mal
bal
ancef
ort
heset
wocont
raaccount
sisadebi
t.

 Sal
esanditscont
raaccount
smayappearwi
thei
theraper
pet
ualorper
iodi
c
i
nvent
orysy
stem.

Thef ol
l
owi
ngentri
esil
lust
rat
etheaccount
sinper
pet
ualandper
iodi
cinv
ent
ory
syst
ems.Theent
ri
esassumethegr
ossmethod.

PerpetualInventorySystem | Per iodicInventor

ySy st
em
-
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1.Sam Companyr eceivedBr600ofdamagedmer chandisefr
om theircust
omerAce.
Theyalsogav eAceaBr 100allowanceforsomeoft hedamagedmer chandi
se
thatAceretained.Theor igi
nalcostofthemer chandiseretur
nedtoSam was
Br400.

Sal
esR&A 700 Sal
esR&A 700
Acc.Recei
vabl
e 700 Acc.Recei
vabl
e 700

I
nventor
y 400
CostofGoodsSol
d Noent
ry
400

2.Sam recei
vedacust
omerpaymentf
orapr
iorsal
eonaccountofBr1,
000subject
tocredi
tter
msof2/10,
n/30.Thecust
omermadepaymentwithi
nthediscount
peri
od.

Cash 980 Cash 980

Sal
esDiscount 20 Sal
esDiscount 20
Acc.Recei
vabl
e Acc.Recei
vable 1,
000
1,
000

Salesont heincomestatementshould beshownnetofi tscontraaccount

s.For
example,ifacompanyhasBr 980,
000insales,Br
3,400insalesret
urnsandall
owances,
andBr2,200insalesdi
scount
s;netsal
eswoul dbeBr974,400.

Basi
cIssuesi
nInv
ent
oryVal
uat
ion

Thev aluat
ionofinvent
ori
escanbeacompl exprocessthatr
equi
resdet
ermini
ngthe
fol
l
owi ng.
1)Thephy si
calgoodst obeincl
udedininv
entor
y( whoownsthegoods?—goodsin
t
ransit,
consi
gnedgoods,speci
alsal
esagr
eements).
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2)Thecostst
obei ncl
udedini
nvent
ory(
productvs.peri
odcosts).
3)Thecostfl
owassumpt i
ontobeadopted(specif
icident
if
icat
ion,av
eragecost
,FI
FO,
LI
FO,ret
ail
,et
c.)
.

Phy
sicalGoodsI
ncl
udedi
nInv
ent
ory
GoodsinTransit
Sometimespurchasedmerchandi
seisi
nt r
ansi
t—notyetr
ecei
ved—attheendofaf i
scal
peri
od.Theaccounti
ngfortheseshi
ppedgoodsdependsonwhoownst hem.Thatcan
bedetermi
nedbyappl i
cat
ionofthe“passageofti
tl
e”rul
e.Legalt
it
leisdet
erminedby
theter
msofsales,asshownbelow:-

 FOBshi
ppingpoint
 Tit
lepassesatsell
er’
splaceofbusiness
 Cost/uni
tsref
lect
edinbuyer’
sinventory
 FOBdest
inati
on
 Tit
lepassesatbuyer’
sbusinesslocati
on
 Sell
erretai
nscost/
unit
sinitsaccounti
ngrecor
ds

Consi
gnedGoods
Consi
gnmentmeanst
hatabusi
ness(
cal
l
edt
heconsi
gnor
)del
i
ver
sgoodst
oanot
her
busi
ness( theconsi
gnee)tobesoldonacommi ssi
onbasi
s.Shi
pmentofgoodson
consignmentdoesnotconst i
tut
esal
es.Inaconsi
gnment
,goodsaretr
ansf
err
edto
anotherparty(t
heconsignee),whoact
sasanagentf ortheownerofgoods(t
he
consigner
)

 Underaconsi gnmentar r
angement ,
t heholderofthegoods(call
edtheconsignee)
doesnotownt hegoods.
 Owner shipremai nswi ththeshi pperoft hegoods( consi
gnor)unti
lthegoodsare
actuall
ysoldt oacust omer.
 Consi gned goods shoul d be included i nt he consi
gnor
’sinventory
,nott he
consignee’sinv entory
.
Thef
ollowinggoodsar eincl
udedin“ sell
er’s”inventory
:
1.Goodsi ntransit( FOBDest i
nation)
2.Goodsonconsi gnmentwi thconsi gnee
3.Goods, soldunderbuybackagr eement s
4.Goods, soldwi thhighr at
esofr eturn
5.I nstal
lmentsal es( i
fbaddebt scannotbe est imated)

I
nvent
orycost
ing
Thet
womosti mport
antfuncti
onsofaccount
ingforinv
entori
esaretodeter
mine.
1.Thequanti
tyofgoodstobei ncl
udedi
ninventor
ies-inv
olvesthet
akinginv
ent
ory
and
2.Thecostofthei
nvent
oriesonhand-thevaluati
onofinventor
y.

Determini
ngI nventorableCost
Allexpendi
turesnecessar ytoacqui r
et hegoodsandt omakethem readyforsal
ear
e
i
ncludedasi nventorablecosts.Invent
orablecostsmayberegardedasapoolofcost
s
thatconsi
stsoft woelements:
1.Thecostoft hebeginninginventor
yand
2.Thecostofgoodspur chaseddur i
ngtheyear
.Thesum oftheset
woelement
s
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equal
sthecostofgoodsav
ail
abl
eforsal
e.
I
nvent
oryCostFl
owAssumpt
ions
Duri
nganygi venfi
scalperiodi ti
sv er
ylikel
yt hatmer chandi
sewillbepurchasedat
sever
aldif
fer
entpri
ces.I
finv entor
iesaretobepr icedatcostandnumer ouspur
chases
havebeenmadeatdiffer
entuni tcosts,whichoft hevari
ouscostpri
cesshouldbeused?
Consequentl
y,oneofseveralsystemat i
cinventorycostf l
owassumpt i
onsisused.The
mostcommonassumpt ionsofdet ermini
ngt hecostoft hemerchandisesol
dar eas
fol
l
ows:-

1.Speci
fi
cIdent
if
icati
on
2.Costf
lowisintheorderinwhichtheexpendit
ureweremade-fi
rst
-i
n,fi
rstout
.
3.Costf
lowinthereverseorderi
nwhi chtheexpendi
tur
emade-
Last-
in,f
ir
stout.
4.Costf
lowisanav er
ageoft heexpendit
ure.

I
nvent
oryCost
ingMet
hodsunderPer
iodi
candPer
pet
ualSy
stems

1.Speci ficIdent i
ficat ion
Speci fi
ci dent i
ficat ioncal lsf ori dent i
fyingeachi tem sol dandeachi tem i ninventory
.
Thecost soft hespeci fi
ci temssol dar eincludedi nt hecostofgoodssol d,andt he
cost s oft he speci f i
ci t
ems on hand ar ei ncluded i nt he i nvent or y.Itcan be
successf ull
yappl iedi nsituat i
onswher ear elat i
velysmal lnumberofcost ly,easil
y
distinguishabl ei temsar ehandl ed.
 Thespeci fi
ci dent i
fi
cat i
onmet hodt rackst heact ualphysi cal fl
owoft hegoods.
 Eachi tem ofi nv ent oryismar ked, tagged, orcodedwi t
hi tsspeci fi
cuni tcost.
 I tismostf requent l
yusedwhent hecompanysel lsal i
mi tedv arietyofhi ghuni t
-
costitems
2.Fi rst-i
n, fi
rstoutmet hod( FIFO)
TheFI FOmet hodassumest hatgoodsar eusedi nt heor derinwhi cht heyar epurchased.
I
not herwor ds,i tassumest hatt hef irstgoodspur chasedar et hef i
r stused( ina
manuf act uri
ngconcer n)orsol d( inamer chandisingconcer n).Thei nv ent oryr emaining
mustt her eforer epr esentt hemostr ecentpur chases.
 TheFI FOmet hodassumest hatt heear l
iestgoodspur chasedar et hef i
rsttobe
sold.
 Of tenr eflectst heact ual phy sicalflowofmer chandi se.
 UnderFI FO,t he cost s oft he ear li
estgoods pur chased ar et he f i
rstt o be
recogni zedascostofgoodssol d.
 Thecost soft hemostr ecentgoodspur chasedar er ecogni zedast heendi ng
i
nv entor y
.
3.Last -i
n, f
irstoutmet hod( LIFO)
 TheLI FOmet hodassumest hatt hel atestgoodspur chasedar et hef ir
sttobe
sol dandt hatt heear l
iestgoodspur chasedr emai ninendi ngi nv ent ory.
 Sel dom coi nci deswi tht heact ual physical fl
owofi nvent or y.
 Undert heper i
odicmet hod, allgoodspur chaseddur ingt hey earar eassumed
tobeav ailabl ef orthef i
rstsal e, regardlessofdat eofpur chase.
 Goodspur chasedl astar eassumedt ohav ebeensol df i
r st.
 Theendi ngi nv ent
or ycompr isespur chasesmadeear li
eri nay ear .
3.Av erageCostMet hod
 T heav er agecostmet hodassumest hatt hegoodsav ail
abl ef orsalear e
homogeneous.

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 Theal l
ocat i
onoft hecostofgoodsav ail
ableforsal eismadeont hebasi s
ofthewei ghtedav erageuni tcosti ncur r
ed.
 T he wei ghted av erage uni tcosti st hen appl i
ed tot he unit
s sol dt o
deter minet hecostofgoodssol dandt ot heunitsonhandt odeterminet he
endingi nvent or y.
 T heav eragecostmet hod, somet imescal ledthewei ghtedaveragemet hod.
 A ver ageuni tcosthast obedet ermi nedandappl i
edbot htoendinginventory
andbegi nningi nv entory.
Il
lustrati
on2:Con s i
de rt h ef ollowi ngd a taf orYERON COMPANY f ort h e
mon the n de dMa rch3 1 ,2 01 0
In ven tor y,Ma r c h1 ……2 0 0u n itsa tBr . 4
Pu rch a ses:
Ma rch1 0 50 0u n itsa tBr .4.50
Ma rch2 0 40 0u n itsa tBr4 .75
Ma rch3 0 30 0u nitsa tBr 5 .00
Sa les:
Ma rc h1 5 50 0u nits
Ma rc h2 5 40 0u nits
Assumet hatt heMar chspeci fi
csal esofi nv ent oryconsi stedof25f r
om thebegi nni
ng
i
nventory,100uni tsfrom t heMar ch10pur chase, 175uni t
sf r
om theMar ch20pur chase,
and200uni tsf rom t heMar ch30pur chase.
Required:Det ermi ne:
I.Costofendi ngi nv entoryandCostofgoodssol dassumi ng:
1)Speci fi
ci dent if
icationmet hod- per i
odi c
2)Per i
odicFI FOandper petual FI FO
3)Per i
odicFI FOandper petual FI FO
4)Per i
odicWei ghtedav erageandper petualweightedaverage
Determini
ngcostofgoodsav ail
ablef orsal e:
March1 I nv ent ory 200uni tsatBr4. 00 Br800
March10 pur chase 500uni t
satBr4. 50 Br2, 250
March20 pur chase 400uni t
satBr4. 75 Br1, 900
March30 pur chase 300uni t
satBr5. 00 Br1, 500
Avail
ableforsal e 1400uni t
s Br 6,450
1. Specificident i
fi
cat i
onmet hod:
25uni ts@ Br .4= Br .100
100uni ts@ Br .
4.50= 450
175uni ts@Br .4.75= 831. 25
200uni ts@Br .5 =1, 000
500uni ts Br.2,381. 25
2. (a)PeriodicFI FO
Costofendi
ngi
nvent
ory:
Mostrecentcosts,
March30 300unit
satBr5.
00 Br1, 500
Nextmostrecentcost
s,Mar
ch20 200uni
tatBr4.75 950
I
nvent
oryforsales 500units Br2450

Costofgoodssol
d:
Costofgoodsav ail
ableforsal
es Br6,450
Less-costofendinginventor
y 2,
450
Costofgoodssol d 4,000
b)Per
petualFI
FO

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Pur
chase Cost of goods I
nvent
ory
sol
d
dat
e Qty Unit Total Qty Unit Total Qt
y Uni
tcost Tot
alcost
cost cost cost cost
Mar1 - - - - - 200 4.
00 800
10 50 4. 50 2,
250 - - - 200 4.
00 800
0 500 4.
50 2,
250
15 - - - 20 4.
00 800 200 4.
50 900
0 4.
50 1350
30
0
20 40 4.
75 1,
900 - - - 200 4.
50 900
0 400 4.
75 1900
25 - - - 20 4.
50 900 200 4.
75 950
0 4.
75 950
20
0
30 30 5.
00 1,
500 - - - 200 4.
75 950*
0 300 5.
00 1500*
4,
000
Costofendi
ngi
nvent
ory:
200uni
tsat4.
75 ---
--
-950*
300uni
tsat5.
75--
--
--
-1500*
500unit
s Br2,
450
Costofgoodssol
d:From costofgoodssol
dcol
umnBr4,
000

3. (
a)per
iodi
c-LI
FO
Costofendi
ngi
nvent
ory:
Ear
li
estcost
,March1 200uni
tsatBR4.
00 Br800
Nextear
li
estcost
s,Mar
ch10 300unit
satBr4.
50 1350
I
nventor
yMarch31 500unit
s Br2150
Costofgoodssol
d:
Costofgoodsavai
lableforsal
es Br6450
Less;
costofendi
nginventory 2150
Costofgoodssold 4300

(
b)Perpet
ualLIFO
Purchase I
nvent
ory
Costofgoodssol
d
dat
e Qt
y Unit Total Qty Unit Total Qty Unit Tot
alcost
cost cost cost cost cost
Mar1 - - - - - 20 4. 00 800
0
10 50 4.
50 2,
250 - - - 20 4. 00 800
0 0 4.50 2,
250
50
0
15 - - - 50 4.
50 2250 20 4. 00 800
0 0

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20 40 4.
75 1,
900 - - - 20 4.
00 800
0 0 4.
75 1900
40
0
25 - - - 40 4.
75 1900 20 4.
00 800
0 0
30 30 5.
00 1,
500 - - - 20 4.
00 800*
0 0 5.
00 1500*
30
0

Costofendi
ngi
nvent
ori
es:200uni
tsatBr4.
00=Br800*
300Uni
tsatBr5.
00= 1500*
500 Br2300
Costofgoodssol
d:
»From costofgoodssol
dcol
umn Br4150

4. (
a)Wei
ghtedaverage-per
iodi
c
Aver
agecost
=Costofgoodsav ai
labl
eforsal
e=6450=Br4.
61
Totaluni
tsavai
labl
eforsal
es 1400

Costofendi
ngi
nvent
ory:
500uni
tsatBr4.
6=Br2,
305
Costofgoodssol
d
Costofgoodsav ail
ableforsal
eBr6450
Less:Costofendi nginventor
y 2305
Costofgoodssol d 4,145
(
b)Weightaverage-perpetual
Purchases Sales Bal
ance
Date
March1 200uni
tsatBr4 =800
March10 500 uni ts at Br 700 uni t
s at Br
4.
5=2250 4.
36=3052
March15 500 uni t
s at Br 4.
36= 200uni
tsatBr4.
36=872
2180*
March20 400 uni ts at Br 600 uni t
s at Br
475=1900 4.
62=2772
March25 400 uni t
s at Br 4.
62= 200uni
tsatBr4.
62=924
1848*
March30 300 uni ts atBr500= 500 uni t
s at Br
1500 4.
85=2425

Costofendi
ngi
nvent
ory:500uni
tsatBr4.
85=Br
2,425
Costofgoodssol
d:Br2180*+Br1848*=Br
4,028

Fi
nanci
alSt
atementEf
fect
sofCostFl
owMet
hods
Each ofthethreecostf l
ow me thodsisaccept
abl
e.Thereasons why
compa ni
esadoptdi
ff
erentinvent
orycostf
low met
hodsar
evar
iedbutthey

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2012 9
 PSCO:Pr
inci
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ACPF202)
;Handout
usua l
lyinvolveoneoft hef ol
l
owi ngfact
ors:
1 .Incomes tateme nteff
ects
2 .Balancesh eeteffect
s
3 .Taxe ff
ects
I
nc omeSt ateme ntEffects
Tou nd erst
a ndwh yc omp ani
esmi ghtchooseap art
icul
arcostf
lowme thod,
l
et’
se xamin ethee ff
e ct
soft hed i
ff
erentfl
owa ssump t
ionsonthefinanci
al
stateme ntsofYe r
onComp any.Assumet hatYeronc ompanysoldits900
uni
t sforBr 10,000,i
tsop erati
nge xpenseswereBr2,000,andi
tsincomet ax
rat
ei s2 0%.

FI
FO Av
eragecost LI
FO
Sales Br10,
000 Br10,
000 Br
10,
000
Beginni
ngI nv
entory 800 800 800
Purchases 5,
650 5,
650 5,
650
CostofGoodsAv ai
lablef
orSal
e 6,
450 6,
450 6,
450
EndingInventor
y 2,
450 2,
305 2,
150
CostofGoodsSol d 4,
000 4,
145 4,
300
GrossPr of
it 6,
000 5,
955 5,
700
Operati
ngExpenses 2,
000 2,
000 2,
000
I
ncomeBef oreI
ncomeTaxes 4,
000 3,
955 3,
700
I
ncomeTaxExpense( 20%) 800 791 740
NetIncome 3,
200 3,
164 2,
960

I np eri
od sofr isi
n gp r
ices ,F I
F Ore port stheh igh estn etincome ,LIFO
thelowe s tan da veragec os tf all
sint h emi dd l
e .
 Th ere vers eist r
u ewh enp ricesa refa lli
n g.
 Wh enp r
ic esa rec on st
a nt, al
l costflowme thod swi llyiel
dt hesa me
results.
 LIFOrepor tshighercostofgoodssol dandl owersgr osspr ofi
t–whichresul
tsin
l
owerneti ncomebef or
etaxes.
 Therepor tofWei ghtedAv eragef al
lsinbet weenFI FOandLI FO
Bal
anceSh eetEf fec ts
 FIFO producest hebestbal ancesheetv aluati
onsi ncet heinventorycost
sar e
cl
osert otheircur r
ent,orr
epl acement ,costs.
 FIFOrepor tshigherendinginv entoryascompar edt oLIFO
 LIFOr epor t
slowerendi nginv ent
oryascompar edtoFI FO
 Therepor tofWei ghtedAv erageendi nginv entoryfall
sinbet weenFI FOandLIFO

TaxEf
fects
F I
F Oc ostflow assump t
ionr esul
tswi t
hh i
gherincomet axli
abil
ityin
thep eri
odofr ai
singpri
cea st hea bovecomp ari
sont hanLI
FOc ost
fl
ow a ssump ti
on.Bu ti
nt hep er
iodoff al
li
ngp ri
ce,therepor
twi l
lb e
reversed.
 TheWe i
g ht
e dAv er
age’
sr eportoftaxliabi
li
tyfal
lsbe t
weenF I
FOa nd
LI
F O.
I
NVENTORYERRORS- INCOMESTATEMENTEF FECTS
 Both b eginni
ng a nd en di
ng in v
e nt
ori
esa ppear on thein come
statement.
Pr
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2012 10
 PSCO:Pr
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ingI
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 Thee ndi
ngi nventory ofon ep er
iod a utoma ti
call
yb ecome st he
beg i
nn i
ngin vent
oryoft hen extp er
iod.
I nventorye rr
orsa f
fectthed eterminationofc ostofg oodssoldandn et
income .
 Thee ff
ectsonc ostofg oodss oldca nb ede t
ermi nedbye nt
eri
ngt he
incorrectd atai nt hef ol
lowin gf or
mu l
aa n dt hens ubsti
tut
ingt he
correctd at
a .
Be ginni
n g+Cos tofGoodss old–En di nginventory=Cos tofGoods
Inventory Sold
I
fbeginninginven t
oryisu nderst
ated, costofg oodss oldwi l
lbeunderst
a t
ed.
Ontheot herhand ,anu nderst
ateme ntofe nd i
nginv entor
ywi l
lover
stat
ec ost
ofgoodss old.Th ee f
fectsofi nventorye r
rorsont hec ur
rentyear
’sincome
st
atemen tares howninb e l
l
ow:

Ef
fect
sOfI
nvent
oryEr
ror
sOnCur
rentYear
’sI
ncomeSt
atement

Understatebegi
nninginventory Understated Overstated
Overstatebegi
nni
ngi nventory Overst
at ed Understated
Understateendi
nginventory Overstated Understated
Overstateendi
nginventory Understated Overstated

Ane r
rorine ndi
nginvent
oryofthecurr
entp eri
odwil
lhavear ever
see ff
ect
onn etincomeoft henextaccount
ingp er
iod.Thi
sisshownb el
ow.Int he
tabl
eNot ethattheunder
stat
ementofen di
nginvent
oryi
n2 010result
sina n
underst
ateme ntofbegi
nni
nginvent
oryin20 08andanoverst
ateme ntofnet
i
ncomei n2 011.

CondensedI
ncomeSt at
ement
  2010  
2011
Par
ti
cul
ars I
ncor
rect  Cor
rect I
ncorrect   Cor
rect
Br Br
Sales 80,
000 Br80,000 90,
000 Br90,
000
Beginni
ngI nvent
ory 20,
000 20,000 12,000 15,
000
Cost of Goods
Purchased 40,
000 40,000 68,000 68,
000
CostofgoodsAv ai
labl
e
forsale 60,
000 60,000 80,000 83,
000
EndingInventory 12,
000 15,000 23,000 23,
000
CostofGoodsSol d 48,
000 45,000 57,
000 60,
000
GrossPr ofi
t 32,
000 35,000 33,
000 30,
000
Operati
ngExpenses 10,
000 10,000 20,
000 20,
000
NetIncome 22,000 25,000 13,
000 10,
000
 I n2010Neti
ncomeUnderstatedBr3,000 (22,
000-25,000)
 I n2011Neti
ncomeOverst
at edBr3,000(10,000-13,
000)
ENDI
NGI
NVENTORYERROR–BALANCESHEETEFFECTS
Theeffectofendi
nginvent
oryerr
orsont
hebal
ancesheetcanbedet
ermi
nedbyusi
ng
thebasicaccount
ingequat
ion:

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2012 11
 PSCO:Pr
inci
plesofAccount
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I(
ACPF202)
;Handout
Asset
s=Li
abi
li
ti
es+Owner
’sEqui
ty

Endi
ngi nvent
oryer
ror Asset
s Li
abi
li
ti
es owner
’s
equi
ty
Overst
ated over
stat
ed None overstated
Underst
ated under
stat
ed None understated

Depar
tur
esf
rom costv
aluat
ion
Speci
alci
rcumst ancessomet i
mescal lforinvent
oryv aluati
onmet hodsotherthancost
.
Thi
sdeparture(orcircumstances)arises:
a.Whent hecostofr eplaci
ngitemsi nInventoryi sbelow recor
dedcost( Whena
conti
nuousdecl i
neinthemar ketv al
ueofmer chandise),and
b.Whent heinvent or
y( merchandise)isnotsal ableatnor malsellspri
cesduet o
physicaldeteri
orati
on,obsolescence,i mperfections,shopwear ,st
ylechangesor
int
roducti
onofnewbr andstothemar ketorothercauses.
Val
uat
ionofi
nvent
oryatLowerofcostorMar
ket(
LCM)
 Whent hev alueofi nventoryislowert hant hecost,thei nventoryiswr i
tt
endown
t
oitsmar ketv alue.Thisisknownast hel owerofcostandmar ket(
LCM)met hod.
 Mar ketisdef i
nedasr eplacementcostornetr eali
zablev alue.
Thebenefitsattri
butedt othismet hodofi nventoryvaluati
onar e:
1.Theloss,ifany ,
isidentifi
edwi ththeaccount i
ngper iodinwhi chi toccurred,
and
2.Goodsar ev aluedatanamountt hatmeasur est heexpect edcont r
ibut
iontor evenue
offutur
eper iods.Thecommonpr act
iceist ouset otalinventoryr atherthanindividual
i
temsormaj orcat egor i
esindet erminingtheLCM v aluati
on.TheLCM met hodcanbe
appli
edtoateachi nventoryitem,t omaj orclassesofi nventor y
,andt oinventoryasa
whole

Fr
om thefol
l
owingdata,
appl
yther
uleofLCM:
(a)i
tem byitem,
and( b)t
otheent
ir
e
i
nvent
ory
I
tem Cost Market LCM
A. Br50 Br55 Br50
B. 60 70 60
C. 65 60 60
Total Br175 Br 185 Br170

 Appl
iedt
oeachitem,thei
nvent
orywi
l
l bev
aluedatBr170.
 Appl
iedi
ntot
al,Br175wil
lbecomparedwithBr185,t
heinvent
orywi
l
lbev
alued
atBr
175
Est
imat
ingI
nvent
orycost
Undercaseswher etaki
ngaphy sicalinventoryormai ntai
ningaper pet
ualinventor
y
becomei mpossi bleforexampl e,takingaphy si
calinventor
yeachmont hmaybet oo
costl
y,whenaf irehasdest royedthei nventory(Catastr
ophe),est
imationofinventor
y
canbemade.Twocommonl yusedmet hodsofest i
mat i
nginvent
orycostsare:
1)Ret ailmethodand
2)Thegr ossprofi
tmet hod.
1.Ret ailMet hodofI nv ent oryCost ing:
Ther et
ailinventorymethodofi nventorycost i
ngiswi delyusedbyr etai
lbusinesses,
part
icul
arlydepartmentstor es.Stepst obef ol
lowed:

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2012 12
 PSCO:Pr
inci
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I(
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;Handout
1.Fi
ndgoodsav ail
ableforsaleatcostandatr et
ail
price.
2.Cal
culaterat
ioofcosttor etailpr
ice.
3.Fi
ndendi ngi
nventoryatretailpri
ce.
4.Mult
iplyendi
nginventoryatr etai
lbyther
ati
oofretailpr
ice.
Exampl
e:
Cost Retail
Begi
nninginventory,Jan.1 Br
.25,
650 Br.
35,000
Netpurchasefort hemont h 210,
600 340,000
NetSales 280,000
1.Merchandiseav ail
ableforsale =25,
650+210.
600
35,
000+340,000
=Br .
236,250 =Br.
375,000
2.Rati
oofcostt or etai
lpri
ce:
236,250
375,000 =63%
3.Merchandisi
ngi nventory,
Jan31, atretail
--
--
--375,
000-280,000=Br .
95,000
4.Merchandisi
ngi nventory,
Jan31atest i
mat edcost(Br.
95,000*63%) -
-Br59,850
Adv
ant
ageofRet ai
lmet hod:
 Whenonl ythesel l
i
ngpriceisav ai
lableitpermit
svaluati
onofi nventory
.
 Usedt oesti
mat ethecostofinv entoryforint
eri
m account i
ngperiods.
 Avoidt hetime-consumi ng and expensi veprocessoft aking aphy sical
invent
oryeachmont horquarter.
2.Gr
osspr
ofi
tMet
hodofEst
imat
ingI
nvent
ori
es
Mostcompani eswoul dl i
ket opr epareinteri
mf i
nancialstatement ssuchasmont hly
,
quarterl
yorsemi annual ly.Phy sicalcounti nvent oryismadeatt heendofy ear.Forthis
reasonthecompani esusesomemet hodst ocalculat ei
tsendingi nventory,oneoft hese
met hodscall
ed" TheGr ossPr of itMet hod".
Thegr ossprofitmethodi sused:
a)Tocont rolandv erifyt hev al idi
tyofinventory.
b)Toest i
mat etheendi ngi nv entoryforinter i
mf i
nanci
alrepor tsori nternalreports
prepar
eddur i
ngt hey earwheni tisimpr acticaltocountt hei nventoryphy sical
ly
andper petualinvent or ysy st em i
snotused.
c)Toest imat ethecostofi nv entorydestroyedbyanacci dent, suchasf i
reorstor m.
Valuat
ionofi nv entor yl osti snecessar yt o accountf ort heacci dentandt o
establ
ishbasi sfori nsur ancecl aimsandi ncomet axes.
Tocomput etheendi ngi nvent orybyt heGrossPr ofitMethod,therear ef i
vest eps:

1.Comput etheTot alcostofgoodsav ail

ableforsale.The costofgoodsav ai
l
able
forsalesconsi stofBegi nning I
nvent ory+ NetPur chases+ Fr ightin ;(Net
Purchases=Pur chases–Di scount,Returns&Al l
owancesPur chases)
2.Comput et he est imated Gr oss pr ofit by multi
plying Sales ×Gr oss Profi
t
percent
age.
3.Comput ethecostofgoodssol dbysubt ract
ingtheComput edGr ossPr of
itfr
om
Sales.
4.Comput eendingi nventorybysubt r
act i
ngt hecomput edcostofgoodssol df r
om
costofgoodsav ai
lableforsale.
Toi
ll
ustrat
ethat,assumet hefoll
owinginformat i
on:-
Begi
nningInventoryBr30, 000;
NetPurchases120, 000;
NetSales185,000;

Pr
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2012 13
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
Fr
ighti
n25,000;
Gr
ossPr ofi
t30%ofsal
es:
Computeendinginv
ent
ory

Sol
uti
on:

1)CostofGoodsav ai
lableforsal
es=Br 30,
000+120,
000+25,000=Br175,000
2)Theest imat edGrossPr ofi
t=Br185,
000*30%=Br55,
500
3)Cost of Goods Sol
d = Br185,
000-
55,500=Br129,500 ,
or
Br185, 000* 70%=Br129,500
4)Endi ngI nventory=Br175,000-
129,500=Br45,
500
Netr eal
izabl
ev alue( NRV)i sdef i
nedast heestimatedsell
ingpriceint heor di
nary
courseofbusi nessl essreasonablypredictabl
ecostsofcompl eti
onanddi sposal
.A
normalpr of
itmar ginissubtractedfrom thatamountt oarr
iveatnetr eal
izablevalue
l
essanor mal pr ofitmargin.

Toil
lust
rate,
assumet hatRobenusCompanyhasunfi
nishedi
nvent
orywi
thasal
es
val
ueofBr 1,
000,est
imatedcostofcompl
eti
onofBr300,andanormalpr
ofi
tmar
ginof
10percentofsal
es.

Thefoll
owingnetreali
zabl
evaluecanbedet er
mined.
I
nventory—sal
esvalue Br
1,000
Less:Esti
matedcostofcompleti
onanddi sposal 300
Netreali
zabl
eval
ue 700
Less:All
owancefornormalprofi
tmar gin(
10%ofsales) 100
Netreali
zabl
eval
uel essanormal pr
ofitmargi
n Br600

Exer
cises:
1.(FI
FO,L I
FO,andAv er
ageCostInventor
y )HopeComp anywasfor
medon
Decemb er1,2002.
Uni
ts UnitCost
Januar
y1 ,2003(begi
nni
nginvent
ory)6 00 Br8.
00
Pur
chasesin2 003
Januar
y5 200 9.
00
Januar
y25 300 1 0.
00
Febr
uary16 800 1 1.
00
March26 600 1 2.
00
Aphysicali
nvent
oryonMa rch31,2003,shows1,600uni
tsonhand.

I
n st
ruct
ions:
Prepar
es chedul
estoc omp utet
hee ndi
ngi
nvent
oryandcostofgoodssol
d
atMa r
ch3 1,2003,undereachofthefol
l
owi
nginvent
orymet
hods.
(a)FI
FO. (
b)LIFO.(c)We i
ght
eda v
e r
age

2.Thefol
l
owinginformati
onisavai
labl
etoyou:
Begi
nningInvent
oryatcost Br32,
000
Costofgoodsp ur
chasedatcost 148,
000
Netsal
es 185,
000

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 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
Be gi
nningInvent
oryatret
ail 45,000
Cos tofgoodsp ur
chasedatret
ail 180,000
Requi
red:Comp utethee st
imatedcostofendi
nginvent
oryundert
her
etai
l
i
nvent
orys yst
em.

3.Assumet hatWisdom Comp anywishestop repar

ea nincomes t
atement
forthemon thofJ anuary,whenit
sr ecordss how netsalesBr200,000;
beginni
nginvent
oryBr40 ,
000;andcostofg oodsp ur
chasedBr 120,
000.I
n
thep r
ecedi
ngy ear
,thec omp anyr
eali
ze da3 0%g rossprofitrat
e,andit
expectstoe ar
nt hes amer atethi
sy ear.Comp utethec os tofendi
ng
i
n v
e nt
oryusi
ngg r
ossp rofi
tme t
hod

4.Tar
ikuCompanyusesap er
pet
u ali
nvent
orysy
stem andt
hef
oll
owi
ng
begi
nni
ngi
nvent
ory
,pur
chasesandsal
esduri
ng1999.

Jan.1 Invent
ory 400u ni
tsatBr.14
15 Sa les 200uni
tsatBr.30
Mar.10 Purchase 200unit
sa tBr
.15
Apr.1 Sa les 200u ni
tsatBr.30
May9 p ur
chase 300unit
sa tBr
.16
Sep.22 Pu r
chase 250un i
tsatBr.20
Nov.1 Sales 300u ni
tsatBr.35
28 Pu rchase 100unit
sa tBr
.21

I
nst
ruct
ion:

(a)Deter
mineth ecostofgoodsavai
labl
ef orsal
e.
(b)Deter
mine( 1)Th eendingi
nvent
ory,an d(2)Th ecostofgoodss ol
d
undere ach ofthea ssumedc ostflow me thods( FI
FO,LI
F O,and
WeightedAve r
age)
5.Zeme nCa me raSh opu sesthel
owe rofc ostorma r
ketbasi
sf orit
s
i
nve nt
ory.Thefoll
owingdataareavai
labl
ea tDecemb er31.

It
em Uni
ts Uni
tcost Mar
ket
Cameras
Nokia 5 Br175 Br
160
Canon 7 150 152

Li
ghtmet
ers
Sony 12 125 110
Kodak 10 115 135

I
nstr
ucti
on:
Deter
minethea moun toft
hee ndi
ngi
nvent
orybyappl
yi
ngt
hel
owerof
costormarketbasi
sto:
a)Indi
viduali
tems
b)Invent
orycategori
esand
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c)Thet
otali
nvent
ory

CHAPTER:TWO
ACCOUNTI NGFORPLANTASSETSANDI NTANGIBLEASSETS
A.Def i
nit
ionandNat ur
eofPlantasset
s
Plantassets:-ar
etangi
bleasset
sacquir
edforusei
ntheoper
ati
onofanent
erpr
iseand
notint
endedf orr
esal
etocustomers.
Char
act
eri
sti
csofpl
antasset
s:

 Theyar eacquiredandheldforuseratherthanforresal
e.
 Relati
velylong lif
e( Theyarel ong ter
m i n natur
e)and usual
l
ysubj
ectt
o
depreciat
ion.
 Tangibleinnature(Theypossessphysicalsubstance)
.
 doesnotbecomei ncorporat
edaspartoft heproduct
 usedrepeat edl
ytof ur
nishser
vice

Cl
assi
fi
cat
ionofAsset
sint
heoper
ati
ons:

 Pl
antAsset -p ropert
y,pl
an t,an de quipme n t
 Currentasset-cash,r
ecei
vable,inventor
ies,suppl
ieset
c.
 I
ntangibleasset-goodwil
l,patent,copyrightandetc.
 Naturalresources-
ti
mbertree,mi ner
als,etc

B.CostofPl antAssets:
Plantassetsarerecordedatcostwhenpur chased.Thisisconsist
entwiththecost
pri
ncipl
e.Costincl
udesallnormal andreasonabl
eexpendituresnecessarytogetthe
assetinplaceandreadyforitsi
ntendeduse.Thef oll
owingsummar izesmanyoft he
expenditur
esthatarecapit
ali
zed(addedt othepurchasepriceoftheplantasset
)to
deter
mi nethecostoftheplantasset:
Plantasset Capit
alizedcosts
1. Land  Pur chasepri
ce;realestat
ecommi ssions;
tit
le

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f
ees;
legalfees;accr
uedpropertytaxespaidby
t
hebuyer.Costspaidforsurv
eying,gradi
ng,and
r
emovingexisti
ngstruct
uresarealsocapital
ized.
2. Landi
mpr
ovement
s  Costsforparkingl otsur
f aces,dr
iveway s,f
encing,
pl
antsandshr ubs,andlightingsystems.
3. Bui
l
dings  Purchaseprice;brokeragef ees,t
axes, ti
tl
efees,
att
orneyfees, andnecessar yrenov at
ions.Desi
gn
orarchi
tecturalfeesareal socapitali
zed.
4. Machi
ner
yandEquipment  Purchaseprice,
taxes,f
reight,andinstal
l
at ionand
test
ingtheequipment.
5. Lump-
Sum Pur
chase  I
nal umpsum pur chase,v ar
iousassetsar e
purchasedforasingleprice.Costsareallocated
toeachassetbasedonr elat
ivemar ketvalues.

C.Account
ingf
orDepr
eci
ati
on

Depr
eciati
onisthesystematicandr ationalal
l
ocationofthehist
ori
calcostofanasset
,
l
essitssal
vagev al
ue,overit
sest i
mat edusefulli
fe.Depr
eciat
ionisanall
ocati
on
pr
ocessasopposedt oav aluati
onpr ocess.Ta ng i
blefi
xeda sset
s,withthe
excep t
ionofla nd,ares ub j
ectedt od epr
e ci
a t
ionex pensed uri
ngt hei
ruseful
l
ife.Thedecl
ineinuti
li
ty(value)offixedassetsiscausedby :

1.Phy si
calf actor s(phy si
caldepreciati
on) :
-wearandt earf r
om operati
ons,act
ion
oft i
meandot herel ements,anddet er
iorati
onanddecay .
2.Funct i
onaldepr eciation
i
.I nadequacy -Whenaf i
xedasseti sincapableofmeet ingi ncr
easeddemandf or
i
t soutput .
i
i
.Obsol escence-I susual l
yther esultoft echnology,ol derassetsbecomel ess
effi
cientandt heref ormoreexpensi v
et ooper at
e.Oracondi ti
onwhere,because
ofnew i nvent i
onsand i mprovement s,af i
xed asseti sno longerusefulin
producinggoodsorser vi
ceswithacompet it
iveadvant age.

Det
ermi
nant
sofdepr
eci
ati
on
Forfi
nancialrepor tingpurposes, compani esmaychoosef rom sev eraldifferent
depr
eciati
onmet hods.Befor estudy ingsomeoft hemet hodsthatcompani esuset o
depr
eciateasset s, makesur eyouunder standt hef oll
owingdef init
ions.
 Cost–Thecostofpl antassetconsi stsofal lnecessar yandr easonabl e
expendi turet oacqui r
eitandt opr eparetheassetf orit
si ntendeduse.
 Usef ul/Economi c/Ser vi
cel i
fe: -Theusef ul l
ifeofapl antasseti st hel engthof
timei tispr oducti
velyusedi nacompany ’
soper ations.Itisanest imat eoft he
product i
v el i
feofanasset .Althoughusual l
yexpr essedi ny ears,anasset 'suseful
li
femayal sobebasedonuni tsofact ivi
ty,suchasi temspr oduced, hour sused,
ormi lesdr iven.
 SalvageVal ue–Ist heest imat ednetr ecov erableamountf rom di sposal ortrade-
inoft heasset .
 Sal v agev al
ue, alsocalledr esidualvalueorscr apvalueort r
ade- inv al
ue.
 I tist heporti
onofanasset ’
sacqui siti
oncostnotconsumedt hroughuse.
 I t 
equal sthev alue,i
fanyt hatacompanyexpect st orecei vebysel lingor
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exchanginganassetatt heendofi tsuseful l
i
fe.
 Depr eciabl
ecost  equal
sanasset '
st otalcostmi nustheasset 'sexpect
edsal vage
val
ue.Thet otalamountofdepr eciati
onexpenseassi gnedt oanassetnev er
exceedst heasset 'sdepr
eciablecost .
 Netbookv alue i
sanasset '
st otalcostmi nustheaccumul at
eddepr eci
ati
on
assignedt otheasset .Netbookv aluerarelyequalsmar ketval
ue,whichisthe
pri
cesomeonewoul dpayfort heasset .Inf act
,themar ketvalueofanasset ,
suchasabui ldi
ng, mayincreasewhi letheasseti sbeingdepr eci
ated.Netbook
val
uesi mpl yrepresentsthepor ti
onofanasset '
scostt hathasnotbeenal located
toexpense.

Depr
eci
ati
onMet
hods
Usual
ly
,ma nagementsel
ectstheme t
h od ormet
h odsitbel
ievest
ob e
appr
opri
ateint heci
rcumst
ancesforal
locat
ingofcostsoff
ixedasset
sto
depr
eciat
ionexpenses.
The ob j
ecti
vei st os electthe method thatb estme asuresthe asset’
s
contr
ibuti
ont ore venueov erit
sus efulli
fe.On ceame thodischose n,it
shouldbea ppl
iedc on si
stent
lyovertheusefulli
feofthea sset
.Consi
stency
enhancesthec omp arabil
it
yoffinanci
alstat
eme nts.Depr
eciati
onaf
fectsthe
balancesheetthroug haccumu l
atedd epr
eciat
ionan dtheincomestateme nt
thr
ou ghdepreci
atione xpense.

Thefact
orsthatdeter
minedepreci
ati
onarecost,
salvagevalueandusefull
if
e.There
aremanydepreciat
ionmethodsforal
locat
ionaplantasset
’scostov
ertheaccounti
ng
peri
odsi
nitsusefulli
fe.

Themostcommondepr eciati
onmet hodsar
e:
1.Strai
ght–linemet hod(sl)
2.Unitsofproductionmethod
3.Declini
ng–Bal ancemet hod
4.Sum- of
-the-years’
-di
gits(SYD)met
hod
1.St
rai
ght
-Li
nemet
hod(
SL)
 Thesame( equal)amountofdepreci
ati
onexpensei schargedeachfully
eart
he
assetisused.
 Thef or
mulaforstrai
ght
-l
inedepr
eciat
ionis:(Cost
-SavageValue)div
idedby
usefull
if
einperi
ods.
AnnualSLdepreci
ation= Acquisit
ionCost–Sav agevalue
Esti
mat edusefull
if
einy ear
s
I
ll
ustrat
ion:AssumethatANB companyboughtamachi nefor$17,000January2008
whichisexpectedtobeusedf orthefol
lowing5year
s.I
tisest
imatedthatthe
machinewillhaveasalv
agev al
ueof$2,000attheendofi
tsser
viceli
fe.Besi
des,t
he
machineisexpectedtoproduce37,500uni
ts.
AnnualSLdepreci
ati
on=$17,000-2,
000
5years
=$3000/year
 Strai
ghtl
inedepreci
ati
onfr
equentl
yisexpr
essedi
nter
msofaper
cent
ager
ate:t
he
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r
ati
oofannual
depr
eciati
onexpenset
odepr
eci
abl
ecost
(100)x100,
n
wheren=usefulli
fe.
SLRat
e= $3,
000 =0.
2x100=20%
15,
000(17,
000-
2,000)
OR
(100) x100
5Year
=20%
ANBCompany
Depreci
ati
onSchedul
e(Strai
ghtli
neMe thod)
Annual
Year Depreci
a bl Deprecat
io Deprecati
o Ac cumu lat
e Book
eCos t nRa t
e n d value
Expense Deprecati
on
2008 $15,
000 20% $3,
000 $3,000 $14,
0 00
2009 15,
000 20% 3,
000 6,
000 11,
000
2010 15,
000 20% 3,
000 9,
0 00 8,000
2011 15,
000 20% 3,
000 12,000 5,000
2012 15,
000 20% 3,
000 15,000 2,000
 Eachy
ear
,20%ofdepr
eci
abl
ecosti
srecogni
zedasdepr
eci
ati
on.
2.Uni
tsofpr
oduct
ionMet
hod
Expressusef ulli
feofapl antassetintermsoft otalout
puttobeproducedov er
i
tslife.
Determi nedepreciati
onexpenseperuni tofout putbyusingastrai
ghtline
method.
Mul t
iplyactualunitproducedbydepr eciati
onexpenseperoutput .
Adi f
fer entamountofdepr eci
ationisrecor deddependingont heplantasset
’s
usage
At
wo-steppr ocessisneededt ocomput edepreciation:
(1)Calculat edepr
eciati
onperuni t
:(Cost-SalvageVal ue)di
videdbytotalunit
sof
product ion.

(
2)Mul
ti
plydepr
eci
ati
onperuni
tbyt
henumberofuni
tspr
oduced.

Depreciat
ionrate = Acqui si
ti
oncost-Resi dualv
alue
Perunitofoutput Totalest
imat edpr
oducti
veoutputi
nuni
ts
= $17,000–2, 000
37,500units
=$0.4/unitofoutput.
 Depreci
ati
onExpense=Depr eci
ationperyearxuni t
susedinperiod
Assumi
ngthatthemachineproducedt hefol
lowingunitseachyear:
Fi
rstyear 5, 000
SecondYear8, 000
Thir
dYear 10, 000
Fourt
hYear 9, 500

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Fi
ft
hYear 5,
000
ANBCompany
De preciati
onSc he dul
e( StraightlineMe thod)
-
--
--
--
--
--
--
--
--
--
--
--
--
----
----
--
--
--
--
--
--
--
--
--
---
--
---
--
--
--
--
--
--
--
---
--
--
---
--
--
--
--
--
--
------
--
--
--
--
--
--
--
--
Numberof Depr eciati
o Depr eciati
o Accumul at
e
Year uni t
s nperuni t nexpense d Bookv al
ue
Depr eciati
o
n
200 5,000 $0. 4 $2,000 $2,000 $15,000
8
200 8,000 0.4 3,
200 5,200 11, 800
9
201 10, 000 0.4 4,
000 9,200 7,800
0
201 9,500 0.4 3,
800 13, 000 4,000
1
201 5,000 0.4 2,
000 15, 000 2,000
2
1.Decl
ini
ngBal
anceDepr
eci
ati
onMet
hod

Thedecli
ningbalancedepr eci
ationmethodusesthedepreci
ablebasisofanasset
multi
pli
edbyaf actorbasedont heli
feoft
heasset.Thi
smet hodiscall
edan
accel
eratedmethodasi tresul
t sinmoredepr
eciati
onexpenseintheearlyy
earsofa
pl
antasset’sl
i
feandl essdepr eciat
ioni
nthelat
teryear
sofitsli
fe.

 Ahigheramountofdepr eciati
onexpensei schargedinearl
ierusef
ulli
feofplant
assetandthenacont i
nuouslydecliningamounti nsubsequentperi
ods.
 Doubledecli
ningbalancerateistwicet hestrai
ghtli
nemet hod.
 Salvageval
uei snotconsi
deredindecl i
ningbalancemethod.
Th ec omp utationofp eri
od i
cd ep reciati
onu nderth i
sme t
hodi sb ased
onad ecli
nin gb ookv alue(c os tles sa ccumu l
atedd epreci
ati
on )oft he
ass et.
An nua ldepreciati
one xp ensei sc omp utedb ymu lt
ip l
yi
n gtheb ookv a l
ue
atth ebeginn i
n gofthey earb yt h ed ecl
ining-bal
anc ed epreci
ationrate.
Th ed epreci
a ti
onr atere ma i
nsc on stantf r
om y eartoy ear,butt heb ook
valuetowh i
c hthera t
ei sa ppli
e dd e cl
inese achy ear.
Bookval
ueforthefi
rstyearisthecostoftheasset
,becauset
h ebalancein
accumul
ateddepreci
ati
ona tthebegi
nningoft
hea sset
’susef
ul l
i
feisze r
o.
I
ns ubsequentyears,book v al
ueist hed i
ff
erenceb et
weenc osta nd
accumul
ateddepreci
ati
ona tthebeginni
ngofthey ear.Unl
iketheot her
depr
eciat
ionmethods,sal
vageval
ueisi
gnoredindeter
miningt heamount
towhichthedecl
ini
ngbalancer
atei
sappl
ied.Sal
vagevalue,however
,does
l
imitthet ot
a ldepr
e ci
ationt hatcanb eta ken.De preci
ati
onst
opswhent
he
asset’
sb ookv al
uee qualse xpect
e dsal
va gev alue.
Athr
ee-st
epprocessi
sneededt ocomputedepreciat
ion:
(1)Calcul
atet
hestraight
-l
iner
ate(
percentage)

(
2)Doubl
ethest
rai
ght
-l
iner
ate(
per
cent
age)

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(
3)Mult
ipl
yther
ate(per
cent
age)det
ermi
nedinstep2byt heasset
’sbookv
alue.
Thebookval
ueisit
scostl
essaccumul
ateddepreci
ati
on.

Thedepr eci ablebasisoftheasseti sthebookv alueofthefixedasset-

-costl ess
accumulat eddepr eciati
on.Thef actorist
heper centageoftheassetthatwoul dbe
depreci
atedeachy earunderstraightli
nedepreciationti
mest heaccel
erator.For
example, anassetwi thafouryearl i
fewouldhav e25%oft hecostdepreciatedeach
year.Usi
ngdoubl edecli
ningbalanceor200%, whichisthemostcommon, wouldmean
thatdepreci ationexpenseinthef i
rstyearwouldbet wi
cethator50%.Sot ocal cul
ate
thedepreci ationexpenseeachy eart hedepreciablebasi
swoul dbemul t
ipli
edby50%.

Exampl e1:
Acopymachi neispurchasedfor$3,217.
89.Theexpectedl
i
feis4years.
Usingdoubledecl
ini
ngbalancethedepreciat
ionwouldbecalcul
atedasfol
lows:
 
factor=2*( 1/
4)=0.50

Depreciabl
e  Depr eci at
ion Depr eciati
on  Accumul ated
Year
Basis Cal cul ati
on Expense Depreciati
on
1 $3,217.89 $3, 217. 89*0. 5 $1, 608.95 $1,608.94
2 1,608.94 1,608. 94*0. 5 804.
47 2,
413.41
3 804.48 804. 48*0. 5 402.
24 2,
815.65
4 402.24 402. 24*0. 5 201.
12 3,
016.77
 UnderDDBmet hodsalvagev al ueisnotconsidered.However,depreci
ati
onst
ops
oncethebookv al
ueequal st hesal vagevalue.

Thereisasi tuat
ioninwhichcompani esmayusear atelessthandoubl e(200%)oft he
st
raightli
nel i
ke150%decl i
ni ngbalancetodepreciatetheirassetslesssmootht han
DDBmet hod.
 Exampl e3:OnApr il1,
2011, CompanyApur chasedequi pmentatt hecostof
$140,000. Thisequi
pmenti sestimat
edt ohave5y earusef ull
if
e. Attheendoft he
5thyear ,
thesalvagevalue( r
esidualv
alue)wil
lbe$20, 000. CompanyAr ecognizes
depreciati
ontothenearestwhol emonth. Cal
culatethedepr eci
ationexpensesf or
2011, 
2012and2013usi ng150%decl i
ningbalancedepr eciati
onmet hod.
  
Sol
ution:
 
  
  
 Usefull
if
e=5y ear
s ; St
rai
ghtl
inedepreciati
onrat
e=1/5=20%pery
ear
 
  
  
 Depreci
ati
onr atef
ordoubledecli
ningbalancemethod 
 
  
  
  
  
  =20%x150%=20%x1. 5=30%pery ear
 
  
  
 Depreci
ationfor2011
 
  
  
  
  
 =$140,000x30%x9/ 12=$31,500
 
  
  
 Depreci
ationfor2012
 
  
  
  
  
 =($140,000-$31,500)x30%x12/ 12=$32, 550
 
  
  
 Depreci
ationfor2013
 
  
  
  
  
 =($140,000-$31,500-$32,
550)x30%x12/ 12=$22,
785

BookVal ue
Depr
eci
ati
on Depreciat
ion BookVal
ueat
Year atthe
Rat
e Expense t
heyear
-end
beginni
ng
2011 $140,000 30% $31,
500(
*1) $108,500
2012 $108,500 30% $32,
550(
*2) $75,
950
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2013 $75.950 30% $22,
785(*3) $53,
165
2014 $53,165 30% $15,
950(*4) $37,
216
2015 $37,216 30% $11,
165(*5) $26,
051
2016 $26,051 30% $6,051(
*6) $20,
000
 150%Decl
ini
ngBalanceDepr
eci
ationMet
hod

  
 (*1)$140,000x30%x9/ 12=$31, 500
 
 (*2)$108,500x30%x12/ 12=$32, 550
 
 (*3)$75,950x30%x12/ 12=$22, 785
 
 (*4)$53,165x30%x12/ 12=$15, 950
 
 (*5)$37,216x30%x12/ 12=$11, 165 
 
 (*6)$26,051x30%x12/ 12=$7, 815 
 Depr eciati
onfor2016is$6, 051tokeepbookv al
uesameassal v ageval
ue.
 
  
  
  
  
  $26, 051-$20,000=$6, 051( Atthispoi
nt,depreci
ati
onstops.)
Not
e :
 De cl
in i
ng-bal
a nceme thodp r
od uc esh i
g herd epreci
a ti
one xpensein
thee a r
lyyearstha nint hela t
e ryea r
s;
I tisc omp ati
blewitht h ema t
ch i
n gp r
inci
p l
e.
 Th eh igherd epre ci
atione xp enseine arl
yy ear
si sma t
chedwi t
h
thehigherb enefitsrec ei
v edinth esey ears.
 Th el owe rd epre ciat
ion e xp ensei sr ecognizedi nl at
ery ear
s
wh enthea sset’sc ontri
b uti
ont orev enueisless.
I tp rovi
de samor ea pprop ri
ated ep r
ec i
ati
ona mou ntforthose
assets t hat l os e t he i
r u seful
ne ss r api
dly b ecause of
obsolescence .
5.Sum-
of-
Year
s-Di
gitmet
hod(
SYD)
 
Equi pmentandv ehicl
esof t
enpr ovi
degr eaterbenefi
tswhent heyar enewt hanwhen
theyapproacht heendoft heirusef
ulliv
esandmor ef r
equent lyrequirerepair
s.
Using sum-of-
the-years'-
digi
tsdepreciati
on isonewayf orcompani est oassigna
disproport
ionateshareofdepr eci
ati
onexpenset othef i
rstyearsofanasset '
susef
ull
if
e.
Depr eci
abl
ecosti sdet erminedbydeduct i
ngsalvagev aluefrom originalcostandi
twil
l
bet hesamef orallyearsofusef ulli
feofapl antasset.
 
  
Depr eci
ationexpense=( Cost-Salvageval
ue)xFr
acti
on
Fraction=Numer ator
Denominator
Numer ator:
-thenumberofy earsremainsintheusef
ull
if
eatthebegi
nningoft
heperi
od.
Denomi nator:-
thesum oft heinteger
sfrom 1uptothenumberofyear
sofuseful
li
fe
(t
hesum oft hey ear’
sdigi
ts.
)

Exampl e1:
Assumet hatANB companyboughtamachi nefor$17,000January2008whichi
s
expectedt obeusedf orthefoll
owing5y ears.I
tisesti
matedt
hatthemachinewil
l
haveasal v agev
alueof$2,000attheendofi tsservi
celi
fe.
Required: Computeannualdepreci
ati
onf ortheli
feofthemachineandjour
nali
zet
he
depreciat
ionexpenseforthefir
sttwoy earsunderSYDmet hod.
Denominator=n( n+1);=5( 5+1) ;=15
2 2
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ingI
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-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
ANBCompany
Depr
eci
ati
onSchedul
e(Sum of–t
heYear
sDi
gitMet
hod)
-
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--

Depreciabl Depreciat
ion Accumul ate
Year e Fr
acti
on Expense d Bookval
ue
Cost depr eciat
ion
2008 $15,000 5/15 $5,000 $5, 000 $17,
000
2009 15,000 4/15 4000 9,000 8,
000
2010 15,000 3/15 3,000 12, 000 5,
000
2011 15,000 2/15 2,000 14, 000 3,
000
2012 15,000 1/15 1000 15, 000 2,
000
Jour
nal
Ent
ri
es
2008 Depr
ecat
ionexpense--
---
--
--
--
--
--
--
--
--
--
--
5,000
AccumulatedDeprecati
on(Machine)--
--
5,000
2009 Depr
ecat
ionexpense--
--
---
--
--
--
--
--
--
--
--
--4,
000
AccumulatedDeprecati
on(Machine)-
--
4,000
Compar
ingDepr
eci
ati
onMet
hods
Year St
rai
ghtLi
ne Unitsof DoubleDecl ini
ng Sum of
Producti
on Balance YearsDi gi
t
2008 $1,800 $2,000 $6,800 $5,000
2009 1,800 3,
200 4,080 4000
2010 1,800 4,
000 2,448 3,000
2011 1,800 3,
800 1,468.8 2,000
2012 1,800 2,
000 203.2 1000
Tot
al $.15,000 $. 15,000 $.15,000
$.
15,000
 Thest r
aightli
nemet hodprovidesforthesameper iodamount sofdepreciati
on
expenseov ertheli
feoftheasset .
 Theunits-of–productionmet hodpr ov
idesforperi
odicamount sofdepreciati
on
expenset hatvar
y ,
dependingupont heamountt heassetisused.
 Thedecliningbalancemethodpr ovidesforahigherdepreciat
ionamountint he
fi
rstyearoftheasset ’
suse,foll
owedbyagr aduallydecl
iningamount.
Par
ti
alYearDepr
eci
ati
on
Whenanassetispurchasedordisposedofatat i
meot hert
hant hebegi
nni
ngorendof
anaccount
ingperi
od,depreci
ati
onisrecordedforpar
tofay ear
Example:-Assumet hemachineispurchasedandplacedinservi
ceonApri
l1,
2002,
andtheannualaccountingper
iodendsonDecember31, 2002.

Costofmachine---
--
--
--
--
Br10,000
Salv
agev al
ue--
--
---
--
--
--
-Br 1,000
Usefull
i
fe---
--
--
--
---
--
--
-- 5y ears.
Esti
mateunitofproducti
on–20, 000unit
s
1.Usi
ngst
rai
ghtl
i
nedepr
eciati
onmethod, wecomput eninemonth’
sdepr
eci
ati
onas

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2012 23
 PSCO:Pr
inci
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ingI
I(
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under
: Br
.10,
000-Br
.1,
000 X9/
12=Br
.1,
350
5year
s
2002,
Dec31 Depr
eciat
ionexpense 1,
350
Accumulateddepr
ecat
ion 1,
350
(1st yearpar
ti
aldepr
eci
ati
on)
2003,
Dec31 Depr
eci
ati
onexpense 1,800
Accumul
ateddeprecati
on 1,
800
(2nd yearandonwar
dsdepr
eci
ati
onwi
llt
aket
hesamef
orm)
2.Usinguni tsofpr oduct i
ondepr eciati
onmet hod, depreciati
onexpensei snotaffected
bythepassageoft imebutbynumberofuni tproduced.Assumet hat4, 000unitis
producedi nt heni nemont hs,thent hedepr ecationexpensef ort hi
sper i
odwillbe
comput edasf ollows:
Deprecationperuni t= Br10, 000–1, 000
20,000uni ts =Br0. 45/uni tof
out
put.
Depr ecationexpensef or2002, Dece.31=4, 000uni t
sxBr0. 45/uni tofoutput
=Br1, 800
3. Comput ationofpar ti
aldepreciati
onexpenseunderDDBmet hodwi ll be:
DDBr ate=2Xst rai
ghtl i
ner at
e
=2X100
5 =2X20% ; =40%
DDBpar t
ialy eardeprecationcomput ation
Beginning Accumul at
ed
Year balance DeprecationExpense depr ecat i
on Bookv al
ue
bookv alue
2002 Br10, 000 [
Br10, 000X40%X9/ 12]=Br3, 000 Br3, 000 Br7,000
2003 7,000 [
10,200X40%] =Br 2,800 5, 800 4,200
2004 4,200 [
4,200X40%]=Br1, 680 7, 480 2,520
2005 2,520 [
2,520X40% =Br 8,488 2,203.2
1,008
2006 1,512 =Br512* 9, 000 1,000

4.Comput
ati
onofpar
ti
aldepr
eci
ati
onexpenseunderSYDmet
hodwi
l
lbe:

Depreci
abl Depreci
ati
on Accumulated
Year e Fr
act
ion Expense Depreci
ati
on Book
Cost Value
2002 Br9,
000 [
9,000X5/15X9/
12]
=Br Br2,
250 Br2,
250 Br7,
750
2,250
2003 9,
000 [9,000X5/
15X3/
12]
+[9,000X4/
15X9/
12]=Br 2,
550 4,
800 5,
200
2,
550
2004 9,
000 [9,000X4/15X3/12]
+[9,000X3/
15X9/
12]= 1,
950 6,
750 3,
250
Br1,950
2005 9,
000 [9,000X3/15X3/12]
+[9,000X2/
15X9/
12]=Br 1,
350 8,
100 1,
900
1,
350

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inci
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2006 9,
000 [9,000X2/15X3/12]
+[9,000X1/
15X9/
12]=Br 750 8,
850 1,
150
750
2007 9,
000 [9,000X5/15X3/12]=Br 150 9,
000 1,
000
150

c.
Changei
nEst
imat
esandRev
isi
onofPer
iodi
cDepr
eci
ati
on

Asy oupr obablyhav esurmised,sometimesourcar efulesti

mat i
onofusef ullif
emaybe
i
ner ror.Anassetmaywearoutpr emat ur
elyorl astl ongerthanmanagementev er
i
ntended.Gener ally Accepted Account i
ng Pr inciples classif
y depr eciat
ion as an
esti
mat e.Est i
mat esar eanecessar yaspectofAccount i
ng,andr uncount ertot he
publi
c'sper cepti
onofanaccount antbeingamet iculous"bean- count
er".Depreciation
canber evisedfrom t i
met otime,aslongast her evisi
oni scar ri
edouti nthecur rent
peri
odorf utureperi
ods.Thebasi cmet hodist ot aket herevisedr emai
ningdepr eciable
cost(l
esssal v
agev alue)andspreaditoutov erther ev i
sedremai ningusefull
ife.

Revi
singtheesti
matesoftheresi
dual
valueandtheusef
ul l
if
eisnormal.When
esti
matesarerevi
sed,t
heyareusedtodeter
minethedepreci
ati
onexpenseinfutur
e
peri
ods.Theydonotaffectt
heamountofdepreci
ati
onexpenserecordedinear
li
er
years.
Il
lustr
ati
on:Assumet hefoll
owingdat a.
Ori
ginalcost-
--
--$.
45, 000
Sal
vagev al
ue----
--
$3,000
Usefulli
fe-
--
---
---7years
t
h
Atthebeginni
ngof4 y eart
her emainingusef
ull
i
fei
sest
imat
edat6y
ear
sand
salvageval
ueat$.
1,000.

BookVal ue( Begi nningof4thy ear):

Ori
ginal Cost --
--
----
--
----
---
--
--
---
--
--
--
---
--
--
---
--
---
--
$45,000
Less: Accumul at ed ( Br.45,000-3,
000)X3y ears---
--
--
---18,000
Depreci ation 7y ears
BookVal ue--
---
--
----
----
--
---
--
---
--
--
---
--
--
--
---
--
--$.27,
000
Less: Revisedsal vagev alue--
---
--
--
---
--
--
--
---
--
---
--
--
- 1, 000
Depreciabl eCost --
----
--
---
---
--
--
---
--
--
--
---
--
--
---$.26, 000
Remai ningusef ul li
fe---
---
--
--
---
--
--
--
---
--
---
--
--
- 6y ears
Reviseddepr eciati
onexpense- --
--
--
---
--
---
--
--
---
--$. 4,
333
Thej
ournalentrybefor eandaf t
err ev i
sionlooksl i
kethef ol
lowing:
Annual
depr ecation = Cost–Sal vagev alue; $45, 000–$. 3,000 =$6, 000/
year
Economi cLi fe 7y ears
Deprecati
onexpense --
--
--
---
--
--
-6,000
Accumul at
edDeprecati
on---
---
--
--
--
---6,000
(Samef ort
hef
irstthr
eey earsbef orer
evi
sion)
Annualdeprecati
on=Cost–Sal vagev alue; $26,000–$1,000 =$4,
333/
year
EconomicLi f
e 6year
s
Deprecati
onexpense --
--
--
--
--
--
--4,333
AccumulatedDeprecat
ion---
--
---
--
--
--
-4,
333
(Sameforther
emai ni
ngy earsaft
errev
isi
on)

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 PSCO:Pr
inci
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Exer
cise:
Usingt
hedatai
nt heabov ei
l
lust
rat
ion,computedepr
eci
ati
onexpensesbef
oreandaf
ter
rev
isi
onundert
hef ol
l
owi ngi
ndependentassumpti
on.
a)Decli
ningbalancemethod
b)Sum of–y ears–digi
tmethod

d.Capi
talandRev
enueExpendi
tur
es
Thecostofacqui ri
ngf ixedasset s,addingt oaf i
xedasset s,improvingaf ixedasset,or
ext
endingaf i
xedasset ’susef ulli
fear ecal l
edCapi t
alexpendi t
ures.
 Addi t
ional costsofpl antasset st hatpr ovedmat er
ialbenefitsextending
beyondt hecur rentper i
od.
 Al socal l
edbal ancesheetexpendi tures.
 Theyar edebi t
edt oassetaccountandr eportedont hebalancesheet .
Example:r oofi
ngr epl
acement ,plantexpansi on,maj orov erhaulsofmachi neryand
equi
pment .
Coststhatbenefitsonl ythecur rentper iodorcost sincur r
edf ornormal maintenance
andrepair
sar ecalledr evenueexpendi tur
es.
 Addi t
ional costsofpl antasset st hatdonotmat eri
all
yincrease
theasset ’
sl if
eorpr oduct i
vecapabi l
iti
es.
 Theyar erecor dedasexpenseanddeduct edf rom revenuesi nthe
currentper iod’
si ncomest atement .
 Theyar eal socal ledincomest atementexpendi t
ures.
Example:-Nor mal costofcl eaning, l
ubr i
cat ing,adjusting, andreplacing(smal l)part
sof
amachi ne, Suppl i
es,fuel ,
andel ect ri
cpower .
Ty
pesofCapi
talExpendi
tur
es
1.Addi tiont ofixedasset s: thecostofanaddi tiontoaf i
xedassetshoul dbe
debitedt other el
atedf ixedassetaccount .
2.Bet terment s/Improv ement s:areexpenditur
esmaki ngapl antassetmor e
eff
icientorpr oduct i
ve.
- Anexpendi turet hatimpr ov
esaf ixedasset ’
soperat
ingefficiencyor
capacityforitsremai ni
nguseful l
if
eiscal l
edbetter
ment .
E.g.Replacingmanual control onamachi newithaut omaticcont
rolstor educelabor
costs
2.Ext raordinaryRepai rs:ar eexpendituresextendingtheasset’susef ull
if
ebeyond
i
tsor iginalesti
mat e.
- Theybenef itfutureper i
ods.
N.B:Or
dinar
yrepai
rsar
eexpendi
turestokeeptheasseti
nnor
mal
,goodoper
ati
ng
condi
ti
on,andtr
eat
edasrevenueexpendi
tures.

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inci
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2.
6.Di
sposalofPl
antAsset
s

Soonerorl ater,vari
ousPlantAsset sar edisposedofforsever alreasons.Regardlessof
thecause, plantassetsthatar enol ongerusefulmaybedi scar ded,sold,
ortradedf or
otherfixedasset s.Her
e,thef ocusshoul dbeupont hebookv alueoft heassetatt he
ti
meofdi sposal.Iti
sthebookv alue( assetcostminusaccumul ateddepreci
ation)that
i
scompar edt otheassetsr eceived,ifany,todeter
mineifagai norlossoccurred.
Met hodsofpl antassetdisposal are:

1.Retir
ementoftheAsset--theAssetisdi
scardedorthrownawayandnothingi
s
recei
ved;
2.SaleoftheAsset-
-Cashorot herasset
swi l
lbereceiv
ed;
3.ExchangeoftheAsset--forasimil
arone,oradiff
erentt
ypeofnoncashasset
.
Cashmi ghtbepai
dinaddi t
iontogiv
inguptheoldasset.

Thet i
meatwhi chthedisposaloccursmaybeatt hebeginning,middle,orendofthe
year.I
ft hedi
sposali
snotatt heendoft heyear
,youmustr emembert orecordany
depreciati
onfortheassetuptot het
imeoft hedi
sposal.Depreci
ationusuallyoccur
s
withthepassageoft i
me, andifdepreci
ati
onisnotupdated,theasset'sbookv al
ueand
theresulti
nggainorlosswill
bemi sstat
ed.

1.DiscardingPl antAssets:
Whenaf ixedassetar enolongeruseful t
othebusi nessandhav enoresi
dualormar
ket
val
ue,t
heyar ediscarded.
E.g.consi derequipmentcostingBr.10,000wi t
haccumul at
eddepreci
ati
onof
Br.
9, 500onDecember31, 2006anddi scardedont hesamedat e.
Accumulateddepr eci
ati
on---
--
---
Br.9,500
Lossondisposal ofequipment --
-- 500
Equi
pment -
---
--
--
---
--
---
--
--
- -
-Br.
10,000
(Torecordthediscardingofequipmenthav ingaBr .
500bookv al
ue)
2.Sell
ingPl antAsset s

Whenaplantassetcoul
dbeuseforotherf
ir
msi tcanbesold.Inadisposalbysal
e,
t
heb ookv al
u eoft heassetisc omp aredwi ththep roceedsrecei
vedfrom
t
hes al
e.I
fthep roceedsofthes aleexceedt hebookv a l
ueoftheplantasset
,
againondis posaloccur
s .I
fthep roceedsoft hesalea rel
essthanthebook
val
ueofthep lantassetsol
d,alos sondi sposaloccurs .

GainonDisposal
Toill
ust
rat
eag ain,assumethatonJul
y1,1996,FanaComp anysel
lsoff
ice
fur
nit
ureforBr16,000c ash.Theof
ficef
urni
tur
eor i
ginal
lycostBr
6 0,000
anda sofJ anuar
y1 ,1 996,hadaccumul
ateddepreci
ati
onofBr 41,000.
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 PSCO:Pr
inci
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I(
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;Handout
Dep r
eci
ati
onf orthef irst6mon thsof1 996isBr 8 ,000.Theentr
ytor ecor
d
depreci
ati
one xpen sea ndu pdatea ccumulat
e dd epreci
ati
ontoJ ul
y1i sa s
fol
lows:
Jul
y1 Depr eciat
ionExpense 8,
000
Accumul atedDepr
eci
ati
on–Of f
iceFurni
tur
e 8,
000
(To record deprecat
ionexpenseforthefirstsi
xmont hsof
1996)

Aft
erthea ccumul
ateddepr
eci
ati
onbal
ancei
supdat
ed,agai
nondi
sposal
ofBr5,000i
sc omput
e dasf
oll
ows:

Costofoffi
cefur
nitur
e Br60,000
Less:Accumulat
eddepr eci
ati
on(
Br41,
000+Br
8,000) 49,
000
Bookv al
ueatdateofdisposal 11,
000
Proceedsfr
om sale 16,
000
Gainondisposal Br5,
000

Theent
ryt
or ecordthesaleandthegai
nondisposali
sasfol
lows:
Jul
y1 Cash 16,
000
AccumulatedDepr eci
ati
on–Offi
ceFurni
tur
e 49, 000
Off
iceFurni
t ur
e 60,
000
GainonDisposal 5,
000

Thegai
nondi
sposali
srepor
tedi
ntheOt
herRev
enuesandGai
nssect
ionoft
hei
ncome
st
atement
.

LossonDisposal
Assumet hati
n st
ea d ofs el
li
ngt heoff
icefu r
nit
uref orBr
16,000,Fana
Companysell
sitforBr9 ,000.Int
h i
scase,
alos sofBr2,000i
scomputedas
fol
l
ows:
Costofofficefurnit
ure Br60,000
Less:Accumu lateddepreci
ati
on 4 9,
0 00
Bookv al
uea tdateofd i
sposal 11,
0 00
Proceedsfrom s al
e 9,
0 00
Lossond isposal Br 2,
0 00

Theent
rytorecordthes alea ndthel
ossond i
sposali
sasfol
l
ows :
Jul
y1 Cash 9,
000
Accumulat
edDepreciat
ion–Of
fi
ceFur
nit
ure 49,000
LossonDisposal 2,
000
Off
iceFur
niture 60,
000

Thelossondi
sposali
srepor
tedi
ntheOt
herEx
p ensesandLossessect
ion
oft
heincomestat
ement.
3.ExchangesofPl
antAsset
s

Plantasset
sma yalsobedi
sposedofthr
oughexchange.Exchangescanbe
foreit
hersimi
l
a rordi
ssi
mil
arasset
s.Becauseexchangesofsimil
arasset
s
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 PSCO:Pr
inci
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ar
emor
ecommon,t
heyar
edi
scussedher
e.
Ane xchangeofs imil
a rassetsoft hes amet ype:Thisoc curs,fore xample,
wh enoldof fi
cef ur
nit
u reisex cha ngedforn ew off
icef urni
tur
eorwh enol d
deliv
e r
ye quipmentexc hangedf orn ewd el
iverequipmen t.Inane x
c hangeof
si
mi larassets,t
hen ewa ssetp erformst hesamef unctiona stheol da sset
.
I
ne xchangeofs i
milarp l
antas sets,i
tisn ecessar
ytod e t
ermine:
(1)Thec ostofthea sseta cquiredand
(
2)Th eg ai
norl ossont hea ssetg i
venu p.Becau sean on -casha sset
i
sg i
venu pint heexch ange,cos tisequ altothec ashe quival
en tpri
cep aid.
Cos t
, t
herefore,i
sthef airma rketv al
ueoft hea ssetgivenu pp lusthec as h
paid.Th ega i
norlossond isposa li
st hediff
erencebet weent hef airmar ket
valueandt hebookv alueoft heas setgivenup.The sed et
ermi nati
onsa n d
theres ul
ti
nga ccounti
nge ntri
esa ree xplai
neda ndil
lustrat
edb elow.
LossTreatme nt
Whenal ossoc cursont hee xchangeofs i
milaras set
s ,i
tisr ecognized
i
mme diatel
y.Toi ll
ustr
a t
et hea ccounti
ngf oraloss,a ssumet hatRon aldo
Comp anyexch angedoldof f
iceequ i
pme ntforsi
milarnewof ficeequipme nt
.
Thebookv alueoftheol dofficeequipme nti
sBr26,00 0(costBr 70,000less
accumulatedd epr
eciat
ionBr 44,00 0)
,it
sf ai
rma r
ketv al
uei sBr10,00 0,and
cashofBr81,0 00ispaid.Th ecostofthen ewoffi
cee quipme nt
,Br91,000,is
computeda sfoll
ows :
Fai
rmarketval
ueofoldoffi
ceequi
pment Br10,
000
Cash 81,
000
Costofnewoffi
ceequipment Br91,000
Throu ghthise xchange,al ossond i
s posalofBr1 6,000i si
n cur
red.Aloss
resul
tswh entheb ookva l
ueisg r
e aterthanthefairma r
k etval
ueoft heasset
gi
ve nu p.Thec omp utat
ionisa sfol
lows :
Bookvalueofoldof
fi
ceequipment(Br70,000-Br
44,000) Br 26,000
Fai
rmarketval
ueofoldoffi
ceequipment 10,000
Lossondisposal Br
16,000
I
nrecor
dinganexc hangeatalossitisnecessar
yto:
(
1)Eli
minat
et hebookv al
ueoft heassetgi
venup,
(
2)Recordt
h ecostofthea ssetacqui
red,and
(
3)Recogni
zeth elossond i
sposal.
Thee ntr
yfort heRon a l
doComp anyisasfoll
ows:
Offi
ceEquipment(new) 91,
000
Accumulated depreci
ati
on – Of
fi
ce Equi
pment 44,
000
(ol
d) 16,
000
LossonDi sposal 70,
000
Off
iceEquipment(old) 81,
000
Cash

Gai
nTr
eat
ment

Whenag ainoccursontheexchangeofsimil
arasset
s,itisnotr
ecogni
zed
i
mme di
atel
y.Inst
ead,t
heg ai
nisdefer
redbyreduci
ngt hecostbasi
softhe
new asset
.Th us,indeter
mini
ngt hec ostofthea ss etacqui
red,i
tis
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necessar
ytoc omp ut
et hec ostbef
oredef er
ralofthegainandt hent
hecost
af
terdeferr
alofthegain.
Toil
lustr
atethea ccounti
ngfors imil
arass et
s,assumet hatMa r
taExp r
ess
Del
iver
yd eci
d estoe xchangeitsol ddeli
veryequipme ntpluscashofBr 3,
000forn ewd e l
i
verye qui
pme nt.Att hi
st i
me ,theb ookv al
ueoft heold
del
iver
ye qui
pme ntis Br 12,0 0 0 (
cost Br40 ,000 l essa ccumul
ated
depr
eciat
ionBr 28,000).Ina ddi
tion,i
tisd eterminedthatt hefai
rma rket
val
ueoftheoldd eli
ver
ye qui
pme ntisBr19,000.

Thec ostofthenewassetrecei
ved(bef
ored ef
erralofthegai
n )i
sequalto
thefairmarketval
ueoftheol dassetexchangedpl usanyc ashorother
consider
ati
ongivenup.Thec ostofthene wd el
iveryequi
pme nt(
before
defer
raloft
heg ai
n)i
sBr
2 2,000,comput
eda sfol
lows :
Fai
rmarketv
alueofol
ddeli
ver
yequipment Br
19,000
Cash 3,000
Costofnewdeli
ver
yequi
pment(bef
oredef
err
alofgai
n) Br22,
000
Againresul
tswh enthef
airmarketv
a l
ueisgr
eat
erthant
h ebookval
ueof
t
heassetgivenup.ForMartaEx
p r
ess,t
her
eisagainofBr
7,000,comput
ed
asf
oll
ows,ont hedi
sposal
:

Fai
rmarketv
alueofol
ddeli
ver
yequi
pment Br
19,
000
Bookval
ueofolddel
iv
eryequi
pment(
Br40,
000-Br
28,
000)
12,
000
Gai
nondisposal Br7,
000
TheBr7,000g ai
nond i
sp osalisthenoff
setaga i
nsttheBr 22,000costofthe
newd el
iver
ye qui
p me nt.Ther esul
tisaBr 15,000c os tofthen ewd el
iv
e r
y
equi
pme nt,
a f
terdeferr
a lofthegain,asshownb elow.
Costofnewdeli
veryequipment Br22,000
Less:
Gainondisposal 7,
000
Costofnewdeli
veryequipment(
aft
erdef
err
alofgai
n) Br15,000
Theentryt
orecordtheexchangeisasfol
l
ows:
Deli
ver
yEquipment(new) 15,
000
Accumulat
eddepreciat
ion–Deliv
eryEqui
pment(
old) 28,
000
Deli
veryEqui
pment(old) 40,
000
Cash 3,
000
Thi
se ntr
yd oesnoteli
minatethegain;i
tjustpost
p onesordefer
sittofutur
e
per
iods.Thed efer
redg ai
nofBr 7,000redu cest
h eBr22,000c ostt
oBr 15,
000.As a r esul
t,n etincome i n fut
urep er
iodsi ncr
easesb ecause
depreci
ati
one xpenseont henewlya cqui
redd el
iver
ye qui
pme ntislessby
Br
7, 000.

Summa ri
zing,t
herul
esf
oraccount
ingforexchangesofsi
milarasset
sar
e
asfol
lows:
Assetsexchanged Lossesrecogni
zed Ga i
ns
Recognized
Dissi
milar Yes Yes
Simil
ar Yes No

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2.
7.Nat
ural
Resour
ces

NaturalResourcesar econsider
ed" wast
ing"asset s,suchast i
mberl
ands,oilwel
ls,
gravelpit
s,gol
dmi nes,et
c.,t
hatinv
olveextracti
onofar esour
ce.Thebasi
cproblem i
s
toaccountf ortheunit
stakenoutoft her esource. Youwi l
lfi
ndthatcomputati
onof
depleti
onexpenseissimil
artocomput i
ngunits-
of-acti
vit
ydepreci
ati
on.

Depl
eti
on

Deplet
ionisaconceptt hatisidenti
caltodepreciat
ion,t
hatis,t
heall
ocat
ionofthecost
oftheNat uralResourcetot heperiodsinwhi chitisproducti
ve.I
nordertocalculate
Deplet
ion,onemustknow t hecostoft heNat ur
alResource,aswellastheexpect ed
vol
umeoft heresourcethatexist
s.Aswi tht
heuni ts-
of-
acti
vit
ymethodofdepreciat
ion,
aunitcostcanbedet ermined;thi
sisthenmultipli
edbythenumberofunitsext
racted.

Anal
ogoust oEquipmentorotherkindsofplantassets,eachNaturalResourceaccount
woul
dhav eit
sownAccumul atedDepleti
onaccount .Whenagi vennat ur
alresource
depl
ete,itisr ecor
ded by debit
ing depl
etion expense and credit
ing accumulated
depi
l
ation account.Thistransaction r
epresents a noncash expense,si mi
lar to
depr
eciat
ion.

Depl
eti
onEx
pense…………….
.XX

Accumul
atedDepl
eti
on…………………XX

I
ntangi
bleAsset
s

I
ntangi
bleAsset
sr epr
esentri
ght
s,pr
ivi
l
eges,andcompeti
ti
veadvant
agesownedbya
busi
ness.Theyareint
angibl
eonlyi
nthesensethattheyhavenophysi
calsubst
ance.
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Veryoften,t
heirl
egal statusmaybeofcr i
ti
calimpor t
ancet othel
ongev it
yofacompany .
Examplesofi ntangibleasset si ncl
ude:Patents,Copy r
ights,Fr
anchi ses,Trademarks,
andGoodwi ll
.Simi l
artopl antassets(whichdepr eci
ate)andNat uralResour ces(which
deplet
e),Int
angiblesar eamor t
ized.Normall
y,howev er,noAccumul atedAmor t
izat
ion
accountisused;thecr edi
ti smadet otheAssetaccounti tsel
f.
Thegener al
ruleforamor tizati
onofI nt
angi
blesisasf oll
ows: anI
ntangi bleshoul
dbe
writ
tenoffoveraper iodequal to:
1)it
sl egalli
fe,or
2)it
susef ul l
if
e, or
3)40y ears,whi cheveroftheseisshortest

Str
aightl
i
neamor ti
zati
onisthenor
m.Unl
i
kedepreci
ati
onanddeplet
ion,
youmaycr
edi
t
t
heassetaccountdir
ectl
y;noneedf
oran"
accumulat
ed"account
.

Therehasbeengr eatdebateamongAccount ingpract

it
ioners,
theori
sts,andst
andards-
sett
ingbodiesregardi
ngt heproperaccount i
ngf orResearchandDev el
opmentCost s.
Noti
cet hatR&DExpendi tur
esarenotl i
stedabov ewiththeIntangi
bleAssets.Thisi s
becauset heFi
nancialAccountingStandar dsBoar dhasdecl ar
edt hatResearchand
Developmentexpendit
urescannotbecapi talized(pl
acedintoanassetaccount ).Such
expendit
uresmustbeexpensedwheni ncurred.

Thef
oll
owi
ngt
abl
esummar
izest
hechar
act
eri
sti
csofsev
eral
oft
heI
ntangi
bleAsset
s:

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Typesof Legal Cost Amor

ti
zat
ionent
ry
i
ntangi
ble Def
ini
ti
on l
ife
Asset

 Ri
ghttomanufactur
e,sel
l
,cont
rolaninvent
ion;
gr
antedf
ederalgover
nmentpatentof
fice
17 Acqui
sit
ion Amor
ti
zat
ionexpense-
--
--
xx
1.Pat
ent year
s cost

Pat
ent-
--
--
--
--
--
--
xx

 Ri
ghttor
epr
oduce,
sel
l
,anar
ti
sti shed Ar
corpubl
i t
ist
’s Acquisit
ion+ Amorti
zat
ionexpense--
--
-xx
2.Copy
right work l
if
e l
i
tigat
ioncost
.
+50year
s Accum.Amort
.(
copyri
ght) xx

 Word,phr
ase,
ji
ngleprotect
edf
eder
al Acqui
sit
ion+ Amor
ti
zat
ionexpense-
--
--
xx
3.Tr
ademar
k gov
ernmentpatentof
fice 20 l
it
igat
ioncost
.
year
s
Accum.
amor
t.
(Tr
ademar
k) xx

 Arisewhenanent irebusi
nessi spurchased.
 Repr esentsanamountpai doverandabov ethe Not Pri
ceminus
valuesoft heassets&l i
abili
ti
esacquired assi
gne Fai
rmarket
i
ndi cati
ngt hebusinesspossessesunusual d val
ue(FMV)of
adv antage:locati
on,customers,li
st,product
s, N/A (A-
L)acqui
red
4.Goodwi
ll reputation,etc. Amor
ti
zat
ionexpense-
-xx

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Accumu.amor
t.(
Goodwi
l
l)xx

5.Fr
anchi
se  Ri
ghtt
ocarryonanent
erpri
sei
ngeogr cal Var
aphi ied Costof
ar
eaorinpubl
icpr
oper
ty. fr
anchise Amor
ti
zat
ionexpense-
-xx
,l
icense,
permit
Accum.
amor
t.
(Fr
anchi
se) xx

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CHAPTERTHREE:Pay
rol
lAccount
ingi
nthecont
extofEt
hiopi
a

TheImpor t
anceoft hepayrollAccount ing
Theconceptpay r
ollisoft
enr eferredtot het otalamountpaidtoempl oyeesofaf i
rm as
compensationf ortheserv i
cer enderedt oaf irminagi venperiodoft i
me.Thepay rol
l
account
ingofaf i
rm hastobegi venasi gnificantemphasisforthef oll
owingreasons:
1.Empl oy ees are sensiti
vet o pay r
ol lerrors and i
rregul
arit
ies,and mai ntai
ning
employeemor alerequiresthatt hepay rollbepaidonat i
mel y,accurat
ebasis
2.Pay rol
l expenditur
esaresubj ectt ov ari
ousgov ernmentregulations.
3.Thepay mentf orpayrollandr el
atedt axeshassi gni
fi
canteffectont henetincome
ofmostbusi nessent erpri
ses.

Payrol
lrel
atedter
ms
Sal
ary
anamountpai dtoempl
oyeesonmont hl
yorannual
basis
Compensat i
onstoempl
oyeesonmont hl
yorannualbasi
saret
ermedassalar
ies.
Wages
 Referstopayment
sformanuallabor
sthatar
epaidonthenumberofhours
workedorthenumberofuni
tsproduced.

Payper i
od:t hel engt hoft i
mecov eredbyeachpay rollpayment
Payday :isthedayonwhi chwagesorsal ariesarepai dt oempl oyees,usual
lythelastof
thepayper iod
Apay r
ollregisters( sheet ):theent i
reli
stof ;
 empl oy ees
 empl oy eesgr ossear ni ng,
 deduct ions, and
 Netpayf orapar ti
cularpay rollperiod.
GrossEar nings:Thet otalspayt oanempl oy eebef orededuct i
onsf orthepayper i
od
Payrol
lTaxes:
 Taxesl eviedagai nsttheempl oyeront hepay rollofthef i
rm.
I tisanaddi ti
onal payr ollrel
atedexpenset oanempl oyer.
WithholdingTaxes:
t axesl ev i
edagai nsttheear ningsofempl oy eesofanor gani
zation
 wi t
hhel dbyt heempl oy erofanor ganization
Payrol
ldeduct ions:Al lther educt ionsfrom t hegr ossear ni
ngsofanempl oyeesuchas:
 withholdingt axes,
 uniondues,
 creditassoci at i
onpay set c
Netpay :Thegr ossear ningsaf tersubt r
act ingallthededuct ions.Itissomet imes
knownast akehomepayamount
Earni
ngs:moneyear nedbyanempl oyee( s)ofaf i
rmf rom varioussources.Incl
udes:
 Basi csal aryorRegul arear ni
ng
 Al lowances:
 Ov er ti
meear ning
 Bonus:
1.Basi csal ar yorr egul arear ning

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 Af latmont hlysalaryofanempl oyeet hatispai df orcar r
yingoutt henor mal
wor ksofempl oymentandsubj ectt ochangewhent heempl oyeei spr omot ed.
 Al lowances: moneypai dmont hlytoanempl oy eef orspeci al r
easonwhi chmay
i
ncl ude:
2.Al lowances:moneypai dmont hlyt oanempl oyeef orspeci alr easonwhi chmay
include:
 Posi tionallowance: forbear i
ngapar ticularof ficeresponsi bi l
i
ty
 Houseal l
owance: tocov erhousi ngcostoft hei ndiv idualempl oy ee
 Har dshi pallowance: tocompensat eforani nconv eni entci rcumst ancecaused
byt heempl oy er
.
 Deser tall
owance: becauseofassi gnmentt oar el
ativ el
yhotr egion
 Tr anspor t
at i
on( f
uel )allowance: tocov ercostoft ranspor tat i
onupt othewor k
place
3.Ov er t
imeear ning-ist heamountpay ablet oanempl oy eeforov erti
mewor kdone.
I
nEt hiopiaAccor dingt oAr t
icle33ofpr oclamat ionNo64/ 1975t hewor kerscanget
overti
meear ningbasedont her ateslistedbel ow:
Awor kershal lbeent itl
edtobepai d:
1. Atar ateof1¼ t i
meshi sor dinar yhour l
yr at ef orov erti
mewor kper for
med
bef ore10: 00P. Mi ntheev ening.
2. Att her at
eof1½ t i
meshi sor dinar yhour l
yr at eforov ertimewor kper for
med
between10: 00P. Mi nt heev eningand6: 00o'clocki nt hemor ning( 6: a.m) .
3.Ov ertimewor kper formedont heweekl yr estdayshal lbepai datar ateoft wo(2)
timest heor dinaryhour lyrateofpay ment .
4. Atar at eoft woandhal f( 2½)t imest heor dinar yhour l
yrat ef orov erti
mewor k
perf ormedonapubl i
chol yday.

4.Bonus; anamountpai dtoemployeeswhoachi

evedbet
terr
esul
ts
Grossearningsofanempl oy eemaytheref
orei
ncl
ude:
t hebasicsal
ary,
 all
owances,
 bonus,and
 Overt
imeearnings.
Deduct
ions:thesearesubtracti
onsmadef r
om t
heearni
ngsofemploy
ees.I
ncl
udes:
 EmployeeIncomeTax
 Pensioncontr
ibutions
 OtherDeducti
ons

1)Empl oy eeIncomeTax:i nEt hi

opiaev eryciti
zenisr equiredtopaysomet hingin
thef or m ofi ncomet axf rom his/herear ningofempl oyment .Inthi
scasea
progressi v
ei ncome t ax sy st
em i s applied on the gr oss earni
ngs ofeach
empl oy eesav et hefir
st150bi rr.Thef i
rstBr.150oft heear ningofanempl oyee
i
sf reeofi ncomet ax.Iti
sanexempt ion.
2)Pensi oncont ributions-permanentempl oyeesofanor ganizat
ionareexpectedto
payorcont ri
but e5%oft heirbasic(mont hly
)salarytot hegov ernmentpension
trustf und.Th isi sma dei ns omeNGO’ sa ndb usin essesb yk eepinga
fu ndk nowna sPr ovide ntF und.
Ont heot herhand, theempl oyeralsoexpectedt ocont r
ibutetowar dsthesamef und7%
ofthebasi csal aryofev erypermanentempl oyeeofi t
.Thist otaliscall
edpayrol
ltaxes
expenset otheempl oy erorganizati
on.

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Consequent l
y,the totalcont r
ibut i
on t ot he pension t r
ustfund oft he Ethi
opian
governmenti sequalto12% oft het otalbasicsalaryofallpermanentemployeesofan
organizati
on(i.
e.5%comesf rom theempl oyeesandt he6%comesf rom t
heempl oyer).
3)Ot herDeduct i
ons:Empl oyeesmayi ndivi
duall
yaut hori
zesaddi
ti
onaldeductions
suchas:
 Topayheal t
horl if
einsur ancepr emiums.
 Topayl oansfrom theempl oyerorcreditassociati
on.
 Topayf ordonationstochar i
tabl
eor ganizat
ionsetc.
Ulti
mat el
y,thesum oft heempl oyee'sincomet ax,pensioncontri
buti
ons,andot her
deduct i
onsgivesthetotaldeductionsf rom thegrossearningsofanemploy ee.

Theincometaxpr
oclamati
on286/
2002st
atedt
hef
oll
owi
ngaboutempl
oymenti
ncome
taxandit
scomputat
ions:

1.Thef i
rstonehundr edf ift
y( Br.150)i ncomesf rom empl oymentshal lbeexemptf rom
paymentofi ncomet axi nal lcases.
2.Thet axoni ncomef rom empl oy mentov eronehundr edf ifty(Br150)shal lbe
charged, leviedandcol l
ectedmont hl yaccor dingtot hef ol
lowingschedul e.
Rat eoft ax(%)onEv er y
Taxabl emont hlyincome( I
nBi rr) Additionali
ncome
1 OverBr .150butnotexceedi ng650ont henext500 10%
2 Over650notexceedi ng1, 400ont henext750 15%
3 1,
401-2, 350ont henext950 20%
4 Over2, 350butnotexceedi ng3, 550ont henext1, 200 25%
5 Over3, 550butnotexceedi ng5, 000ont henext1, 450 30%
6 Over5000 35%
Accordi ngt oi ncomet axpr ocl amat i
ont hef oll
owingcat egoriesofpay mentsincash
orbenef i
tsinki ndar eexempt edf rom t axat i
on.
1.Medi cal costsincur redbyempl oy erf ortreatmentofempl oy ees.
2.Tr anspor tati
onal lowancespai dbyempl oyertoi tsempl oyees( notexceedi ng
Br.300) .
3.Rei mbur sement by empl oy er of t r
aveling expenses i ncurred on dut y by
empl oy ees.
4.Tr av eli
ngexpensespai dt ot ranspor templ oyeesf rom el sewher etoplaceof
empl oy mentandt or eturnt hem uponcompl et
ionofempl oyment .
5.Pensi on cont r
ibut i
on,pr ov i
dentf und and al lf orms ofr et
irementbenef i
ts
cont ri
but edbyempl oyer si nanamountt hatdoesnotexceed15% ofhi s/her
mont hlysalaryoft heempl oy ee.
Il
lustration :Et hi
oRe l
ie fAg e n c yp a yst hes alaryofi t
se mp loye esac cordin g
toth eEt h i
op ia nCa le nd a rmon th. Th ef orth-comi ngd atere latest othemon th
ofHi dar, 1 99 6.
        OT Dur ati
onof Basic
Ser.  Basi c Mont hly Hour s OT Salary
Name of
No.Empl oy ee Sal ary Al lowanceWor ked Wor k PerHour
01 Bont uTol a 2,080 100 10 Upt o10p. m. 13
02 Pet roschal l
a 640 - 8 10p. m.to6a. m 4
03 AbduMohammed1, 280 - 6 Weekl yRestDay s8
04 Chal tuGudet a 960 50 - - 6
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;Handout
05 Yer
osaBor
u 480 50 10 Publ
i
cHol
i
day 3

 Th ea ge ncyu sual
lyex pectsawor kertowor k40-hou r
si nawe ekan d
 Du r
ingHi dar20 04allwor kersh aved onea stheyha veb eene xpected.
 Al lwor kersoft hisa ge ncya rep erma nente mp l
oyee sex ceptPe tr
os
Ch all
a.
 Th emon thlyall
owa nc eofYer osaBoruisn ottaxabl
e.
 Ab duMoh amme dag reedtoh aveamon thlyBir
r2 00b ed edu ctedand
paidt ot hec r
ed i
tAs sociati
onoft hea gencyasamon t
hlysav ing.
I
NSTURCTI ONS: Ba sedont h ea bovein f
orma ti
on ;
1.Comp uteg r
os searnings,de ductionsa ndn etpayofe ache mp l
oy ee
2.Prep areap ayrollr
eg i
ster(ors hee t
)forthea gencyforth emon thofHi dar,
200 4.
3.Re cordth ep ayme ntofs alarya sofHi dar3 0,2004–u s i
ngCK. No4 1a sa
sou rced oc ume nt.
4.Re cordt hep ayrollta xese xp ensef or t he mon th of Hi d ar
;2 004
Me mor a nd um No. 10
5.Re cordt hep ayme ntoft hec l
a i
m oft hec reditassociati
onofh eag ency
thata rosef rom Hi dar’
sPa y r
olla ssumingt hatthep ayme ntwa sma deon
Ta hi
sa s3 ,20 04.
6.As sumi ngt hatthewi thholdingta xesa ndpay r
ollt
axest hemon thofHi dar
,
199 6h aveb e enp aidonTa hi
sa s5 ,20 04Vi aCk .No.5 0rec ordedth e
requ i
redj ourna l
e nt
ry.
Solut
ion:
1.Compu tationsofe a r
nings ,dedu cti
onsa ndn etpa y
OVERTI MEEARNI NGS:

Ov
e rTi
meEar
nings=OTHr
swor
ked(
ordi
nar
yhour
lyr
atexOTRat
e)

(Br
13x1.
25 Br
162.
5
Bont
uTol
a 10hr
sx ) = 0
Pet
rosChal
a 8hr
s x (Br
4x1.
5) = 48.
00
AbduMohamed 6hr
s x (Br
.8x2) = 96.
00
Yer
osaBor
u 10hr
s x (Br
.3x2.
5) = 75.
00

GROSSEARNI NGS:
GrossEar
nings=Basi
cSal
ary+Al
l
owance+Ov
e rt
imeEar
ning

Bont
u
1.Tol
a Br
2080+ 100 + 162.
80=Br2,
342.
50
Pet
ros
2.chal
l
a 640 +0 + 48.
00= 688.
00

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;Handout
Abdu
Mohamm
3.ed 1280 +0 + 96.
00=1,
376.
00
Chal
tu
4. a 9
Gudet 60 +50 + 0 =1,
010.
00
Yer
osa
5.Bor
u 480 +50 + 75.
00= 605.
00

Deduct
ions&NetPays:

1.Bont
u:
GrossTaxabl
eIncome
=Br2,342.
50 Pensi
on
EmployeeI
n comeTax: cont
ri
buti
on:
Basi
cSalar
yx5 %
I
ncomet
axI
ncom Br 2080x5 %=
Ear
ningx r
ate(
%) =etax 104
Pensi
on+Incomet
ax
150.
00 0 0.
00 Tot
alDeducti
onsBr104+351.
00=455
Gr
ossear
ning-Deduct
ions
NetPay Br2,
342.
50-455
500.
00 10 50.
00 =Br1,
887.
50
750.
00 15 112.
50
942.
50 20 188.
50
2,
342.5
Tot
al0 351.
00
2.Pet
ros:
GrossTaxabl
eIncome
=Br688
Employee I
ncome Pensi
on
Tax: cont
ribut
ion:
I
ncome Basi
c Sa lar
y x
Earni
n t
ax r at
e Inc ome 5%
g x (%) =tax Nop ensi
on Cont
ractualempl
oyee
150.
0 Total Pension+Incomet ax
0 0 0.
00 Deducti
ons Br0+55. 70=55.70

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Gross ear
ning -
Deduct
ions
500.
0 NetPay Br688–55.70
0 10 50.
00 =Br632.
70
38.
00 15 5.
70
688.
0
0 55.
70

3.Abdu:
GrossTaxabl
eI ncome
=Br1,376 Pensi
on
EmployeeI
n comeTa x: cont
ribut
ion:
Basi
c Sa lar
yx
5%
I
ncomet
ax I
nc ome Br 1 ,280 x
Ear
ningx r
ate(
%) = tax 5%=64
Pe nsi
on+I
ncometax
Total Br 6 4 + 158.
90=
150.
00 0 0.
00 Deducti
ons 222.90
Gross ear
ning -
Deduct
ions
NetPay Br1,
376–422.
90
500.
00 10 50.
00 =Br1,
153.
10
726.
00 15 108.
90
1,
376.0
0 158.
90

4.Chal
tu:
GrossTaxabl
eI ncome
=Br1,010 Pensi
on
EmployeeI
n comeTa x: cont
ri
but
ion:
Inc ometaxI ncome Basi
cSal
aryx5%
Earni
ngx rate(%) =t ax Br960x5 %=48
Pensi
on+Incomet
ax
150.
00 0 0.
00 Tot
alDeduct
ionsBr48+104=152
Grossearni
ng-
deduct
ions
NetPay Br
1,010–152
500.00 10 50.
00 =Br
858
360.00 15 54.
00
1,
010.0
0 104.
00
5.Yerosa:
Gr
ossTaxabl
eIncome Pensi
on
=Br555 Cont
ribut
ion:

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Employ
e e I
ncome
Tax:
I
ncome
t
ax rat
eI nc ome Basi
cSa l
aryx5%
Ear
ningx (
%) =tax Br4 80x5%= 24
Total Pensi
on+I
n cometax
150.
00 0 0.
00 Deducti
ons Br24+40.
50=64.50
Gr
ossear
ning-deduct
ions
NetPay Br
605–64.
50
405.
00 10 40.
50 =Br
540.
50
555.
00 40.
50
2.
ETHIORELI
EFAGENCY
APAYROLLSHEET
FORTHEMONTHOFHi dar,
2002

Gr
os s Deduc
    Ear
ning     ti
on  
     
Incom
  Basi
c   Over Total e     Tot al Net  
Name of t he Al
lowa PensiOtherDe ducPa ymeSi
No Emp loyee Salar
yn ce Ti
me Ea r
n i
ngTax on s ti
on n t g.
2080.0 162.
52 342.
53 51.0
1 Bont uTol
a 01 00.
00 0 0 0 1 04 - 4 5 51887.
50 
2 Pet r
oschall
a 640.00 -48.
006 88.
005 5.70 - -5 5 .
7 0 632.
30 
Abdu 1280.0 1376.
01 58.9 200.0
3 Mohammed 0 -96.
00 0 0 64 0422 .
9 0 953.
10 
1010.
01 04.0
4 ChaltuGudeta 9 60.00 5 0.
00 - 0 0 48 - 1 5 2 858.
00 
5 YerosaBoru 480.00 5 0.
007 5.
006 05.
004 0.50 24 -6 4 .
5 0 540.
50 
 
5440.0 381.
56 021.
57 10 .
11 92.
02 00.
0
  Tot al... 0 200.
00 0  0  0 0  0  1150.14871.
40
Appr
oved
Pr
epar
edby:     Ver
if
iedby:    by:    

3.Recordi
n gthePayme ntofSa l
a r
y .
Hidar30,
2004. Sal
aryExpense..........6,021.
50
EmployeeIncomeTaxPay abl
e.........710.10
Pensioncontri
but i
onPayable .......192. 00
Credi
tAssociati
on–ERA ...........200. 00
Cash.....................………..
.4,871.40
(Ck.No.41)
4.Recordi
n gthePayrolltaxese xpe ns eforHida r
,2004
TotalBasicSalar
yPay roll
Taxes Pay r
ollTax
OfallpermanentEmpl oyeesx7% = Expense
(2,
080+1, 280+960+480)x7% = Br336. 00

Hi
dar30,
2004 Payr
oll
TaxesEx
p ense 336

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Pensi
oncont.Payabl
e 336
(
M1 0)
Thesour
cedocumenti
saninter
naloff
iceme mor
andumthati
ndi
cat
est
he
S.
NO. Basic All
owance Overt
ime Durati
onof
Name sal
ary( t
ranspor
tat
ion) worked overt
imework
1 Abdi Br730 Br.200 4 6:
00-
10pm
2 Burka 1020 --
-- 8 Sunday
3 Mot uma 5300 -
--
-- -
--
--
- -
--
--
-
4 Tolt
u 1470 -
--
-- --
--
- -
--
--
-
5 Yomi you 950 --
-- 6 Publi
choli
day
i
ncurr
en ceoft hisexpe nse.
5.Recordin gTh ePa ymentofDe duct
ionsf r
om Abdu’
searni
ngstothec r
edi
t
associ
ationonTa hsas3 ,
200 4.

Tahsas3,
2004 Cr
edi
tAssoci
ati
on 200
Cash 200

6.Recordi
ngthe PaymentofWi thhol
dingand Payr
ollt
axest
oInl
and
RevenueAut
hor
it
yonTa hi
ssas5,2004.

Emp loy eeIn comeTa x……………… Br 7 10.1 0

Pen sionc on tr
ibuti
on( 192+3 36)…… 528 .
00
Tota l. ..... ....................Br1 ,238 .
10
Tot
alpensionc on tri
butionp ayableise qualt
o1 2%oft heb asi
csal
aryofal
l
per
ma nentemp loy ees.Th atis:Br4 ,
800x1 2%=Br 52 8
Thepay
mentisrecor dedasf ol
l
ows:
Employ eesIncomeTaxPay 710.10
PensionCont ri
buti
onPay abl
e 528.
00
Cash 1,238.10
Ck.No.50

Pract
icalExer
cise (
Sel
fAssessment)
: The fol
lowi
ng dat
arel
ates t
othe mont
h
Nehassefoeagivengov
ernment
alor
gani
zat
ion-
2002

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Addi
ti
onalinformat ion:
 Thewor kersar eexpect edtowor k40hour sinaweekandur i
ngNehasset here
are4weeks
 Ther ewer enoabsent eesduringthemont h
 Al lempl oyeesar eper manentexceptYomi you
 Bur kaagr eedt ocont ri
butemont hlyBr 300from hi
ssalar
ytocredi
tassoci
ation
Requi r
ed:
1.Comput e:
a) Ov er
timeear ningsofeachempl oyee
b) Gr ossear ningsofeachempl oy ee
c) I ncomet ax
d) Pensi on
e) Netpay
2.Pr eparepay rollregister
3.Recor dpay mentofsal ary
4.Recor dpay mentoft heclaim ofcreditassociati
on
5.Recor dpay mentofwi thholdi
ngt axandpensi oncontri
buti
ontoconcerned
government
bodyonsep. 2,2003
6.Pr eparepay rollregister

NB:
Ear
ningperhours=Basi
csalar
y/t
otal
hoursworkedduri
ngthemonth
Ov
erti
meearning=Overti
mehoursworked(earni
ngsperhour*Ov
erti
mer
ate)

CHAPTER FOUR:Gener
all
y Accept
ed Account
ing Pr
inci
ples
(GAAPs)

I
tisi mport
antthatg ener
alg ui
d el
inesbea vail
abletor esol
vea ccounti
ng
i
ssues.Wi t
houtthes eb asi
cg ui
deli
nes,e ache nter
pri
se wou l
dh aveto
devel
op its own se t of accounti
ngp r
ac t
ices.Ift hi
sh appened,the
i
nformati
onu ser
sh avet obecomef amil
iarwithe ver
yc omp any’
sp ecul
iar
account
inga ndr eport
ingr ul
esi n ordert ou nd er
standt hei
rf i
nancial
st
atements.Thus,itwou l
db ed iff
icul
t,i
fn otimp ossi
ble,tocomp arethe

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inci
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f
inanci
alst
atement
sofdi
ff
erentcompani
es.
Tos olvesuchp robl
ems ,thea ccounti
ngp r
ofessionhase stabl
ishedas etof
standardsa ndr ul
est hatarer ecognizeda sag ener
alg ui
def orfinanci
al
reporti
ngp urposes.Th i
sr ecogn i
zeds etofs tandardsisc al
ledGe neral
ly
Acc eptedAccou nt
ingPr i
nci
ple( GAAP)
Two or gani
za t
ionsa r
ep r
ima r
ilyrespon si
blef ore st
abli
shingg eneral
ly
accep t
eda ccou nti
ngp r
inci
ples.Th ef ir
sti st heF inanci
alAc counting
Standa r
ds Boa rd( FASB),a p ri
vate organi
zati
on thate stabl
ishesb r
oa d
reporti
ngs t
and ardsofg enerala ppl
icabi
li
tyaswe l
lass pecif
icaccounting
rul
es.
TheFASBwassetupwi t
ht hepurposeofdev elopingaccount i
ngpr i
nciplesin1973.
Todayi tisthemosti nf
luenti
alaccounti
ngor ganizati
on.TheFASBi sinvol
v edinsolvi
ng
report
ingprobl emsanddev el
opingsoluti
ons.WhenSt at
ement sofFinanci
alAccount i
ng
Standards ar er el
eased by t he FASB,t hey qui ckly become gener ally accept
ed
account i
ngpr inci
ples(GAAP)per tai
ningtost andar ds,assumpt ions,conv ent
ionsor
concept s.Wheni tisdiff
icul
ttounder st
andaccount i
ngpr i
ncipl
es,int
erpretati
onsare
rel
easedwhi chhavethesameaut hori
tyasthest andar ds.
Th e s econd, t he Secu r
it
ies a nd Ex change Commi ssion ( SEC),is
gove r
n mentalag encythatrequir
escomp anyfil
ingfinanci
alreport
swi thitt
o
foll
ow g eneral
lya ccept
eda c count
ingp r
inci
ples.TheSecuri
ti
esandExchange
Commi ssi
on ist he mostinfl
uenti
algover
nmentagency thatregulat
es fi
nanci
al
stat
ementreport
ing. 
TheF ASB d evel
ope da c onceptualfr
ame workt os ervea st heb asi
sfor
resol
vingaccounti
n gandre port
ingprobl
ems .
TheF ASB’Sconcep t
ualfr
a me workconsist
soft hefol
lowingf ouri
tems :
1.Obj
ectiv
eoff i
n ancialr
eport
ing
2.Qual
it
a t
ivecharacteri
sti
csofa ccounti
nginformation
3.El
eme ntsoffinancialst
atements
4.Operat
ingg ui
delines(assumpti
on s,
p r
inci
ples,andc onst
rai
nts)

1. FINANCIALREPORTI NGOBJECTIVES
Toprovi
deinformation:
 Useful tothosemakingi
nvest
mentandcr
edi
tdeci
sions.

 Hel
pful
inassessi
ngf
utur
ecashf
lows

 Thatident
if
iestheeconomicresources,t
hecl
aimst
othoser
esour
ces,andt
he
changesinthoser
esourcesandclai
ms.

Asset
s–Li
abi
li
ti
es=St
ockhol
der
s’Equi
ty

2.Qual
it
ati
veChar
act
eri
sti
csofAccount
ingI
nfor
mat
ion
Thea ccount
ingp r
acti
ces el
ectedort hepoli
cyadoptedshoul
dbetheon e
thatgener
atesthemos tu sef
ulfi
n anci
ali
nfor
ma t
ionformaki
ngad eci
sion.
To b e useful
,i nfor
ma ti
on sh ould posses the fol
l
owing qual
it
ativ
e
charact
eri
sti
cs:Usef
uli
nfor
mati
onis:

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RELEVANT

RELI
ABLE

COMPARABLE

CONSI
STENT

RELEVANTINFORMATION:
• Makesadif
fer
encei
nadeci
sion.

• Haspr
edi
cti
vev
alueandf
eedbackv
alue.

• I
sti
mel
y.

RELIABLEINFORMATION
• Isdependabl
eandver
if
iabl
e.

• I
sfr
eeofer
rorandbi
as.

• I
saf
ait
hful
repr
esent
ati
on.

• I
sfact
ual
.

COMPARABLEINFORMATI
ON
• Account
ingi
nfor
mat
ionf
rom t
wosi
mil
arcompani
esshoul
dbecompar
abl
e.

• Di
ffer
entcompani
es i
n si
mil
ari
ndust
ri
es shoul
d use t
he same account
ing
pr
inci
ples.

CONSI
STENTINFORMATI ON
• Companiesshoul
dusethesameaccount
ingpr
inci
plesf
rom y
eart
oyear
.

• Changesi
naccount
ingpr
inci
plesmustbej
ust
if
iabl
e.

3.El
ement
sofFi
nanci
alSt
atement
s
An imp or
tantp ar
tofa na ccounti
ngc oncept
ualframeworki sas etof
defi
nit
ionst hatdescr
ibet heb asi
ct er
msu sedina ccounti
ng.Th eF ASB
ref
erstothissetofdefi
nit
ionsa stheelement
soffinanci
alst
atements.They
i
ncludes uchtermsasasse t
,li
abil
i
ties,
equi
ty,r
evenues,andexpenses.

4.Oper
ati
nggui
del
ines

1.ACCOUNTI NGCONCEPT
Account
ingconceptrefer
stothebasi
cassumpt
ionswhi
chser
vet
hebasi
sofr
ecor
ding
act
ualbusi
nesstransacti
ons.

BUSINESSENTITYCONCEPT
Account
ingconceptref
erstothebasicassumpti
onsandr ulesandprinci
pleswhi
ch
workasthebasi
sofrecordi
ngofbusi
nesst
ransact
ionsandprepar
ingaccount
s

Si
gni
fi
cance

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inci
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Thef
ollowingpointshighlightthesi
gnificanceofbusinessent i
tyconcept:
 Thi sconcepthel psi nascer
tai
ningt heprof
itoft hebusinessasonlythebusi ness
expensesandr evenuesar erecor dedandallthepr ivat
eandper sonalexpenses
areignored.
 Thi sconceptr estraint
saccount antfrom r
ecor dingofowner ’
spr i
vate/personal
transact
ions.
 I talsofacil
it
atest herecordi
ngandr eport
ingofbusi nesst r
ansacti
onsf r
om t he
businesspointofv iew
 I tistheverybasisofaccount i
ngconcept s,conventionsandpr i
nci
ples.

MONEYMEASUREMENTCONCEPT
Thi
sconceptassumesthatal
lbusi
nesstransact
ionsmustbeinter
msofmoneythati
s
i
nthecurr
encyofacountry
.Inourcount
rysuchtransact
ionsar
eint
ermsofBi
rr

Si
gni
fi
cance
Thef
ollowingpoi nt
shi ghli
ghtthesignificanceofmoneymeasur ementconcept:
 Thi sconceptgui desaccount ant swhatt orecordandwhatnott orecor
d.
 I thelpsi nrecordingbusinesst ransacti
onsuni for
mly.
 I fallthebusi nesstransacti
onsar eexpressedi nmonetaryt
erms, i
twil
lbeeasyto
under standtheaccount sprepar edbyt hebusi nessent
erpri
se.
 I tfacili
tatescompar i
sonofbusi nessperformanceoftwodi ff
erentper
iodsofthe
samef irm oroft hetwodiff
er entf i
rmsforthesameper i
od.

GOINGCONCERNCONCEPT
Thisconceptstat
est
hatabusi
nessf
ir
m wi
llcont
inuetocar
ryonit
sacti
vi
tiesforan
i
ndefi
nit
e peri
od ofti
me.Simpl
ystat
ed,i
tmeans t hatev
erybusi
ness ent
it
yhas
conti
nui
tyofli
fe.

Si
gni
fi
cance
Thef
oll
owingpoi
ntshi
ghl
i
ghtt
hesi
gni
fi
canceofgoi
ngconcer
nconcept
;

 Thisconceptf acil
it
atespreparationoff inanci
alstat
ement s.
 Ont hebasisoft hisconcept,
depr eci ati
onischargedonthef i
xedasset.
 Itisofgr eathel ptot heinv estors,because,i tassurest hem t
hatt heywi
l
l
continuetogeti ncomeont heirinv estments.
 Intheabsenceoft hisconcept ,thecostofaf i
xedassetwi llbet
reatedasan
expensei nthey earofit
spurchase.
 Abusi nessisjudgedf ori
tscapaci tyt oearnprof
itsi
nfuture

OBJECTI VI
TY
Alli
nformat
ionmustbemai ntai
nedobjecti
vel
y,whi
chmeanst hatitisfr
eeofbi asand
subj
ecttoveri
fi
cati
on.Object
ivi
tyi
scloselyti
edtor
eli
abi
li
ty.Objecti
veevidence
consist
sofanythi
ngthatcanbephy si
call
yveri
fi
edsuchasabi l
l,check,i
nvoice,orbank
stat
ement

ACCOUNTI
NGPERI
ODCONCEPT

Al
lthetr
ansacti
onsarer ecor
dedint
hebooksofaccountsontheassumpti
ont hat
pr
ofi
tsonthesetr
ansact
ionsaret
obeascer
tai
nedf
oraspeci
fi
edper
iod.Thi
sisknown

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asaccount ingper i
odconcept .Thus,t hisconceptr equirest hatabal ancesheetand
profi
tandl ossaccountshoul dbepr eparedatr egularint erv
als.Thisi snecessar yfor
diff
erentpur poses l i
ke,cal cul
at ion ofpr ofit
,ascer taining financialposi ti
on,t ax
comput at
ionetc.
Signif
icance
 I thelpsinpr edicti
ngt hef ut urepr ospect softhebusi ness.
 I thel psincal culat
ingt axonbusi nessi ncomecal cul
atedf orapar t
icul
art i
me
peri
od.
 I talsohel psbanks, financi ali nst
ituti
ons, credi
tors, etctoassessandanal yset he
perf
or manceofbusi nessf orapar ti
cularper i
od.
 I talsohel psthebusi nessf irmst odi stri
butet heirincomeatr egularinterv
alsas
div
idends.
REALI SATI ONCONCEPT
Thisconceptst atest hatrev enuef rom anybusi nesst ransact i
onshoul dbei ncl
udedi n
theaccount i
ngr ecordsonl ywheni tisrealized.Thet ermr eali
zati
onmeanscr eati
onof
l
egal ri
ghtt oreceivemoney .Sel l
inggoodsi sr eali
zati
on, receivi
ngor derisnot .
Revenuei ssaidt ohav ebeenr eal izedwhencashhasbeenr eceivedorr ighttoreceive
cashont hesaleofgoodsorser vicesorbot hhasbeencr eated.

Theconceptofr eali
zat
ionst atesthatrevenueisreal
i
zedattheti
mewhengoodsor
servi
cesareactual
lydel
ivered.
Signi
fi
cance
 Ithelpsinmakingtheaccount i
nginformat
ionmoreobj
ecti
ve.
 Itprov i
des t
hatt he transact
ions shoul
d be r
ecor
ded onl
ywhen goods ar
e
del
i
veredtothebuy er.

2.BASI CACCOUNTI NGPRI NCIPLES

1.COST
2.REVENUERECOGNI TI
ON
3.MATCHI NG
4.FULLDI SCLOSURE
Assets–Li abi
li
ti
es=Stockhol ders’
Equit
y
COSTPRI NCIPLE
AccountingcostPr i
nci
plest
atest hatallasset
sarerecordedint hebooksofaccounts
att hei
rpur chase price,which includes costofacqui sit
ion,t r
anspor
tati
on and
i
nstall
ati
onandnotati tsmarketprice.Itmeansthatf
ixedassetslikebui
ldi
ng,pl
antand
machinery,f
urnitur
e,et
carerecordedi nthebooksofaccountsatapr i
cepaidforthem.

Si
gni
fi
cance
 Thi spri
ncipl
er equi
resassett obeshownatt hepri
ceithasbeenacqui
red,whi
ch
canbev eri
fi
edf rom t
hesuppor t
ingdocuments.
 I thel
psincalculati
ngdepreciati
ononf i
xedassets.
 Theef fectofcostpr i
nci
pleisthatifthebusi
nessenti
tydoesnotpayanyt
hingf
or
anasset,thi
sitem wil
lnotbeshowni nthebooksofaccount
s.
 Requiresassetstober ecordedatcost.

 COST i
srel
evantbecausei
trepr
esent
s:

 pr
icepai
dorasset
ssacr
if
icedorcommi
tmentmade

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 COSTi
srel
i
abl
ebecausei
tis:OBJECTI
VELY

 measur
abl
eandf
act
ual
andv
eri
fi
abl
e

REVENUERECOGNI TI
ONPRINCI
PLE
 Revenueshoul
dber
ecogni
zedi
ntheaccount
ingper
iodi
nwhi
chi
tisear
ned.

 Whenasal
eisi
nvol
ved,
rev
enuei
srecogni
zedatt
hepoi
ntofsal
e.

MATCHI NGPRI NCI PLE

Themat chingconceptst atesthatther evenueandt heexpensesincurr
edtoearnthe
revenuesmustbel ongt ot hesameaccount ingperi
od.Sooncet herevenuei
sreal
ized,
thenextstepist oallocatei tt
ot herelevantaccounti
ngperiod.Thi
scanbedonewi t
h
thehelpofaccrualconcept .
 Expensesar emat chedwi threvenuesi ntheperi
odinwhi cheff
ortsar
emadet o
generat
erevenues.

Si
gni
fi
cance
 I tguideshow theexpensesshoul dbemat chedwi
threv
enuefordet
ermini
ng
exactprofi
torl
ossf oraparti
cul
arperi
od.
 I tisv er
yhelpf
ulf ortheinvest
ors/
sharehol
der
stoknow t
heexactamountof
profi
torlossofthebusiness.

Ty
pesofcosts
1)Expi
redCost
s:Gener
ater
evenuesonl
yint
hecur
rentaccount
ingper
iod.

2)Unexpi
redCost
s:Gener
ater
evenuesi
nfut
ureaccount
ingper
iods.

EXPENSERECOGNITIONPATTERN
 Operati
ngexpensescontri
butetotherevenuesoft
heperi
odbutt
hei
rassoci
ati
on
wi
threv
enuesislessdi
rectthanforcostofgoodssol
d.

FULLDISCLOSUREPRINCIPLE
 Requir
esthatcir
cumstancesandevent
sthatmakeadi f
fer
encet
ofi
nanci
al
stat
ementuser
saretobediscl
osedi
noneoftwopl
aces.

 Al
lrel
evantandmat
eri
alf
act
swhi
chaf
fectt
her
eli
abi
l
ityandcompar
abi
l
ityof
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fi
nanci
al st
atementsmustbedi sclosed.Thi
susuall
yrelat
esto
1)accounti
ngmet hodsused,
2)changesinaccount i
ngestimates,
3)conti
ngentliabi
li
ti
es,
4)perf
ormanceofbusi nesssegment s,and
5)anysignif
icanteventsubsequenttotheendofthefinanci
alper
iod.

3.BASI CACCOUNTI NGCONSTRAI NTS

Materi
ali
ty:Forsmal
lamounts,GAAPdoesnothavet
obefoll
owed
Conservat
ism:Wheni ndoubt,chooset
hesol
uti
onthatwi
llbel
eastl
i
kel
ytoov
erst
ate
asset
sandi ncome.
E.g.LCM
CHAPTERFI
VE:ACCOUNTI
NGFORAPARTNERSHI
P
TheNat
ureofaPar
tner
shi
p

Ap ar tnershipisav olun t
a r
ya s soc i
a t
ionoft woormor ep ersonst oc ar
ryon,
asc o-own ers,ab us i
n essf orp rofit
. Byla w, apa r
tne r
s hipmu stha veatleast
twope rsons,bu tth er
ei sn oma ximu ml i
mi tont h en umbe rofpa rtnersina
fi
rm. Apa rt
ners hi
pi sf orme dbyc on t
ribu t
ionofa ssetsbyt hepa rtner
s .
For
mi ngapar t
nershiprequiresthatt woormor elegallycompet entpeople(whoar eof
ageandofsoundment alcapacity)agreet obepar tners.Theiragreementbecomesa
par
t nershipcontract,al
socal edar
l ti
clesofcopar tnership.Al
thoughi tshouldbein
wri
ting, t
hecontractisbindingev enifitisonlyexpr essedv er
bally.Part
nership
agr
eement snormal l
yincludedetailsoft hepar t
ners’:
1)namesandcont r
ibuti
ons,
2)r ightsanddut i
es,
3)shar i
ngofincomeandl osses,
4)wi t
hdrawal ar
rangement ,
5)di sputeprocedures,
6)admi ssi
onandwi thdrawalofpar tners,and
7)Ri ghtsanddut iesintheev entapar tnerdies

Char
act
eri
sti
csofaPar
tner
shi
p

1)VoluntaryAssoci ation:Apar tnershi pisav ol

unt ar
yassoci ati
onbet weenpar tner s.
Joiningapar tnershipi ncr easest her iskt oone’ sper sonalf inancialposition.
Some cour ts hav er uled t hatpar t
ner ships ar e creat ed by t he actions of
i
ndiv i
dualsev enwhent her ei snoexpr essagr eementt of orm one.
2)Mut ualAgency :meanst hatev erypar tneri sanagentf ort hef ir
m,wi t
ht he
authoritytobindt hepar tner shipt ocont racts.
3)UnlimitedLi abilit
y :Mostpar t
ner shipsar egener alpar t
ner ships,i nwhi cheach
partneri sindiv i
dual l
yl i
abl ef ort heobl igationsoft hef i
rm,r egardlessoft he
amountofper sonal i
nvest ment .
4)Li
mi tedLi f
e:Becauseapar tnershipi sav oluntar
yassoci ationofper sons,many
eventsmaycausei tsdi ssol uti
on.Theseev ent
si ncludet heexpi rationoft he
agreed-onpar tnershipt erm;t heaccompl ishmentoft hebusi nessobj ecti
ve;t he
admi ssionofanew par tner ;thewi t
hdr awal ,death,orbankr upt cyofanexi sti
ng
partner;andt hei ssuanceofacour tdecr eebecauseofapar tner ’
sincapacityor
misconduct .

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5)Co-
owner
shipofProper
ty:Assetscont
ri
but
edbypar
tner
sbecomepar
tner
shi
p
pr
oper
tyj
oint
lyownedbyall
partner
s.

6)Nont
axabl
eEnt
it
y:t
heor
gani
zat
ioni
tsel
fisnotat
axabl
eent
it
y.

Adv
ant
ages:

 Easeoff ormati
on
 Lowst art
-upcost s
 Addit
ional sour
cesofinvest
mentcapi
tal
 Possibletaxadv ant
ages
 Li
mi t
edr egulat
ion
 Broadermanagementbase

Di
sadv
ant
ages:

 Unli
mi t
edliabil
it
y
 Divi
dedaut horit
y
 Dif
fi
cultyinraisi
ngadditi
onalcapi
tal
 Hardtof i
ndsui tabl
epart
ners
 Possibl
edev elopmentofconfli
ctbet
weenpart
ners
 Part
nerscanl egal l
ybi
ndeachotherwit
houtpr
iorappr
oval
 Lackofcont i
nuity
 nonamepr otection

Basi
cPar
tner
shi
pAccount
ing
Since ownershiprightsin a part
nership are di
vi
ded among par
tners,part
ner
shi
p
accounti
ng
 Usesacapi talaccountf
oreachpar t
ner.
 Usesawi t
hdrawalsaccountforeachpartner
.
 Allocatesnetincomeorlosstopartnersaccordi
ngtot
hepart
nershipagr
eement
.

Or
gani
zing(
For
ming)aPar
tner
shi
p

When partner
si nvestin a part
nership,t
heircapitalaccountsarecr edi
ted f
ort he
i
nvested amounts.Partners can i
nv estboth assets and l
iabi
l
iti
es.Each partner’
s
i
nvestmenti srecorded atan agreed-on val
ue,nor mall
ythemar ketval
uesoft he
cont
ri
butedassetsandliabi
li
ti
esatthedat eofcontri
buti
on.

Toi ll
ustr
ate, RobenusandYeronor gani
zeapar t
nershi
ponJanuar y11.Robenuswould
i
nv estthef oll
owing:cashBr7,000,merchandi
seinvent
oryvaluedat23,000,andanote
pay abl
er eflecti
ngabankl oanf orthenew businessBr10,000.Yeronwoul dinv
est
Br10,000incash.Theent ri
estor ecor
dtheseinvest
mentsfol
low.

RobenusI nvest
ment
Jan.11 Cash...............................………7,000
I
nvent
ory.........................………. .23,
000

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Notepayable.......................... 10,000
Robenus,Capit
al.........................30,000
Tor
ecor
dthei
nvest
mentofRobenus

Yeron’sInvestment
Jan.11 Cash.................................10,000
Yeron,Capit
al ........................10,
000
Tor
ecor
dthei
nvest
mentofYer
on

I
naccount
ingf
orapar
tner
shi
p,t
hef
oll
owi
ngaddi
ti
onal
rel
ati
onshol
dtr
ue:

1)Partner
s’wit
hdrawalsaredebit
edtothei
rownsepar atewithdrawalsaccounts.
2)Partner
s’capi
talaccountsar
ecredit
ed(ordebi
ted)fortheirsharesofnetincome
(ornetl
oss)whencl osi
ngtheaccountsatt
heendofaper iod.
3)Eachpar t
ner’
swi t
hdrawalsaccountiscl
osedt othatpartner’scapit
alaccount.
Separatecapi
talandwithdr
awalsaccount
sarekeptf oreachpar t
ner.

Wi
thdr
awalofAsset
sbyPar
tner
s
Par
tnersma ywit
hd r
awc a shornon-
casha sset
sfrom ap ar
tner
ship.Upon
wi
thdrawalofa sset
sb ya part
ner,theDrawinga ccountofthep ar
tner
wi
thdrawi
ngt heas set
swou l
db edebit
e dandt heassetswithdr
awna re
cr
edit
edforthefairvalue.Forexampl
ei fpar
tnerBma deaBr.3,000c ash
wi
thdrawalonMay1 ,20X1 ,
theent
rywou l
dbe:
Dat
e Account
s Debi
t Cr
edi
t
20X1
May1 B,
Drawing 3000
  Cash 3000
Loanst
o/f
rom Par
tner
I
fap ar
tnergi
vesloantothepart
nershi
p,theLoanaccountt
othatpar
tneri
s
cr
edit
ed.Forexample,i
fap ar
tnershi
ps i
gnsaBr .4,
000,10per
cent
,1 -
year
l
oana greementwit
hp art
nerA onJ ul
y1 ,20Xlitwouldberecordedas
f
oll
ows :
Da t
e Account
s Debi
t Cr
edi
t
20X1
Jul
y1 Cash 4000
  LoanPayabl
etoA 4000
On the
otherhand,ap ar
tnershi
pma yextendaloant
oapar
tner
,inwhi
chcasea
LoantoPartner(
a sset
)accounti
sdebit
ed.

Al
l
ocat
ingPr
ofi
torLosst
oPar
tner
s
Pr
ofit
/l
ossisa l
locat
edt ot
hepart
ner
sinaccordancewit
ht hepar
tner
shi
p
agr
eeme nt
.Ifnopartner
shi
pagr
eementexi
sts,pr
ofi
tsandlossesar
etobe
shar
edequ al
lybyal
lpart
ner
s.

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Mos tpa r
tnershipsu seon eormor eoft hefoll
owingd i
stri
buti
onme thods:
1 . Pr e-sel
ecte drati
o;
2 . I nt heratiooft heircapit
a li
nvestme nt
3 . I nteresta l
lowa ncet opa r
tners;
4 . Sa lar
iestop ar
tne rs;and
5 . Bon u sestop artne r
s.
I
ll
us tration: Ma kart
i andHop eop erateawh ol
es al
eb usi
ne ssasap ar
tner.
Mak art
i hasinvestedBr 10 0,
00 0a ndHop eh asinvestedBr50,000.Determine
eachp artner’
sd i
s t
ribut
ives h ar
eofan etincomeofBr 4 5,
000u ndere achof
t
hef oll
owin gse parat
ea s sump ti
on s;
1 .Th eys haren eti
n comei na2 /5:
3/5r at
io
2 .Th eys haren eti
n comei nt herati
ooft he i
rcapit
alinvest
me nt
3 .Ma kar
tireceiveas alar
ya ll
owa nceofBr 20,
000,Hop ereceiv
e sas alar
y
al
lowa nceofBr 15,00 0,wit
ht herema inderdivi
dede quall
y
4 .Ea chp art
n erreceivesa ni nter
esta l
lowa nceof1 0%onc api
talwiththe
r
ema inderd i
videdi na2 :3r ati
o.
5 .Sa lar
ya l
lowa ncea n dinterestall
owa ncea sde scr
ibedin(3)an d(4)are
gi
ven ,
witht herema i
ningn etincomed i
videdequall
y
6 .Th ep art
ne r
sh i
pa greeme n tcontai
n snop lanfordivi
dingnetincome .

Answer
s:

(
1). Makar
ti
:2/5xBr
45,
000=Br18,
000
Hope: 3/5xBr
45,
000=Br27,
000
Tot
al =Br
45,000

(
2). Makart
i:100,
000/150,
000xBr45,
000=Br30,
000
Hope: 50,000/
150,000x Br
45,000=Br15,
000
Total =Br
45,
000

(
3). Makar
ti Hope Tot
al
Sal
arya l
l
owa nce 20,
000 15,
000 35,
000
Excessnetincome 5,
000 5,
000
10,
000
Total
s 25,
000 20,
000
45,
000

(
4). Makar
ti Hope Tot
al
I
nter
es tal
lowance 10,
000 5,
000
15,
000
Excessnetincome(2:
3)12,
000 18,
000 30,
000
Tot
als 22,
000 23,
000
45,
000

(
5). Makar
ti Hope Tot
al
Sal
aryal
lowance 20,
000 15,
000 35,
000
I
nter
estall
owance 10,
000 5,
000
15,
000

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Excessneti
ncome (
2,500) (
2,500)
(
5,000)
Tot
als 27,
500 17,
500
45,
000

(
6). Makar
ti
:1/2xBr
45,
000=Br22,
500
Hope: 1/2xBr
45,
000=Br22,
500
Tot
al =Br45,
000
Pr
epar
ingt
heSt
atementofPar
tner
sCapi
tal

Par
tnershi
pf inanci
als tat
eme ntsa r
es imil
art op ropri
etorshi
pf i
n anci
al
st
atemen t
s.Thet hr
eefinancialst
a t
eme nt
s:
i ncomes tatement,
b alances heet
,and
 Stateme ntofcashf l
ows :aretyp i
call
yp repar
edf orthep ar
tnershi
pa t
thee nd ofe achr epor
tingp eriod.Ina ddi
ti
on tot het hreeb asic
fi
na nci
als tat
eme nts,a s tateme ntofpar t
ners’c apit
alisu sual
ly
preparedt opresenttheCh ang esint hepartner
s’cap i
talaccountsfor
thep er
iod.
Thestat
e mentofp art
ners’capit
al f
orth eABPa rtner
sh i
pfor2 0X1u nderthe
mult
ipl
e-baseprofi
td i
str
ibuti
onp l
a nab oveispresentedb el
ow:

Par
tner
shi
pDi
ssol
uti
on
Di
s sol
utionisthech angeintherel
a t
ionofthepartner
s,usual
lyasar esul
tof
anewp art
ner’
se nt
e r
ingthep ar
tnershi
porap art
ner’
sleavi
ngt he
part
n er
sh i
pb ecauseofd eat
h,ret
ir
e ment,
orvoluntar
ywithdr
a wal.The
di
ssoluti
onofap art
nershipdoesn otnecessar
il
yme anthep ar
tnershi
p
shouldstopd oi
ngb usiness.

Admi ssi
ona n dWi t
h drawa lofPa r
tners
A.AdmissionofaPa rtner—twowa ys:
1.Purchaseofp artne r
shipinterest
.
a)Thep u r
ch aseisap e r
son altr
an sact
ionb etweenon eormor ec ur
rent
par
tne r
sa ndt hen ewp artner.
b)Purcha serdoe sn otb ec omeap a r
tneru nti
la cceptedb ythec ur
rent
par
tne r
s.
c)I
n v
olvesar eallocati
onofc ur
rentp art
n er
s'c api
talton ewp art
nert o
r
efl
ec tthetrans act
ion.
2.I
nvesti
nga ss et
si nap artnership.
a)Thet rans act
ion isb etwee nthen ew p art
ne ra ndt hep ar
tnershi
p.
I
nvesteda ssetsb ecomep artner
sh i
pp ropert
y.
b)Newp a rt
ne r
’se quit
yr ecordedforas set
si nvest
edma ybee qualt
o,less
t
han,org reaterthani nvestme nt
.
c)Wh ent herecord edn ewp ar
tner’
se quit
yd if
fersfrom invest
me nt
,there
i
sab on uston e worol dp art
ner’
se quit
y .

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d)Bon usest ooldp a rt
nersa realloca t
edb a se dont hei
rinc omea ndl oss
shari
nga g r
e eme nt.
B.Withdrawa lofaPa r
t ner
—t wowa y s:
1)Withdrawingp ar
tners ell
sh isorh eri nt
e r
es ttoa not herper sonwh op ays
cashorot he rassetst othewi t
hd rawingp artne r.
2)Ca sh orot h era ssets oft hep artnershipc anb ed ist
ributedt ot he
withdrawingp artnerins et
tlemen tofh isorh e rint
e rest
.
a)Wi thdrawingp a r
tnerma yacce pta ssetse qu alto,lessth an,org re at
er
t
h anhis/here quity.
b)Wh enth ewi t
h dr
a wingp art
ner’se quityd i
ffersf rom a ssetswi thdrawn ,
t
h er
eisab on ustor ema i
ningp artners’orwi thdra wi
n gpa rtner
’se quit
y.
c)Bon usest ore ma i
ningp artnersa rea ll
oc atedb asedont hei
rin come
andlosss har
inga greeme nt.
C.DeathofaPa r
tne r
1.Deathe ndsap ar
tnersh i
p.
2.Deceasedp art
n er
'se st
a t
eise nti
tledt orec eiveh i
sorh ere qu i
ty.Con tr
act
usual
lycall
sf orc l
osingoft heb ooks :
t od etermi neincomeorl osssin cethep re vi
ou sp eri
od ,and
t od etermi ne/r
e cordcurrentva l
ueofa sse t
sa n dliabi
lit
ies.
3.Sett
leme ntoft hed ece asedp ar
tne r
'se quityc anin volvese l
lingthee qui
ty
toremainingp art
n er
sort oa nou tsi
d er,oritcan

1.Admi
ssi
ont
hroughPur
chaseofpar
tner
shi
pint
erest

Thea dmissi
on ofa p art
nerb ypu r
chase ofa ni nt
erestisap ersonal
tr
ansacti
onb etwe enon eormor ee xist
ingp ar
tnersandt hen ewp art
ner.
Eachp ar
tyactsa sa ni ndi
vidualsep ar
atefrom thepartner
s hi
pe nt
it
y.The
i
nd i
vi
dualsi
nvolve dneg oti
atethep r
icep ai
d.Itma ybee qualtoord i
ff
erent
fr
om thecapit
ale qui
tya cquir
e d.
Thep ur
chasepricep assesd i
rectl
yfrom thenewp art
nertothep ar
tnerswho
aregiv
ingupp artoralloftheirownershipclai
ms .

Toill
ust
rat
e,assumet hatL.agreestop ayBr10,
00 0eachtop art
nerCa ndD
for one-
thi
rdoft hei
rinter
e sti
nt heC–D p ar
tnershi
p.Att hetimeoft he
admissi
onofL ,eachpartnerhasaBr 30 ,
000c api
talbal
a nce.Bot
hp art
n er
s,
ther
efor
e,giv
eu pBr 10,
000oft heirc api
talequi
ty.Thee ntrytorecordt he
admissi
onofLis:
C,Capital10,
000
D,Capital10,
000
L,Capit
al20,000
(Torecorda dmissi
onofCa rsonb ypurchase)
2.Admi
ssi
onwi
thI
nvest
menti
nthePar
tner
shi
p
Thea dmissionofap art
ne rbya ninv est
me ntofa sset
sisat ransact
ion
betweent hen ewp ar
tneran dthep ar
tnershi
p.Of t
enreferr
edtos i
mp l
ya s
admissionb yinvestment,thetransact
ionincr
ea sesboththenetasset
sa nd
tot
alc api
taloft hep artner
s hi
p.Th en ew pa r
tnerma yb ea dmi
ttedb y
i
n v
e st
me ntofass etunderthefoll
owingc ases;
a.Recogn i
zi
n gg oodwil
lofthen ewp ar
tner

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b.Gr
ant
ingabonust
othenewp ar
tner
c.Gr
ant
ingabonust
otheexi
sti
ngp ar
tner
s

AssumeW a ndM arep ar

tner
swh oa gr
eetoa dmi
tFt othei
rpart
nershi
p,i
n
whichtheyshareincomee qual
ly
. Preparethegeneralj
our
nalent
rytorecor
d
admissi
onu ndereachofthefoll
owi ngunrel
atedsi
tuati
ons:
a)Fi nvest
sBr30,000cashforaBr 30,000equi
ty.
b)F investsBr20 ,
000c ashfora Br 30,
000e qui
ty.Goodwil
listob e
r
ecognized
c)F investsBr30 ,
000c ashfora Br 30,
000e qui
ty.Goodwil
listob e
r
ecognized
d)Fi nvest
sBr36,000cashforaBr 30,000equi
ty.

a)
.Cash……………………….30,
000
F,Capi
tal
………………………….
30,
000

b)
.Cash………………………..
20,
0 00
Goodwi
ll
……………………1 0,
000
F,Capi
tal
………………………..
30,
000

c)
.Cash…………………………20,
000
W,Capi
tal
……………………5,000
M,Capi
tal
……………………5,000
F,Capi
tal
…………………………….
30,
000

e)Cash……………………………. 36,
000
F,Capi
tal…………………………..
30,
0 00
W, Capi
tal………………………….
.3,
000
M,Ca pi
tal
…………………………...
3,000

Par
tner
shi
pLi
qui
dat
ion
Li
quidat
ionofab u si
nessinvol
vess el
li
ngt heas set
soft hefi
rm,p ayi
ng
l
i
a bi
li
ti
es,andd i
str
ibuti
nganyremaini
nga sset
s.Liquidat
ionma yresul
tfr
om
t
hes aleoft heb usi
nessbymu t
uala gr
eeme ntoft hep art
ners,f
rom the
deat
hofap artner,
orfrom bankr
uptcy.Part
nershi
pliqui
da t
ionendsboththe
l
egalandecon omicli
feoftheenti
ty.

I
nliquidat
ion,thesaleofn oncasha ssetsforc ashiscall
edreali
zati
on.An y
di
ff
e r
enceb etweenb ookv al
u eandt hec ashp r
oceedsisc al
ledtheg ai
nor
l
ossonr eali
zati
on.Toliquidat
eap ar
tnershi
p,iti
sn ecessar
yto:
1.Sellnoncasha sset
sforc ashan drecognizeag ai
norlossonr eal
izat
ion.
2.Allocateg ai
n/l
ossonr eal
izat
iont othep art
nersbasedont hei
rincome
r
ati
os .
3.Payp artner
shipl
iabil
it
iesincash .
4. Distri
buter emaini
ngc ashtop art
ners on theb asi
s oft hei
rc api
tal
bal
ances .

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Wh enap ar
tnershi
pisl i
quidat
ed,allpart
nersmayh avec r
edi
tb al
a ncesin
thei
rcapi
talaccounts.Thi
ss i
tuat
ionisc al
lednocapi
taldefi
ciency.Or,one
ormor epartner
sma yh avead ebitbalanceint
h eca pi
talaccount.This
si
tuati
oni
st er
me dac apit
aldefi
ciency.

I
ll
ust
rat
ion:
JLR,Pa r
tnershi
p
Balances heet
Oc t
ob er31,2009
Cash Br60,
000
Non-cashAssets 200,
000
Accountspayabl
e Br
90,000
J,Capi
tal(
50%) 80,
000
L,Capi
tal(
30%) 50,
000
R,Capit
al(
20%) 40,
000
Total Br260,000 Br260,
000
Th epartnershipli
qu i
dations chedul
ewi l
lbep r
ep a r
e dandthej
ournalent
ri
es
recordedu nd ert
h efol
lowin gassump ti
ons.
1.Non -
cas has set
sofJ LRp ar
tner
s hi
pa r
es ol
df orBr2 30,
000,
Ca sh Non -
cash L i
a b. J,Cap.L ,Cap. R,Ca p.
assets 50% 30% 20%
Pre -
li
quidati
on 6 0,
000 200,
000 9 0,
0 00 8 0,
000 5 0,
000 4 0,
000
b al
ance
Sa l
e ofAs setsa nd
lossd i
stri
bu t
ion 2 30,
000 (200,
000) 15,
000 9 ,
000 6,
000
Ba l
ance 2 90,
000 0 9 0,
0 00 9 5,
000 5 9,
000 4 6,
000
Pa yme ntof
p ar
tnership (90,
000) (90,000)
li
ab i
li
ti
es .
Ba l
ance 2 00,
000 95,
000 5 9,
000 4 6,
000
L /
Su m p ay me ntt o
p ar
tners (200,000) (95,
000 (
59 ,
000 (46,
,
000
) ) )
Bal
ance -
--
--
- -
--
--
- -
--
--
- -
--
--
- -
--
--
- -
--
--
-

Thef
oll
owinge nt
ri
esar
erecor
dedusi
ngt
hepar
tner
shi
pli
qui
dat
ion
schedul
e:
Dat
e Account
s Debi
t Cr
edi
t
2009
Nov1 5 Cash
230,
000
J,Capi
tal[
5/10x10,
000]
15,
000
L,
Capi
tal[
3/10x10,
000]
9,
000
R,
Capi
tal[
2/10x10,
000]
6,
000

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Non-
cashasset
s
200,
000

20 Li
abi
li
ti
es 90,
000
Ca sh 90,
000

30 J,
capi
tal 95,
000
L,
Ca pi
tal 59,
000
R,capi
tal 46,
000
Ca sh 200,
000

2.Non -casha ssetsofJLRpart

nershi
pa r
es ol
dforBr160,
000,
Cash Non - Liab. J ,Cap. L,Cap. R,Cap.
cash 50% 30% 20%
assets
Pr
e-l
iqui
da t
ionBa l
a nce 60,
000 2 00,000 90,
000 8 0,
000 5 0,
000 40,
000
Sal
eofAs s et
sa n dloss1 60,
00 ( 200,000 (
20 ,
000 (
12 ,
000 (
8,000)
di
st 0 ) ) )
Bal
ance 220,
00 --
--
-- 90,000 60,
000 3 8,000 32,
000
0
Payment t o outsi
de( 90,
000 (90,
000
cr
edit
ors ) )
Bal
ance 130,
00 - -
--
---
-- 0 60,
000 3 8,000 32,
000
0
L/
Su m Payme nt t o 130,
00 0 0 (
60 ,
000 (
38 ,
000 (
32,
000
par
tners: 0 ) ) )
Bal
ance - - - - - -

Thef
oll
owinge nt
ri
esar
erecor
dedusi
ngt
hepar
tner
shi
pli
qui
dat
ion
schedul
e:
Dat
e Account
s Debi
t Cr
edi
t
2009
Nov1 5 Cash 160,
000
J,
Ca pi
tal[
5/10x40,
0 00] 20,
000
L,
Cap i
tal[
3/10x40,
0 00] 12,
000
R,Capi
tal[
2/10x40,000] 8,
000
Non -
cashasset
s 200,
000
20 Li
abi
li
ti
es 90,
000
Cash 90,
000

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30 J,
cap i
tal 60,
000
L,
Ca pi
tal 38,
000
R,capi
tal 32,
000
Ca sh 130,
000

Summar
y:

Li
feofPar
tner
shi
p

For
mat
ion Art
icl
eofp ar
tner
ship
I
nit
iali
nvest
me nt

Di
vi
si
onofneti
ncome Rati
o
Al
lowances

Endofper
iod Cl
osi
ngentr
ies
St
atement
s

Admi
ssi
onofnewpar
tner
s’ i
nvest
me ntofasset
Goodwil
l
Bonustonewp art
ners
Bonustoexist
ingpar
tners
Pur
chaseofa nint
erest

Wi
thdr
awalofapar
tner Wi
thdrawalofasset
s
Sal
eofi
nter
est

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Li
qui
dat
ion Rea l
i
zati
on
Payme ntofcredi
tor
s
Di
stri
butiontopartner
s

CHAPTERSI
X:ACCOUNTI
NGFORCORPORATI
ONS

Nat
ureofaCor
por
ati
on
Ofthethreepri
maryformsofbusi nessor
ganization-t
hepropr
ietorship,t
hepar t
nershi
p
and,t
hecor por
ati
on-thedomi nantfor
m ofbusinessisthecorporatef or
m.I ntermsof
theaggregateamountofr esourcescontr
olled,goodsand ser vicespr oduced,and
peopl
eempl oyed,t
hecor porat
ionisbyfarthel eader
.Bec auseac orpora t
ionisa
separatele galent
it
y ,
itc an
 Owna ssets.
 In curli
abil
it
ies.
 Su eandb es ued.
 En t
erintocon t
rac t
s

Ac orporat
ionisalegalenti
ty—ana r
tif
ici
allegal“
person”—creat
edonthe
approvaloftheappr
opri
ategov er
nme nt
a laut
hori
ty.Acorpor
ati
onisafor
m
ofbus i
nessthati
sownedb yseverali
nvestors.

Cor
porat
ionsmaybeclassi
fiedbyt
henat
ureofowner
shi
pasfol
lows:
1.Publi
csectorCorporat
ion:gover
nment
alunitorbusi
nessoperat
ionsowned by
government
aluni
ts.

2.Pr
ivat
esect
orcor
por
ati
ons;

a)Non stock:nonprof
iti
n nat
ure and no st
ock i
ssued(
such as chur
ches,
char
it
ies,andcol
l
eges)

b)St
ock:
compani
est
hatoper
atef
orpr
ofi
tandi
ssuest
ock.

Char
act
eri
sti
csofCor
por
ati
ons
 Separ
atel
egalent
it
y:cor
por
ati
ont
hatconduct
sit
saf
fai
rswi
tht
hesamer
ight
s,

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dut ies, andr esponsi bili
ti
esofaper son.
 Limi t edl iabil
ityofst ockhol der s:St ockhol dersar enei therli
ablef orcor porate
act snorcor poratedebt .
 Tr ansf erabl eowner shipr i
ght s:Thet ransferofshar esf rom onest ockhol dert o
anot her ,usual l
ywi thnoef f
ectont hecor porati
onori tsoperati
ons
 Cont inuousl i
fe:Acor porati
on’ sl i
fecont i
nuesi ndefinitel
ybecausei tisnott i
edt o
thephy sicalli
vesofi t
sowner s.
 Lackofmut ualagencyf orst ockhol ders:Acor porat i
onact sthroughi t
sagent s,
whoar ei tsofficersandmanager s.
 Easeofcapi talaccumul ation:Buy ingst ocki sat tracti
vet oinvestor sbecause
stockhol der sar en’
tliablefort hecor por ati
on’sact sanddebt s,stocksusual l
yar e
transf er r
edeasi ly,
thel i
feoft hecor porationisunl i
mi t
ed,andst ockhol dersaren’ t
cor por ateagent s.
 Pr ofessi onalmanagement :Inv est orsinacor porationneednotact i
v elymanage
thebusi ness,asmostcor por ationshi r
epr ofessionalmanager st ooper atet he
busi ness.Thei nvestorsv oteont heBoar dofDi r
ect orswhoi sresponsi blef or
hiringmanagement
 Ta xa tion :Asl ega le nti
tie s,c orp oration sa res u bj
e cttoi nc omet axe s
ont h e ire arn i
n gs, wh eth erd is tr
ib utedorn ot.I na dditi
on ,sh a reholde rs
mu s tp a yinc omet ax esone a rning sr ece i
v eda sd ivi
de nds .Th erefore ,
cor p or a tein comei ss ub j
e c tt od ou b l
et ax ati
on .
 Re gu la ti
on a nd Su pe rvis ion :Cor por at
ion sa res u bj
e ctt og re ate r
d e gr e e sofr e gulationa n ds u pervisiont hana rep roprietors h i
psa n d
p a rtn e rs hips.Th el a wsl imi tt hep owe rsac or porati
onma ye xercise ,
ide n tif yr e port sth atmu s tb ef i
led ,an dd e fi
net her i
g htsa n dl iabil
iti
e s
ofs t oc kh olde rs.

ADVANTAGES/ DISADVANTAGESOFCORPORATI
ON
Advant
ages
 L i
mi tedl i
abili
ty
 Sp eci al i
zedmanagement
 Own er shipistransf
erabl
e
 Co ntinuousexi stence
 Se par atelegalentit
y
 E asi ert oraisecapital
Di
sadvant ages
 Cl osel yr egulat
ed

 Mostexpensi veform ofbusi

nesstoor
ganize
 Charterrestr
ict
ions
 Ext
ensi verecordkeepingnecessar
y
 Possibledoubletaxati
onofpr of
it
s
 Shareholders(dir
ector
s)maybehel dl
egal
l
yr esponsi
blei
ncer
tai
nci
rcumst
ances

FORMATI ON&ORGANI ZATIONALSTRUCTUREOFACORPORATI ON

Histori
call
y,cor
porat
ionswerecreatedbya chart
er 
grant
edbygov er
nment.Today
,
corpor
ati eu
onsar suall
yregi
ster
edwi t
hthestate,pr
ovince,
ornat
ionalgov
ernmentand
regulatedbythelawsenactedbythatgover
nment .

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General
ly,acor por
at i
onfil
es 
arti
clesofincorpor
ati
on  wi
tht hegov er
nment ,l
ayingout
thegeneralnatureoft hecor
porati
on,theamountofst ocki tisaut
horizedtoissue,and
thenamesandaddr essesofdirector
s.Oncethearti
clesareappr oved,thecorporati
on'
s
dir
ector
smeett ocr eatebyl
aws thatgoverntheint
er nalfuncti
onsoft hecorporat
ion,
suchasmeet ingproceduresandof fi
cerposi
ti
ons.
Ar
ti
cl
esofI
ncor
por
ati
on
TheAr
ti
clesofIncorporat i
onenumer at
est hepower sand  l
imitat
ionsconf erreduponthe
cor
por
ati
onbyt he government . 
Itincludes  t
hef oll
owi ngi nfor
mat ion:
1)The name ofthe corporati on;
2)Thepur poseorpur poses  f
orwhi cht hecor por at
ioni s for med;
3)Thepl aceof  t
hepr i
nci palof fice oft hecor por ation;
4)Thet erm of  existenceof  thecor porat ion,not  
exceedi ng50year s;
5)Thenames,nat ionali
t i
esandaddr esses  oft hei ncor porat ors;
6)Thenames  oft hedi rect orswho wi llser veunt iltheirsuccessor sar e
dul yel
ect edandqual i
fiedi naccor dancewi ththeby -
laws;
7)Theaut horizedcapi talst ock,t hecl assesofst ockst o bei ssuedand
thenumberof  
eachcl assofst ocki ndicat i
ngt heparv al
uei fthereisany;
8)The amountofsubscr i
pt ion t ot he capi talst ock,t he names oft he
subscr i
ber sandt henumberofshar essubscr ibedbyeach;
9)The t otalamount pai d on t he subscr iptions and t he amount  
paid
by eachsubscr i
beronhi ssubscr ipti
on

OrganizationalSt r
uctureofCorporati
on
1)Shar eholder
sofacor porat
ionelecttheboar
dofdirect
ors.
2)Theboar dofdi rect
orsareresponsibl
efordet
ermi
ningcor porat
epol
ici
esand
el
ecti
ngof fi
cers.
3)Officersarer esponsibl
eforoperati
onsandhiri
ngempl oyees.Whensharehol
dersare
notpleasedwi tht heperfor
manceoft heboardofdir
ectors,theycanel
ectnewdirect
ors.

Natur
ea ndTy pesofStockinaCor porati
on
Theown ershi
pinac orpor
ati
oni sdividedintoshares(
stocks)andown er
sof
ac orpor
ation arec al
leds t
oc kholders( ors har
ehol
ders).Stoc khol
ders’
equi
tyr epr
e sent
sine xcess oft otala sset
s overtotalliabi
li
ti
es. Th e
Pr
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;Handout
i
nvest
me ntsofstockhol
der
sar
eref
err
edt
oast
hecapi
talst
ock(
orst
ock)
oft
hec or
porat
ion.

Authorizedst ock:ma xi
mu mn umb erofsh aresthec orporat
ioni spermitt
edto
sell.
I
ssuedst ock:Af t
ershareshav ebeens ol
dt os har
eh ol
de r
sth eya r
ereferr
edto
asi ssu eds tock
Outstandingst ock:thed i
ff
erenceb etweent hen umb erofs ha r
e sissuedan d
then umb eroft reasur
ys har
e s:t
hen umb erofs haresactuall
yint hehandsof
thes toc kholde r
s.
Treasuryst ock:Ca pit
alstockt hatisreacqu i
redb yac orporati
oni sterme d
tr
e asu rys toc k.Assumet hatRob enusComp a nywa sin corporat
edwi tha n
au t
hor izati
ont osell600,
000s haresofs tock.Aftertwoy e ar
s, t
hec omp any
ha diss ued4 00,000shares.Thec omp anyrequir
e s(buyb ack)2 0,
000s hares
fr
om s tock holders.

Aut
hori
zedst
ock
600,
000shar
es

I
ssuedst
ock Un i
ssued
st
ock
400,
000shar
es
200,
000

Tr
easuryst
ock
Outst
andi
ngstock
20,
000shares
380,
000shar
es
 Parvalue.Thev al
ueassignedinacor porati
on'sart
icl
esofi
ncorporat
iontoone
shar
eofst ock.Itappear
sont hestockcer t
ifi
cate.I
nsomestates,theparvalue
ofal
lout st
andingsharesisconsider
edt helegalcapit
alofacorporati
on.Legal
capi
talistheamountofcont ri
butedcapitalthatmustremai
nint hecorpor
ati
on
andmaynotbepai douti
ndi v
idends.

No-
parv
aluest
ock.Shar
esofst
ockt
hatdonoti
ncl
udeaparv
alue.TheBoar
dof
Di
rect
orsmayassi
gnav
aluet
othi
sty
peofst
ock.

St
atedv
alue.Thev
alueassi
gnedt
ono-
parv
aluest
ockbyt
heBoar
dofDi
rect
ors
ofacor
por
ati
on.

Mar
ketv
alue.Thepr
icesetbyi
nter
est
edbuy
ersandsel
l
ersf
ort
hest
ockof
publ
i
clyt
radedcompani
es

Cor
porat
ecapit
al
Owner
’sequi
tyi
nacor por
ationisdef
inedasstockhol
der
s’equi
ty,shar
ehol
der
s’equi
ty,
orcor
porat
ecapit
al.Thef oll
owingt
hreecategori
esnormall
yappearaspar tofthe
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st
ockhol
der
sequit
y:
1.Capit
alst
ock

2.Addi
ti
onal
pai
d-i
n-capi
tal

3.Ret
ainedear
nings

The firsttwo cat egories,capitalst ock and addi t

ionalpaidi n capit
al,const i
tute
contri
buted (paid- i
n-capit
al)
;ret ai
ned earnings representthe earned capi t
aloft he
enter
pr i
se.
Contributedcapi tal(paid–i n-capit
al)isthet otalamountpaidi noncapi talstock-the
amountpr ovided byst ockholderst ot hecor porati
on fortheusei nt hebusi ness.
Contri
butedcapi tali ncl
udesi t
emssuchast heparv alueofalloutstandingst ockand
premiumsl essdi scount sonissuance.
Earnedcapi t
alist hecapi tal
thatdev elopsi
ft hebusinessoperatesprofi
tably;i
tconsists
ofallundistr
ibutedi ncomet hatremai nsinvestedintheenterpr
ise.

Cl
assi
fi
cat
ionofSt
ock
Thea mou nt
sa ndk i
nds ofstockthata cor
porat
ion ma yissueare
enumerat
edi nth ecompany’
sc har
ter
.Whenonlyonec l
assofs t
ockis
i
ssued,i
ti sc al
ledcommons t
ock.Commons har
eholder
sc omposethe
basi
cown er
shipclass.

TYPI
CALCOMMONSTOCKFEATURES

Di
vi
dends:
 sharesin a por
ti
on ofdi
vi
dendst
hatar
e decl
ared and i
ssued t
o common
sharehol
der
s

Preempt i
veRi ght
 Anopt i
ont obuyapr opor t
ionalpar tofanyadditionalsharest
hatmaybei ssued
bythecompany .
Voting;
 Ther ighttov oteoncertaingener algovernancemat t
ersli
keelecti
onofboardof
dir
ector s,employeestockawar dplans,mergers,andsimilarmajorit
ems
Proceedsf rom liquidati
on
 Shar esi nproceedsofl iquidationaf t
ercredit
orsandot herprior
it
yclai
msar e
sett
led.
Peri
odicf i
nanci alreport:
 Ther i
ghtt oper i
odicf
inancialreportaboutcorporateperformance

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Pref
err
edSt ock
Pref
err
edst ock:stockthathasspeci alr
ightsthatgi
vei
tprior
it
yovercommonstockin
oneormor eareas
 
Canbesol datapr i
cediffer
entf r
om par
 Preferr
edst ockusual l
ycarriesapr ef
erencefordivi
dends,inwhi
chprefer
red
stockholder
sar eallocat
edt heirdivi
dendsbeforeanydivi
dendsar
eall
ocatedto
commonst ockholders.

POSSI
BLEPREFERREDSTOCKFEATURES

Preferr
edposi ti
onfordi vi
dends
Paidadi videndpr i
ort oanydi stri
butiont ocommonst ockholdersandthedi v
idendi
s
mor eorl essexpect edeachper i
od.Theamountofdi vi
dendisusuall
yst at
edasa
percentageoft hepreferr
edstocksparv alue.
Theabsenceofv ot
ingrights:
Usual l
ylackinginvot
ingri
ghts
Positi
oni nliquidat
ion:Intheev entofacor por
ateli
quidat
ion,tobepai
doffbef
orecommon
st
ockhol
der
s.
Cal
l e:Ca
abl ll
abl
epr
efer
redst
ock:gi
vest
hei
ssui
ngcor
por
ati
ont
her
ightt
opur
chase
t
hisstockfr
om i
tshol
dersatspeci
fi
edf ut
urepri
cesanddates.
Convert
ibl
epref
err
edstock:gi
vesholderstheopti
ontoexchanget
hei
rpr
efer
redshar
es
forcommonsharesataspecif
iedr
ate.

Fixedmatur
it
y:I
ntentt
obeboughtbackbyt
hecompany(
“mandat
oryr
edeemabl
e”onacer
tai
n
futur
edat
e

Cumul ati
vepr eferredst ock:hasar ightt
obepai dboththecurrentandallpri
orperi
ods’
unpai ddividendsbef oreanydi vi
dendi spaidt ocommonst ockhol
ders.Divi
dendin
arrears:t
heunpai ddi videndamount
Noncumul at i
vepr eferredst ock:confersnorighttopr i
orperiods’unpaiddiv
idendsif
theywer enotdecl aredi nt hosepriorperi
ods
Nonpar ti
cipatingpr eferredst ock:featur
esthatlimitdivi
dendstoamaxi mum amount
eachy ear.
Par t
ici
pati
ngpr eferredst ock:featureall
owingpr efer
redstockholderstoshar ewit
h
commonst ockholdersi nanydi vi
dendspaidinexcessoft hepercentordoll
aramount
statedont hepr ef
er r
edst ock

I
ssuanceofSt
ocks

I
nissui
ngst
ock,t
hefoll
owingproceduresar
efoll
owed:
1.The stock mustbe aut hor
ized by t
he st
ate,gener
all
yin a cer
ti
fi
cat
e of
i
ncor
porat
ionorchar
ter

2.Shar
esar
eof
fer
edf
orsal
eandcont
ract
stosel
lst
ockar
eent
eredi
nto,

3.Amount
stober
ecei
vedf
ort
hest
ockar
ecol
l
ect
edandt
heshar
esi
ssued.

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Capi
talst
oc kma ybei ssuedatp ar
,abovepar
,orb el
owp a r
.Parval
ueisnot
anindi
catorofma rketvalue–itisstr
ict
lyalegalmatter
.Wh enstocki
s
i
ssueda boveorb el
owp ar,theexcessordefi
ciencyi
sr ecordedi
na
pr
emi uma ccountcall
edPa i
d-i
nCa pi
tali
nExcessofPa r,or,i
fnobalance
exi
stsinthi
sa ccount,i
nadi scountaccount
.Stockcanb eissuedforcash,
pl
antasse t
s,

Account
ingf
orParv
aluest
ock

AssumethatonJanuar
y1 ,
2 010,Col
oni
alcor
porat
ionsol
dof10 0shar
esofits
Br
5c ommons tockatparval
ue.Th ecomp anyrecor
d sthef
oll
owingjour
nal
ent
ry:
Date Account
s Debi
t Cr
edi
t
2010
Jan.1 Cash(100xBr5) 500
Commonst ock(100xBr5) 500
I
ssued1,000sharesofcommonst
ockat
par

Exampl e:Assumet hatonApr i

l30,Coloni
alcorporati
onsol
d,forBr1,
100,onehundr ed
sharesofstockwithaparv al
ueofBr 5pershare.Theentryt
orecordtheissuanceis:
Cash 1,100
Commonst ock 500
Pai
d-i
n-capitali
nexcessofpar 600
I
ssued100shar esofcommonst ockatpremi um
Ift
hest ockhadbeeni ssuedinr et
urnforBr300,t
heent r
ywouldberecordedasf ol
l
ows:

Cash 300
Pai
d-i
n-capi
tal
inexcessofpar 200
Commonst ock 500

I
ssued500shar
esofcommonst
ockatdi
scount

Accounti
ngforno-parst
ock
No-parv
alueissharesi
ssuedwi
thnoper
-shar
eamountpr
int
edont
hest
ockcer
ti
fi
cat
e.
Forexampl
e,Vi
deoEl
ect
roni
csCor
por
ati
oni
sor
gani
zedwi
thaut
hor
izedcommonst
ock
of10,
000shar
eswi
thoutparv
alue.I
f500shar
esar
eissuedf
orcashatBr
10pershar
e,
t
heent
rywoul
dbe:
Cash 5,
000
Commonst
ock-
No-
parval
ue 5,
000

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;Handout
Tr
easur
ySt
ock
o Ca pi
tals t
oc kth atisr eacqu i
redb yac orporati
oni ste r
me dt r
e asury
stock .Treasurys toc kh asn ov oting,d i
vi
d end,orot h ers t
oc kholder
ri
g ht
s .
o Stockc anber eac quiredforv ari
ousr eason s,sucha st oh av es hares
avail
a bleford i
stri
b uti
on toe mp l
oyeesu nderb onusp lans ,a ndt o
sup portthema rketp ri
ceoft hes tockb ysti
mu lati
ngt r
a di
n gini t
.
oI ftrea sur
ys t
oc ki sr esold,n og ain orl ossi sr ecog ni
z ed on t he
excha ngeb ecau set hec or
p orat
ion’sp r
ima ryobjecti
vei sn ott oma ke
profi
tb ytradingini t
sowns tock.
o Th etreasurys tock sa r
en ota sse t
s;rathert heya r
ed e duc t
ionsf rom
stockh ol
derse quity.
o Th eTr easur
ySt ocka ccountisa ctual
lyac ontrae quit
yac count, which
me an sthatitisrep ortedasas ub t
racti
onf rom thetota lstockh older
s'
equ i
ty.
o Treas urystocki ss tockt hatisn olon gerou tst
an di
ng ,andt h eref
ore,
shou l
dn otb einclude dasp artofs t
oc kholders'
equ i
ty.
As sumet ha tOnAp ri
l1 ,2 011,M Comp anyb ou ght10 0,
00 0s h ar
e sofi ts
stockint heop enma rketwh e nitwa ss ell
i
n gforBr 22p ers hare.Us ingt he
costme thod ,t
hec omp an yrecordst hefoll
owi ngjournalentry:
Date Accounts Debi
t Cr
edi
t
20X5
Apr.1 Treasur
ystock(
100,
000xBr
22) 2,
200,
000
Cash 2,
200,
000

Assumet
h atonApri
l15,M Compa nysol
d1 0,
000shar
esoft
reasur
yst
ock
forBr
30pershar
e.M Companyrecor
d st
hefol
lowi
ngentr
y:
Date Account s Debi
t Cr
edi
t
20X5
Apr.15 Cash( 10,
000xBr30) 300,
000
TreasurySt
ock(10,
000xBr22) 220,000
Paidincapi
talf
rom sal
eoftr
easur
y 80,000
sock

TheSt ate me ntofSt ockh olders’Equ ity:Th es t ateme ntofs tock hol
ders’
equityisp r
ep ar
e dp eriodicall
yt os umma rizethec ha ng esthath av eoc cur
red
inthes tockh ol
d ers’e quit
yoft hec or
p orati
on .Preferredstock,commonst ock,
addi
tionalpaid-i
n-capit
al,ret
ainedear ni
ngs,andt reasur
yst ockar eallreportedonthe
bal
ancesheeti nthest ockholders'equit
ysection.Ifacompanyhaspr eferredstock,
iti
s
l
ist
edf ir
sti nthest ockholders'equit
ysectionduet oitspr efer
encei ndi v
idendsand
duri
ngliquidat
ion.
Par
ti
alBal
anceSheetasofDecember31,
2011
PreferredStock,Br100parv al
ue,10,000shar
esauthor
ized,
issuedand Br1,
000,
000
outstanding
CommonSt ock,Br1parvalue,2,
000,000sharesaut
hor
ized,1,
200,000 1,
200,
000
sharesi ssued,and1,180,
000shar esoutst
anding
AdditionalPaid-i
n-Capi
tal 16,
800,
000

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Retai
nedEar nings 3,670,000
Less:TreasuryStock,20,
000shar
es (240,000)
TotalStockholder
s'Equit
y Br
22, 430,000

St
ockSpl
it
s

 Areduct
ionint
heparorstat
edvalueofashar
eofcommons t
ock,
and
t
heissuanceofapr
oport
ionatenumberofaddi
ti
onalshar
es

 Appl
iest
oal
lshar
es,
incl
udi
nguni
ssued,i
ssued,andt
reasur
yshar
es

 Astockspl
itdoesnotchangethet
otal
doll
aramountofcommon
st
ockoutst
anding;onl
ytheparval
uepershar
eandthenumberof
shar
esischanged

 Ast
ockspltd
i oesnotr
equir
eaj our
nalent
ry—t
hedet
ail
sar
edi
scl
osed
i
nthenot
estothefi
nanci
alstat
eme nt
s

 Astockspl
itdoesnotchangethepr
opor
ti
onalowner
shi
pint
he
cor
porat
ionforani
n di
vi
dualst
ockhol
der

Assumet hatacor porati

onhas10, 000shar esofBr 100parv alue
commons t
ockou tst
andingwithama r
ke tpri
ceofBr120pe rshar
e. The
boardofdirector
sde cl
ar esa4-f
or-1stocks pl
it
.Whati sthene wpar
val
uep ershar
e,thenewt ot
alnumberofsh ar
esoutst
andi
ng ,
a ndt
het otal
dollaramountofcommonst ockout standingaf terthespl i
t?

Bef
oret
hespl
i
t Af
tert
hespl
it

Parv
a l
uepershar
e Br
100 (
Br100/
4)=Br25

Numberofshar
es 10,
000 (
10,
000shar
esx4)
out
standi
ng =40,
000

Tot
a l
d oll
aramount (Br100/shar
ex10,
000 (Br25/shar
ex40,
000
ofcommons t
ock shar
es) shar
es)
out
stan di
ng =Br1,000,
000 =Br1,000,
000

Thepropor
tionalowner
shi
pint hecor
porat
ion doesnotchangef oran
i
ndi
vi
dualstockhol
der
.L et
’ssayast
ockhol
de rhas100shar
esb ef
orethe

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spl
it
:

%owner
shi
pbef
oret
hespl
it
:100shar
es/
10,
000shar
es=10%

%owner
shi
paf
tert
hespl
i:
t400shar
es/40,
000shar
es =10%

Di
vi
dends
Adi v
idendi sadi stributionbyacor por at i
ont oitsowner sint hef or m ofcash, asset s,or
the company 's st ock.St ockhol ders do nothav e wi t
hdr awalaccount sl i
ke sol e
propri
et orsorapar tnerbecauset heonl ywayt heycangetmoneyf rom thecor por ati
on
i
si ft
heBoar dofDi rect orsaut hor i
zesadi v
idend.
1) Th edat eofdecl arationi st hedat et heBoar dofDi r ectorsf ormallyaut horizes
fort hepay mentofacashdi videndori ssuanceofshar esofst ock.Thi sdat e
est abli
shest hel iabi l
ityoft hecompany .Ont hisdat e,thev alueoft hedi vi
dend
tobepai dordi str i
but edi sdeduct edf rom r etainedear nings.
2) Th edat eofr ecor ddoesnotr equi reaf ormalaccount i
ngent ry.I
test abli
shes
whowi llrecei vet hedi vi
dend.Det ermineswhoget sthedi vidend
3) Th edat eofpay mentordi stri
but ioni swhent hedi vi
dendi sgi v ent ot he
st ockhol der sofr ecor d.
Cashdi v i
dends
Conditionsf oraCashDi v i
dend
1.Suf fi
cientr etainedear nings
 decl arationofadi vi
dendr educesr etainedear nings
2.Suf fi
cientcash
3.For mal actionbyt heboar dofdi rector s
 On Ma y1,t heBoar d ofDi rect or sofTr iplePl ayaut horized pay mentofa
Br 50,000cashdi videndonJune30t ot hest ockholder sofr ecordonMay25.
OnMay1,t hedat eofdecl arat ion,thev alueoft hedi videndt obepai di s
deduct edf rom ( debi tedt o)r etai nedear ningsandsetupasal i
abilit
yina
separ at edi videndspay ableaccount .
Gener alJour nal
AccountTi tleand
Dat e Descript ion Ref. Debi t Cr edit
20X1
May1 Ret ainedEar ni
ngs 50,000
Di videndPay abl e 50,000
Author izeddi vidend

 I
tshoul d be not
ed t
hatsome compani es use separ
ate accounts call
ed
“Di
vidends,Common St ock”and “Di
vi
dends,Prefer
red St
ock”r at
hert han
ret
ainedearni
ngst or
ecorddiv
idendsdecl
ared.I
ftheseaccountsareused,a

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;Handout
closi
ngent ryismadeatt heendoft heperiodt
odecrease(debi
t)r
etai
ned
earningsanddecr ease(cr
edit
)“Di
vidends,CommonStock”and“Div
idends,
PreferredStock”t
ozerooutthebal
ancesinthedi
vi
dendaccount
sandupdate
theretainedearni
ngsbal
ance.

 Ont hedat eofpay mentwhenthecashissentouttothestockhol

der
s,the
di
videndspay abl
eaccountisdecr
eased(debi
ted)andthecashaccountis
decreased(cr
edit
ed).

Gener
alJournal
Date AccountTitl
eandDescri
pti
on Ref
. Debit Cr
edi
t
20X1
June DividendPay
able 50,
000
30
Cash 50,
000
Paydi
vi
dend

Oncedecl aredandpai d,acashdi v

idenddecr easest otalstockhol ders'equi t
y
and decreases totalasset s.Di vi
dends ar e notr epor ted on t he i ncome
statement.Theywoul d be f ound in a statementofr etained ear nings or
statementofst ockholders'equi t
yoncedecl aredandi nast atementofcash
fl
owswhenpai d.
St
ockdiv i
dends
 Stockdi v
idendsar eusedwhenacompanyneedst omai ntaini t
scashi nthe
businessbutwant st opr ovi
deadi videndtoi t
sstockhol ders.Thesi zeofa
stockdividenddetermi neshow i tisv al
ued.Asmal lsizedi vidend( lesst han
20–25% ofout standingshar es)isusual l
yv aluedatt hemar ketvalueoft he
stock.A largesizedi vidend( moret han20–25% ofout standingshar es)is
usuall
yvaluedatparorst atedv al
ue.

 Assumet heBoardofDi rector

sofGr andma'sGirl
saut hori
zesa10% st ock
di
videndonMay20th,distr
ibutableonJuly17thtost ockhol
dersofrecordon
June9thwhenthestockissellingforBr20pershare.Beforethedi
vidend,the
company'
sbal
ancesheethadt hef ol
lowi
ngstockhol
der s'
equit
ysect
ion:

CommonSt ock,Br3parv al
ue,1,500,
000shares Br
1,500,
000
author i
zed,500,
000shar esissuedandoutstandi
ng
AdditionalPaid-
in-
Capital 6,000,
000
RetainedEar ni
ngs 2,325,
000
Total st
ockholders'
equi t
y Br
9,825,
000

 TheBr 1,000,000v alueofthedi videndi sdet er

minedbymul ti
plyingt he50, 000
sharestobei ssued( 10%×500, 000out standingshares)byBr20( mar ketv alue
ofstock).Theent rytorecordthedecl arati
onoft hedivi
denddecreases( debits)
ret
ainedear ningsfortheBr 1,
000, 000mar ketval
ueoft hesharestobei ssued,
i
ncreases( credit
s)commonst ockdiv i
denddi str
ibut
ablefortheBr 150,000par
val
ue oft he shar est o be i
ssued ( Br3 × 50,000)
,and increases( credits)
additi
onalpai d-
in-
capitalfort
hedi ff
erencebet weent hepar( orstatedv alue)

Pr
epar
edby
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2012 69
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
andt
hemar
ketv
alueofBr
850,
000(
Br50,
000×(
Br20–Br
3))
.

Gener
alJour
nal
Date AccountTit
leandDescr
ipt
ion Ref
. Debi
t Cr
edi
t
20X0
May20 Ret ai
nedEar
nings((
10%×500,000shares)×Br
20 1,
000,00
0
CommonSt ockDivi
dendDist
ri
but
abl
e(50,
000 150,
00
shar
estobeissued×Br3par ) 0
Addi
ti
onalPaid-
in-
Capi
tal 850,
00
0
Aut
hor
ize10%st
ockdi
vi
dend

 OnJul y17thwhenthesharesofst ockaredist

ri
but
edtot hest ockholder
s,an
ent
ryismadet odecrease( debi
t)commonst ockdiv
idenddi stri
butableand
i
ncrease(cr
edi
t)commonst ockforBr150,
000,t
hepar(
orst at
edv alue).

Gener
alJournal
AccountTi t
leand
Date Descri
ption Ref
. Debit Cr
edi
t
20X0
July CommonSt ockDivi
dend 150,
00
17 Di
str
ibutabl
e 0
CommonSt ock 150,
000

Di
vi
dendDi
str
ibut
iont
ocommonst
ockandpr
efer
redst
ock
Toill
ustrat
e,OnNov embe r26,2011t heboa r
dofd ir
ectorsofworld
comp anyd ecl
aredc ashdivi
dendofBr 2 00,
0 00toshareholder
s,payabl
eon
January15 ,
2012.Th efol
lowings hareswe r
eou t
standi
ngont heda t
eof
record.
a)1 0,
000s haresofBr 50p ar
,1 0%c umulativepref
erredstock.Di
videndi
n
ar
rearstot
aledBr 30,
0 00
b)1 8,
000s haresofBr10p arc ommons tock.
Distr
ibut
ed iv
idendtob oths t
ockc lasses.
Soluti
on:
Prefer
redd i
vidend-cur
rent=1 0,
0 00xBr 50x1 0 %=Br 50,
000
Divi
d endinarrears=Br30 ,
000
Tot alpr
e f
erreddivi
d end=Br
80,000

Commonst
ockdi
vi
dend=Br
200,
000………totaldecl
ared
(-
) 80,
000………pr
e f
err
edd i
vidend
Br
120,
000………di
videndtocommons t
ock

Date Account
s Debi
t Cr
edi
t
Pr
epar
edby
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2012 70
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
On 2011 the
dat
e Dec.26 Di
v i
dends 200,
000 of
Div
idendPayabl
e: 80,
000
Pref
erred
Div
idendPayabl
e: 120,
000
Common

decl
arat
ionoft
hedi
vi
dends,
December26,2011,t
hef
oll
owi
ngent
ryi
s
pr
epared:

Thedi
vi
dendsaccountwoul
dbecl
osedasf
oll
ows:
Dat
e Accounts Debi
t Cr
edi
t
2011
Dec.31 Ret
a i
nedEarni
ngs 200,
000
Dividends 200,
000

OnJanuar
y15,2 012,whent
hedi
vi
dendsar
epai
dout
,thef
oll
owi
ngent
ry
woul
dbeprepar
ed:
Da t
e Account
s Debi
t Cr
edi
t
2012 Divi
dendPayabl
e:Pr
efer
red 80,
000
Jan15
Di
vi
d endPayabl
e:Common 120,
000
Cash 200,
000

Pr
efer
redSt
ockDi
vi
dends

Gi
ven:
• Br50,
000tob edistr
ibut
eda scashd i
vi
d ends
• Commons har
esc apit
alBr400,
00 0
• Pref
err
eds haresoutstandi
ng
•1 ,
000sh ar
e s
• Sh ar
ec apit
alval
ueBr 100,
000
• Stateddivi
d endBr6.
0 0pershare
• Di
videndshaven otbeend ecl
aredfortheprevi
ous2y
e ar
s
1)Non-
Cumul
ati
ve,
Non-
Par
ti
cipat
ing
 Withnon-cumul
ati
vesharesnodi
str
ibut
ionofdi
vi
dendsinar
rear
sis
requi
red
 Pref
erredshar
edivi
dendsarecal
cul
atedandpai
db ef
orecommon

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2012 71
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
shar
edi
vi
dendsasunder
:
Pr
efer
red Common Tot
al

Cur
renty
e ardi
vi
dend1000*Br
6.00 Br
6,000 Br
6,000

Bal
ancet
oCommon Br 44,
000
44,
000

Tot
als Br6,
000 Br Br
44,
000 50,
000
2)Cumul
ati
ve,
Non-
Par
ti
cipat
ing

Pr
efer
redshar
edi
vi
dendar
rear
sar
ecal
cul
atedandpai
dbef
oreanyot
her
di
vi
dends
Pr
efer
red Common Tot
al

Di
videndsi
nar
rear
s Br12,
000 Br12,
000
1000*Br6.
00*2year
s

Cur
renty
e ardi
vi
dend1000*Br
6.00 6,
000 Br6,
000

Bal
ancet
oCommon Br32,
000 32,
000

Tot
als Br18,
000 Br32,
000 Br50,
000
3)Par
ti
cipat
ingPr
efer
red
Cal
cul
ationsteps:
a.Payou tthe“regular
”preferr
edd i
vide nds(i
ncludi
nga nyarr
ears)
b.Payou ttothec ommons harehol
d er
sa na mou ntequalt
othe“retur
n
rat
e”e ar
nedb yt hepref
erredsh ar
e holder
s
c.Theb al
an ceisthena v
a i
l
a bl
eforp arti
cipat
ionbyp ref
err
ed
sharehol
d ers
i.Sh aredb ybothpreferr
eda ndc ommon
i
i.Pa rt
icipat
ionisbas edonp ro-rat
as har
eofs harecapi
tal

4)Non-
Cumul
ati
ve,
Par
ti
cipat
ing

Pr
efer
red Common Tot
al

Cur
renty
e ardi
vi
dend1000*Br6.
00 Br6,
000 Br6,
000

‘
Li
ke’
amountpai
dtocommon Br24,
000 24,
000
Br400,
000*6%

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2012 72
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
Bal
anceavai
labl
eforpar
ti
ci
pat
ion 4,
000 16,
000 20,
000
Pr
efer
red=4.
0%*Br100,
000
Common=4.
0%*Br400,
000

Tot
als Br10,
000 Br40,
000 Br
50,
000
Rat
eofr
etur
near
nedbypr
efer
red=Cur
rentDi
vi
dendShar
eCapi
tal
=Br6 ,
000Br100,
000=6 %
Thi
srateofret
urnispai
dtot
hec ommons har
eholder
spr
iort
othe
par
ti
cipat
iondi
videndbei
ngpai
dou t
.
Par
ti
cipat
ionr
ate=(
Bal
anceofdi
vi
dendsTot
alShar
eCapi
tal
)
=(50,
000-
[6,
000+24,
000)(
] 100,
000+400,
000)=4.0%
Eachshar
ecat
egor
ythenrecei
vesanamount=Rate*ShareCapi
tal
5)Cumul
ati
ve,
Par
ti
cipat
ing

Pr
efer
red Common Tot
al

Di
vi
dendsi
nar
rear
s:1000*Br
6.00*2year
s Br
12,
000 Br
12,
00
0

Cur
renty
eardi
vi
dend1000*Br
6.00 Br
6,000 Br
6,000

“Li
ke”amountpai
dtocommon Br
24,
000 24,
000
Br400,
000*6%(Notet
hiscal
cul
ati
ondoes
notchangewi
thcumul
ati
ve!
)
Tot
alt
obepai
doutpr
iort
opar
ti
cipat
ion 42,
000

Bal
anceavai
labl
eforpar
ti
ci
pat
ion 4,
000 16,
000 8,
000
Par
ti
cipat
ionRate=Br
8,000Br500,
000=
1.
6%
Pref
err
ed=1.6%*Br100,
000
Common=1 .6%*Br400,
000

Tot
als Br
10,
000 Br
40,
000 Br
50,
00
0

Pr
epar
edby
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2012 73
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout

Newaccount
sandt
hei
rcat
egor
y&nor
malbal
ance

Account Cat
egor
y Normal
Bal
ance
CommonSt
ock Stockhol
der
s Cr
edi
t
equi
ty
Pr
efer
redSt
ock Stockhol
der
s Cr
edi
t
equi
ty
Pai
d-i
nCapi
tali
nExcessofPar
/St
ated Stockhol
der
s Cr
edi
t
Val
ue equi
ty
Ret
ainedEar
nings Stockhol
der
s Cr
edi
t
equi
ty
Donat
edCapi
tal Stockhol
der
s Cr
edi
t
equi
ty
Tr
easur
ySt
ock Stockhol
der
s Debi
t
equi
ty
Pai
d-i
nCapi
talf
rom Sal
eofTr
easur
y Stockhol
der
s Cr
edi
t
St
ock equi
ty
CashDi
vi
dends(
tempor
aryaccount
) Stockhol
der
s Debi
t
equi
ty
CashDi
vi
dendsPayabl
e Li
abi
li
ty Cr
edi
t
St
ockDi
vi
dends(
tempor
aryaccount
) Stockhol
der
s Debi
t
equi
ty
St
ockDi
vi
dendsDi
str
ibut
abl
e Stockhol
der
s Cr
edi
t
equi
ty

Ear
ningspershar
e(BookValuepershar
e)
Ear
ningspershar
e(EPS):t
heamountofincomeear
nedpereachshar
eofacompany
’s
out
standi
ngcommonst
ock.I
fther
eisonl
yonecl
assofshar
es(
commonst
ock)
,
equi
typershar
eiscomput
edasf
oll
ows:

BookVal
uepershar
e=Tot
alShar
ehol
der
sEqui
ty/
NumberofCommon
shar
es

Wh enacompanyhasbot
hpref
err
edandcommonshar
es,
thecal
cul
ati
onof
bookval
ueismorecompl
ex.
Pr
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2012 74
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
St
epsrequir
eda r
e:
1)Calcul
atethep refer
reds harehol
d er
s ’equi
ty(thesu m ofredemption
pri
ceofp ref
erredsharesplusa nyc umu l
ati
vedivi
dendsinarrear
s).
2)Determinet hec ommon s har
eholde r
s’e qui
ty( t
otals har
eholders’
equit
ylessp r
eferr
eds hareholder
s’equ i
ty)
.
3)Divi
dec ommon s hareholders’equ i
tyb yt hen umb erofc ommon
sharestodetermineb ookvaluep ershare.

Theequi
tytoprefer
redstockincl
udest
hedi
vi
dendsi
nar
rear
sthen;EPS
woul
dbec omput
eda sfol
l
ows :

Bookv
aluepercommonshar
e=Stockhol
der
s’equi
tyappl
i
cablet
ocommonshar
es
Numberofcommonshar esout
standi
ng

Bookv
alueperpr
efer
redshar
e=St
ockhol
der
s’equi
tyappl
i
cabletopref
erredshar
e
Numberofpref
err
edsharesoutst
anding

TheRe tainedEarningsa ccountisas tockhol

ders’e quit
ya ccountwitha
normal cr
editbal
ance. Asar esul
tofn etlosses,howe ver
,ad ebi
tbalancein
Retai
nedEa rni
ngsma yoccur.Suchab a l
a ncei
sc all
e dade f
ici
t.Thed ef
ici
t
reducesthetotalst
ockh ol
ders’
equ i
tyofth ecor
por at
ion.

Toill
ustr
ate,assumet hatthef ol
l
owi
ngbal
ancesappearont hebal
ance
sheetofABCComp any:
Commons tock,Br10p ar Br60 0,
000
Pai
dinCapitalexcessofpar 1 20,
000
Def
ici
t 7 5,000
Tot
als t
ockhol
der
s’equit
yisBr6 45,
000(Br600,
000+Br1 20,
000– Br
75,
000)andthenumberofshar
eis60,
000(
Br600,
000/
Br10)
.

Toi
l
lust
rat
e,assumet
hef
oll
owi
ngdat
a:
Prefer
red,11%stoc k,Br50par Br2,500,
000
Premium onp r
eferreds t
ock 275,
000
Commons tock,Br25p ar 3,750,
00 0
De f
ici
t 1,240,
00 0
Assumea l
sothatPreferr
eds tockhaspr
iorcl
aimt
oa ssetsonliqui
dat
iont
o
theext
entof110%ofp ar
.

Toc omp ut
eEPS,l etu sfir
stspl
itt
het
otalequi
tyint
ot hetwocl
assesof
shar
e s:
Tot
al Equi
ty:
Pref
erred,11%stock,Br50par Br2,500,
000
Premium onp r
eferr
eds t
ock 275,
000
Commons tock,Br
25p ar 3,
750,000

Pr
epar
edby
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2012 75
 PSCO:Pr
inci
plesofAccount
ingI
I(
ACPF202)
;Handout
Def
ici
t (
1,240,
000) Br5,
285,
000
Less:Equityt
opr
e f
erredstock(
110 %x2,500,
000) 2,750,
000
Equi
tyt oCommonSt ock Br2,535,
000
Ther
ef ore,
Pref
erredEPS=Br2 ,
750,000 =Br55.
00pershar
e
2,
500,
000/Br50

CommonEPS=Br2,
535,
000 =Br16.
90
3,
750,
000/
Br25

Summary:CORPORATI
ONVSPARTNERSHI P
CORPORATION PARTNERSHI P
1. Creati
on  Cr
eatedbyoper
ati
onofl
aw Created by agr
eement of t
he
part
ies;

2. Numbersof Requi res at l

east 5 Requiresatl east2par tners
i
ncorpor
ators  i
ncor por ators
3. Commencement Acqui res j uri
dical per sonal
ity Acquires j uri
dical per sonali
ty
of j
uri
dical from thedat eofi ssuanceofthe f ormthemomentofexecut i
onof
per
sonali
ty  cert
ificate ofi ncor porati
on by t hecont ractofpar t
nership 
thegov ernment
4. Powers  can exer cise onl yt he power s may exer ci
se any power
expressl y gr anted by l aw or aut horized by t he par tners
i
mpl i
ed f rom t hosegr anted or (provi
dedi tisnotcont rarytolaw,
i
ncidentt oitsexi stence mor al
s,good cust oms,publ ic
order,publicpoli
cy )

5. Management
  Thepowert odot hebusi ness Whenmanagementi snotagreed
andmanagei t
saffairsisv ested upon, everypar t
nerisanagentof
i
nt he boar d ofdi rectors and t hepar t
ner shi
p 
trustees
6. Ef fectof Thesui tagai nstamemberof Apar tnerassuchcansueaco-
mismanagement   t he boar d of di rect
ors or par tnerwhomi smanages
trusteeswhomi smanagesmust
be i n t he name of t he
corpor ati
on
7. Ri ght of Hasr i
ghtofsuccessi on Hasnorr ightofsuccessi on
succession 
8. Ext ent of liabi
li
ty Stockhol dersar eliableonl yt o Partnersar eli
ableper sonal
lyand
tothirdpersons  t he ex t
ent of t he shar es subsidiaril
y(somet imes
subscr ibedbyt hem soli
dar i
ly)forpartnershipdebts
tothirdper sons 
9. Tr ansferabi
li
ty of St ockhol derhas gener all
yt he Partnercannott ransferhis
i
nterests  ri
ght t o t r
ansfer hi s shar es i
nterestint hepar t
ner shi
p
wi t
hout pr ior consent of t he
otherst ockholders
10. Term ofexistence  Maynotbef ormedf orat ermi n Maybeest abl
ishedf orany
Pr
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2012 76
 PSCO:Pr
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plesofAccount
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;Handout
excessof50y earsextendi
blet
o periodoftimestipul
atedbyt he
no moret han50y earsinany partners 
oneinstance
11. Fi
rm name  Mayadoptanynamepr ovi
dedit Li
mitedpartner
shipi
sr equir
edby
i
snott hesameasorsi mi
lart
o lawt oaddthewor d“Ltd”toits
anyregi
steredfi
rm name name 

12. Di
ssol
uti
on Canonl ybedi
ssol
vedwi
tht
he Maybedissol
vedatanyt
imeby
consentoft
heSt
ate oral
loft
hepartner
s 

13. Gov
erni
ngLaw  Gover
ned by t
he Cor
por
ati
on Gov
ernedbyt
heCi
vi
lCode
Code

Pr
epar
edby
:Ber
hanuG.&AbebeN./
2012 77