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| Various Types of Transactions - Part 6, Refund of Deposits Placed Earlier With Third Parties |
| 2008-02-11 06:20:00 |
I have discussed in detail the relevant double entries for the recording of rental income and the rental deposits and utility deposits in the books of the landlord, ABC Co. Ltd., in my post:Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income).The recording of all these transactions in the books of the tenant, XYZ Co. Ltd., are the opposite of those of the landlord. If XYZ Co. Ltd. records its transactions on cash basis, the double entry used to record the transactions when XYZ Co. Ltd. pays the monthly rentals is: - Balance SheetIncome Statement DRCRDRCR Rental expense xxxx Cash at bank xxxx 1. The double entry for the recording of the security deposits is: - Balance SheetIncome Statement DRCRDRCR Refundable deposits (c...
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| Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties |
| 2008-01-27 11:07:00 |
Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the principal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay the price for this – interest). Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers.The double entry involved in the recording of the realease of the loan is as follows:- Balance SheetIncome StatementDRCRDRCRCash at bank24,000Loan ...
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| Various Types of Transactions – Part 4, Collection from Other Source of Revenue and Income |
| 2008-01-18 08:16:00 |
As mentioned in my post: Various Types of Transactions - Part 1, Introduction, there were 5 examples of other source of revenue or income highlighted – interest income, dividend income, rental income, proceeds from disposal of assets and compensation received for loss of assets. Please take note that this is not an exhaustive list as there are more types of other source of revenue and income not mentioned. For the purpose of easy understanding and simplicity, I will only discuss these 5 different other source of revenue and income in the following posts:-Various Types of Transactions – Part 4a, Collection from Other Source of Revenue and Income (I...
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| Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income) |
| 2008-01-18 05:49:00 |
Rental income is earned by business entities for allowing another party to "use" the resources (assets) of the business entities. For example, letting of property, machinery, equipment & etc.An agreement is usually drafted and agreed by both parties. The terms agreed upon usually include the details or specifications of the assets, date of agreement, period, amount of rental e.g. per month.Many small businesses record rental income on cash basis, i.e. upon receipt. The double entry for recording rental income on cash basis is:- Balance SheetIncome Statement DRCRDRCR Cash at bankXXXX Rental income XXXXExampleThe financial period of ABC Co. Ltd. is from 1 January to 31 December....
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| Dividend Imputation |
| 2008-01-17 18:56:00 |
In some countries, dividends are distributed to shareholders under dividend imputation system. The purpose of this system is to avoid imposing tax "2 times" on the same income is first generated by companies (taxed the first time when the income is reported by companies), which is then distributed to shareholders as dividends (taxed the second time when the dividend income is reported by individual shareholders).ExampleCompany A has 2 shareholders – Mr Big and Mr Small, each holding 50% of the shares in Company A. The details of the share capital of Company A are shown below: -$Authorised Share Capital:100,000 ordinary shares or $1.00 each100,000Issued and Fully Paid-up Share Capital:100,000 ordinary shares or $1.00 each100,000For the financial year ended 31 December 2007, Company A made...
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| Cash Basis Vs Accrual Basis of Accounting |
| 2008-01-09 01:20:00 |
Many small businesses use cash basis of accounting to record transactions, especially those who prepare the accounts once a year. Please refer to my post: Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To Avoid for further illustrations.Indications that cash basis of accounting is used includes the following:-No books of original entry such as sales day book and purchases day book used to record sales and purchases.No debtors ledger or creditors ledger maintained.All receipts and payments are recorded directly in cash book.Cash basis of recording transactions and presenting the financial statements produced has long been deemed an inappropriate basis to use. Accrual basis of accounting is the acce...
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| Effective Interest? Simple Interest? Compound Interest? Nominal Interest? |
| 2008-01-06 07:23:00 |
Simple interest is usually discussed and compared with compound interest. Simple interest is named as such because the interest calculated is not compounded.In contrast, when compound interest is calculated, nominal interest rate and effective interest rate would be the relevant interest rates involved in the calculations or discussions.ExampleSimple InterestABC Co Ltd. placed $100,000 deposit with Bank A for 1 year with interest of 3.5% per annum and calculated on simple interest method.Interest earned at the end of the one year period is therefore calculated as follows: -$100,000 x 3.5%= $3,500Compound InterestIn the context of compound interest calculation, you need to specify the following: -The total length of the placement of deposit. In this example, one year.The frequency of compou...
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| Various Types of Transactions – Part 3, Collection from Sales or Services Rendered |
| 2008-01-01 01:42:00 |
For profit orientated entities, revenue is the "bloodline" of the businesses. The cash collected from invoicing or billing is vital in keeping the businesses up and running – meeting all sorts of daily expenses. Depending on the nature of the businesses, the sales invoices or bills issued to customers are for the sale of goods or services rendered. Generally the invoices or bills issued could be on cash term (pay on delivery of goods or services performed) or on credit term (e.g. 30 days, 60 days, 90 days etc). I have discussed in length the day book used in recording sales, the sales ledger and posting to the relevant accounts in the general ledger in my post:General Ledger? Journals? Day Books? Debtors Ledger? Credito...
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| Various Types of Transactions – Part 2, Contribution of Capital from Owners |
| 2007-12-24 00:27:00 |
When owners inject cash into businesses as capital, the double entry to record this type of transactions is: - Balance SheetIncome Statement DRCRDRCR Petty cash/cash at bankXXXX Capital XXXX Cash injections could be done by way of contributing "hard cash". If this is the case, the asset account debited is the Petty Cash account. Cash injections could also be done by way of the owners issue cheques. If this is the case, the asset account debited is the Cash at Bank account. Usually, if the amount involved is huge, cheques are issued instead of hard cash.Following the rule of double entry recording system, whenever there is a debit entry made to an account (the Petty Cash of Cash at Bank account in this illustration), there must also be ...
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| Three Most Common Types of Small Businesses – Sole Proprietorship, Partnership and Private Limited Company |
| 2007-12-22 12:50:00 |
Sole ProprietorshipThis is the type of business which legally the business entity is not separated from the owner. However, do not get yourself confused with the Separate Entity Concept in accounting. Usually the business is registered with government under a trade name (either with some association with the name of the owner or a different name altogether) and this trade name will represent the business entity in the conduct of its business activities.PartnershipThis is the type of business with more than one owner. All the owners are called partners. In general all the partners contribute capital to the business and share common objectives of making the business successful and share the profits generated. Generally in law, the partners may have join...
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| Preparing Accounts of Small Businesses Once A Year - Tips and Pitfalls To Avoid |
| 2007-12-15 23:50:00 |
Many small business owners started the businesses on their own or with minimal staff strength. Usually, the major focus of the businesses is on revenue generation and leaves the function of transactions record keeping and accounting to inexperience staff. Many business owners leave it aside until the end of the financial year or when the deadline of accounts submission to the authorities coming close. The accounts and financial statements of the business entities are prepared once a year. Please take note that this practice of recording transactions once a year is definitely not encouraged and may even contravene the law imposed on businesses in some countries with the owners unaware of this. Depending on how the acc...
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| Separate Entity Concept |
| 2007-12-15 06:22:00 |
In accounting, a business entity is treated as a separate entity from the owner(s). Therefore, any capital injections made by the owner(s) are recorded as capital contribution from owners in the books of the business entity. The owner(s)’ private expenditure/spending are not recorded in the books of the business entity. There are many instances whereby the owner(s) withdrew money from the business for their personal use. This is actually a lending of money from the business to the owner(s) and should be recorded as such in the books of the business entity. On the other hand, when the owner(s) inject cash into the business to help easing tight cash flow situation faced by the business entity, it is a lending of money from the owner(s) to the business and should also be recorded as such in...
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| Various Types of Transactions - Part 1, Introduction |
| 2007-12-13 07:49:00 |
It is easier to understand the basic principles and concepts of accounting once you are familiar with the types of transactions that a typical business entity has to deal with. There is no better place to start with knowing what kind of receipts a typical business receives and also the type of payments made. Even though numerous transactions nowadays are done on credit, eventually the amount owned is expected to be settled or paid.ReceiptsGenerally, the receipt transactions of a typical business include the following:-·Contribution of capital from owners·Collection from sales or services rendered (cash sales or payments received from trade debtors). This is usually the major source of revenue or income of the business entity· Collection from other source of revenue or income:-o Interest...
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| Inventories or Stocks – Part 1, Introduction |
| 2007-11-28 06:08:00 |
Inventories or stocks are one type of assets to many business entities. Inventories or stocks could be in the form of trading goods/merchandise for those business entities principally engaged in purchasing the goods from suppliers and resell those goods to the customers. For a typical manufacturer, inventories or stocks could be in the form of raw materials used in the manufacturing process. Other than raw materials, inventories or stocks could also be in the form of unfinished products called work-in-progress or they could also be in the form of finished goods/products that are ready for sale to the customers. For many business entities that engaged mainly in providing services, all the tangible inventories mentioned earlier simply are not applicable beca...
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| The Income Statement |
| 2007-11-23 01:42:00 |
Please refer to my post: http://learnaccounting.wordpress.com/2007/10/26/the-income-statement/...
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| The Balance Sheet |
| 2007-11-23 01:41:00 |
Please refer to my post: http://learnaccounting.wordpress.com/2007/10/22/the-balance-sheet/...
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| Debits and Credits |
| 2007-11-23 01:39:00 |
These two words are typical to the world of accounting and they relate to the Accounting Equation discussed yesterday: -Assets = Liabilities + Owners’ EquityUnder what we called double entry system in accounting, each transaction must be recorded TWO times. For example, when you as an owner of an entity you contribute capital to the business by opening a bank account lets say $10,000, the following entry is made: -Dr. Cash at bank $10,000 (Asset)Cr. Paid-up share capital $10,000 (Owners’ Equity)Note: Dr. represents “debit” and Cr. represents “credit”Points to note: -1. All assets item when recorded initially, you must follow the convention of “debiting” the account relating to that particular asset.2. All liabilities item and Owners’ Equity item on the other hand you must...
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| The Accounting Equation |
| 2007-11-23 01:25:00 |
You can find a lot of materials on-line about what accounting is about and you will not miss them mentioning The Accounting Equation: -ASSETS = LIABILITIES + OWNERS’ EQUITYAssets are simply those things that are valuable to an entity and they include items such as the equipment bought and used in business, the trade receivables, cash kept at banks, inventories & etc. Generally, the entity must have some form of control over these items and enjoy the benefits that these items would bring to the entity. It is easier to understand the meaning of benefits to the owner if you could picture that by using the assets in your business, they would help generate the sales/revenue which is important to a profit orientated entity. (Mmm… leave your thoughts ...
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