Double entry concept is a very important concept underpinning financial accounting. The idea is that every financial transaction has dual effect and therefore is recorded twice, one debit and one credit. This concept is sometime difficult to apply in certain transactions, it requires practice.
The followings are some examples:
1. Debit expenses = more expenses are incurred.
2. Debit asset = more asset is controlled.
With the above, you should understand that credit will be the opposite:
1. Credit income = more incomes are earned.
2. Credit liability = more liability is obliged.
3. Credit capital = more capital is injected/created.
Note: Capital provider injects money or other assets to the business, thus created capital. Capital is therefore the amount that business owes to the capital provider and so it is on the credit side, like liability.
Now let's mix them up:
1. Debit income = income is reduced.
2. Credit asset = asset is reduced.
3. Debit liability = liability is reduced.
Therefore, by knowing a little of double entry principles, you can do the rest, this is where common sense applies.
Certain accounts are known as contra asset, for example accumulated depreciation and allowance for receivables (provision for doubtful debt). The word "contra" implies cancel, so you would credit them to the relevant assets, ie. non-current assets and trade receivables. Drawing made by the sole proprietor or partner is a contra capital/equity account so you debit drawing to the capital account.
One more common question asked by student is why profit is credited to the capital account. This is because profit earned from the business belongs to the capital provider, by crediting the capital account, the business is owing more to the capital provider.
Do not underestimate this concept because you will use it throughout your accountancy life, it is still very important even in ACCA P2. Catch the logic and master them now. :)
Monday, October 17, 2011
Thursday, October 13, 2011
IAS 11 Contruction contracts - advanced
Two issues to look at are the unplanned rectification costs and when we are not in the first year of contract.
Unplanned rectification cost
When there is such cost exist, it should be recognised in full in the income statement. This is because the cost is not originally estimated so what we do is to deduct the gross profit to be recognised in the period.
We are not in the first year of contract
You should understand that income statement only shows figures in an accounting period, ie. 12 months while statement of financial position shows the balance to date (therefore the amount is accumulated). Therefore, we have a problem, in the second year of contract for example, you should only show the 12 months revenue, cost of sales and gross profit in the income statement. However, the one who certifies the work will only be able to identify the sale value of work done to date, he can't determine exactly how much of work certified is for the 12 months. What we can do is to follow the steps as normal, then take the revenue/cost of sales/gross profit less the last year balance, with this we can identify the amount for current period (12 months). Do not confuse with the revenue/cost of sales/gross profit in the income statement, here I am referring to those relating to the contract only.
You will need to practice some questions to understand what I have just said here, June 2011 question 5 would be a good question to try.
Unplanned rectification cost
When there is such cost exist, it should be recognised in full in the income statement. This is because the cost is not originally estimated so what we do is to deduct the gross profit to be recognised in the period.
We are not in the first year of contract
You should understand that income statement only shows figures in an accounting period, ie. 12 months while statement of financial position shows the balance to date (therefore the amount is accumulated). Therefore, we have a problem, in the second year of contract for example, you should only show the 12 months revenue, cost of sales and gross profit in the income statement. However, the one who certifies the work will only be able to identify the sale value of work done to date, he can't determine exactly how much of work certified is for the 12 months. What we can do is to follow the steps as normal, then take the revenue/cost of sales/gross profit less the last year balance, with this we can identify the amount for current period (12 months). Do not confuse with the revenue/cost of sales/gross profit in the income statement, here I am referring to those relating to the contract only.
You will need to practice some questions to understand what I have just said here, June 2011 question 5 would be a good question to try.
Wednesday, October 12, 2011
IAS 11 Construction contracts - basic ideas
This standard seems to be complicated, but if you know the concept then it should be easy to handle. It follows accrual basis of accounting so although money is received in progress payments, you should recognise revenue earned in the period.
Recognition of revenue and cost
They are recognised when it is probable that economic benefits attached to the contract will flow to the entity and outcome can be measured reliably.
Stage of completion
This can be calculated either using revenue basis (work certified to date/contract price) or cost basis (cost to date/estimated total cost). If you are using revenue basis, revenue to be recognised in the period is equal to the work certified to date and if you use cost basis, cost of sales to be recognised in the period is equal to the cost incurred to date.
Steps of accounting
1. Determine profit or loss - this can be found by contract price - estimated total cost. Estimated total cost includes any contract cost incurred to date - estimated further cost to complete the contract. If it results in loss, then you don't need to calculate stage of completion of the contract because loss must be recognised in full as a gross loss.
2. Determine stage of completion and profit to recognise - use the stage of completion calculated and multiply by the estimated profit in step 1, that will be the gross profit.
3. Determine amount due from customers (current asset) - this is calculated from cost to date + profit recognised (from step 2) - progress payment. The idea is that cost + profit is the price that customer should pay, then less the progress payment will arrive at the amount that customer is still owing to us. If it is a negative figure, then it should be a current liability (amount due to customer).
4. Prepare income statement and statement of financial position. The trick is that let say you use revenue basis to calculate stage of completion and then profit to be recognised, you know that the revenue to be recognised is equal to work certified to date, therefore with both revenue and gross profit amount, the balance is cost of sales.
More complicated issue is discussed later.
Recognition of revenue and cost
They are recognised when it is probable that economic benefits attached to the contract will flow to the entity and outcome can be measured reliably.
Stage of completion
This can be calculated either using revenue basis (work certified to date/contract price) or cost basis (cost to date/estimated total cost). If you are using revenue basis, revenue to be recognised in the period is equal to the work certified to date and if you use cost basis, cost of sales to be recognised in the period is equal to the cost incurred to date.
Steps of accounting
1. Determine profit or loss - this can be found by contract price - estimated total cost. Estimated total cost includes any contract cost incurred to date - estimated further cost to complete the contract. If it results in loss, then you don't need to calculate stage of completion of the contract because loss must be recognised in full as a gross loss.
2. Determine stage of completion and profit to recognise - use the stage of completion calculated and multiply by the estimated profit in step 1, that will be the gross profit.
3. Determine amount due from customers (current asset) - this is calculated from cost to date + profit recognised (from step 2) - progress payment. The idea is that cost + profit is the price that customer should pay, then less the progress payment will arrive at the amount that customer is still owing to us. If it is a negative figure, then it should be a current liability (amount due to customer).
4. Prepare income statement and statement of financial position. The trick is that let say you use revenue basis to calculate stage of completion and then profit to be recognised, you know that the revenue to be recognised is equal to work certified to date, therefore with both revenue and gross profit amount, the balance is cost of sales.
More complicated issue is discussed later.
Tuesday, October 11, 2011
Inti Social night 2011
The date is at 14th of October 2011, 7.00pm to 10.30pm, Kampungku restaurant near Holiday Villa in Subang. Price is at RM25 and the theme is black and gold. Do register for this event as there are variety of food and we have prepared some games for you all. The price is much subsidised and 50 pax is the maximum. Register NOW!!! :D
Tuesday, September 27, 2011
F8 Performance materiality
ISA 320 gives this definition:
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
By interpreting this definition, it shows that performance materiality/planning materiality (PM) is set to reduce the risk that misstatements are too large.
Auditor will first determine the PM based on eg. 5% of profit before tax or larger amount if the company is very large, then any item that is more than this materiality level will be tested, ie. considered to be material. For those items less than this materiality level, ie. considered immaterial, sample will be taken for testing.
Later, errors will be projected to be compared to the materiality set for the financial statements as a whole (let's call it final materiality here). When the projected errors are still larger than final materiality, then auditor will consider whether to revise the PM.
Note that the setting of PM requires the exercise of professional judgement.
In conclusion, ISA 320 also states that the purpose of determining performance materiality is to assess the risks of material misstatement and determining the nature, timing and extent of further audit procedures. :)
Tuesday, September 13, 2011
Warren Buffett
Warren Buffett is the world's second richest man. He has donated $31 billion to charity! The following is his stories (red) and advices (blue) to us.
1. He bought his first share at age 11 and he now regrets that he started too late!
Things were very cheap that time, encourage your children to invest.
2. He bought a small farm at age 14 with savings from delivering newspapers.
One could have bought many things with little savings, encourage your children to start some kind of business.
3. He still lives in the same small 3-bed house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
Don't buy more than what you "really need" and encourage your children to do and think the same.
4. He drives his own car everywhere and does not have a driver or security people around him.
You are what you are.
5. He never travels by private jet, although he owns the world's largest private jet company.
Always think how you can accomplish things economically.
6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.
Assign the right people to the right jobs.
7. He has given his CEO's only two rules. Rule 1: do not lose any of your shareholder's money. Rule 2: Do not forget rule number 1.
Set goals and make sure people focus on them.
8. He does not socialise with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.
Don't try to show off, just be yourself and do what you enjoy doing.
His advices to young people:
Stay away from credit cards (bank loans) and invest in yourself and remember:
1. Money doesn't create man but it is the man who created money.
2. Live your life as simple as you are.
3. Don't do what others say, just listen to them, but do what you feel good.
4. Don't go on brand name; just wear those things in which you feel comfortable.
5. Don't waste your money on unnecessary things; just spend on them who really in need rather.
6. After all it's your life then why give chance to others to rule our life.
You may like to take him as your role model :D
1. He bought his first share at age 11 and he now regrets that he started too late!
Things were very cheap that time, encourage your children to invest.
2. He bought a small farm at age 14 with savings from delivering newspapers.
One could have bought many things with little savings, encourage your children to start some kind of business.
3. He still lives in the same small 3-bed house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
Don't buy more than what you "really need" and encourage your children to do and think the same.
4. He drives his own car everywhere and does not have a driver or security people around him.
You are what you are.
5. He never travels by private jet, although he owns the world's largest private jet company.
Always think how you can accomplish things economically.
6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.
Assign the right people to the right jobs.
7. He has given his CEO's only two rules. Rule 1: do not lose any of your shareholder's money. Rule 2: Do not forget rule number 1.
Set goals and make sure people focus on them.
8. He does not socialise with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.
Don't try to show off, just be yourself and do what you enjoy doing.
His advices to young people:
Stay away from credit cards (bank loans) and invest in yourself and remember:
1. Money doesn't create man but it is the man who created money.
2. Live your life as simple as you are.
3. Don't do what others say, just listen to them, but do what you feel good.
4. Don't go on brand name; just wear those things in which you feel comfortable.
5. Don't waste your money on unnecessary things; just spend on them who really in need rather.
6. After all it's your life then why give chance to others to rule our life.
You may like to take him as your role model :D
Sunday, September 4, 2011
Remember to claim discount for exam fees
The last date for paying a reduced exam fees is just 3 days away from now, ie. 8th of September. As you know, you will save a lot of money if you pay before or at this date. Therefore, don't hessitate anymore, pay as soon as possible and don't miss out this chance.
For those who have problem in paying the fees, you can try to call ACCA to pay as I have heard of people paying through telephoning ACCA.
Note that you can also pay for June 2012 sitting but I don't recommend that because the papers that you can sit will be uncertain. Finally, make sure that you select the papers that you are going to sit in December 2011 with great care, including the variants.
For those who have problem in paying the fees, you can try to call ACCA to pay as I have heard of people paying through telephoning ACCA.
Note that you can also pay for June 2012 sitting but I don't recommend that because the papers that you can sit will be uncertain. Finally, make sure that you select the papers that you are going to sit in December 2011 with great care, including the variants.
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