(ANIKA) Budhwar Peth Call Girls Just Call 7001035870 [ Cash on Delivery ] Pun...
Â
Problem based learning (repaired) (autosaved) (2)
1. Page 1
Contents
Page
Introduction of Single Entry and Incomplete
Record
2
Business’ Problem 3
Solutions:
i. Disadvantages
ii. Accounting Concepts
iii. Method of Depreciation
iv. Statement of Comprehensive Income
v. Statement of Financial Position
4
4-6
6-7
8-10
11
2. Page 2
Single Entry and Incomplete Record
According to Carter ‘Single Entry system is a method or a variety of methods, employed for the
recording of transactions, which ignore the two-fold aspect and consequently fails to provide the
businessman with the information necessary for him to be able to ascertain the position’
Single Entry and Incomplete Record is one of the major problems that most businesses may
encounter in managing their accounts.However, they are still some business that practicing
single entry system since it has many advantages:
1) It is the simplest method of recording account’s transactions.
2) Do not need to hire a qualified staff and it will reduce the cost as well.
3) There are only a few assets and liabilities involved. Hence, it is totally applicable for
small businesses.
4) Flexible.
Basically, all businesses supposed to record their transaction in an appropriate way; based on
double entry system. However, there are several small businesses that do not have recorded
their transactions based on that system. Thus, it will affect the whole accounting records which
they are not able to prepare trial balance and financial statement; Statement of Comprehensive
income and Statement of Financial Position. Apart from that, they also do not able to provide a
complete set of final accounts without further analysis of the existence records. It is due to lack
of knowledge and expertise in accounting system as well as experience.
Sometimes, the owners of the business cannot differentiate the business account from their
personal transactions that may cause haywire in their business account. For example, they do
not record the drawings that being made from business account and it is totally contradict to
entity concept. In addition, for large business, they may have a complete records of their
transaction, however it still have a chance of being destroyed, lost or misplaced. Thus, it will
result in incomplete records.
3. Page 3
Business’ Problem
Zaki is operating his own business and he acts as a sole trader which he currently runs the
business on his own without any partners. Usually, this type of business is exists in the form of
small businesses only. Sole proprietorship is a type of organization that has only one owner,
unlimited liability, the owner owns all the profit and as well as incur all the debts. However, due
to his lackness of knowledge in managing business’ accounts, he does not know on how to
prepare a proper standard accounting records. Normally, this kind of organization may have the
same problem in managing and recording their business transactions. The reason is because
they have no expertise in accounting area as well as experience. Therefore, most small
business will face a similar problem; single entry and incomplete records.
Hence, Zaki has decided to get a professional in preparing his financial statement so
that he would be able to determine his profit or loss on that year. Thus, by ensuring the
accountant could manage his accounts, he has provided some information regarding his
transactions that occur on that period.
Through the information given, it is clearly informed that Zaki just started the business by
commenced his business with several assets; cash in hand amounted RM 2,000, bank
amounted RM 8,000, and non-current assets which amounted RM 50,000. Besides that, he also
provides the information regarding his business’ transactions during that period. However, after
being analyzed, it is not completed yet since there is a lot of missing information. For example,
he did not mention about his total purchases, sales and others.
Therefore, it is the responsibility of professional accountant in ensuring that the
accurate financial statement is being prepared that may help Zaki in making further decision for
his business in future.
Disadvantages of keeping incomplete records
4. Page 4
As mentioned earlier, there are several problems that business may incur in dealing with
keeping incomplete records along the business’ transactions. Plus, it also may increase the cost
because the owner has to hire a professional accountant to set up a proper system of recording.
The other disadvantages are as follows:
1. A great deal of useful information may be lost. Certain transactions may not be
accounted for and there is also no continuity in the recording of financial and other useful
information.
2. Difficulty in determining and assessing net profit or loss and net worth of the business as
details are not readily available.
3. Under this system only partial and incomplete record is maintained because two fold
aspects of transactions are generally ignored.
4. Trial Balance cannot be extracted to test the arithmetical accuracy of the records, due to
lack of information in double entry of each transaction.
5. There is possible to prepare a balance sheet/statement of Financial Position since
information on the assets and owner’s liabilities may be incomplete.
Five accounting concepts
1) Duality Concept
Through the information given by Zaki about his business transaction during the year of 2010,
there are five accounting concepts that are applicable in Zaki’s business. Most importantly is
duality concept. This concept is explaining the basic foundation of accounting records. It is
assume that all transaction occur in a year has a dual effect.Beside that, there are two aspect of
accounting which one represented by asset of the business and the other by claim against
them. The concept states that these two aspects are always equal to each other.Simply saying,
each transaction must have an effect in both debit and credit side. This concept is totally against
the concept of single entry which it just record only one entry on each transaction. Thus, single
entry may unreliable for preparing financial statement.
2) Historical Cost Concept
5. Page 5
Historical concept is the concept where each business should assume the cost of each asset is
going to be valued on the historical cost (the cost incurred during the asset purchased) not on
the market value and this is the basis for valuation of the assets . It is important to ensure that
the cost is remain constant as before and do not vary. If the business taking market value for his
asset, then his cost of asset may be vary from day to day due to the economic condition.
3) Materiality Concept
Each business is assuming to record all transaction from purchasing goods, acquiring assets or
capital and others into specific account. However, all businesses are advised to differentiate
between material and non-material. Materiality concept brings meaning the reporting of
significant accounting information is known as the application of the materiality concept, the
distinction between significant and insignificant information depends on the size of the
enterprise. The prepare of the financial statement needs to make certain judgement in
determining the significant of the information to be reported. These include the nature of the
information, amount of an item and effect on the result which will be reported. While the small
amount items should not be recorded. The example is stationary that amount RM 0.20 is not
affected the whole accounting.
4) Monetary terms concept
In monetary terms, it is clearly shown that all business transaction should be valued based on
Ringgit Malaysia (RM). It is contradicted to barter system that is likely to be practiced in the past
which nowdays most agree to the monetary value of the transaction. Basically, this concept is
applicable to each business either small or large business. Since technology has improved and
a lot of new innovative idea has been created, people more trusted in value of money rather
than in terms of exchange goods.
5) Periodicity Concept
6. Page 6
Periodicity concept is applicable to Zaki business as well as other businesses. It
is the concept which justifies the profit on those transactions at a specific period.The life
of a business is divided into specified periods of time for the purpose of preparing
financial statement. With the assumption that the business will continue to operate
indefinite period of time, it is not possible to wait until the end of the life of the entity to
measure its performance. Therefore, in measuring our business performance, the
business owner has to decide on the accounting period that might be use in preparing
the financial reports. The period may be in monthly, a half-yearly, a full year, or any other
length if time depending on the volume and nature of the business.Therefore, Zaki is
applying one whole year for his accounting period in order to calculate the profit that
manage to acquired.
Depreciation method
In the Statement of Comprehensive Income, cost of fixed asset must be charged and
listed down under expenses in order to determine the pattern of economic use of the asset.
Currently, Zaki is using straight line method of depreciation policy which charged 10%
per annum on cost, yearly basis on both types of his non-current assets; Motor Vehicle and
Office Equipment. Out of other methods of depreciation, straight line method is the simplest and
most commonly being used by calculating the depreciation based on acquisition price of an
asset throughout its useful life. Basically, this type of method will charge the same amount of
depreciation value every year until the value shown for the asset has reduced from the original
cost to the salvage value.
However, Zaki is advised to use another method which may give more advantages to him.
Thus, the method suggested is reducing balance method or also known as declining balance
method. Basically, reducing balance method charges its asset’s depreciation at a higher rate in
the earlier years of an asset.
7. Page 7
Why reducing balance method is being chosen rather than any other methods?
I. It is easy to understand and simple to implement.
II. Reducing balance method equalizes the yearly burden on profit and loss account in
respect of both depreciation and repairs. The amount of depreciation goes on
decreasing while the expenses on repairs goes on increasing, so that the total charge
against revenue over different years remains more or less the same.
III. It is acceptable for income tax purposes.
IV. Reducing balance method matches the cost and revenue of the business.
The differences between straight-line method and reducing balance method:
Straight Line Method Reducing Balance Method
The method calculates the depreciation
for an asset in a specific period time.
The method calculates the depreciation for
provisional rate of an asset.
Depreciation is charged on fixed asset
with fixed rate.
Depreciation is charged on the amount of
fixed asset after deducting previous year
depreciation.
The amount of the depreciation will
equal in the first year or end of the
year.
Depreciation expense under reducing
balance method progressively declines
over the asset's useful life.
It has a salvage value as well as the
asset’s useful life.
It has no salvage value and useful life.
10. Page
10
ZAKI
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
RM RM RM
Sales 150,000
Less return inward 4,000
Net Sales 146,000
Less: Cost of Goods Sold
Purchases 80,000
Less return outward 60,000
Cost of Available Goods for Sale 74,000
Less Closing inventory 20,000
Cost of goods sales 54,000
GROSS PROFIT 92,000
Add: Revenue
Discount received 3,000
Total Income 95,000
Less: Operating Expenses
Salary 38,500
Utilities 280
Rental 12,000
Repair of Motor Vehicles 1,000
Depreciation : Office Equipment 1,400
: Motor Vehicles 3,600
Interest on Loan 1,667 58,447
NET PROFIT 36,553
11. Page
11
ZAKI
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
COST ACC. DEP NBV
RM RM RM
NON-CURRENT
ASSET
Motor Vehicle 36,000 3,600 32,400
Office Equipment 14,000 1,400 12,600
45,000
CURRENT
ASSET
Closing inventory 20,000
Accounts Receivable 6,000
Cash 120,000
Prepaid Rent 3,000 149,000
194,000
FINANCED BY:
OWNER;S
EQUITY
Opening Capital 60,000
Add: Net Profit 36,553
96,553
Less: Drawings 2,800
Closing Inventory 93,753
NON-CURRENT
LIABILITY
Loan 50,000
CURRENT
LIABILITY
Accounts Payable 1,000
Accrued Salary 2,500
Accrued Utilities 80
Accrued Interest on
Loan 1,667
Bank Overdraft 45,000 50,247
194,000