HAC 1001 NOTES

Basic Hotel AccountingTOPIC 1: THE PRINCIPLES OF ACCOUNTING

THE ACCOUNTING EQUATION AND THE BALANCE SHEET

1. Accounting equation Firms that set up and start trading need resources. In the first place the owner of the business will supply all of the resources. Thus the equation is;

CAPITAL is the amount of the resources supplied by the owner. ASSET is the actual resources that are in the business. Thus the equation is;

Usually, however someone other than the owner has supplied some of the asset. LIABILITIES are the name given to the amount owing to this person for these assets. Thus the equation is;

It can be seen that the two sides of the equation will have the same totals. This is because we are dealing with the same thing from two different points of view. Thus the equation is;

It is a fact that the totals of each side will always equal one another and that this will always be true no matter how many transactions there may be.

Asset consist of property of all kinds such as buildings, machinery, stock of goods and motors vehicles, debts owes by customer and amount of money in the bank.

Liabilities consist of money owing for goods supplied to the firm and for expenses. Capital is often called the owner equity or net worth.

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

a. The introduction of capitalOn 1 May 2007, B Blake started in business and put RM 5,000 into a bank account for the business, the balance sheet would appear:

B.Blake balance sheet as at 1 May 2007

b. The purchase of an asset by Cheque

Resources in the business = Resources supplied by the owner

ASSET = CAPITAL

ASSET = CAPITAL + LIABILITIES

Resources: What they are = Resources: Who supplied them( Assets) (Capital +Liabilities)

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

1

Basic Hotel AccountingOn 3 May 2007 Blake buys furniture for RM3, 000.The effect of this transaction is that the cash at the bank is reduced and a new asset, called fixtures appears.

B.Blake balance sheet as at 3 May 2007AssetFurniture 3,000 Capital 5,000Cash at bank 2,000

5,000 5,000

c. The purchased of an asset and the incurring of a liability.On 6 may 2007, Blake buys some goods for RM500 from D Smith and agrees to pay for them some times within the next

two weeks. There is now a new asset, stock of goods and there is also a new liability because Blake owes money to D Smith for the goods. A person to whom money is owed for goods is known as creditors.

B.Blake balance sheet as at 6 May 2007Asset Capital and liabilitiesFurniture 3,000 Capital 5,000Cash at bank 2,000 Creditor 500Stock of goods 500

5,500 5,500

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

B.Blake balance sheet as at 10 May 2007Asset Capital and liabilitiesFurniture 3,000 Capital 5,000Cash at bank 2,000 Creditor 500Stock of goods 400Debtor 100

5,500 5,500

e. Sale of an asset for immediate paymentOn 13 May 2007 goods that have cost RM 50 were sold to D.Daley for the same amount, Daley paying for them immediately by cheque. Here one asset, stock of goods, is reduced, while another asset, cash at bank, is increased. The balance sheet now appears thus:


5,500 5,500

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


5,300 5,300

e. Collection of an asset

2

Basic Hotel AccountingOn 31 May 2007, J.Brown, who owes Blakes RM 100, makes a part payment of RM 75 by cheque. The effect is to reduce one asset, debtors, and to increase another asset, cash at bank. This results in a balance sheet as followed;


5,300 5,300

3. Equality of the accounting equation It can be seen that every transaction has affected two items. Sometimes it has changed two assets by reducing one and

increasing the other.

Example of transaction Effect1. Buy goods on credit Increase asset (Stock of good) Increase liability ( Creditor)2. Buy good by cheque Increase asset (Stock of good) Decrease asset (Bank)3. Pay creditor by cheque Decrease asset (Bank) Decrease liability (Creditors)4. Owner pay more capital into the bank

Increase asset ( Bank) Increased capital

5.Owner take money out of the business bank account for his own use

Decrease asset (Bank) Decreased Capital

6. Owner pay creditor from private money outside the firm

Decreased liability (Creditor) Increase capital

4. Alternative form of balance sheet presentation

Horizontal formatB.Blake balance sheet as at _________

Asset Capital and liabilitiesFurniture XXX Capital XXXCash at bank XXX Creditor XXXStock of goods XXXDebtor XXX

XXXX XXXX

Vertical formatB.Blake balance sheet as at _________

RM RM RMFixed assetFixtures 3,000

Current assetsStock 350Debtors 25Cash at bank 1,925 2,300

Less: Current liabilitiesCreditor 300 300

Net current assets 2,0005,000

Financed by:Capital 5,000

Exercises

3

Basic Hotel Accounting

1.1. Examine the following table and complete the gaps:Assets Liabilities Capital

RM RM RM(a) 34,282 7,909 ?(b) 276,303 ? 213,817(c) ? 6,181 70,919(d) ? 109,625 877,138(e) 88,489 ? 78,224(f) 456,066 51,163 ?

1.2. Examine the following table and complete the gaps:Assets Liabilities Capital

RM RM RM(a) ? 59,997 604,337(b) 346,512 ? 293,555(c) 47,707 ? 42,438(d) 108,129 11,151 ?(e) 515,164 77,352 ?(f) ? 19,928 179,352

1.3. Determine which are asset and which are liabilities from the following list:

(a) Computer equipment(b) Stock of goods(c) Loan from H.Barlow.(d) Motor vehicles(e) What we owes for advertising materials(f) Bank balance

1.4. Which of the following are assets and which are liabilities?

(a) Premises(b) Debtors(c) Cash in hand(d) Creditor(e) Loan from finance company(f) Owing to bank(g) Machinery(h) Motor Vehicles

1.5. State which of the following are shown under the wrong heading for Murphy’s business:

Assets LiabilitiesCash in hand Money owing to bankCreditors DebtorsPremises Stock of goodsMotors VehiclesLoan from C.Shaw

1.6. Which of the following are shown under the wrong heading?

Assets LiabilitiesCash in hand MachineryComputer equipment Motor vehiclesCreditors Loan from W.BarlowCapitalStock of goods

4

Basic Hotel Accounting1.7. Ann Wood decides to open a retail shop selling greeting card and gifts. Her uncle lends her RM 30,000 to help her with

financial the venture. Ann buys shop premises costing RM 50,000, a motor vehicles for RM 10,000 and stock of goods for RM 5,000. Ann did not pay for her stock of goods in full and stills owes RM 2, 100 to her supplier in respect of them. After the event described above and before she starts trading, Ann has RM 100 cash in hand and RM 7,000 cash at the bank.

You are required to calculate the amount of capital that Ann invested in her business.

1.8. T. Charles starts a business. Before he actually starts to sell anything, he buys fixtures costing RM2, 000, a motor vehicles for RM 5,000 and stock of goods for RM3, 500. Although he has paid in full for the fixtures and the motor vehicles, he still owes RM1, 400 for some of the goods. J. Preston has lent him RM3, 000. Charles, after the above, has RM2, 800 in the business bank account and RM100 cash in hand.

You are required to calculate his capital.

1.9. Draw up T Lymer’s balance sheet, using the vertical presentation method from the following information as at 31 December 2007:

RMCapital 34,823Delivery van 12,000Debtors 10,892Office furniture 8,640Stock of goods 4,220Cash at bank 11,722Creditors 12,651

1.10.Draw up A .Pennington’s balance sheet as at 31 march 2008 from the following information:

RMPremises 50,000Plant and machinery 26,500Debtors 28,790Creditor 32,320Bank overdraft 3,625Stock 21,000Cash in hand 35Capital 90,380

THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL

1. Nature of transaction Various events changed two items in the balance sheet. Event which result in such changes are known as transactions. This mean that if the proprietor of a business asks the price of some goods but does not buy them, then there is no transaction

since no balance sheet item will have changed.

2. The double entry system Every transaction effect two items. For each transaction, a book-keeping entry will have to be made to show an increase of that item, and another entry to show

the increase or decrease of the other item. Transactions that have occurred are entered in a set of accounts. An account is a place in our books where all the information

referring to a particular asset, liability or the capital, is entered.

3. Account for double entry. Each account should be shown on a separate page. The left-hand side of each page is called the debit side while the right-

hand side is called the credit side.

5


Title of account written hereDate Details RM Date Details RM

Left-hand side of the page Right hand side of the page This is the debit sides This is the credit side

4. Rules for double entry Double entry mean that every transaction affects two things and should therefore, be entered twice: Debit side and once on

the credit side. The order in which items are entered does not matter, first using the “IN” and “OUT” principle. A debit entry is always an asset and expenses. A credit entry is a liability, capital or income. To increase or decrease assets, liabilities or capital the double entry rules are as follow:

Account To record Entry in the account

AssetAn increaseA decrease

DebitCredit

LiabilitiesAn increaseA decrease

CreditDebit

CapitalAn increaseA decrease

CreditDebit

5. T account. The types of account that are going to be demonstrated are known as T account. This is because the accounts are in the shape of

a T.Accounts title is here

Debit side Credit side

Exercises2.1. Complete the following table showing which accounts are to be credited and which to be debited.

Account tobe debited

Account tobe credited

(a) Bought motor van for cash(b) Bought office machinery on credit from J. Grant & Son(C) Introduced capital in cash (d) A debtor, J. Beach, Pays us by cheque( e) Paid a creditor, A. Barrett, in cash

2.2. Complete the following table showing which accounts are to be credited and which to be debited.Account tobe debited


(a) Bought motor lorry for cash(b) Paid creditor, T.Lake, by cheque(C) Repaid P.Lagan’s loan by cash (d) Sold lorry for cash( e) Bought office machinery on credit from Ultra LTD(f) A debtor, A Hill, Pays us by Cash(g) A debtor, J. Cross, pays us by cheque(h) Proprietor puts a further amount into the business by cheque(i) A loan of RM200 in cash is received from L.Lowe(j) Paid a creditor, D.Lord, by cash

6


2.3. Write up the asset and liability and capital accounts to record the following transactions in the records of G.Powell.

2.4. You are required to open the asset, liabilities and capital accounts and record the following transaction for June 2008 in the records of C.Williams.

2.5. Write up the asset, capital and liability accounts in the books of C.Walsh to record the following transactions.

THE DOUBLE ENTRY SYSTEM FOR THE ASSET OF STOCK

1. Stock movement A business, on any particular date, will normally have goods which have been bought previously and have not yet been sold. These unsold goods are known as the business “stock” of goods. The stock of goods in a business is therefore constantly

changing because some of it is bought, some of it is sold, and some is returned to the supplier and some of it returned by the firm’s customers.

To keep a check on the movement of stock, an account is opened for each type of dealing in goods. Thus we will have the following account.

Account ReasonPurchases account For the purchased of goodsSales account For the sales of goodsReturns Inwards account For goods returned to the firm by it customersReturns Outwards Account For goods returned by the firm to it customers

As stock is an asset, and these four accounts are all connected with these assets, the double entry rules are those used for asset.

2008July 1 Started business with RM 2,500 in the bank.July 2 Bought office furniture by cheque, RM 150.July 3 Bought machinery RM 750 on credit from Planers Ltd.July 5 Bought a second-hand van paying by cheque , RM 600.July 8 Sold some of the office furniture- not suitable for the firm-for RM 60 on credit to J.Walker & Son.July 15 Paid the amount owing to Planers Ltd, RM 750, by cheque.July 23 Received the amount due from J.Walker, RM 60, in cash.July 31 Bought more machinery by cheque, RM 280.

2008June 1 Started business with RM 2,000 in cashJune 2 Paid RM 1,800 of the opening cash into a bank account for the businessJune 5 Bought office furniture on credit from Betta-Built Ltd for RM120June 8 Bought a motor van paying by cheque RM950June 12 Bought works machinery from Evan & Son on credit RM560June 18 Returned faulty office furniture costing RM 62 to Betta-Built Ltd June 25 Sold some of the works machinery for RM75 cashJune 26 Paid amount owing to Betta-Built Ltd, RM58 by chequeJune 28 Took RM100 out of the bank and put it in the cash tillJune 30 J.Smith lent us RM500-giving us the money by cheque

2007June 1 Started a business with RM5,000 in the bankJune 2 Bought a motor van , paying by cheque RM1,200June 5 Bought office fixtures RM 400 on credit from Young LtdJune 8 Bought motor van on credit from Super Motors RM800June 12 Took RM100 out of the bank and put it into the cash tillJune 15 Bought office fixtures paying by cash RM 60June 19 Paid super Motors a cheque for RM800June 21 A loan of RM1,000 cash in received from J.JarvisJune 25 Paid RM800of the cash in hand into the bank accountJune 30 Bought more office fixtures, paying by cheque RM300

7

Basic Hotel AccountingExample of entry;

a. Purchase of stock on credit. On 1 August 2004, goods costing RM165 are bought on credit from D.Henry.Thus effect of the transaction:(i) The asset of stock is increased. An increased in an asset needs a debit entry in an account. In this case it is the purchases

movement, so that the account must be the purchase account.(ii) There is an increase in a liability. This is the liability of the firm to D.Henry because the goods supplied have not yet been

paid for. An increase in a liability needs a credit entry, and so in order to enter this part of the transaction credit entry is made in D.Henry’s account.

Dr Purchase Account Cr2004 Rm 2004 RmAug 1 D Henry 165

Dr D.Henry Account Cr2004 Rm 2004 Rm

Aug 1 Purchases 165

b. Purchases of stock for cashOn 2 August 204, goods costing RM220 were bought, cash being paid for them immediately.

(i) The asset of stock is increase. Thus debit entry wills be needed. The movement of stock is that of a purchase, so that it is the purchase account which needs debiting.

(ii) The asset of cash is decreased. To reduce an asset a credit entry is called for, and the asset is that of cash so that the Cash Account needs crediting.

Purchase AccountDr Cr2004 Rm 2004 RmAug 2 Cash 220

Cash AccountDr Cr2004 Rm 2004 Rm

Aug 2 Purchases 220

c. Sales of stock on creditOn 2 August 2004, a business sold goods on credit for RM250 to K.Leach.

(i) An asset account is increased. This is the account showing that K.Leach is a debtor for the goods. The increase in the asset of debtors requires a debit and the debtor is K.Leach, so that the account concerned is that of K.Leach.

(ii) The asset of stock is decrease. A credit entry to reduce an asset is needed. The movement of stock is that of ‘sale” and so the account credited is the sales account.

Dr K.Leach Account Cr2004 Rm 2004 RmAug 3 Sales 250

Dr Sales Account Cr2004 Rm 2004 Rm

Aug 3 K.Leach 250d. Sales of stock on cashOn 4 August 2004, goods are sold for RM55, the cash for them being paid immediately.

(i) The asset of cash is increase. A debit in the cash account is needed to show this.

8

Basic Hotel Accounting(ii) The asset of stock is reduced. The reduction of an asset required a credit and he movement of stock is represented by ‘Sales.

So the entry needed is a credit in the Sales Account.

Dr Cash Account Cr2004 Rm 2004 RmAug 4 Sales 55

Dr Sales Account Cr2004 Rm 2004 Rm

Aug 3 Cash 55

2. Returns inwards Represent goods sold which have subsequently been returned by a customer. Reason ;

i. The good sent to the customer are of the incorrect size, colour or model.ii. The goods have been damaged in transit.iii. The goods are of poor quality.

Example illustration:On 5 August 2004, goods which had previously been sold to F.Lowe for RM29 have been returned by him.(i) The asset of stock was increased by the goods returned. A debit representing an increase of an asset is needed, and this time

the movement of stock is that of ‘Returns inwards’. The entry required therefore is a debit in the return inwards account.(ii) An asset is decreased. The debt of F.Lowe to the firm is now reducing, and to record this credit is required in F.Lowe’s

account.

Dr Return inwards Account Cr2004 Rm 2004 RmAug 5 F.Lowe 29

Dr F.Lowe Account Cr2004 Rm 2004 Rm

Aug 5 Return inwards 29

3. Returns outwards Represent goods which were purchased, and are now being returned to the supplier. Example illustration;

On 6 August 2004, goods previously bought for RM96 are returned by the firm to K.Howe.(i) The liability of the firm to K.Howe is decrease by the value of the goods return to him. The decreased in a liability needs a

debit, this time in the K.Howe Account.(ii) The asset of stock is decreased by the goods sent out. A credit representing a reduction in an asset is needed, and the

movement of stock is that of ‘Returns Outwards’, so that the entry will be a credit in the returns outwards account.

Dr K.Howe Account Cr2004 Rm 2004 RmAug 6 Returns outwards 96

Dr Return Outwards Account Cr2004 Rm 2004 Rm

Aug 6 K.Howe 96

Exercises3.1. You are to write up the following in the books of account:

9


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

THE DOUBLE ENTRY SYSTEM FOR EXPENSES AND REVENUES

1. The nature of profit and loss Profit means the amount by which revenues are greater than expenses for a set of transactions. Revenues mean the sales value of goods and services that have been supplied to customers. Expenses mean the values of all the assets that have been used up to obtain those revenues. It could also be possible that our expenses may exceed our revenues for a set of transaction. In this case the result is a loss.

2. The effect of profit and loss on capital Profit will increased capital, in the other hand loss will decrease capital. Formula

Assets – Liabilities = Capital

Example;On 1 January the asset and liabilities of a firm are:

Asset: Fixtures Rm10, 000, stock Rm7, 000, Cash at the bank Rm3, 000.Liabilities: Creditors Rm2, 000.

Capital = [10,000 + 7,000 + 3,000] – 2,000 = 18,000

During January the whole of the Rm7, 000 is sold for Rm11, 000 cash. On 31 January the assets and liabilities have becomes:

Asset: Fixtures Rm10, 000, stock Nil, Cash at the bank Rm14, 000.Liabilities: Creditors Rm2, 000.Old Capital + Profit = New capital 18,000 + 4,000 = 22,000

It can be seen that capital has increased from Rm18, 000 to Rm22, 000 = Rm4, 000 increase because the Rm7, 000 stocks was sold for Rm11, 000, a profit of Rm4, 000.

2004July 1 Started a business with Rm500 cashJuly 3 Bought good for cash Rm85July 7 Bought goods on credit for Rm116 from E. MorganJuly 10 Sold good for cash Rm42July 14 Returned goods to E.Morgan Rm28July 18 Bought goods on credit Rm98 from A.MosesJuly 21 Return good to A.Moses Rm19July 24 Sold to A.knight Rm55 on creditJuly 25 Paid E.Morgan’s account by cash Rm88July 31 A.knight paid us his account in cash Rm55

2006Aug 1 Started a business with Rm1,000 cashAug 2 Paid Rm900 of the opening cash into the bankAug 4 Bought goods on credit for Rm78 from S.HolmesAug 5 Bought a motor van by cheque Rm500Aug 7 Bought goods for cash Rm55Aug 10 Sold goods on credit Rm98 to D. MoreAug 12 Return goods to S. Holmes , Rm18Aug 19 Sold goods for cash, Rm28Aug 22 Bought fixtures on credit from Kingston equipment Co. Rm150Aug 24 D.Watson lent us Rm100, paying us the money by chequeAug 29 We paid S.Holmes his account by cheque, Rm60Aug 31 We paid Kingston Equipment Co. by cheque, Rm150

10

Basic Hotel Accounting Profit will be made when goods are sold at more than cost price, while the opposite will mean a loss.

3. Profit or loss and………...

Expenses Other than the cost of goods, a firm also incurs other expenses such as rent, salaries, wages, telephone cost, and motor expenses and

so on. Separate accounts are opened for each type of expenses. Expenses involve expenditure by the firm and therefore should be debit entries. Effect of transaction;

a. A rent of Rm20 is paid in cash. The total of the expenses of rent is increase. As expense entries are shown as debits, and the expenses is rent, so the

action required is the debiting of the Rent Account The asset of cash is decreased. This means crediting the Cash Account to show the decreased of the asset.

Sometimes the owner of the business will want to take cash out of the business for his or her private use and this known as drawings.

Any money taken out as drawing will reduce capital.

b. On 25 August 2006 a proprietor takes Rm50 cash out of her business for her own use.

Dr Cash Account Cr2006 Rm 2006 Rm

Aug 25 Drawing 50

Dr Drawing account Cr2006 Rm 2006 RmAug 25 Cash 50

Revenues Separate accounts also opened for each type of revenues. Example of revenues are rent received, commission received, bank interest and so on. Effect of transaction;

a. On 5 June 2006 it is decided that part of the firm’s premises are not need at the moment. The firm lets someone else use the space over and receives rent of Rm140 by cheque.

The asset of the bank is increased. This means debiting the bank account to show the increase of the asset. The total of the revenue of rent received is increased. The action required is the crediting of the rent received

account.

Exercises4.1. Complete the following table:

Account tobe debited


(a) Paid rent by cash

11


(b) Paid for goods by cash(C) Received by cheque a refund of rates already paid (d) Paid general expenses by cheque( e) Received commission in cash(f) Goods returns by us to T.Jones(g) Goods sold for cash(h) Bought office fixtures by cash(i) Paid wages by cash(j) Took cash out of business for private use.

4.2. You are required to enter the following transactions in the double entry accounts of B.Cartwright.

4.3. You are required to enter the following transactions, completing the double entry in the records of K.Walsh for the month of July 2006.

TOPIC 2: BALANCING OF ACCOUNT

1. Account for debtors.a. Where debtor have paid their account.

We have record the transactions in the books by mean of debit and credit entries. T the end of each period, we will have to look at each account to see what is shown by the entries.

This is because we want to know how many our customers us for goods we have sold to them.

Example;

Dr K Tandy Account Cr2005 Rm 2005 RmAug 1 Sales 144 Aug 22 Bank 144Aug 19 Sales 300 Aug 28 Bank 300

During the month of August we sold a total of Rm444 in goods to Tandy and have been paid a total of Rm444 by him.

2005Jan 1 Started business with Rm20, 000 capitals, which were deposited in the bank.Jan 3 Paid rent for premises by cheque, Rm1,000Jan 4 Bought goods on credit from M.Parkin for Rm580Jan 4 Purchased motor van for Rm5,000, paying by chequeJan 5 Cash sales of Rm1, 005.Jan 10 Paid motor expenses in cash, Rm75.Jan 12 Paid wages in cash, Rm120.Jan 17 Bought goods on credit from M.Parkin, Rm670 Jan 19 Paid insurance by cheque, Rm220Jan 25 Sold goods for Rm800, payment being received as a cheque, which was banked immediatelyJan 31 Paid wages in cash, Rm135, and electricity by cheque, Rm78

2006July 1 Started in business with Rm8,000 in the bankJuly 2 Paid rent for premises by cheque, Rm375July 3 Bought shop fitting for Rm800 paid by chequeJuly 5 Bought goods on credit from A Jackson, Rm450; D.Hill Rm675; and E.Frudd, Rm1,490July 6 Paid insurance by cheque Rm130July 7 Bought motor van for Rm5,000 on credit from High Lane MotorsJuly 11 Cash sales of Rm1,500July 13 Paid for printing and stationery by cheque, Rm120July 15 Paid wages in cash Rm200July 18 Bought goods from A.Jackson, Rm890, on creditJuly 21 Cash sales Rm780July 25 Paid motors expenses Rm89 by cash July 30 Paid High Lane Motors, Rm5,000July 31 Paid wages in cash Rm300, and stationery, Rm45 in cash.

12

Basic Hotel Accounting At the close of business at the end of August he therefore owes us nothing: his account can be closed off on 31 August

2005 by inserting the total of each side, as follow;

Dr K Tandy Account Cr2005 Rm 2005 RmAug 1 Sales 144 Aug 22 Bank 144Aug 19 Sales 300 Aug 28 Bank 300

444 444

b. Where debtors still owes for goods. Some of our customers are likely still to owe us something at the end of a month. In this cases, the totals each side would

not equal each other.

Example;

Dr D Knight Account Cr2005 Rm 2005 RmAug 1 Sales 158 Aug 28 Bank 158Aug 15 Sales 206 Aug 30 Sales 118

If you add the figures, you will see that the debit side up to Rm482 and the credit side add up to Rm158. Thus the different is Rm324.

We want to close off the account for August, but showing that Knight owes us Rm324. If he owes Rm324 at closed off business on 31 August 2005, then he will still owe us that same figures when the business open on 1 September 2005.

Thus we should balance the account.

D Knight AccountDr Cr2005 Rm 2005 RmAug 1 Sales 158 Aug 28 Bank 158Aug 15 Sales 206 Aug 31 Balance carries down (c/d) 324Aug 30 Sales 118

482 482Sep 1 Balance brought down (b/d) 324

2. Account for creditors. The same principles apply when the balances are carried down to the credit side.Example;

E William AccountDr Cr2005 Rm 2005 RmAug 21 Bank 100 Aug 2 Purchases 248Aug 31 Balance c/d 264 Aug 18 Purchases 116

364 364Sep 1 Balance b/d 264

Exercises5.1 Enter the following items in the necessary debtors and creditors accounts only; do not write up other accounts. Then balance down

each personal account at the end of the month.

13


5.2 Enter the following in the personal accounts only; do not write up the other accounts. Then balance down each personal account at the end of the month.

THE TRIAL BALANCE

1. Total debit balance =Total credit balance All the items recoded in all the account on the debit side should equal in total all the items recorded on the credit side of the books. To see whether the two total equal , usually known as seeing whether the two side of the book is ‘balance’, a trial balance may be

drawn up at the end of a period. Form of trial balance could be drawn up by listing all the accounts and adding together all the debit entries, at the same time adding

together all the credit entries.

Trial balance as on 31 may 2004Dr Cr

Rm RmPurchases 309Sales 255Return inward 16Return outward 15A Lyon & Son 141M Spencer 29Cash 57

411 4112. The uses of the trial balance.

To check that the books ‘balance’, that every debit entry has been accompanied by a credit entry. To ascertain the amount of the errors, should one or more have been made, and make necessary corrections. As a basis from which the final account of a business are prepared, i.e. the trading account, the profit and loss account and the

balance sheet.

3. Trial balance and errors

With some errors, the trial balance will still balance. For example, a credit sale of Rm87nwhich has been incorrectly entered in both the sales account and the debtor’s account as Rm78. Since both the debit entry and the credit entry are of the same amount, then this will not effect the agreement of the total in the trial balance.

Some errors, however, mean that the totals in the trial balance will not agree. An instance could be where a payment of rent of Rm200 by cheque has been entered on the credit side of the bank account, but has been completely omitted from the rent account. Here a credit entry was not accompanied by a debit entry for this transaction and thus the trial balance will not agree.

Exercises6.1 You are required to enter the following details for the month of May 2004, balance the account off and extract a trial balance as at

31 May 2004.

2008May 1 Sales on credit to H Harvey Rm690, N Morgan Rm153, J Lindo Rm420May 4 Sales on credit to L.Master Rm418, H Harvey Rm66May 10 Return inward from H Harvey m40, J Lindo Rm20May 18 N Morgan paid us by cheque Rm153May 20 J Lindo paid us Rm400 by chequeMay 24 H Harvey paid us Rm300 by cashMay 31 Sales on credit to L Masters Rm203

2008June 1 Purchase on credit from J Young Rm458, L Williams Rm120, G Norman Rm708June 3 Purchase on credit from L Williams Rm77, T Harris Rm880June 10 We return goods to G Norman Rm22, J Young Rm55June 15 Purchases on credit from J Young Rm80June 19 We paid T Harris by cheque Rm880June 28 We paid J Young by cash Rm250June 30 We return goods to L William Rm17

14


6.2

Correct and balance the following trial balance.

Trial balance of P.Brown as at 31 May 2006Dr Cr

Rm RmCapital 20,000Drawings 7,000General expenses 500Sales 38,500Purchases 29,000Debtors 6,800Creditors 9,000Bank balance (Dr) 15,100Cash 200Plant and equipment 5,000Heating and lighting 1,500Rent 2,400

6.3 Reconstruct the trial balance after making the necessary corrections.

Trial balance of S Hingston as at 30 June 2005Dr Cr

Rm RmCapital 19,956Sales 119,439Stationery 1,200General expenses 2,745Motor expenses 4,476Cash at bank 1,950Stock 1 July 2004 7,668Wages and salaries 9,492Rent and rates 10,500Office equipment 6,000Purchases 81,753Heating and lighting 2,208Rent received 2,139Debtors 10,353Drawings 4,200Creditors 10,230Motor vehicles 7,500

2004May 1 Started in business with capital of Rm2,500, which was paid into the bankMay 2 Bought goods on credit from the following: D Ellis Rm540; C Mendez Rm87; K Gibson Rm76May 4 Sold goods on credit to ; C Bailey Rm430; B Hughes Rm62; H Spencer Rm176May 6 Paid rent by cash Rm120May 8 Sold goods for cash Rm500May 9 C Bailey paid us Rm250 by cheque on accountMay10 H Spencer paid us Rm150 on account by chequeMay 12 We paid the following by cheque ; K Gibson Rm76, D Ellis Rm370 on accountMay 15 Bought stationery for cash Rm60May 18 Bought goods on credit from; D Ellis Rm145; C Mendez Rm234May 19 Paid rent by cash Rm120May 25 Sold goods on credit to : C Bailey Rm90; B Hughes Rm110 ; H Spencer Rm128May 31 Paid C Mendez Rm87 by cheque

15

Basic Hotel AccountingInterest received 1,725Insurance 3,444

153,489 153,489

6.4 From the following list of balances, prepare a trial balance as at 31 December 2004 for Miss Anita Hall.

DrRm

Plant and Machinery 21,450Motor Vehicles 26,000Premises 80,000Wages 42,840Purchases 119,856Sales 179,744Rent received 3,360Telephone, printing and stationery 3,600Creditors 27,200Debtors 30,440Bank overdraft 2,216Capital 131,250Drawings 10,680General expenses 3,584Lighting and heating 2,960Motor expenses 2,360

AN INTRODUCTION TO THE TRADING AND PROFIT AND LOSS ACCOUNT

1. Purposes of the trading and profit and loss account. The main reason why people set up a business is to make profits of course; if they are not successful they will incur losses. To

calculate how much profit or loss has been made over a period of time, a trading and profit and loss account is prepared. The main purpose of a trading and profit and loss account is for the owners to see how profitably the business is being run.

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

3. Preparation of a trading and profit and loss account. Before drawing up a trading and profit and loss account, the trial balance should be first obtain because it contain all the

information needed. Example of trading profit and loss account.

Trading Account

Profit and Loss

B.Swift trading and profit and loss account for the year ended 31 December 2005Rm Rm

Sales XXXXLess; Cost of good soldOpening stock XXXPurchases XXX

XXXXClosing stock XXX

XXXXGross profit XXXXLees: ExpensesRent XXXLighting XXXGeneral expenses XXXNet profit XXXX

16

Basic Hotel AccountingAccount

a. To calculate gross profit

Sales – Cost of goods Sold = Gross profit

b. To calculate net profit

Gross profit – Expenses = Net profit

Exercises 7.1 From the following trial balance of W.Worth, who has been trading for one year, you are required to draw up a trading and profit

and loss account for the year ended 30 June 2004.

Trial balance as at 30 June 2004Dr Cr

Rm RmSales 28,794Purchases 23,803Rent and rates 854Lighting expenses 422Salaries and wages 3,164Insurance 105Shop building 50,000Shop fixtures 1,000Debtors 3,166Trade expenses 506Creditors 1,206Cash at bank 3,847Drawings 2,400Motors Vans 5,500Motors running expenses 1,133Capitals 65,900

95,900 95,900

Stock at 30 June 2004 was Rm4, 166

7.2 From the following trial balance of F Chaplin, draw up a trading and profit and loss account for the year ended 31 December 2008. She has been in business for one year only.

Trial balance as at 31 December 2008Dr Cr

Rm RmGeneral expenses 210Rent and rates 400Motor expenses 735Salaries 3,560Insurance 392Purchases 18,385Sales 26,815Motor vehicles 2,800Creditors 5,160Debtors 4,090Premises 20,000Cash at bank 1,375Cash in hand 25

17

Basic Hotel AccountingCapital 24,347Drawings 4,350

56,322 56,322

Stock at 31 December 2008 was Rm4, 960.

THE BALANCE SHEET

1. Contents of the balance sheet Balance sheet contents details of assets, capital and liabilities.

2. Drawing up a balance sheet.

B. Swift Balance sheet as at 31 December 2005

These two sides must be balance/equal

3. No double entry in balance sheets A balance sheet is not part of the double entry.

4. Balance sheet layout

a. Assets The first section is assets; assets are shown under two heading, namely fixed asset and current assets. Asset are called fixed assets when they:

- are of long life- are to be used in the business- Were not bought only for the purposes of resale.

Example; building, machinery, motors vehicles, fixtures and fittings, etc. Current assets are cash in hand, cash at bank, items held for resale at a profit, or items that have a short life.

b. Liabilities Liabilities are categories under two heading;

i. Current liabilities.- Liabilities due for repayment in the short term. Examples of current liabilities are; bank overdraft, trade creditors,

and sundry creditors.- Current liabilities are deducted from current asset.

Rm RmFixed assetFixtures and fitting XXXXXCurrent assetStock XXXDebtors XXXCash at bank XXXCash in hand XXX XXXXX

Less: Current liabilitiesCreditors XXXX Net current asset XXXXXLong term liabilitiesLong term loan XXXNet asset XXXXX

Finance by:Capital XXXXX

Net profit XXXXX XXXXXDrawing XXXXX

XXXXX

18


ii.Long term liabilities.- Liabilities not due for repayment in the short term. Examples of long term liabilities loan and mortgages.- Long term liabilities deducted after the net current assets.

c. Capital account. This is the proprietor’s or partner account with the business.

Capital accountRm Rm

Balance b/d XAdd: Cash introduced X Net profit fir the period X

Less: Drawing X Net loss for the period X X

X

Exercises8.1 Complete exercise 7.1 by drawing up a balance sheet as at 30 June 2004 for C Worth.

8.2 Complete exercise 7.2 by drawing up a balance sheet as at 31 December 2008 for F Chaplin.

FURTHER CONSIDERATION REGARDING FINAL ACCOUNT

1. Carriage inwards Carriage (the cost of transport of goods) into a firm is called carriage inwards. When you buy goods, the cost of carriage inward may either be included as part of the price, or else the firm may have to pay

separately for it. To keep the cost of buying goods shown on the same basis, carriage inwards is always added to the purchases costing the

trading account.

2. Carriage outwards Carriage from a firm out of its customer is called carriage outwards. This is always treated as an expense to be transferred to the debit of the profit and loss account.

3. Final account The term final account is used to describe the final figures of a period of account, and comprise the trading and profit and loss

account, the balance sheets.

4. Other expenses in the trading account. The cost of putting goods into a saleable condition should be charged in the trading account.

5. Treatment of return inwards and return outwards in final account.

19

Basic Hotel Accounting When a business buys and sells goods, it is very probable that some of the goods will turn out to be either faulty or unsuitable. A large number of firms will return such goods to their suppliers (returns outwards), and will have goods returned to them by

their customers (return inwards). Return inwards should be deducted from ‘sales’ Return outwards should be deducted from ‘purchases’

6. Loses For all kinds of reasons, such as poor trading conditions, bad management, or unexpected increases in expenses, the business

may trade at a loss for a given period.

Exercises 9.1 From the following details draw up the trading account for the year ended 31 December 2007.

RmCarriage inwards 670Sales 38,742Purchases 26,409Stock of goods: 1 January 2007 6,924 31 December 2007 7,489

9.2 The following details for the years ended 31 March 2008 are available. Draw up a trading account for the year.

RmStocks: 31 March 2007 16,492 31 March 2008 18,504Purchases 36,905Carriage inwards 1,122Sales 54,600

9.3 Draw up the trading and profit and loss account for the year ended 31 December 2006, in respect of T. Mann, from the following details.

RmReturns inwards 490Returns outwards 560Purchases 31,000Sales 52,790Stock of goods: 1 January 2006 5,690 31 December 2006 4,230Carriage inwards 1,700Salaries and wages 5,010Rent 1,460Motor expenses 3,120General expenses 420Carriage outwards 790

9.4 A trading and profit and loss account for the year ended 31 December 2008 is to be drawn up for K Lake from the following:

RmReturns inwards 1,500Returns outwards 1,580Purchases 64,570

20

Basic Hotel AccountingSales 99,500Stock of goods: 1 January 2008 18,280 31 December 2008 17,360Carriage inwards 210Salaries and wages 6,250Rent 1,750Sundry expenses 360Carriage outwards 490

9.5 From the following trial balance of S Makin, draw up a trading and profit and loss account for the year ended 30 September 2006, and balance sheet as at that date.

Rm RmStock 1 October 2005 2,368Carriage outwards 200Carriage inwards 310Return inwards 205Return outwards 322Purchases 11,874Sales 18,600Salaries and wages 3,862Rent and rates 304Insurance 78Motor expenses 664Office expenses 216Lighting and heating expenses 166General expenses 314Premises 15,000Motor vehicles 1,800Fixtures and fitting 350Debtors 3,896Creditors 1,731Cash at bank 482Drawing 1,200Capitals 22,636

43,289 43,289

Stock at 30 September 2006 was RM2, 9469.6 The following is the trial balance of J Smailes as at 31 March 2007. Draw up a set of final account for the year ended 31 March

2007.

Rm RmStock 1 April 2006 18,160Sales 92,340Purchases 69,185Carriage inwards 420Carriage outwards 1,570Return outwards 640Wages and salaries 10,240Rent and rates 3,015Communication expenses 624Commission payables 216Insurance 405Sundry expenses 318Buildings 20,000Debtors 14,320Creditors 8,160Fixtures 2,850Cash at bank 2,970Cash in hand 115

21

Basic Hotel AccountingLoan from K Ball 10,000Drawings 7,620Capital 40,888

152,028 152,028

Stock at 31 March 2007 was Rm22, 390

TOPIC 3: THE DIVISION OF THE LEDGER

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

2. Types of books of original entry Sales day book – for credit sales Purchases day book – for credit purchases Returns inwards day book – for return inwards Returns outwards day book – for return outwards Cash book – for receipt and payment of cash General journal – for other items

3. The ledger The book of original entry lists the transaction but do not show the effect of the transaction on the account. A separate ledger will be kept for different types of transaction;

a. Sales ledger – contain the record of customers personal account.b. Purchases ledger – contain the record of supplier personal account.c. General ledger – contain the remaining double entry account such as expenses, fixed assets, capital

account.4. Types of accounts

22

Basic Hotel Accounting Some people describe all accounts as personal accounts or as impersonal accounts. There are, in

fact, four distinct types of account;a. Personal accounts – for debtors and creditors.b. Impersonal account – all other accounts, divided between real account and nominal account.c. Real accounts – account in which property recorded, examples is being buildings, machinery, fixtures and

stock.d. Nominal account – account in which expenses, income and capital are recorded.

TWO - COLUMN CASH BOOK Cash book consist of the cash account and the bank account put together in one book. In the cash book, the debit column for cash is put next to the debit column for bank. The credit column for cash is put next to

the credit for bank.

Dr Cash Book CrDate Particulars Cash Bank Date Particulars Cash Bank

Exercises10.1 Write up a two column cash book from the following details, and balance off as at the end of the month.

10.2 A two – column cash book are to be written up from the following, carrying the balance down to the following month.

10.3 write up a two column cash book from the following

2005May 1 Started business with capital in cash Rm100May 2 Paid rent by cash Rm10May 3 F Lake lent us Rm500, paying by chequeMay 4 We paid B Mckanzie by cheque Rm65May 5 Cash sales Rm98May 7 N Miller paid us by cheque Rm62May 9 We paid B Burton in cash Rm22May 11 Cash sales paid direct into the bank Rm53May 15 G Moore paid us in cash Rm65May 16 We took Rm50 out of the cash till and paid it into the bank accountMay 19 We repaid FLlake RM100 by chequeMay 22 Cash sales paid direct into the bank Rm66May 26 Paid motor expenses by cheque Rm12May 30 Withdrew Rm100 cash from the bank for business useMay 31 Paid wages in cash Rm97

2004Jan 1 Started business with Rm4,000 in the bankJan 2 Paid for fixtures by cheque Rm660Jan 4 Cash sales Rm225; paid rent by cash Rm140Jan 6 T Thomas paid us by cheque Rm188Jan 8 Cash sales paid direct into the bank Rm308Jan 10 J King paid us in cash Rm300Jan 12 Paid wages in cash Rm275Jan 14 J Walter lent us Rm500 paying by chequeJan 15 Withdrew Rm200 from the bank for business use Jan 20 Bought stationery paying by cash Rm60Jan 22 We paid J French by cheque Rm166Jan 28 Cash drawing Rm100Jan 30 J Scott paid us by cheque Rm277Jan 31 Cash sales Rm66

23


CASH DISCOUNT AND THE THREE COLUMN CASH BOOK

The amount of the reduction of the sum to be paid is known as a ‘Cash discount’. Cash discount refers to the allowance given for quick payment. It is still called cash discount even if the account is paid by cheque.

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

column on the debit side of the cash book.

2. Bank overdraft and the cash book A firm may borrow money from a bank by mean of a bank overdraft, this mean that the firm is allowed to pay more out of the

bank account, by paying out cheque, than the total amount place in the account. When the account is overdrawn, the firm owes money to the bank and so the account is a liability and the balance becomes a

credit ones.

Dr Cash book Cr Date Particular Discount Cash Bank Date Particular Discount Cash Bank

Exercises 11.1 Enter up a three – column cash book from the details following. Balance off at the end of the month, and show the relevant

discount accounts as they would appear in the general ledger.

11.2 From the following details, write up a three column cash book, balance off at the end of the month, and show the relevant discount accounts as they would appear in the general ledger.

2006Nov 1 Balance brought forward form last month: Cash Rm105 : Bank Rm2,164Nov 2 Cash sales Rm605Nov 3 Took Rm500 out of the cash till and paid it into the bankNov 4 J Mathew paid us by cheque Rm217Nov 5 We paid for postage stamps in cash Rm60 Nov 6 Bought office equipment by cheque Rm189Nov 7 We paid J Lucas by cheque Rm50Nov 9 Received rates refund by cheque Rm72Nov 11 Withdrew Rm 250 from the bank for business usedNov 12 Paid wages in cash Rm239Nov 14 Paid motor expenses by cheque Rm57Nov 16 L Levy lent us Rm200 in cashNov 20 R Norman paid us by cheque Rm112Nov 28 We paid general expenses in cash Rm22Nov 30 Paid insurance by cheque Rm74

2004May 1 Started a business with Rm6,000 in the bankMay 1 Bought fixtures paying by cheque Rm950May 2 Bought goods paying by cheque Rm1,240May 3 Cash sales Rm407May 4 Paid rent in cash Rm200May 5 N Morgan paid us his account of Rm220 by a cheque for Rm210, we allowed him Rm10 discount.May 7 Paid S Thomson & co Rm80 owing to them by means of a cheque Rm76, they allowed us Rm4 discountMay 9 We received a cheque for Rm380 from S Cooper, discount having been allowed Rm20May 12 Paid rates by cheque Rm410May 14 L Curtis pays us a cheque for Rm115May 16 Paid M Monroe his account of Rm120 by cash Rm114, having deducted Rm6 cash discount May 20 P Exeter paid us a cheque for Rm78, having deducted Rm2 cash discountMay 31 Cash sales paid direct into the bank Rm88

24


TOPIC 4: THE JOURNAL AND POSTING

THE SALES DAY BOOK AND SALES LEDGER

1. Cash sales When good were paid for immediately by cash, there is no need to enter these sales in the sales day book.

2. Credit sales For each credit sales the selling firm will send a document to the buyer showing full details of the goods sold and the price of

the goods. This document is known as an invoice, and to the seller it is known as a sales invoice.

3. Entering credit sales into the sales day book There is no need to show details of the goods sold in the sales day book.

Example:Sales Day Books

2005 Invoice no Amount (RM)

Sep 1 D Poole & Co 16554 560Sep 8 T Cockburn 16555 1,640Sep 28 C Carter 16556 220Sep 30 D Stevens & Co 16557 1,100

3,520

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

Sales Day Books2005 Invoice no Amount

(RM)Sep 1 D Poole & Co 16554 560Sep 8 T Cockburn 16555 1,640Sep 28 C Carter 16556 220Sep 30 D Stevens & Co 16557 1,100

3,520

2003Mar 1 Balance brought forward :

Cash in hand Rm211Cash at bank Rm3,984

Mar 2 We paid each of the following account by cheque, in case we deducted a 5 percent discount: T Adams Rm80; C Bibby Rm260; D Clarke Rm440

Mar 4 C Potts pays us a cheque for Rm98Mar 6 Cash sales paid direct into the bank Rm49Mar 7 Paid insurance by cash Rm65Mar 9 The following person pay us their account by cheque, in each cash they deducted a discount of 2 ½ percent : R

Smiley Rm160, J Turner Rm640, R Pimlott Rm520,Mar 12 Paid motors expenses by cash Rm100Mar 18 Cash sales Rm98Mar 21 Paid salaries by cheque Rm120Mar 23 Paid rent by cash Rm60Mar 28 Received a cheque for Rm500 being a loan from R Godfrey Mar 31 Paid for stationery by cheque Rm27

25


Sales ledgerD Poole & Co account

Dr Cr2005 Rm 2005 RmSep 1 Sales 560

T Cockburn accountDr Cr2005 Rm 2005 RmSep 8 Sales 1,640

C Carter accountDr Cr2005 Rm 2005 RmSep 28 Sales 220

D Stevens & Co accountDr Cr2005 Rm 2005 RmSep 30 Sales 1,100

General ledgerSales account

Dr Cr2005 Rm 2005 Rm

Sep 30 Credit sales for the month 3,520

5. Trade discount A reduction (Discount), called a trade discount is given to traders who buy many goods from us, and traders who buy only a

few items from us.Example:

Trader ARental price 200Less: Trader discount 50 (20%)Price to be paid by customer 150

6. Trade discount and cash discount As the trade discount is simply a way of calculating sales price, no entry for a trade discount should be made in the double

entry record or in the sales day book. Cash discount is given for prompt payment, and do not affect the amount of balance on the personal accounts. There are

therefore parts of the double entry accounting. To compare cash discount and trade discount;

1. Trade discounts are not shown in double accounts.2. Cash discounts are shown in double entry account.

Exercises12.1 You are to enter up the sales day book from the following details. Post the items to the relevant accounts in the sales ledger and

then show the transfer to the sales account in the general ledger.

2006 RMMar 1 Credit sales to J Gordon 187Mar 3 Credit sales to G Abraham 166Mar 6 Credit sales to V White 12Mar 10 Credit sales to J Gordon 55Mar 17 Credit sales to F Williams 289

26

Basic Hotel AccountingMar 19 Credit sale to C Richard 66Mar 27 Credit sales to V Wood 28Mar 31 Credit sales to L Simes 78

12.2 Enter up the sales day book from the following, and then post the items to the relevant account in the sales ledger. Show the transfer to the sales account in the general ledger.

2006 RMMay 1 Credit sales to J Johnson 305May 3 Credit sales to T Royes 164May 5 Credit sales to B Howe 45May 7 Credit sales to M Lee 100May 16 Credit sales to J Jakes 308May 23 Credit sale to A Vinden 212May 30 Credit sales to J Samuels 1,296

THE PURCHASES DAY BOOK AND PURCHASES LEDGER

1. Purchase orders When a business or organization decides to buy goods or engage the services of another company, it usually issues a

purchase order. Each purchase order is normally raised by the customer’s purchasing office and then sent to the suppliers.

2. Entering into the purchases day book From the purchase invoices for bought on credit, the purchaser enter the details in his purchases day book. There is no need to show details of the goods bought in the purchases day book. The purchase day book is often known also as the purchases book or the purchases journal.

ExamplePurchases Day Books

2005 Invoice no Amount (RM)

Sep 2 R Simpsom 9/101 670Sep 8 B Hamilton 9/102 1,380Sep 19 C Brown 9/103 120Sep 30 K Gabriel 9/104 510

2,680

3. Posting credit purchases to the purchases ledger. The double entry are as follow;

1. The credit purchases are posted one by one, to the credit of each supplier’s account in the purchases ledger.2. At the end of each period, the total of the credit purchases is posted to the debit of the purchases account in the general

ledger.

Purchases Day Books2005 Invoice no Amount

(RM)Sep 2 R Simpsom 9/101 670Sep 8 B Hamilton 9/102 1,380Sep 19 C Brown 9/103 120Sep 30 K Gabriel 9/104 510

2,680

Purchases ledgerR Simpson account

Dr Cr

27


2005 Rm 2005 RmSep 2 Purchases 670

B Hamilton accountDr Cr2005 Rm 2005 Rm

Sep 8 Purchases 1,380

C Brown accountDr Cr2005 Rm 2005 Rm

Sep 19 Purchases 120

K Gabriel accountDr Cr2005 Rm 2005 Rm

Sep 30 Purchases 510

General ledgerPurchases account

Dr Cr2005 Rm 2005 RmSep 30 Credit purchases for the month 2,680

Exercises13.1 B Mann has the following purchases for the month of May 2004:

2004May 1 From K King: 4 radio at Rm30 each, 3 music centre at Rm160 each. Less 25 percent trade discount.May 3 From A Bell: 2 washing machines at Rm200 each, 5 vacuum cleaners at Rm60 each, 2 dish dryer at

Rm150 each. Less 20 percent trade discount.May 15 From J Key: 1 music’s centers at Rm30 each, 2 washing machine at Rm250 each. Less 25 percent

trade discount.May 20 From B Powel: radios at Rm70 each, less 33 ½ percent trade discount.May 30 From B Lewis: 4 dish dryers at Rm200 each, less 20 percent trade discount.

Required;(a) Enter up the purchases day book for the month.(b) Transfer the total to the purchases account.

13.2 A Rowland has the following purchases for the month of June 2009:

2005Mar 1 Bought from Smith stores: silk Rm40, cotton Rm80, all less 25 per cent trade discount.Mar 8 Sold to A Grandly: Linen goods Rm28, woolen items Rm44, cotton goods Rm120.No trade discount.Mar 15 Sold to A Henry: silk Rm36, linen Rm144, cotton gods Rm120, all less 20 percent trade discount.Mar 23 Bought from K Kelly: cotton Rm88, linen Rm52, all less 20 percent trade discount.Mar 24 Sold to D Sangster : linen goods Rm42, cotton Rm48, less 10 percent trade discount.Mar 31 Bought from J Hamilton: linen goods, Rm270 less 33 1/3 percent trade discount.

THE RETURNS DAY BOOKS

1. Return inwards and credit notes Customer may return goods to the supplier if they are faulty, damaged or not suitable for their requirements, where the

consignment is incomplete when compared with the delivery notes, or where an overcharge has been made. When this happen, supplier will make an allowance to correct the situation.

28

Basic Hotel Accounting Since customer will have been sent an invoice at the same time as the good were delivered, they will be in debt to the

supplier for the value of the goods. When supplier makes an allowance for goods that have been returned or a reduction in price has been agreed, the supplier

will issue credit note to the customer. It is called a credit note since the customer’s account will be credited with the amount of the allowance, thereby showing a

reduction in the amount owed by the customer. The procedures involving credit note is necessary so that the various books of account that are maintained by the supplier and

customer do, in fact, reflect the correct amount owed.

2. Return inward day book. Credit notes are listed in a return inwards day book. This is then used for posting the items as follows:

- Sales ledger – credit the amount of credit notes, one by one, to the account of the customers in the sales ledger.- General ledger – at the end of the period the total of the returned inward day book is posted to the debit of the return

inward account.

3. Returns outwards and debits notes. If supplier agreed, good bought previously may be returned. When this happen, a debit note is sent to the supplies giving

detail of the goods and the reason for their return.

4. Returns outwards day book. Debit note are listed in the return outwards day book. This is then used for posting the items, as follows:

- Purchase ledger – debit amount of debits notes, one by one to the account of the supplier in the purchases ledger.- General ledger – at the end of the period, the total of the return outwards day book is posted, to the credit of the return

outwards account.

Exercises14.1 On 30 April 2008, the balance in the sales and purchase ledger of a particular company were as follows: Debtors – C Cooks:

K King Rm560: AB Ltd Rm40: Creditors – S Todd Rm120: W Mears Rm520: K Fisher Rm280.The following are transaction for May 2008:

2008May 2 Sold good on credit to K King RM119May 4 Bought good n credit from S Todd Rm200May 6 C Cook paid us the balance on his account by cheque less cash discount of 5 per cent.May 8 We return good Rm40 to W MearsMay 11 Sold good on credit to AB ltd Rm99May 14 Sold good on credit to K King Rm720May 15 AB Ltd return good to us Rm19May 17 Bought good on credit from T Jay Rm142May 19 We paid W Mears the balance in his account by cheque, less 5 per cent cash discountMay 20 Bought goods on credit from K Fisher Rm180May 22 We returned good to K Fisher Rm49May 24 K King returned good to us Rm39May 27 K King paid his account in full, less 5 per cent discount, by chequeMay 28 We paid S Todd’s account by cash less 5 percent cash discount.

Write up the following for May 2008:(a) Sales day book.(b) Purchase day book.(c) Return inward day book.(d) Return outward day book.(e) Sales ledger.(f) Purchase ledger.(g) All necessary account in the general ledger.

29


TOPIC 5: DEPRECIATION OF FIXED ASSETS AND ADJUSTMENT FOR FINAL ACCOUNT

METHODS OF DEPRECIATION

1. Depreciation of fixed asset. Fixed asset are those asset of material value that are:

a. of long lifeb. to be use in the businessc. Not bought with the intention of being resold.

Fixed asset such as machinery, motor vehicle, fixtures and even building do not last forever. If the amount receive (if any) on disposal is deducted form the cost of buying them, the differences is called depreciation.

2. Depreciation as an expense Depreciation then, is the part of the original cost of a fixed asset consumed during its period of use by a firm. It is an expense

for service consumed, in the same way as expenses for items such as wages, rent, or electricity. Since depreciation is an expense, it will have to be charged to the profit and loss account and will, therefore, reduce net

profit. The only difference between the cost of depreciation for a motor vehicle and the cost of petrol for the motor vehicle is that

the petrol cost is used up in day or two, whereas the cost of depreciation for the motor vehicle is spread over several years.

3. Cause of depreciation. The principle cause of depreciation are:

a. Physical deterioration - Wear and tear when motor vehicle or machinery are used, they eventually wear out; - Erosion, rut, rot and decay Land may be eroded or wasted away by the action of wind, rain, sun or the other element

of nature. Similarly the metal in motor vehicles or machinery will rust away. Wood will rot eventually. Decay is a process, which will be present due to the element of nature and the lack of proper attention.

b. Economic factor- Obsolescence . This is the process of becoming out of date.- Inadequacy. This arise when an assets is no longer used because of the growth and change in the size of the firm.

c. The time factors.- These are asset that have a legal life fixed in term of years. For instance, you may agree to rent some buildings for

ten year. Such an agreement is normally called lease. When a lease expired, it is worth nothing to you as it has finished ; whether you paid for the lease is now of no value.

4. Land and building It was contended that, as property value tended to rise instead of fall, it was inappropriate to charge depreciation.

5. Methods of calculating depreciation charges The two main methods for calculating depreciation charges are the straight line method and reducing balance method.

30

Basic Hotel Accountinga. Straight Line Method

- By this method, sometimes also called the fixed installment method, the number of years of used is estimated. The cost is then divided by the number of years, to give the depreciation charge each year.

- For instance, if a lorry was bought for Rm22,000 and we thought we will keep it for four years and then sell it for Rm2,000, the depreciation to be charge would be:

Cost(Rm22,000)- Disposal value(M2,000) = Rm20,000Number of years used (4 years) 4 years

= RM 5, 000 depreciation each year for four years.

- if after the four years, the lorry would have no disposal value, the charge for depreciation would have been:

Cost(Rm22,000) = Rm22,000Number of years used (4 years) 4 years

= Rm5, 500 depreciation for four years.

b. Reducing Balance Method- By this method fixed percentage for deprecation is deducted from the cost in the first year. In the second or later

year the same percentage is taken of the reduced balance. This method is also known as the diminishing balance method.

- For instance, if machine is bought for Rm10, 000 and depreciation to be charged at 20 percent, the calculation for the first three years would be as followed.

RmCost 10,000First year; depreciation (20% of Rm10,000) 2,000

8,000Second year; depreciation (20% of Rm8,000) 1,600

6,400Third year; depreciation (20% of Rm6,400) 1,280Net book value at the end of the third year 5,120

- Net book value means the cost of fixed asset with depreciation deducted.

Exercises15.1 D Sanky, a manufacturer, purchase a lathe for the sum of Rm4, 000. It has an estimated life of five years and a scrap value of

RM500. Sanky is not certain whether he should use the ‘straight line’ or the ‘reducing balance’ basis for the purpose of calculating depreciation on the machine.

You are required to calculate the depreciation on the lathe using both methods, showing clearly the balance remaining in the lathe account at the end of each of the five years for each method. Assume 40 percent per annum is to be used for the reducing balance method, and make your calculations to the nearest Rm.

15.2 A machine cost Rm12, 500. It will be kept for four years and then sold for estimated figures of Rm5, 120. Show the calculation of the figures for depreciation for each of the four year using straight line method, and the reducing balance method. For reducing balance method use the depreciation rate of 20 per cent.

15.3 A motor vehicle cost Rm6, 400. It will be kept for five years and then sold for scrap for Rm200. Calculate the depreciation for each year using the reducing balance method, using a depreciation rate of 50 per cent, and the straight line method.

BAD DEBTS AND PROVISION FOR BAD DEBTS

1. Bad debts If a firm finds that it is impossible to collect a debt, then that debt should be written off as a bad debt.

31

Basic Hotel Accounting This could happen if the debtor is suffering a loss in the business, or may even have gone bankrupt and is thus unable to pay

the debt. A bad debt is therefore, an expense on the firm that is owed the money.

Example; We sold goods Rm50 to k Leeming on 5 January 2005, but that firm becomes bankrupt. On 16 February 2005 we sold Rm240 goods to T Young. Young manage to pay Rm200 on 17 May 2005, but it become obvious that he would never be able to pay the final Rm40.

Accounting entries:

Accounting entries ExplanationDebit: Bad Debt accountCredit: Debtor account

To transfer the amount of unpaid debt to the bad debt account.To reduce the liability of the debtors who is unable to settle the debt.

Debit: Profit and loss accountCredit: Bad debt account

To record the amount of bad debt of the period concern.To transfer the amount of bad debt to profit and loss account.

The account would appear as follow;Dr K Leeming Account Cr2005 Rm 2005 RmJan 5 Sales 50 Dec 31 Bad Debts 50

Dr T Young Account Cr2005 Rm 2005 RmFeb 16 Sales 240 May 17 Cash 200

Dec 31 Bad Debts 40240 240

Dr Bad debts Account Cr2005 Rm 2005 RmDec 31 K Lee 50 Dec 31 Profit and Loss a/c 90Dec 31 T Young 40

90 90

Profit and loss account for the year ended 31 December 2005 (extract)RM RM

Gross profit XXXExpensesBad debts 90 90

2. Provision for bad debts / doubtful debts Why provision are needed, When we are drawing up our financial statements, we want to achieve the following objective:

i. To charge as an expense in the profit and loss account for that year an amount representing debts that will never be paid.

ii. To show in the balance sheet a debtors figure as close as possible to the true value of debtors at the balance sheets date.

Debts declared bad are usually debts that have existed for same times, perhaps even from earlier accounting periods. However for debts that have not been paid by the year end which may not have owed for so long, it is difficult to determine

which of them will be bad debts. In this case, this possibility need to be provided for in the current period, otherwise both the debtors balance reported in the

balance sheets and the profit reported in the profit and loss account will almost certainly be overstated. It is impossible to determine with absolute accuracy at the year end what the true amount is in respect of debtors who will

never pay their accounts. In order to arrive at a figure for doubtful debts, a business must first consider that some debtors will never paid any of the

amount they owed, while other will paid a part of the amount owing only, leaving the remainder permanently unpaid.

32


3. Provision for doubtful debts: estimating provision The estimates of provision for bad debts can be made thus:

i. By looking into each debts, and estimating which one will be bad debts.ii. By estimating, on the basis of experience, what percentage of the debts will result in bad debts?

It is well known that the longer a debt owes, the more likely it will become a bad debt. Some firms draw up an aging debtor’s schedule, showing how long debts have been owed. Older debtors need higher

percentage estimates of bad debts than newer debtors.

4. Accounting entries for provision for bad debts When decision has been taken as to the amount of provision to be made, then the accounting entries needed for the provision

relate to the year in which provision is first made, as follows:i. Debit : profit and lost account with the amount of provisionii. Credit: provision for bad debts account.

Example: As at 31 December 2003, the debtors figure for a firms amounted to RM10, 000 after writing off RM422 of definite bad debts. It is estimated that 2 per cents of debts will prove to be bad debts, and it is decided to make a provision for these.

Profit and loss account for the year ended 31 December 2003 (extract)RM RM

Gross profit XXXExpensesBad debts 422Provision for bad debts 200 622

Dr Provision for bad debts account Cr2003 Rm 2003 RmDec 31 Balance c/d 200 Dec 31 Profit and Loss a/c 200

2004Jan 1 Balance d/c 200

In the balance sheet, the balance on the provision for bad debts will be deducted from the total of debtors; Thus

Balance sheet (extracts) 31 December 2003RM RM

Current assetDebtors 10,000Less: provision for bad debts 200 9,800

5. Increasing the provisionsExample: at the end f the following year, on 30 December 2004, the bad debts provision needed to be increased because the provision could be kept at 2 percent but the debtors had risen to Rm12, 000.

The double entry will be:

Debit: Profit and loss accountCredit: Provision for bad debt account

And the relevant accounts will look as set out below.

Profit and loss account for the year ended 31 December 2004RM RM

Gross profitLess: Expenses

33

Basic Hotel AccountingBad debts 884Provision for bad debts 40 924

Dr Provision for bad debts account Cr2004 Rm 2004 RmDec 31 Balance c/d 240 Jan 1 Balance b/d 200

Dec 31 Profit and loss account 40240 240

2005Jan Balance b/d 240



6. Reducing the provision The provision is shown in credit balance. To reduce it, we would need a debit entry in the provision account.

Example: On 31 December 2005 the debtors figure have fallen to RM10, 500 but the provision remained at 2 per cent. As the provision had previously been RM240, it now needs a reduction of RM30. Bad debts of RM616 had already been written off during the year and are not included in the debtors’ figure of RM10, 500.

The double entry is:

Debit: Provision for bad debts accountCredit: Profit and loss account

And the relevant account looks thus:

Profit and loss account for the year ended 31 December 2005RM RM

Gross profit xxxAdd: Reduction in provision for bad debt 30

xxxLess: ExpensesBad debts 616

Dr Provision for bad debts account Cr2005 Rm 2005 RmDec 31 Profit and loss account 30 Jan 1 Balance b/d 240Dec 31 Balance c/d 210

240 2402006Jan 1 Balance b/d 210



Exercises 16.1 Data Computer Services commences in business on 1 January 2004, and during its first year of trading the following debts

are found to be bad and the firm decided to write them off as bad:

34

Basic Hotel Accounting2004April 30 H Gordon RM1,110August 31 D Bellamy Ltd RM 640October 31 J Alderton RM120

On 31 December 2004, the schedule of remaining debtor, amounting in total to RM68, 500, is examined, and it is decided to make a provision for bad debts of RM2, 200.

You are required to show:a) The bad debts account and the provision for bad debts account.b) The charge to the profit and loss accountc) The relevant extract fro the balance sheet as at 31 December 2004

16.2 A business has always made a provision for bad debts at the rates of 5 percent of debtors. On 1 January 2003 the provision for this, brought forward from the previous year, amounted to RM2, 600. During the year to 31 December 2003 the bad debts written off amounted to RM540. On 31 December 2003 the remaining debtors totaled RM62, 000 and the usual provision for bad debts is to be made.

You are to show:a) the bad debts account for the year ended 31 December 2003b) the provision for bad debts account for the yearc) an extract from the profit and loss account for the yeard) the relevant extract from the balance sheet as at 31 December 2003

16.3 A business started trading on 1 January 2006. During the two years ended 31 December 2006 and 2007, the following debts were written off to the bad debts account on the dates stated:

31 August 2006 W Best RM8530 September 2006 S Avon RM14028 February 2007 L J Friend RM18031 August 2007 N Kelly RM6030 November 2007 A Oliver RM250

On 31 December 2006 there had been a total of debtors remaining of RM40, 500, and it was decided to make a provision for doubtful debts of RM550. On 31 December 2007 there had been a total of debtors remaining of RM47, 300, and it was decided to make a provision for doubtful debts of RM600.

You are required to show:a) The bad debts account and the provision for bad debts account for each of the two years.b) The relevant extract from the balance sheet as at 31 December 2006 and 2007

OTHER ADJUSTMENT FOR FINAL ACCOUNT

1. Adjustment needed for expenses owing or paid in advance. Not all business pay their rent exactly on time and, indeed, some businesses prefer to pay for their rent in advance.

Example: A firm rent their premises for RM1, 200 per year. Firm A pay RM1, 000 during the year and owes RM200 rent at the end of the year.

o Rent expenses used up during the year = RM1,200o Rent actually paid in the year = RM1,000

Firm B pays RM1, 300 during the year, including RM100 in advance for the following year.

o Rent expense used up during the year = RM1,200o Rent actually paid for in the year = RM1, 300.

A profit and loss account for the 12 month needs 12 months’ rent as an expense (RM1, 200). That mean that in the above two example the double entry accounts will have to be adjust.

35


2. Accrued expenses (Owing expenses) Those expenses incurred but not yet paid or recorded in the accounts. Item such as interest, rent and salaries can be accrued

expenses. At the end of the accounting period, an adjusting entry should be made to recognize those expenses, which, have accrued but

have not yet been recorded.

Example: Assume accounting period ends on 31 December every year. On 1 December 2006, AB Enterprise hired Encik Dollah as a part-time salesman. The agreed salary was Rm1, 200 monthly payable on the fifth of the following month. Payment for the first month was made on 5 January 2007. To ensure that the January salary is reflected in the accounts, an adjusting entry is necessary on 31 December 2006.

On 31 December 2006, adjusting entry for accrued expense is as follows:

The accounts show the following ledger:Dr Accrued salary account Cr2006 Rm 2006 Rm

Dec 31 Salaries expense 1,200

Dr Salaries expense account Cr2006 Rm 2006 RmDec 31 Accrued salaries 1,200

The correct amount of salaries expense to be charged to the year 2006 income statement is RM1, 200. Notice that the liability of RM1, 200 has been recognized. This amount is represented by a credit balance in the accrued salaries account and would be shown in the balance sheet under the heading of current liabilities.

At the end of the accounting period, the expenses account is closed and related amount is transferred to the income statement.

3. Accrued or unrecorded Revenue Refer to any revenue which has been earned during the period but which has not been recorded prior to the closing date. An adjusting entry is required at the end of the accounting period to record the revenue, which has been earned during the

period, and to show that asset exists at the balance sheet date.

Example: Assume that AB enterprise is a publishing business, which receives 12 months’ subscription for a magazine its produces. On 31 December 2006, the business send a reminder to a customer who is late in making payment for the 12 months’ subscriptions, which amount to RM8,000. To ensure that the subscription revenue that has been earned is reflected in the account, an adjusting entry is necessary on 31 December 2006.

On 30 December 2006, adjusting entry for accrued revenue is as follow:

The accounts show the following ledger:Dr Accrued Subscription Revenues account Cr2006 Rm 2006 RmDec 31 Subscription revenue 8,000

Dr Subscription revenue account Cr2006 Rm 2006 Rm

Dec 31 Accrued Subscription 8,000

Date Particular RM RMDec 31 DR Salary account 1,200

CR Accrued account 1,200

Date Particular RM RMDec 31 DR Accrued subscription revenues 8,000

CR Subscription revenues 8,000( to record accrued subscription revenue which has been earned)

36

Basic Hotel Accounting At the end of the accounting period, the income account is closed and related amount is transferred to the income statement. The correct amount of subscription revenue to be credited to the year 2006 income statement is Rm8, 000. Notice that an asset of Rm8, 000 has been recognize. This amount is representing by the debit balance in the accrued

subscription revenue account and would be shown in the balance sheet under the heading of current asset.

4. Prepaid Expenses Expenses paid in advance where payment is made to cover future period as well. Such as expenses has been paid during the

current accounting period but will not be incurred until the next accounting period. Typical items that often are required to be paid in advance are insurance, rent, and road tax and office supplies. The portion that is used up in the current period will be treated as an expense on that period. The portion that is not used is

allocated t expense in the accounting period in which the services or the supplies are used. Adjusting entry is needed to ensure that only part of the payment, which related to the current period, should be matched

against revenue of the related period and no items of expenses that related to future period be recognize in the current income statement.

Example: Assume that the accounting period ends on 31 December every year. AB Enterprise pays Rm4, 800 for one year insurance premium beginning on 1 April 2006. This payment is recorded as a debit entry of RM4, 800 to the insurance expense account and a credit entry to the bank account. The amount paid is treated as an expense on the date of payment.

Dr Prepaid insurance account Cr2006 Rm 2006 RmDec 31 Insurance expense 1,200 Dec 31 Balance c/d 2,400

Dr Insurance expense account Cr2006 Rm 2006 RmApril 1 Bank 4,800 Dec 31 Prepaid insurance 1,200

Income statement 3,600

From the above it shows that the correct amount of insurance expense to be charged to the year 2006 income statement is RM3, 600.

Notice that an asset of RM1, 200 has been recognized. This amount is represented by a debit balance in the prepaid insurance account and would be shown in the balance sheet under the heading of current asset.

5. Prepaid or unearned Revenues Revenues received in advance. Customer may pay in advance for service to be rendered in a later accounting period. For accounting purpose, amount collected in advance, do not represent revenue because these amount have not yet been

earned and as such they are not realized yet in the current accounting period. At the end of the accounting period, adjusting entry is mad to ensure that part of the revenues, which relates to the current

period, are recognized.

Example: Assume accounting period end on 31 December every year. On 1 November 2006, AB enterprise agreed to act as consultant for a monthly fee of RM1, 00 and received a 6 month consultancy fees on the same date. The amount received of RM6, 000 would be recorded as a debit to bank account and a credit to the consultancy fees account.

Dr Prepaid consultancy Fees (Liability) Cr2006 Rm 2006 RmDec 31 Balance c/d 4,000 Dec 31 Consultancy fees 4,000

Dr Consultancy fees Cr2006 Rm 2006 RmDec 31 Prepaid consultancy fees 4,000 Nov 1 Bank 6,000

Income statement 2,000

From the above, it shows that the correct amount of consultancy fees to be credited to the year 2006 income statement is RM2, 000.

37

Basic Hotel Accounting Notice that a liability of RM4, 000 has been recognized. This amount is represented by a credit balance in the prepaid

consultancy fees account and would be shown in the balance sheet under the heading of current liabilities.

Exercise17.1 The financial year of H Samberg ended on 31 December 2008. Show the ledger account for the following items including the

balance transferred to the necessary part of the final accounts, and the balance carried down to 2009.

a. Motor expenses: paid in 2008 RM744; owing at 31 December 2008 RM28.b. Insurance: paid in 2008 RM420; prepaid as at 31 December 2008 RM35.c. Stationery: paid during 2008 RM1, 800; owing as at 31 December 2007 RM250; owing as at 31 December 2008 RM490.d. Rent: paid during 2008 RM950; prepaid as at 31 December 2007 RM220; prepaid as at 31 December 2008 RM290.e. Samberg sub-let part of the premises. Receives RM550 during the year ended 31 December 2008. The tenant owed Samberg

RM180 on 30 December 2007 and RM210 on 31 December 2008.

17.2 The following balances were part of the trial balance of C Cane on 31 December 2008.

Dr(RM) Cr(RM)Stock 1 January 2008 2,050Sales 18,590Purchases 11,170Rent 640Wages and salary 2,140Insurance 590Bad debts 270Telephone 300General expenses 180

On 31 December 2008 you ascertain that:a. The rent for four months of 2009, RM160, has been paid in 2008.b. RM290 owes for wages and salaries.c. Insurance has been prepaid RM190d. A telephone bill of RM110 is owede. Stock is valued at RM3, 910.

Draw up Cane’s trading and profit and loss account for the year ended 31 December 2008.

17.3 From the following trial balance of J Sears, a store owner, prepare a trading and profit and loss account for the year ended 31 December 2007 and a balance sheet as at that date, taking into consideration the adjustment shown below:

Trial balance as at 31 December 2007 Dr(RM) Cr(RM)Sales 80,000Purchases 70,000Return inward 1,000Return outward 1,240Stock at 1 January 2007 20,000Provision for bad debts 160Wages and salaries 7,200Telephone 200Store fittings 8,000Motor Van 6,00Debtors and creditor 1,960 1,400Bad debts 40Capital 35,800Bank Balance 600Drawings 3,600

38


118,600 118,600

Adjustments:a. Closing stock at 31 December 2007 is RM24, 000.b. Accrued wages RM450c. Telephone prepaid RM20d. Provision for bad debts to be increase to 10 per cent of debtors.e. Depreciation on store fittings RM800 and motor van RM1, 200.

TOPIC 6: THE ANALYTICAL PETTY CASH BOOK AND THE IMPREST SYSTEM

1. Division of the cash book In almost any firm there will be many small cash payment to be made. It would be an advantage if the record of these

payments could be kept separate from the main cash book. Where separate book is kept, it is known as a petty cash book.

Illustration 12004 RMSep 1 The cashier gave RM600 as float to the petty cashier

Payment out of petty cash during SeptemberSep 2 Petrol 63Sep 3 K Long-traveling expenses 32Sep 3 Postage 24Sep 4 D Campell-travelling expenses 21Sep 7 Cleaning expenses 15Sep 9 Petrol 19Sep 12 K Lee- traveling expenses 30Sep 14 Petrol 35Sep 15 L Waites – refund: sales ledger account overpaid 50Sep 16 Cleaning expenses 15Sep 18 Petrol 24Sep 20 Postage 28Sep 22 Cleaning expenses 19Sep 24 H Wood – traveling expenses 75Sep 27 Settlement of K Young’s account in the purchase ledger 33Sep 29 Postage 22Oct 1 The cashier reimbursed the petty cashier the amount spent in the month.

PETTY CASH BOOK

Receipt Folio Date DetailVoucher

NoTotal

Motor expense

s

Staff traveling

Postage CleaningLedger

Account

RM 2004600 Sep 1 Cash

Sep 2 Petrol 1 63 63Sep 3 K long 2 32 32Sep 3 Postage 3 24 24Sep 4 D Campbell 4 21 21Sep 7 Cleaning 5 15 15

39

Basic Hotel AccountingSep 9 Petrol 6 19 19Sep 12 K Lee 7 30 30Sep 14 Petrol 8 35 35Sep 15 L Waites 9 50 50Sep 16 Cleaning 10 15 15Sep 18 Petrol 11 24 24Sep 20 Postage 12 28 28Sep 22 Cleaning 13 19 19Sep 24 H Wood 14 75 75Sep 27 K young 15 33 33Sep 29 Postage 16 22 22

505141 158 74 49 83

Sep 30 Balance c/d 95600 60075 Oct 1 Balance b/d505 Oct 1 Cash

2. The imprest system Imprest system is where the cashier gives the petty cashier enough cash to meet the needs of the following period. At the end of the period, the cashier finds out the amount equal to that spent. The petty cash in hand should then be equal to

the original amount with which the period was started. It may necessary to increase the fixed sum, often called the cash float, to be held at the start of each period.

Exercises18.1 Enter the following transactions in a petty cash book that has analysis columns for motor expenses, postage and stationery,

cleaning, sundry expenses, and a ledger column. This is to be kept on the imprest system, the amount spent to be reimbursed on the last of each month. The opening petty cash float is Rm1, 000.

2006May 1 Cleaning 36May 3 Speedy garage- petrol 24May 4 Postage stamp 55May 5 Envelope 17May 6 Poison license 18May 8 Unique garage – petrol 57May 9 Corner garage – petrol 64May 11 Postage stamps 58May 12 F Lee – ledger account 99May 13 H Norman – Ledger account 44May 15 Sweeping brush (cleaning) 23May 16 Bends garage – petrol 77May 17 K King – stationery 65May 19 Driving license 11May 21 C Hope – ledger account 72May 25 Cleaning 68May 27 License for guar dog 12May 28 Guard dog – food 29May 31 Corner garage – petrol 54

18.2 Write up a petty cash book with analysis columns for office expenses, motor expenses, cleaning expenses and casual labor. The cash float brought down is RM500 and the amount spent is reimbursed on 30 June. Show the balance carried down to 1 July.

2007June 1 H Sangster – casual labor 13June 2 Letterhaeding 22June 2 Unique motors - motor repair 30June 3 Cleaning material 16

40

Basic Hotel AccountingJune 6 Envelope 14June 8 Petrol 28June 11 J Hogan – casual labor 15June 12 Paper- clip 12June 12 Mrs Bell – cleaner 27June 14 Petrol 11June 16 Computer disks 31June 16 Petrol 29June 21 Motor vehicle repair 50June 22 T Cooke – casual labor 21June 23 Mrs Bell - cleaner 10June 24 P King – casual labor 19June 25 Stationery 27June 26 Flat cars – motor repairs 21June 29 Petrol 12June 30 J Young – casual labor 16

ACCOUNTING ERRORS AND THEIR EFFECT ON ACCOUNTING RECORDS

1. Trial balance agreement and errors Classification of errors:a. Errors not affecting trial balance agreement.

These error results in the same amount of debit being entered as there are credits, or no entry being made either on the debit or the credit side. This mean that the trial balance will still balance evens thought errors have been made in the account.

b. Errors affecting trial balance agreement These error results in the total of the debit columns in the trial balance not being the same as the total of the credit

columns.

2. Types of errors not affecting trial balance agreement.a. Errors of commission

Arise when a correct amount is entered in the books, but in the wrong person’s account.

Example 1: D Long paid us RM50 by cheque on 18 May 2005. The transaction is correctly entered in the cash book, but it was entered by mistake in the account for D Longman. This means that there had been both a debit of RM50 and a credit of RM50.

Entry: Dr D Longman account Cr2005 Rm 2005 Rm

May 18 Bank 50

Correction entry: Dr D Longman account Cr2005 Rm 2005 RmMay 31 D long: error correction 50 May 18 Bank 50

Dr D Long Cr2005 Rm 2005 Rm

May 31 Cash entered in error in D Longman’s account 50

b. Errors of principle A transaction is entered in the wrong type of account. For instance, the purchase of a fixed asset should be debited to

a fixed asset account. If in error it is debited to an expenses account, then it has been entered in the wrong type of account.

41

Basic Hotel AccountingExample 2: The purchase of a motor car for RM5, 500 by cheque on 14 May 2005 has been debited in error to a

motor expenses account. In the cash book it is shown correctly. This means that there has been both a debit of RM5, 500 and a credit of RM5, 500.

Entry: Dr Motor expenses account Cr2005 Rm 2005 RmMay 14 Bank 5,500

Correction entry: Dr Motor Expenses Account Cr2005 Rm 2005 RmMay 14 Bank 5,500 May 31 Motor car error correction 5,500

Dr Motor Car account Cr2005 Rm 2005 RmMay 31 Bank: entered originally in motor

expenses 5,500

c. Error of original entry Occur where an original amount is incorrect and is then entered in double entry.

Example 3: Sales of RM150 to T Higgins on 13 May 2005 have been entered as both a debit and a debit of RM130.

Entry: Dr T Higgins Account Cr2005 Rm 2005 RmMay 13 Sales 130

Dr Sales account Cr2005 Rm 2005 Rm

May 31 Sales Journal 130

Correction entry: Dr T Higgins Account Cr2005 Rm 2005 RmMay 13 Sales 130May 31 Sales: Error 20


May 31 Sales Journal 130May 31 T Higgins: error corrected 20

d. Error of omissionWhere transactions are not entered in the book at all.

Example 4: We purchase good from T Hope for RM250 on 13 May 2005 but did not enter the transaction in the account. So there were nil debits and nil credit.

Correction entry: Dr Purchase account Cr2005 Rm 2005 RmMay 13 T Hope: error corrected 250

Dr T Hope account Cr2005 Rm 2005 Rm

May 31 Purchases: error corrected 250

42

Basic Hotel Accountinge. Compensating error

When errors in total for both the debit and credit side compensate or cancel each other.

Example 5: let us take a case where incorrect totals had purchase of RM7, 900 and sales of RM9, 900. The purchases journal adds up to be RM100 too much. In the same period, the sales journal also adds up to be RM100 too much.

Entry: Dr Purchase account Cr2005 Rm 2005 RmMay 13 Purchases 7,900


May 31 Sales 9,900

Correction entry: Dr Purchases account Cr2005 Rm 2005 RmMay 13 Purchases 7,900 May 31 The journal: error corected 100

Dr Sales account Cr2005 Rm 2005 RmMay 31 The journal: Error corrected 100 May 31 Sales 9,900

f. Complete reversal of entries. This error is where the correct amounts are entered in the correct account, but each item is shown on the wrong side

of each account.

Example 6: We paid a cheque for RM200 on 28 May 2005 to D Charles. We have entered it as follows in accounts with the letter (A). There has therefore been both a debit and a credit of RM200.

Entry: Dr Cash Book (A) Cr2005 Rm 2005 RmMay 28 D Charles 200

Dr D Charles account (A) Cr2005 Rm 2005 Rm

May 28 Bank 200

Correction entry: Dr Cash Book (B) Cr2005 Rm 2005 Rm

May 28 D Charles 200

Dr D Charles (B) Cr2005 Rm 2005 RmMay 28 bank 200

Exercises19.1 Show the journal entry necessary to correct the following errors:

a. A Sale of goods RM678 to J Harkness had been entered in J Harker’s account.b. The purchase of a machine on credit from L Pearson for RM4, 390 had been completely omitted from our books.c. The purchase of a motor vehicle for RM3, 800 had been entered in error in the motor expenses account.d. A sale of RM221 to E Fletcher had been entered in the book - both debit and credit – as RM212.

43

Basic Hotel Accountinge. Commission received RM257 had been entered in error in the sales account.

19.2 Elaine Rowe extracted the following balances from her books on 31 May 2008:

RMEquipment 9,752General expenses 1,394Sales 15,863Purchases 7,590Sales return 426Purchase return 674Creditors 2,095Drawings 1,420Debtors 3,738Bank overdraft 372Capital 5,314

A short time later the following errors were discovered.

a. A sales invoice for RM392 has not been entered in the sales day book.b. A cheque of RM545, receive from a customer, has not been recorded in the books.c. An invoice for RM196, receive from a supplier, has been entered in the account twice.d. Elaine Rowe has taken RM150 by cheque for her own use, but no entries have been made in the account.

You are required to prepare a trial balance as at 31 may 2008 after considering the above information.

SUSPENSE ACCOUNT AND ERRORS

1. Errors and the trial balance. Trial balance may not balance because of the following possibility:

a. Incorrect additions in any account.b. Making an entry on only one side of the accounts.c. Entering a different amount on the debit side from the amount on the credit side.

2. Suspense account. We should try a very hard to find errors immediately when the trial balance totals are not equal. When they cannot be found, the trial balance totals should be made to agree with each other by inserting the amount of the

difference between the two sides in a suspense account.

Example:

Trial Balance as at 31 December 2005RM RM

Total after all the account been listed 100,000 99,960Suspense account 40

To make the two totals the same, a figure of Rm40 for the suspense account has been shown on the credit side. A suspense account is opened and the RM40 difference is also shown there o the credit side.

Dr Suspense account Cr2005 Rm 2005 Rm

Dec 31 Different per trial balance 40

3. Suspense account and the balance sheet. If the errors are not found before the final accounts are prepared, the suspense account balance will be included in the balance

sheet.

44

Basic Hotel Accounting Where the balance is a credit balance, it should be included under current liabilities on the balance sheet. When the balance is

a debit balance, it should be shown under current assets on the balance sheet.

4. Correction of errors. When errors are found, they must be corrected using double entry. Each correction must be described by an entry in the

journal.

Example 1: One error only.Assume that the errors of RM40 is found in the following year on 31 March 2006, the errors being that the sales account was under cast by RM40.

Action taken: Debit the suspense account to close it. Credit sales account to show items were it should have been.

Dr Suspense account Cr2006 Rm 2005 RmMar 31 Sales 40 Dec 31 Different per trial balance 40


Dec 31 Suspense 40

Example 2: More than 1 errorA trial balance at 31 December 2007 show a difference of RM77, being a shortage on the debit side. A suspense account is opened, and the difference of RM77 is entered on the debit side of the account. On 28 February all the errors from the previous year were found.

a. A cheque of RM150 paid to L.Kent had been correctly entered in the cash book, but had not been entered in Kent’s account.

b. The purchases account has been under cast by RM20.c. A cheque of RM93 received from K Sand has been correctly entered in the cash book but has not been entered in Sand

account.

These three errors have result in a net error of RM77 shown by a debit of RM77 on the debit side of the suspense account.

Dr L Kent account Cr2008 Rm 2008 RmFeb 28 Suspense (a) 150

Dr Purchases account Cr2008 Rm 2008 RmFeb 28 Suspense (b) 20

Dr K Sand account Cr2008 Rm 2008 Rm

Feb 28 Suspense ( c ) 93

Dr Suspense account Cr2008 Rm 2008 RmJan 1 Balance b/d 77 Feb 28 L Kent ( a) 150Feb 28 K Sand ( c ) 93 Feb 28 Purchases (b) 20

170 170

Exercises20.1 On 31 March 2005 the following items are to be corrected via the journal. Show the corrections.

45

Basic Hotel Accountinga. T.Thomas, a customer, had paid us a cheque for RM900 to settle his debts. The cheque has now been returned to us marked

‘Dishonored’.b. We had allowed C Charles, a debtor, a cash discount of RM35. Because of a dispute with her, we had now disallowed the cash

discount.c. Office equipment bought for Rm6, 000 has been debited to motor vehicles account.d. The copy sales invoice of sales to J Graham RM715 was lost, and therefore was completely omitted form our books.e. Cash drawings of RM210 have been correctly entered in the cash book but have been credited to the wages account.

20.2 On 31 December 2004, your bookkeeper extracted a trial balance that fail to agree by RM330, being a shortage on the credit side of the trial balance. A suspense account was opened for the difference.

In January 2005 the following errors made I 2004 were found.

i. Sales day book has been under cast by Rm100.ii. Sales of RM250 to K Hart had been debited in errors to K Hartley’s account.iii. Rent account had been under cast by RM 70.iv. Discount received account had been under cast by RM300.v. The sales of motor vehicles at net book value had been credited in errors to sales account RM360.

Required:a. Show the journal entry necessary to correct the errors.b. Draw up the suspense account after the error described have been correctedc. If the net profit have previously been calculated at RM7, 900 for the year ended 31 December 2004, show the calculation of

the corrected net profit.

CONTROL ACCOUNT

1. Need for control account When all accounts were kept in one ledger, a trial balance could be drawn up as a test of the arithmetical accuracy of the

account. It must be remember that certain errors were not reveal by such a trial balance. We have to check every item in every ledger. What is required is a type of trial balance for each ledger, and this requirement

is met by the control account.

2. Principle of control account If the opening balance of an account is known, together with the information of the additions and deductions entered in the

account, the closing balance can be calculated.

3. Information for control account The following tables show where information is obtained from in order to draw up control accounts.

Sales ledger control Sources1. Opening debtors List of debtors’ balance drawn up at the end of the previous period.2. Credit sales Total from sales journal.3. Return inwards Total of return inwards journal.4. Cheque receives Cash book: Bank Column on received side. All transaction of credit purchased

extracted.5. Cash received Cash book: Cash column on received side. All transaction of cash sales

extracted.6. Discount allowed Total of discount allowed column in the cash book.7. Closing debtors List of debtors’ balances drawn up at the end of the period.

Purchases Ledger Control Sources1. Opening Creditor List of creditors’ balances drawn up at the end of the previous period.2. Credit Purchases Total from purchases journal3. Return Outward Total of return outward journal

46


4. Cheque paid Cash Book: Bank column on payment side. All transaction of credit purchases extracted.

5. Cash paid Cash book: Cash column on payment side. All transaction of cash purchases extracted.

6. Discount received Total of discount received column in the cash book.7. Closing creditors List of creditors’ balances drawn up at the end of the period.

Exercises21.1 You are required to prepare a sales ledger control account from the following:

2004 RMMay 1 Sales ledger balances 4,560

Total of entry for may:Sales day book 10,870Return inward day book 460Cheque and cash received form customers 9,615Discount allowed 305

May 30 Sales ledger balances 5,050

21.2 You are to prepare a sales ledger control account from the following. Deduce the closing figure for the sales ledger balance as at 31 March 2008.

2008 RMMar 1 Sales ledger balances 6,708

Totals for March:Discount allowed 300Cash and cheque received from debtors 8,970Sales day book 11,500Bad debts written off 115Return inwards day book 210

Mar 31 Sales ledger balances ?

21.3 Draw up a purchases ledger control account form the following:

2002 RMJune 1 Purchases ledger balances 3,890

Total for June:Purchases day book 5,640Return outward day book 315Cash and cheque paid to creditors 5,230Discount received 110

June 31 Purchases ledger balances ?

VALUE ADDED TAX

1. Introduction Value added tax (VAT) is a tax on turnover, not on profit. It is describe as an indirect tax, and ultimately the tax is paid by

the final consumer of the goods or services. The rate of VAT is decided by parliament through the finance acts, which are passed each year after the budget.

2. VAT system workExample: A toymaker manufactures toys from scarf of material, and sell them to a wholesaler for RM200 plus VAT. The

wholesaler sales these toys to a chain of retailers for RM300 plus VAT, who in turn retail the toys in their shops for RM400 plus VAT.

(I) The toymaker account for VAT as follows:Net (RM) VAT (RM)

@ 17.5%Sales of toys 200 35

47


Cost 0 00VAT payable 35

(II) The wholesaler account for VAT as follow:Net (RM) VAT (RM)

@ 17.5%Sales of toys 300 52.50Cost 200 35.00VAT payable 17.50

(III) The retailer account for VAT as follows:Net (RM) VAT (RM)

@ 17.5%Sales of toys 400 70.00Cost 300 52.50VAT payable 17.50

3. Vat included in gross amount To find the gross amount of VAT that has been added to the net amount , a formula capable of being used with any rate

of VAT is:

% rate of VatX Gross amount = VAT in RM

100 + % rate of VAT

Example: Suppose that gross amount of sales was RM940.00 and the rate of VAT was 17.5 per cent. Finding the amount of VAT and the net amount before VAT was added using the formula yields:

17.5X 940

100 + 17.5

17.5X 940

117.50

= 140

Exercises22.1 Comart Supplies Ltd recently purchased from Ace Import Ltd 10 printer originally priced at RM200 each. A 10 percent trade

discount was negotiated, together with a 5 percent cash discount if payment was made within 14 days. Calculate the following:

a. the total of the trade discountb. the total of the cash discountc. the total of the VAT

22.2 A manufacturer sales a product to a wholesaler for RM200 plus VAT of RM35. The wholesaler sells the same product to a retailer fro RM280 plus VAT of RM49. The retailer then sells the product to a customer for RM320 plus VAT of RM56. What is the amount of VAT collectable?

48


TOPIC 7: SINGLE ENTRY AND INCOMPLETE RECORD

1. Why does double entry sometime is not use? For every small shopkeeper, market stall or other small business to keep it books using a full double entry system would

not be practical. A large number of the owner of such firm would not know how to write up a double entry records, even if they want to. It is more likely that they would enter details of a transaction once only, using a single entry system. Many of them

would fail to record every transaction, resulting n incomplete records. However despite many small business not having any need for accounting record, most do have to prepare financial

statement or at least calculate their sales or profit once a year.

2. Profit as an increase in capital.a. identifying profit when opening and closing capital are known.

Profit can be found by subtracting capital at the start of the period from that at the end of the period.b. identify when you only have a list of the opening and closing asset and liabilities.

Using statement of affairs to calculate the amount of profit. Statement of affair is a balance sheet, but it is used when you are dealing with incomplete record.

Exercises23.1 F Lee starts in business on 1 January 2002 with RM35, 00 in a bank account. Unfortunately he did not keep proper books of

account. He forces to submit a calculation of profit for the year ended31 December 2003 to the inspector of tax. He ascertain that at 31 December 2002 he had stock valued at cost RM6,200, a van which has cost RM6,400 during the year and which had depreciated during the year by RM1,600, debtors of RM15,200, expenses prepaid of RM310, a bank balance of RM33,490, a cash balance RM270, trade creditors RM7,100 and expenses owing RM640.His drawings were: Cash RM400 per week for 50 weeks, cheque payments RM870.Draw up statement to show the profit or loss for the year.

23.2 Ivor Clue is a magician. He has conjures up the following result form his non-existent accounting records.Fees are equal to 5 times his direct cost.At any given times his stock equal one week’s direct costs.He defines a month as four weeks.His stocks at both 31 May and 30 June were valued at RM500.

Required:Calculate his fees and profit for the month of June.

23.3 The following is the summary of Jane’s bank account for the year ended 31 December 2002.

49

Basic Hotel AccountingRM RM

Balance 1.1.2002 4,100 Payment to creditors for goods 67,360Receipt from debtors 91,190 Rent 3,950Balance 31.12.2002 6,300 Insurance 1,470

Sundry expenses 610Drawings 28,200

101,590 101,590 All of the business taking have been paid into the bank with the exception of RM17, 400. Out of this Jane has paid wages of RM11, 260, drawing of rM1, 200 and purchase of goods RM4, 940.The following additional information is available:

31.12.2001 31.12.2002Stock 10,800 12,200Creditors for goods 12,700 14,100Debtors for goods 21,200 19,800Insurance prepaid 420 440Rent owing 390 -Fixtures at valuation 1,800 1,600

You are to draw up a set of financial statement for the year ended 31 December 2002. Show all of your working.TOPIC 8: HOTEL EXPENSES ACCOUNTING

In the accounting terminology, expense is an income statement account representing the cost of items consumed in the process of generating revenue (ex. Cost of Goods Sold) or that expires due to the passage of time (ex. Depreciation Expense).

Expense cannot be mixed with expenditure. For, Expenditure represents the purchase amount (whether paid in cash or credited with the Accounts Payable) of a certain asset.

According to the matching principle, all expenses must be recorded in the same accounting period as the revenue that they helped to generate.

In the hotel industry, expenses are divided into two main categories:

a. Direct Expenses: These are the expenses that vary with the level of production. For example, in the Food and Beverage department,

the Cost of Food Sales is a direct expense.b. Indirect Expenses:

These are the expenses that do not vary with the level of production, or variable costs that can not be feasibly distributed to various Financial Reporting Centers. In the hotel industry, indirect expenses are, hence, divided into two different categories: i. Fixed Charges:

For, these very expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single department.

To illustrate, if a hotel insures itself against fire, theft and burglary, and one day some valuable equipment has been stolen, from any department whatsoever, the insurance company will indemnify the hotel.

ii. Undistributed Expenses: Examples might include electricity, energy, and water expenses. For, usually the hotel receives a total

energy bill to be paid. In the old days, some hotels went for allocating this amount according to certain factors (ex. Surface, Department Usage)

However, this practice proved to be misleading, since it might under-allocate energy expenses for some departments and over-allocate it for others. Nowadays, most of the hotels decide not to allocate such expenses any more. Rather, hotels report such expenses in separate schedules.

1. Typical Hotel Departments: Rooms Division Department:

- It is the place where guests receive several kinds of services ranging from reservation, registration, to checkout and settlement of their accounts. This department typically compromises a Rooms Division manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform service personnel.

- This department typically compromises a Rooms Division manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform service personnel.

50

Basic Hotel Accounting- The various types of Rooms Division department direct expenses include:

a. Commission’s expenses: This account includes payments by the hotel to authorized agents that bring room business to the hotel. Usually at the end of each month, hotels sit with these agents in order to reconcile their monthly sales figures and authorize commission payment (usually in the form of a percentage of room revenue).

b. Reservation expenses: This expense account represents any payment to various agents contracting to bring potential room revenue business to the hotel. These agents might have the form of Central Reservation Offices (Whether affiliate or non-affiliate), Intersell agencie.

c. Contract cleaning expenses: This expense account represents payment to contracting outside cleaning agencies. Some hotels (especially small and middle size hotels) might opt for contract cleaning because of its attractive financial implications. If this is the case, these hotels might not be forced to have a housekeeping department, or might keep housekeeping staff to minimum. Such expenses should be determined in light of the contract signed between both parties (i.e. the hotel from one side and the cleaning company from the other.)

d. Laundry and dry cleaning expenses: This cost applies to outside laundry and dry cleaning costs for the Rooms Division department. In most of the cases, such contracts are signed to benefit more than one revenue generator. In this case, the Rooms Division department shall report the laundry and dry cleaning expenses related only to the Rooms Division department.

e. Guest transportation expenses: These expenses include the cost of transporting guests from and to the hotel via various means of transportation (ex: Mini-buses, buses, limousines…). If the guest transportation's volume business, staff, and costs are significantly high, then a separate department might be established.

f. Linen expenses: This specific expense account includes the allocation of a portion of linen expenditure for a specific period of time. This practice goes along with one of the accounting principles: the matching principle. Some sub-accounts of linen expense might be: Towels expenses, Facecloth expenses, Blankets expenses, Sheets expenses, Pillow expenses.

g. Guest supplies expenses: This account includes the various guest supplies provided free of charge to guests in their rooms. Some sub-accounts of guest supplies expenses might include:

Newspaper expenses Guest stationary expenses Shoe cloth expensesCoffee expenses Writing supplies

expensesToilet requisites expenses

Flowers expenses Hangers expenses Matches expensesIce expenses Candy expenses

h. Cleaning supplies expenses: Such an account includes the cost of Rooms Division's cleaning supplies. Some sub-accounts of guest supplies expenses might include:

Brooms expenses Soaps and polishes expenses

cleaning cloths expenses

Mops expenses Cleaning chemicals expenses

Dusters expenses

Brushes expenses Insecticides expenses Dustpans expensesPail expenses cleaning accessories

expenseDisinfectants expenses

i. Printing and stationary expenses: This expense account includes printed formats (ex: virgin registration records, reservation records, guest folios…), office supplies (ex: pens, pencils, rubbers, erasers…), printed manuals and guidelines for the use of the Rooms Division employees. Some sub-accounts of printing and stationary expenses might include:

Binders expenses Floor plans expenses Pencils and Pens expensesVouchers expenses Rack card expenses Reports expensesDesk pad expenses Envelopes expensesFolio expenses Ink expenses

j. Uniforms expenses: This expense account includes the allocation of a portion of uniforms asset (if the hotel purchases uniforms) for a certain period of time along with the expense of repairing, and cleaning them. If the hotel rents uniforms rather than purchasing them, then the uniform expense

51

Basic Hotel Accountingshall include the renting cost, usually predetermined in light of the contract linking the hotel and the uniform renting company.

Food & Beverage Department: This department is responsible for the preparation and service of food and beverage to guests. It compromises the kitchen, restaurants, bars, and any premise in which Food and Beverage is served.

Telephone Department: This department is responsible to handle guest communication. This might be insured through connecting guests to desired locations, whether in-house, local or long distance calls. Moreover, this department is usually composed of a chief operator, supervisors, operators, and messengers. Last, with the automation revolution affecting right now most hotels, it became possible to separate calls of guests and communication handled by hotel employees, therefore, making it possible to have the telephone department as a minor revenue generating department. For, prior to automation, the separation of cost of calls was not possible and hence the telephone department might show frequently a loss since telephone direct costs are overstated.

Administrative & General Department: Actually looking at any hotel organization chart, Administrative and General Department (referred usually as A&G) does not exist. It is however a financial reporting centers including executives of the Hotel (ex: General Manager, Assistant General Managers…) and other employees involved with executive and financial activities (ex: Accounting personnel, resident Manager, Accounts Receivable clerks, Night Auditors…). Moreover, if there is staff in the hotel not included in departments due to low business volume not justifying the establishment of a department, they might be included under the A& G department (ex. Data Processing Staff, Transportation Staff, and Personnel Staff…).

Marketing Department: This department is composed of a marketing manager, marketing assistant managers responsible for sales, convention, public relations, and advertising functions, along with marketing personnel. This department is a cost center that indirectly supports revenue generators in their sole aim of generating hotel revenue. This can be insured, for example, through large group reservations, hence maximizing room revenue, or buffet, conference, and catering opportunities brought by this very department hence maximizing room revenue, F& B revenue, and the hotel revenue as a whole.

Property, Operation and Maintenance (POM): Concerned with the appearance and physical condition of the building, the repair and maintenance of equipment, and rubbish removal. Some positions of this department might include POM manager, POM assistant manager(s), electricians, plumbers, gardeners, painters, and interior design specialists.

Data Processing Department: This special department might be established in hotels operating under the fully automated system. Moreover, such hotels should have significant investment in computer equipment and staff to justify the establishment of a single department. If these conditions do not exist, than the Data Processing functions would be financially grouped under Administrative & General Department.

Human Resources Department: Similar to Data Processing Department, if the Dollar Amount and Staff incurred for employees' hiring, screening, interviewing, selecting, recruiting, and Training is significant, than a Human Resources Department may be established. Otherwise, Human Resources functions would be financially grouped under Administrative & General Department

Guest Transportation Department: If the Dollar Amount and Number of Staff employed in the transportation of Guests is significant, a separate Department might be established. Otherwise, guest transportation staff would be grouped under Rooms Division Department.

2. Financial Reporting Centers:A Financial Reporting Center is an area of responsibility for which separate Cost Information must be collectedMight be classified as Revenue Centers, Support Centers, and Other Financial Reporting Centers1. Revenue Centers Generate Revenue through sales of Products and/or Services to Guests Rooms Food and Beverage Telephone Gift Shops Garage and Parking Other Operated Departments Rentals and other Income

2. Support Centers those departments that have minimal Guest Contact and do not produce Sales. Yet, they do provide services to Revenue Centers, which, in turn, provide Services to Guests Administrative & General Marketing Property Operation and Maintenance Data Processing

52

Basic Hotel Accounting Human Resources

3. Other Financial Reporting Centers include Energy Costs and Fixed Charges (Rent Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and Amortization Expenses)

Each Financial Reporting Center should be assigned an Identification Number. To illustrate, consider the following Example:

Financial Reporting Center Identification NumberRooms 11

Food and Beverage 15Telephone 17

Administrative & General 31Marketing 36

Property Operation and Maintenance 38Energy Costs 41Fixed Charges 51

Furthermore, each Account should be assigned an Identification Number. Hotels commonly opt for either the Five-Digit (xx-xxx) or Eight-Digit Account Numbering Systems (xx-xxx-xxx)

3. Responsibility Accounting:Aim provides Financial Information useful in evaluating the effectiveness of Managers and Department Heads. That's why only Direct Expenses should be charged to Specific Departments

1. Expenses include the day-to-day Costs of Operating the Business, the Expired Costs of Assets through Depreciation and Amortization, and the "write-off" of pre-paid items. Expenses are classified as Direct expenses (Cost of Sales and Operating Expenses), Indirect Expenses (Fixed Charges and Undistributed Expenses) and Income Taxesa) Direct Expenses they are Costs incurred solely for the benefit of a particular Department Cost of Sales Payroll Expenses Payroll-related Expenses Operating Supplies China, Glassware, Silver, and Linen Laundry and Dry Cleaning

b) Indirect Expenses They are incurred for the benefit of the Hotel as a whole, and cannot be identified with any particular Department

Property Insurance | Interest Expense | Property Taxes | FIXED CHARGES Rent Expense | Depreciation and Amortization |

Marketing Expense | Administrative & General Expenses | UNDISTRIBUTED EXPENSES Property Operations and Maintenance | Energy Costs |

c) Income Taxes it is neither a Direct Expense, nor an Indirect Expense. It should appear as a separate Line Item on a Hotel's Summary Income Statement

2-Departmental Expense Accounting:Separate Expenses versus one Lump-sum Amount of Expenses

4. Payroll and Payroll-related Expenses:

1. Salaries and Wages (Payroll Expense) Includes Salaries, Wages, Overtime Pay, and any Employee Bonuses and Commissions 2. Employee Benefits Include Vacation and Holiday Pay3. Payroll Taxes Includes Social Security Taxes (Employer's Portion)

53

Basic Hotel Accounting4. Employee Meals Includes the Cost of Food furnished to Employees as a Convenience to the Employer5. Worker's Compensation Insurance Includes the Expense of Worker's Compensation Insurance6. Employee Group Plans Includes Life and Health Insurance, and Other Forms of Employee Group-plan Fringe Benefits

54

HAC 1001 NOTES

Documents

Transcript of HAC 1001 NOTES