Session 1
☆Types of business entity
A business can be organized in one of the several ways:
●Sole trader – a business owned and operated by one person.
The simple form of business is the sole trader. This is owned and managed by one person, although there might be any number of employees. A sole trader is fully personally liable for any losses that the business might make.
●Partnership – a business owned and operated by two or more people.
A partnership is a business owned jointly by a number of partners. The partners are jointly and severely liable for any losses that the business might make.
（Traditionally the big accounting firms have been partnerships, although some are converting their status to limited liability companies.）
●Limited Liability Company – a business owned by many people and operated by many （ though not necessarily the same） people. Companies are owned by shareholders.
Shareholders are also known as members. As a group, they elect the directors who run the business. Companies are always limited companies.
In summary, types of business entity should be differentiated in Ownership; Operation right and Liability for the business to undertake.
For all three types of entity, the money put up by the individual, the partners or the shareholders, is referred to as the business capital. In the case of a company, this capital is divided into shares.
☆Business Transactions: Main types of business transactions for a business include: ●Purchase of inventory for resale ●Sales of goods
●Purchase of non-current assets ●Payment of expenses
●Introduction of new capital to the business
●Withdrawal of funds from the business by the owner ☆Cash and credit transactions:
Cash transactions: the buyer pays for the item immediately or possibly in advance. Credit transactions: the buyer does not have to pay for the item on receipt, but is allowed some time （ a credit period） before having to make the payment. ☆Definition of accounting
Recording : transactions must be recorded as they occur in order to provide up-to-date information for management.
Summarizing: the transactions for a period are summarized in order to provide information about the company to interested parties. ☆Types of accounting
Financial accounting vs management accounting
Purpose Financial accounting Record financial transactions Limited liability company, by law, prepare financial accounts External At the end of period historic Cost and management accounting Information of cost of operations No legal requirement to prepare management accounts Internal regularly historic and forecast Legal requirement Main user Time Information ☆Users of financial statements
Accounting reports users include:
●Management: Need information about the company’s financial situation as it is currently and it is expected to be in the future. This is to enable them to manage the business efficiently and to make effective decisions.
●Investors: The providers of risk, capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help
them determine whether they should buy, hold or sell.
●Trade payables/ Suppliers: Suppliers and other trade payables. Suppliers and other trade payables are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade payables are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuance of an enterprise as a major customer.
●Shareholders: Shareholders are also interested in market value of shares as well as information which enables them to assess the ability of the enterprise to pay dividends. ●Lenders: Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
●Customers: Customers have an interest in information about the continuance of an enterprise, especially when they have a long term involvement with or are dependent on, the enterprise.
●Government and their agencies: Governments are their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics.
●Employees: Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to prove remuneration, retirement benefits and employment opportunities.
●General public: Enterprises affect members of the public in an variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. ☆The business entity concept The business entity concept
●States that financial accounting information relates only to the activities of the business entity and not to the activities of its owner.
●The business entity is treated as separate from its owners.
Session 8 Irrecoverable debts and allowances
Main contents:
1.Irrecoverable debts
2.Allowance for receivables
3.Accounting for irrecoverable debts and receivable allowances
8.1 Irrecoverable debts ●Trade receivables:
A trade receivable is a customer who owes money to the business as a result of buying goods or service on credit. ●Accruals concept:
The accruals concept requires a sale to be included in the ledger accounts at the time that it is made.Credit sales are claimed when the sale is invoiced.The double entry at the
invoice date will be:
Dr. Cr. Receivables xx
Sales xx
When the customer eventually settles the invoice the double entry will be: Dr. Cr. Cash xx
Receivables xx
Problems: collecting the amounts owing from customers Reasons: bankruptcy, fraud or disputes ●Prudence concept:
The prudence concept requires some adjustment to reflect the actual or potential loss arising from unpaid debts. ●Irrecoverable debt:
A debt which is considered to be uncollectible.
- Highly unlikely that the amount owed will be received.
- Written off by writing it out of the ledger accounts completely. ●Accounting for irrecoverable debts
- It is prudent to remove the irrecoverable debts from the accounts and to charge the amount as an expense for irrecoverable debts to the I.S.
- The original sales remains in the accounts as this did actually take place. Dr.Irrecoverable debts expense xx Cr.Receivables control account xx Example:
Arctic Co.have total accounts receivable at the end of their accounting period of $45,000.Of these it is discovered that one, Mr.X who woes $790, has been declared bankruptcy, and another who gave his name as Mr.Jones has totally disappeared owing Arctic Co.$1,240. Write up the ledger accounts to reflect the writing off these debts as irrecoverable. Solution:
Dr.Irrecoverable debts expense 2,030 Cr.Receivables control account 2,030 ●Accounting for irrecoverable debts recovered Irrecoverable debts are received
When an irrecoverable debt is recovered, the accounting entry is: Dr.Cash xx Cr.Irrecoverable debt expense xx
Example:
At 1 October 20x6 a business had total outstanding debts of $8,600.During the year to 30 September 20x7: Credit sales amounted to $44,000; Payments from various debtors amounted to $49,000; Two debts, for $180 and $420（both including sales tax）were declared
irrecoverable.After the debts was written off, the payment is received before the end of the period, now what journal entry to prepare for the recovery of payment? Dr.Cash 600 Cr.Irrecoverable debt expense 600
8.2 An allowance for receivables:
●Allowance for receivables is an estimate of the percentage of debts which are not expected to be paid.
（a）When an allowance is first made, the amount of this initial allowance is charged as an expense in the income statement, for the period in which the allowance is created. （b）When an allowance already exists, but is subsequently increased in size, the amount of the increase in allowance is charged as an expense in the income statement, for the period in which the increased allowance is made.
（c）When an allowance already exists, but is subsequently reduced in size, the amount of the decrease in allowance is credited back to the income statement, for the period in which the increased allowance is made. The value of trade receivable in the statement of financial position must be shown after deducting the allowance for receivables. Example:
A business has trade receivables outstanding at 30 June 20x5 and decided to create 5% allowances for receivables.
（a）In the income statement, the newly created allowance of $2,500 （5% x 50,000 = 2,500）will be shown as an expense.
（b）In the statement of financial position, trade accounts receivables will be shown