# Revision time – SOCI/SOFP (Level 1)

Again…. for those who really wants to study. You can print this and attempt this exercise.

 RM RM Dr Cr Sales and Purchases 61,900 287,600 Returns 1,750 1,010 Carriage inwards 2,500 Inventory 1.1.18 10,400 Equity 1.1.18 150,000 Salary 52,000 Rental 15,000 6,000 Interest 2,200 1,480 Stationery 2,750 Utilities 8,800 Insurance 1,520 Bad debt 2,400 Advertising 8,550 Premises 200,000 Furniture and fittings 15,000 Machinery 30,000 Receivables and payables 35,400 8,730 Bank 4,500 Cash 150 454,820 454,820

 Closing inventory as at 31.12.2018 is RM12,350 Depreciation for machine is to be provided at 20% using straight line method The owner took RM100 on a weekly basis throughout the year from the bank

Good luck

# Depreciation – Part 4

Reducing balance method

I almost forgot that I haven’t finish the depreciation calculation for the above method. How about I use the previous example for this method as we can see clearly the difference between them. Just wait….

A machine cost RM80,000 acquired in 2016. The depreciation is 20% per annum using reducing balance method.

As you can see, the calculation doesn’t change much. It just that, the similarities of between the straight line and reducing balance is that, they have same depreciation figure for the first year. This is because, the cost will be the base for the calculation. Therefore, both method same the same figure ONLY for the first year.

As for the second year, the reducing balance method, takes the balance figure (Net book value), using it as the base. By using the net book value each year as the base to calculate the yearly depreciation, the annual depreciation will continue to decrease. Therefore, the expenses to be reported in the SOCI will be smaller and smaller every year. And also, the profit looks good too.

But…..

It all depends on the company policy and also the advice from the auditor. Companies always use the normal practice according to the industry. Whenever they want to change the method of depreciation, they have to ask for and advise from the auditor and they better have such a strong reason on why they want to change method.

Try to compare between those two. What would be the net profit in year 5, given the gross profit of RM50,000. Answers? Tell me in class.

# Depreciation – Part 3

Again….

There are two popular methods in calculating depreciation;

1. Straight line method
2. Reducing balance method

Straight line method

As stated by its name, straight line refers to the recurring figure over and over the year throughout its useful life. Of course the asset has its useful life as stated in my posting previously. For example;

A machine costing RM80,000 acquired in 2016. The useful life of the machine is 5 years. Then, the depreciation calculation is to get the cost of the machine and divided by the total number of years expected (useful life).

The calculation would be RM80,000/5 years = RM16,000  per year. This RM16,000 is the annual depreciation charged to the Profit and Loss Account in the expenses section for the next 5 years. Clear example will be as below;

See! every year will be the same depreciation figure. That is why we called this a straight line method.

Now, for another example,

A machine cost RM80,000 acquired in 2016. The expected useful life of the machine is 5 years and at the end of year 5, the machine is expected to have a secondhand value of RM10,000. Then the depreciation calculation will be as follow,

Since the depreciation charged is RM14,000 every year, then it is a straight line method. Because the same figure keeps recurring every year.

Another example…

A machine cost RM80,000 acquired in 2016. The depreciation is 20% per annum using straight line method. Here, the question is clear, it states the depreciation method. So the depreciation calculation will be much simpler.

Last one, many huh!

A machine cost RM80,000 acquired in 2016. The depreciation is 20% at cost. It doesn’t state the depreciation method as well as useful life. The question is silent. Logically, if the depreciation is at cost, then the calculation should always refer to the cost. Just follow the same calculation as above.

Ok see you later!

# Depreciation – Part 2

There are also other reasons for depreciation and that are

• Obsolescence
• Wear and tear
• Perishability
• Usage right
• Natural causes

Obsolescence

It comes from the word obsolete. Do you know what is typewriter. If you don’t know, I suggest you can browse the net and take a look at the thing. Years ago, people use that to type letters etc. And now, people seldom use that unless you have a power failure or a times of emergency. It is now being replaced by the computer. We can say that the typewriter is now obsolete and may cause inefficiency.

Wear and tear

Things will be old. Humans also growing old and older by the day. Like I was saying previously, you purchased a mobile phone and the usage of the mobile phone will eventually makes the phone looks old. Even when you have a new car today, what will your car looks in the next 5 years? Clothes…the colour will gradually changed and end up as a cloth for wiping tables!

Perishability

Some asset has a very short life span. Mostly applicable to inventory. Did you notice that there is an expiry date on the bottle of milk you purchase from the convenient store or a loaf of bread, there must be an expiry date. That time limit is also the sign of depreciation. Of course the milk is still fresh within the period and  still safe to drink until the last date. But do you want to drink a milk that will expire tomorrow.? I don’t think so…

Usage right

The usage right is quite similar to the above concept. We take a software for example. Sometimes you purchase a program at a very high cost but the usage is only for a couple of years. So the software will be self terminated at due time. For instance, like any other antivirus software…it lasts only one year. then it will continue to updating new database as you extended or purchased new license.

Natural causes

Erosion, rust, rot and decay, that are some of the natural causes that cause the depreciation. Land facing erosion, steel rust, wood will rot and teeth will decay. We cannot stop that because its natural. So everything depreciates.

# Depreciation – Part 1

Why depreciate?

As you all know, it is because of time. Will you be young forever? I don’t think so unless you are immortal. Humans ageing every minute of their life. Same goes to non-living things. They grew older and older through time.

So…Assets. We have current and non-current assets. The one that we will focus on is the non-current assets. This is because the business use these assets to generate income and in their operations. Still remember what are the things in the non-current assets? They are land and building, pant and machinery, fixtures and fittings, motor vehicles and office equipment. All these things the business use to generate income, which they owned, possess and control.

Simple example for depreciation, let say, you bought a mobile phone last January 2017 for RM3,000 and then you want to sell it to your friend in December 2017. How much you think you can sell it? Can you sell it for RM3,000 same as you purchased the mobile phone a year ago? Well, if you succeed to sell it for the same price you bought it at RM3,000, congratulations! Maybe that person either crazy or want to win your heart or maybe that person is on drugs! If you ask me, how much would I take it, of course, I would happy to purchase it from you for RM800-RM1,000.

Why?

Because the phone is considered a second hand item. It is already being used. Probably it might fell down from a cliff or something and not to mention, the owner of the phone always bring the phone to the toilet for whatever reasons…

The difference between the original price (cost price) and the current value is what we called depreciation. Original cost is RM3,000, the secondhand value is RM1,000. The difference is RM2,000 is depreciation. That is the cost of using the asset.

That is the simplest explanation for depreciation.

So tune in for the next episode. Later! Chiow!

# Cash book

Assalamualaikum,

We have actually or currently studying cash book. It is the combination of the cash account and also the bank account. In reality, we don’t have cash account coz we will only dealing with petty cash. We will not cover petty cash at the moment, so let’s focus on the cash book as it will be a question in your final.

I have already covered most of the topic during my lecture. And here is some notes I took from the net. You as same as me, should always refer to the net because it has so many valuable information that might help you in your study. Since you want to be spoon fed, then I’m not pasting it in my posting.

# Definition and Explanation of Cash Book

## Definition:

The book in which all cash transactions (either cash is received or paid) are primarily recorded according to dates, is called ‘Cash Book’.

## Features:

A Cash Book has the following features:

1. It plays a dual role. It is both a book of original entry as well as a book of final entry. All cash transactions are primarily recorded in it as soon as they take place; so it is a journal (a book of original entry). On the other hand, the cash aspect of all cash transactions is finally recorded in the Cash Book (no posting in Ledger); so a Cash Book is also a Ledger (a book of final entry).
2. Only one aspect of cash transaction is posted to the ledger account. The other aspect ( i.e. cash aspect) needs no posting in Cash A/c. Since the Cash Book is the substitute for Cash A/c, no Cash A/c is opened in the ledger.
3. It has two identical sides-left hand side, the debit side and right hand side, the credit side.
4. All the items of cash receipts are recorded on the left hand side and all items of cash payments on the right hand side in order of date.
5. The difference between the total of two sides shows cash in hand.
6. Its balance is verified by counting actual cash in the cash box.
7. It always shows debit balance. It can never show credit balance.

Generally cash transactions are numerous. What is credit transaction today, will be cash transactions tomorrow. In other words, all credit transactions are finally settled by cash. If like all other transactions cash transactions are also recorded primarily in Journal, the cash aspect of the transactions will be required to be posted to Cash A/C, in the Ledger separately. This involves much time and labour. This is why, cash transactions are recorded in a separate book named Cash Book. It saves much time and labour. Besides this the Cash Book renders the following benefits:

1. Daily cash receipts and cash payments are easily ascertained.
2. Cash in hand at any time can easily be ascertained through Cash Book balance.
3. Any mistake in the book can be easily detected at the time of verification of cash.
4. Any defalcation of money can be detected while verifying cash.
5. Since cash is verified daily, Cash Book is always kept up-to-date.

## Is Cash Book a Journal or a Ledger?

From the above discussion it appears that the Cash Book is the substitute for the Cash Account. In fact, no separate Cash Account is opened in the Ledger, Cash Book serves the purpose of the Cash Account. The entries in Cash Book are regarded as one aspect of the Double Entry System – the other aspect is posted to the Ledger in the concerned account. L.C. Cropper remarked “Every entry in the Cash Book makes one half of a double entry; the other half of the double entry appears on the opposite side of some account in the Ledger.”From this angle, ‘Cash Book is a Ledger’.

On the other hand, all cash transactions are primarily recorded in the Cash Book in order of date and thereafter posted to the concerned ledger accounts. Judging from this angle, ‘Cash Book is a Journal’. Thus we see that a Cash Book is the ‘mixture of Journal and Ledger’. According to Spicer & Pegler, “the Cash Book is actually a ledger account, but owing to the large number of entries made therein, it is kept in a separate book, called a Cash Book, which is used also as a book of prime entry.”

## Specimen/format of Simple Cash Book:

 Date Particular V. No. L. F. Amount\$ Date Particulars V. No. L. F. Amount\$

## The Columns of the Cash Book are Explained Below:

### 1. Date:

The date of transaction is written in this column in two lines—in the first line, the year and in the second line, the name of the month followed by the actual date.

### 2. Particulars:

In this column the name of the opposite account is written (the second aspect of cash transaction). Below this is written the narration of the transaction.

### 3. L.F. (Ledger Folio):

The page number of the Ledger where the concerned (opposite ) account has been opened, is written in this column. This will help to locate the account from the Ledger. It may be noted that in a Ledger account J.F. is written as reference, while in a Cash Book L.F. is written. It is so, because cash transactions are not recorded in any Journal.

### 4. Amount:

The amount of the transaction is recorded in this column. The amount of cash received is recorded on the debit side in amount column and the amount of cash paid is recorded on the credit side in amount column.

### 5. V. NO. (Voucher Number):

The voucher number of each item of receipt and payment is also written. A voucher is necessary for each item of receipt and payment. Generally, a voucher has a serial number and this number-is written in this column (V. No).

When cash is received from a debtor or customer, generally a receipt or ‘cash memo’ is issued to the debtor which is called Receipt Voucher. Again, when money is paid to a creditor or supplier a receipt is obtained from him which is called ‘Payment Voucher, Cash transactions are recorded in the Cash Book on the basis of Receipt Voucher and Payment Voucher.

Thus, a document evidencing cash receipts and payments and forming the basis for making entries in the Cash Book is called Cash Voucher.

## Distinction Between a Cash Book and a Cash Account:

In fact, Cash Book is a substitute for a Cash Account. Yet there are some differences between the two, which are given below:

 Cash Book Cash Account 1. It is a separate book in which cash transactions are directly recorded. 1. It is an account in a Ledger in which posting is made from journal. 2. It serves the purpose of both journal and ledger and hence cash transactions need not be primarily recorded in Journal. 2. It serves the purpose of a Ledger only. If Cash A/C is opened in the Ledger, all cash transactions are first recorded in journal. 3. Narration is required. 3. Narration is not required. 4. A column for Ledger Folio is provided. 4. A column for Journal Folio is provided.

Thanks and credits to:

http://www.accountingexplanation.com/definition_and_explanation_of_cash_book.htm