CHAPTER 2: ANALYZING AND RECORDING TRANSACTIONS

Accounting Cycle

A step-by-step process of recording, classifying and summarizing

economic transaction of a business.
Generates useful information in the form of financial statements
(SOPL,SOFP,SOCE)

Process (Steps in Accounting cycle)

1.
2.
3.
4.
5.
6.
7.
8.

Analyse and record transactions using journal entries

Post journal entries to ledger accounts (T accounts)
Prepare the unadjusted trial balance
Prepare the adjusting entries required at the end of accounting period
Prepare the adjusted trial balance
Prepare the financial statements (SOPL,SOCE,SOFP)
Close all temporary accounts (eg. Acc. Receivables)
Prepare post-closing trial balance (Debit side = Credit Side)

ANALYZE
PREPARE
TRIAL
BALANCE

RECORD
JOURNAL
ENTRY

POST TO
LEDGER

General Ledger
Contains main accounts (balance are shown in major financial statements)
Divided into several categories :
I.
Assets
II.
Liabilities
III.
Share Holders Equity
IV.
Revenues
V.
Expenses
VI.
Gains/Loss

Accounts
Record of increase/decrease in the specific accounts (eg. Assets, liabilities
and etc.)
Assets : Cash, Acc. Receivable, Inventory, Prepaid Expense, Motor Vehicles and
etc.
Liabilities: Acc. Payable, Unearned Revenues and etc.
Share Holders Capital and Revenues
Expenses: Utility, Depreciation, Amortization/Patent and etc.

Accounts Nature : Increase/ Decrease through Debit/ Credit

Dr.
Cr.

Assets

+
Increa
se

Decre
ase

Dr.
Liabilities

Decrea
se

Dr.
Cr.
Based on the

ASSETS
CASH
ACC
RECEIVABLE
EQUIPMENTS
PREPAID
EXPEN.

+
Increa
se

Sales Rev

Decrea
se

ASSETS =
IN THE SOFP)

Cr.

+
Increa
se

Accounting Equation:
LIABILITIES + EQUITIES (TO BE BALANCED

= LIABILITIES
Dr.
Expenses
ACC
PAYABLE
Cr.
ACCRUED EXPENSE EG.
SALARY
+ PAYABLE
UNEARNED
REVENUE
Increa Decrea
se
se

+ EQUITIES
SHARE CAPITAL
DIVIDEND

TO RECORD TRANSACTIONS IN GENERAL LEDGER (T- ACCOUNT) AND

JOURNAL
EXAMPLE: Oppa Sdn. Bhd bought an equipment for RM 1500 cash.
Solutions:

Classify which accounts involved. ( Equipment (asset) and Cash (asset) )

Determine which increase or decrease ( Buy Equipment; Increases) ( Pay
Cash; Decreases)

Journalize;
Dr.
Cr.

Equipment
Cash

1500
1500

Equipment Acc
Jan-31

Cash
balance b/d

1500
1500
1500

Jan-31

Balance c/d

1500
1500

Equipment
balance c/d #

1500
1000
2500

Cash Account
Jan-30

balance b/d *

2500

Jan-31

2500
Feb01

balance b/d

1000

*Balance b/d means the previous balance of the cash account before the
purchase takes place.
On the 31 Jan, Oppa bought an Equipment for RM1500 Cash. Thus, the Cash
Account will be CREDITED indicating there is a DECREASE in the amount of
cash.
#Balance c/d means the balance of cash AFTER the purchase takes place. Thus
this amount will be carried down to the next month (explaining why the balance
b/d of 1000 on the 1st February)

Trial Balance (Format)

WCH SDN. BHD (name of company)
Trial Balance for the year ended 31 December 20xx
Account Title
Cash
Account Receivable
Inventories
Land and Building
Prepaid Expense
Sales
Sales Return and Discount
Purchases
Purchases Return and Discount

RM (Dr)
X
X
X
X
X

RM (Cr)

X
X
X
X

Account Payable
Share Capitals
Drawings
Dividends
Utilities Expense
XX

X
X
X
X
X
XX

Income Statement (SOCI/SOPL/IS)

..Name of Company..
Statement of Profit or Loss for the year ended 31
Dec 20xx
RM
Sales
(-) Sales Return and Allowance
Net
Sales
(-) Cost of Goods Sold
*Omit
Beginning Inventory
(+) Purchases
(-) Purchase Return and
Discount
Net Purchase
(-) Ending Inventories
Gross Income
(+) Revenues

RM
x
(x)
xx

x
x
(x)
x
(x)

(-) Expenses
Insurance
Expense
Depreciation
Advertising
Salaries
Expense
Net Income / Net loss (if
Negative)

(xx)
xx
x
xx

x
x
x
x

(xx)
xx

WCH SDN BHD

Statement of Changes in Equity for year ended 31

December 20xx
RM
Opening Balance (Jan 1)

(+) Net Income/Loss

(+)Additional Capitals

x
xx

(-) Dividends)

(xx)

Retained Earning (Dec 31)

xx

*omit COGS if the Company provides services not

product
WHC Sdn. Bhd.
Statement of Financial Position as at 31 December 20xx
RM
Non Current Assets
Land
Building @ NBV
Motor Vehicle @ NBV

x
x
x
xx

Current Assets
Cash
Account Payable
Inventories
Prepaid Expense
Total Assets

x
x
x
x
#

Non-Current Liabilities
Long Term Loan

Current Liabilities
Account Payable
Accrued Expenses (payable account)
Unearned Revenue

x
x
x
xx

Equity
Share Capital
(+)Retained Earning (Dec 31)
Total Liabilities + Owner's Equity

xx

x
x
#

xx

# These two must be the same

# You may use the T-Account Concept for SOFP,
i.e. Assets = Liabilities + Equity

Exercises

Chapter 3: Adjustments
Adjustment
Financial reporting that corrects any mistakes
made previously in the accounting period.
Adjusting Account
To balance the assets/liabilities account to its
proper amount
2 types of adjustment :
I. Pay or Receive Cash in advance before
expense or revenue is recognized (Matching
Principal)
II. Pay or Receive cash after expense or revenue
is recognized
Paid/Receive (BEFORE) - Prepaid Expense
- Unearned Revenues
(Receive in advance)
Paid/Receive (AFTER) - Accrued Expense ( eg. Salary
Payable)
-Accrued Revenue

Examples:
Prepaid Expense
- resources paid but not yet receive the
benefit
- An asset until you have used it (turns
into operating expense)
- Example: Prepaid Insurance
Eg. Ahmad and Co. paid RM 3000 for Insurance which
covers for 1 year on the 1st of November 2013. The
Company closes its account on the 31st December
2013. What will be the adjustment needed?

Solutions and Explanations:

-On the 1st November 2013, the transactions involved
are Debit the Prepaid Insurance and Credit Cash RM
3000 (assume they pay cash)
-Thus, the asset (Prepaid Insurance Increases by
RM3000), and Cash (decreases by RM 3000).
-On the 31 December 2013, the insurance has covered
the first two months of the 1 Year of coverage ( 1st Nov
2013- 31st October 2014)
-So, the company must make some adjustment for
the prepaid expense as the operating expense
(Insurance Expense) has been incurred.
The Adjustments Involved as of 31 December 2013
Dr
Cr

Insurance
Expense
Prepaid
Insurance

*500
500

*(3000/12) x 2
months (Nov and
Dec)

Unearned Revenues
o Money received in advance
o Services to be provided in the
future
o Revenue is earned when job is
performed
o It is a liability ( under Current
Liability,SOFP)
Eg. On the 31st Oct 2014, Gees Consultation agrees to
provide consulting services to a company for a fixed
fees of RM5000 for 5 months and they receive the RM
5000 in advance.
Thus the journal entry would be;
Dr
Cash
5000 *Cash Increase by RM5000
Cr
Unearned Service Fee
5000 *Liability Increases by
RM5000
until job is
performed
But since Gees closes its account on the 31st December
2014, the need to make some adjustments to the
respective account, to ensure that they do not
understate or overstate the net income as well as the
liability. (Prudent Concept applied)
The adjustments involved;
Dr
Cr

Unearned Service Fee

2000

Service Fees Earned

2000

2014.
#Explanation;

*(5000/5)x 2months
*Jobs performed from
1st Nov till 31st Dec

-Previously as of 31st Oct, the liability is increased by

RM 5000
-As of 31st December, the Gees has performed the job
for 2 months thus the obligation or liability towards the
customer has been reduced by 2 months.
-Gees company has recognized the RM 2000 as its
revenue/sales
Accrued Expense
- cost incurred in the accounting
period
But unrecorded and unpaid
For examples like salary payable
Eg. Zakis Sox employee earns RM 2000 monthly and
receive his pay on the last day of each month.
Unfortunately, on the month of December 2014, the
company couldnt pay the employee his full salary due
to some financial problem. They only pay RM 1000.
So on the 31st December, the transaction occurred is
*The RM 1000 is recognized
Dr
Salary Expense
1000
as an expense by the
Cr
Cash
1000
Company
* Cash reduced by RM1000

At the same time, as the company owes the employee

the balance of his pay, they need to make adjustment
to avoid understating their liability.
The adjustment Involved ;

Dr
Cr

Salary Expense
Salary Payable

1000
1000

*The balance of RM1000 is

recognized as an expense
* They owe the employee RM

1000
Accrued Revenue
- Revenue earned but not yet paid
and recorded
- an asset to the company
Eg. On the 1st Nov 2014, Zul has rented his building to
Wafiy Comel Sdn Bhd for RM 2000 per month. The rent
is to be paid once in 2 months basis. Unfortunately, at
the end of December 2014, Wafiy Comel Sdn Bhd only
able to pay half of the total amount.
So, on the 31st December, Zul will record the following,
Dr
Cash
1000 *Receive cash, so cash
increases by RM 1000
Cr
Rent
1000
* Recognize revenue of RM
1000
But since Wafiy Comel owes Zul another RM1000, Zul
needs to make some adjustment.
Dr
Cr

Rent Receivable
Rent

1000
1000

*Rent owed to Zul (an asset)

*Recognized the revenue

Supplies
Consumable items that have shorter life
span
Stocked for recurring use

 An asset to the company until it is used

(expense)
Eg. On Jan 1st 2015, NachosLibre purchased supplies
worth RM 5500.
The company recorded the purchased supplies in the
asset account under the name Supplies Account. At
the end of the accounting period, after counting the
supplies, they found that supplies at hand worth RM
2500. What is the amount of supplies expense incurred
and journalize the transactions involved. Assume they
paid by cash.
On January 1st, they bought the supplies, thus the
supplies increase by RM 5500 and their cash decreases
by RM5500 (pay by cash)
Dr
Cr

Supplies

5500

Cash

5500

As of December 31, the balance of the supplies is RM

2500. Thus the expense incurred is, Beginning used
= Balance,
Used = Beginning
Balance
= 5500
2500
Used/Expense = 3000
Dr
Cr

Supply Expense
Supply

3000
3000

*incurred expense of
RM3000
*Supply (asset) reduced
by RM3000

Suppli
es
Jan
1st

Purcha
se

Accou
nt
Supply
Expense
balance c/d

5500
5500

Jan
1st

balance b/d

2500

Suppli
es
Suppli
es

Exercises

3000

Expen
se

3000
2500
5500

Chapter 4: Completing the Accounting Cycle

Reset the temporary accounts balance to zero

Use Income Summary to summarize revenues and
expenses incurred
Income Summary = Statement Profit Loss =
Comprehensive Income

Steps Involved
1) Identify accounts for closing temporary and permanent
accounts
o Temporary accounts ( Zero Balance at end of period)
1. Revenues
2. Expenses
3. Divided
4. Income summary
o Permanent Accounts: ( to be transferred to SOFP)
1. Assets- cash, receivables, etc
2. Liabilities- payables, unearned revenues
3. Equity Share Capital, Dividends and etc.
2) Record Closing Entries
4 steps:
Close credit balance in revenue to income
summary
Close debit balance in expense to income
summary
Close income summary to Retained Earnings
(in SOCE)

 Close Dividend to Retained Earnings

1. Close credit balance in revenue to income summary

Dr Revenue
Cr Income Summary

xx
xx

2. Close debit balance in expense to income summary

Dr Income Summary
Cr Expenses Account

xx
xx

3. Close Income Summary ( Net Income ) to Retained Earnings

Dr Income Summary
Cr Retained Earnings

xx
xx

4. Close dividend to Retained Earnings

Dr Retained Earnings
Cr Dividend

xx
xx

Items in the Statement of Financial Positons (SOFP) and their

categories
Assets
Current Assets
Non-current Assets
Long term investment
Intangible Assets

Liabilities and Equities

Current Liabilities
Non-Current Liabilities
Equity

Terminologies and Explanations

Current Assets- used, sold within one year
Non-current Assets - not used within one year
Current Liabilities obligations (debt) due within one year

Non-Current Liabilities ( Long term) - debt due not within one year
Equities- owners claim on asset, after deducting the liabilities

Exercises:

Chapter 5: Merchandising

Merchandise Company VS Service Company

-Merchandise Companies sell goods and therell be stock inventory
-Examples; grocery store, book stores and etc.
-Service Company provides services, things that are not tangible.
- NO inventories but may stock tools and supplies.

Merchandising Company
Goods
Grocery Stores
Net Sales-Cost of Goods
Sold
= Gross Profit + Revenues
Expenses
= Net Income

Types of
Companies
Type of
Products
Examples
Net Income
Calculation

Service Company
Sells time (provide
services)
Law Firm, Plumbing
Service
Revenue- Expense= Net
Income

Merchandizer
Merchandising Company

Manufacture
Consumer
r

Wholesaler

Retailer

Inventory System
There are two inventory system :
Perpetual (transaction continuously
updated)
Periodic ( transaction update at the
end of account period)

Comparisons between Perpetual and

Periodic
Similarity: both use inventory account and cost of
goods sold account
Differences:
Perpetual
-stocks updated
continuously
-purchases directly
debited to inventory and
purchase return credited
to inventory
-Sales are recorded in two
journal, i. sales ii. cogs

Periodic
-stocks updated begin and
end
-purchases account,
purchase return and
allowance used here
-sales recorded once
-requires closing entries to
update inventory and

cogs.
Periodi
c
Perpetual
To record Purchases of Goods on
Credit
Invento
Purchases
1200
ry
1200
Acc Payable
1200
Acc Payable

1200

To Record Purchase
Dicount
Acc Payable
Purc. Dis

1200

Cash

Acc Payable
24
Inventory
1176

1200
24

Cash

To record Purchase Return and Allowances

Acc Payable
250
Acc Payable
Purch R&A
250
Inventory
To record Freight-In
Expenses
Inventory (absorbs
Transport in
70
cost)
cash
70
cash

1176

250
250

70
70

To Record Sales on
Credit
Acc
Receivable
Sales

2300

Acc Receivable
2300
Sales @ selling price
COGS @ cost price
Inventory (reduce amt)

Sales R&A
Acc
Receivable

2300
2300
1500

To record Sales Return and

Allowances
700
Sales R&A
700

700

Acc Receivable (to reduce)

700

Inventory ( put back @ cost)

500
COGS

500

To record Sales
Discount

1500

Cash
Sales Disc
Acc
Receivable

1552
48

Cash
Sales Disc
1600

1552
48

Acc Receivable

1600

There are few concepts involved in recording transaction for

both systems.
-Trade Discount by manufacturer, wholesaler to offer better
price for greater
Quantity purchased
-Purchase Discount- reduction from invoice price to
encourage early payment

2/10, n/30
-2 means the % of discount
-10 means the discount period (entitled the discount within 10
days)
-n means otherwise normal price (without discount)
-30 is the credit period

Transportation Cost and Ownership transfer

Freight on Board (FOB) Shipping
Point

Freight on Board (FOB)

Destination Point

Ownership transferred to
courier
Buyer bears the cost
Sales occurs once goods
reach the destination

Ownership transfer to buyer

Sellers bear the cost
Sales occur once the goods
leave the suppliers shipping
dock

Exercises

Chapter 8 and 9 : Receivables & Long Term Assets

Receivable
Account Receivables -> amount due from debtor
->due to Sales on Credit (not yet paid)
->assets to the company (in SOFP)
Sales On Credit

 Customers havent paid but the sales is

recognized
Example:
On Feb 1, Encik Bunga purchased an item of RM 1500 from
Amans store on credit.
On Feb 2, Amans store received RM 900 from OmakKau from
previous credit sales.
Journalize the transaction(s)
Feb 1,
Dr
Cr

Acc Receivable
Sales

1500
1500

*Encik Bunga owes to Amans

Stores
* Sales is recognized as credit

sales
Feb 2,
Dr
Cr

Cash
Acc Receivable

900
900

*Receives cash,so cash

increases (debit)
*OmakKaus liability towards

Amans Store decreases

Credit Card Sales
Advantages Increase sales by providing customers more
payment methods
-faster cash collection
-risk of extending credit is transferred to credit
card issuer
-customers credit is evaluated by credit card
issuer
Disadvantage credit card expense incurred( wont get full
amount)

Example:

On April 5th, Tone Excil had credit card sales of RM 500. The fee
is 5% and its cash received immediately on deposit.
April 5th ,
Dr

Cash
Credit Card Expense
Cr

5%x500= RM 25
(expense)

475
25

Sales

500

However, if the cash is

not received immediately, the journal should be like this:
Dr
Acc Receivable
475
To record sales with
Credit Card Expense
25
expense
Cr

Dr
Cr

Sales

500

Acc Receivable
Sales

475
475

To record collection on credit

card sales

Bad Debt
-Uncollectible debt (customer unable to pay)
- It is an EXPENSE (in SOPL)
- 2 methods for bad debt
i. Direct Write-Off method
ii. Allowance Method
Direct Write-Off method
Eg. On April 5th, Maimun decided that she cannot collect RM
250 debt from Ahmad.
Dr
Cr

Bad Debt
Acc Receivable-Ahmad

250
250

In case of debt recovery (debtor decided to pay back), just

reverse the transaction.
Dr. Acc
*To recover the uncollectible debt
Receivable
Cr Bad Debt

250

record cash collection,

Increases

250

Dr
Cash
Cr Acc
Receivable

*to
cash

250
250

Allowance method
-At the end of accounting period, it is expected that total bad
debts to be realized.
-2 advantages

i. it records the estimated bad debt expense in the period

when the related sales are recorded.
ii. it reports Account Receivable on the SOFP at the estimated
amount to be collected.
Eg. It is estimated that out of RM 5000 of credit sales, RM3500
is estimated to be uncollectible. Journalize.
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Acc
(ADA)

3500
3500

*Allowance for Doubtful account is a contra-asset account.

*It is used instead of reducing account receivable directly since
the company do not know which customer will not be able to
pay.
On the Statement of Financial Position (SOFP) (assets extract)
Assets
Account Receivable
5000
(-) ADA/AFDD
(3500)
Net Realizable value 1500
Write off bad debt,
-the company decided that it cannot collect RM 250 debt that
Ahmad owed to it.
Dr. ADA 250
Cr. Acc Receivable 250
Account
Receivable
bal b/d

250 ADA

250

Recovering a Bad Debt

Allowance for Doubtful

Account
25
Acc Rec
0 Bad Debt

25
0

Eg. Fadhli has decided to pay his full RM 300 account which
previously was written off.
i.

To reinstate the uncollectible,

Dr
Cr

Acc Receivable
Bad Debt

Dr

Cash
Acc
Receivable

Cr

300
300

ii.

To collect the cash

300
300

Estimating Bad Debt

2 methods
(c/d for ADA)

a) Percent % of Balance of Acc Receivable

b) Percent % of Sales (Directly Bad Debt

Expense)

Eg The company has decided to write off RM1200 of account

receivable. It is estimated from past experience that 5% of Acc
Receivable to be uncollectible. The balance of Acc Receivable is
RM 2500. Balance of ADA is 500.
Solution, it is advisable to open a T- Account to find the
estimated Bad Debt.
i.
Dr
Cr Acc
ii.

5%
*

iii.

The

Allowance for Doubtful

Account
Acc
120
Recei
0 b/d
500
Bad
c/d
65 Debt
765
126
5

Percentage of Sales

126
5

ADA 1200
Receivable 1200
x (2500-1200)= 65
balance c/d of ADA
765= (1265-500)

Eg. Is it estimated that 5% of sales to be uncollectible. The total

sales is RM 3000. Find the Bad Debt Expense.
5% x 3000 = 150
Dr

Bad Debt

Cr

ADA

150
150

Aging of Receivable *usually will be asked in Objective

Questions

1. Classify each receivable according to how long it is due

2. Multiply each group by the estimated bad debt %
3. Total the estimated bad debt for each group

Notes Receivable
-a promissory note is a written promise to pay a
specified amount of money usually with interest, either
on demand or definite future date.
How to calculate the interest Revenue and
Receivable?
Principal Value x Annual Interest Rate x Time in
Fraction of Year.
Eg. 6% Notes Receivable of RM 10,000 was accepted on
October 1st 2014. No interest has been received and recorded
at the end of the accounting period, Dec 31 st 2014.
Interest Receivable = Principal Value x Ann Rates x Time in
fraction of year
= 10,000 x 6% x (3/12)* (Oct until Dec)
= 150
Interest
*to be included in SOFP
Dr
Receivable
150
asset
Interest
Cr
Revenue
150 *to be included in SOPL
other operating
revenues

Long Term Assets

-Examples like Plant, Land, Building, Motor Vehicle, Equipment
and etc.
-Tangible in nature, actively used in operations, and benefit in
the future
-Declining in value of assets over its useful life.
Land
-not depreciable, but may appreciate (revalued)
Land Improvement such as clearing the bushes, and etc
-will be depreciated over its useful life
Building
-depreciable
-cost of acquisition includes title fees, attorney fees and etc.
Machinery
-depreciable
-cost includes the purchase price + any related cost to operate
it
Intangible Assets
-cannot be seen nor touched
-its depreciation is called amortization
-examples; copyright, patent, franchises.

Depreciation
-the process of allocating the cost of an item, to expense in the
accounting period benefiting from its use
-Simply put, Depreciation is the reduction of the value of
assets over time
- it is an EXPENSE in SOPL
Factors in Computing Depreciation
-cost

-residual value
-useful life

Depreciation Method
-Straight line method (most common)
-Declining Balance method (most common)
-Units-of-production (common is MCQ)
Given,
Cost
Residual Value
Depreciable Value
Useful life

10,000
3000
7000
5-

Years
Unit

years
300,000

a) Straight Line Method

10,000 Cost - Residual
3000
Value
5 years
Useful
Years
Dr

Dep Expense
Accumulated
Dep

Cr

b)

10,000 1400
Cost- Accumulated
Dep
4
Useful Life

Dr
Cr

Dep Expense
Accumulated
Dep

1400

RM 1400/ year
1400

Declining Balance Method

=
=

RM 2150 / year

2150
2150

Units-of-Production Method
Cost - Residual
Value
Total Unit
Produced

= (10,000-3000)/(300,000)
= 0.02

Cost per unit x Number of units produced in a period

0.02 x 60,000 = RM 1200 / year * Dr Dep. Expense
1200
Cr.
Accumulated. Dep
1200
Disposals of Plant, Property, Equipment
1. Compares, Cash VS Carrying Value (Net Book
Value)
i.
If cash > NBV, Gain on disposal *Revenue
in SOPL
ii. If cash < NBV, Loss on disposal * Expense
in SOPL
iii. If Cash = NBV, no gain or loss
Example:
Disposing the asset
-Equipment of RM 20000 with accumulated
depreciation of RM 20000 is discarded.
Dr
Cr

Accumulated
Dep.

*equipment reduced by

20,000

Equipment *

20,000

20,000

Selling Motor Vehicle

-A motor vehicle or RM 10,000 with accumulated depreciation
of RM 2000 is sold at RM 9000.
Dr
Cr

Cash (+)
Accumulated Dep
(reduce)
Equipment (to

9000
2000
10000

reduce)
Gain on Disposal
(Reve)

Cash VS NBV
9000 > ( 10,000-2000)
*Gain on Disposal of RM 1000
Exercises

1000