ACT3121 INTERMEDIATE FINANCIAL ACCOUNTING I (WEEK 1)

1. ACT3121 INTERMEDIATE FINANCIAL ACCOUNTING I (WEEK 1) SEMESTER TWO 2007/08 GROUP 5 (BBA) PN ASNA ATQA ABDULLAH ROOM A208, DIRECT LINE 89467636 asnaatqa@econ.upm.edu.my

2. COURSE OUTLINE • CREDIT HOURS :3 • PRE REQUISITES:ACT 2112 (Introduction to Accounting) • OBJECTIVES: At the end of the course, students will understand and be able to prepare partnership accounts, multiple aspects of company accounts including the legal aspects as well as the relevant accounting standards; and detail analysis of financial statements • SYNOPSIS: The course covers accounting for partnership, preparation of company accounts in compliance with requirements of relevant accounting standards and Schedule 9 of the Company’s Act 1965 and interpretation of financial statements

3. COURSE OUTLINE ASSESSMENT: • Quiz (3-5 quizzes, at least one by Week 5) 10% • Group project/Assignment (dateline-end of Week 13) 15 % • Mid Term Test (25/1/08, 8-10.30pm) 25 % • Final Exam - Comprehensive 50 % Total 100 % TUTORIAL CLASSES: Will begin from Week 4 onward (30 students per session)

4. COURSE OUTLINE Course contents • Partnership accounts – Week 1&2 • Introduction to Company accounts – Week 3 • Company accounts – Overview of Financial Accounting & Reporting in Malaysia – Week 4 • SEMESTER BREAK – Week 5 • Financing of companies (Shares) – Week 6 • Redemption of preference shares – Week 7 • Share buybacks – Week 8

5. COURSE OUTLINE Course contents • MID-TERM TEST – Week 8 • Financing of companies (Long-term Liabilities)– Week 9 • Company’s Financial Statements - Week 10 & 11 • Accounting for Research & Development – Week 12 • Accounting for fixed assets (Revaluation & Impairment) – Week 13 • Cash Flow Statements – Week 14 • Analysis of financial statements – Week 15 • REVISION – Week 16 • FINAL EXAM – Week 17-19

6. REFERENCES PARTNERSHIP • Siti Manisah Ngalim, Rapiah Mohd Zaini, Asna Atqa Abdullah and Shabnam Mohamad Mokhtar (2008), Partnership Accounting: Principles & Practice, McGraw-Hill (Malaysia). • Zulkarnain Muhamad Sori, Mohamad Ali Abdul Hamid, Azemin Yusoff and Mohd Rosniazam Mohd Deris (2002), Perakaunan Perkongsian Di Malaysia, McGraw-Hill (Malaysia). • Partnership Act 1961 • Frank Woods (2002). Business Accounting 1(9th Edition) Pitman Publishing. • Gillespie, Lewis and Hamilton (2004), Principles of Financial Accounting (Third Edition), Prentice Hall.

7. REFERENCES COMPANY ACCOUNTS • Lazar, J. and Tan, L.L. (2003). Company Accounts and Reporting (5th Edition), Prentice Hall. (Chapters 1, 2 [excluding 2.4 and 2.5], 3, 4 ,5 and 20) • Tan Liong Tong (2000) Financial Accounting & Reporting in Malaysia, Volume 1, 2nd edition, PAAC. (Chapter 1; Chapter 2 : Part 1-6; Chapter 3: Part 1-4; Chapter 4: Part 1-3, 5 and 7 (on R&D only) and Chapter 12 (pages 561 –588, 598 - 607). • Tan Liong Tong (2000) Financial Accounting & Reporting in Malaysia, Volume 2, 2nd edition, PAAC. (Chapter 1 EPS and 19 CFS) • Skousen, Stice and Stice; (2005), Financial Accounting and Reporting, Book 1, Incorporating Malaysian Accounting Standards; Thompson.

8. REFERENCES COMPANY ACCOUNTS-CONTINUED Approved Accounting Standards TR1 (Revised) – Share buybacks – accounting & disclosure FRS 101 2006 – Presentation of financial statements FRS 102 2006 - Inventories FRS 104 – Depreciation Accounting FRS 116 2006 – Property, Plant & Equipment FRS 107 – Cash Flow Statements FRS 110 2006 – Events after the balance sheet date FRS 118 2004 - Revenue FRS 138 2006 – Intangible Assets (see section on R&D) FRS 132 2006 – Financial Instruments: Disclosure & Presentation FRS 136 2006 – Impairment of Assets

9. PARTNERSHIP ACCOUNTS Definition of a partnership business Section 3(1) of Partnership Act 1961 "Partnership is the relation which subsists between persons carrying on business in common with a view of profit." • 3 elements: • 2 or more persons carrying on business • a business in common • with a view of profit

10. PARTNERSHIP ACCOUNTS Section 3(2) of Partnership Act 1961 "The relation between members of any company or association which is – (a) registered as a company under the Companies Act 1965 or as a co-operative society under any written law relating to co-operative societies; or (b) formed or incorporated by or in pursuance of- (i) any other law having effect in Malaysia or any part thereof; or (ii) any letters patent, Royal Charted or Act of the Parliament of the United Kingdom is NOT a partnership within the meaning of this Act."

11. PARTNERSHIP ACCOUNTS Formation of partnership 1) 2 or more persons decide to create a business (they will bring in capital and skills) 2) a sole trader invites a person to form a partnership 3) two businesses join together to trade as partnership (this is called amalgamation)

12. PARTNERSHIP ACCOUNTS General principle of partnership • No separate legal personality between the business and partners as owners. • Legal personality = entity that has rights and duties recognised in law (e.g. to sue and be sued, buy asset, incur liability, etc.) • unlimited liability (i.e. if partnership has no sufficient asset to meet creditors' claims, partners will be personally liable (have to surrender private possessions)

13. PARTNERSHIP ACCOUNTS Number of owners – limited to twenty persons Section 47(2): "Nothing in this Act shall be read to permit any association of more than twenty persons to be formed or to carry on any business in partnership contrary to section 14(3)(b)of the Companies Act 1965"

14. PARTNERSHIP ACCOUNTS Partnership agreement • In general, there is no legal barrier to what may be agreed between partners. • Agreement can be in writing or verbal. • In case where no agreement is reached (for some matters), the partnership Act will guide them.

15. PARTNERSHIP AGREEMENT Section 26 of Partnership Act 1961 "Rules as to interests and duties of partners, sub­ject to special agreement. The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement, express or implied, between the partners, by the following rules: (a) all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm; (b) the firm must indemnify every partner in respect of payments made and personal liabilities incurred by him— (i) in the ordinary and proper conduct of the business of the firm; or (ii) in or about anything necessarily done for the preservation of the business or property of the firm;

16. PARTNERSHIP AGREEMENT (c) partner making, for the purposes of the partner­ship, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of eight per cent per annum from the date of the payment or advance; (d) partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him;

17. PARTNERSHIP AGREEMENT (e) every partner may take part in the management of the partnership business; (f) no partner shall be entitled to remuneration for acting in the partnership business; (g) no person may be introduced as a partner without the consent of all existing partners;

18. PARTNERSHIP AGREEMENT (h) any difference arising as to ordinary matters con­nected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners; and (i) the partnership books are to be kept at the place of business of the partnership (or the principal place, if there are more places than one) and every partner may, when he thinks fit, have access to and inspect and copy any of them."

19. PARTNERSHIP ACCOUNTS Accounting for partnership • Partnership accounts are distinguished from sole trader accounts on the following basis: (1) More than one owners' equity accounts (i.e. capital accounts) – according to number of owners (i.e. partners) (2) Option in dividing owners' equity account to: • Capital account (of individual partner) & • Current account (of individual partner)

20. PARTNERSHIP ACCOUNTS • Purpose of current accounts- to record all frequent changes in capital (mainly share in profits and withdrawn of capital (i.e. drawings) by leaving the fixed capital account balance unchanged. • [Fixed capital is what partners agree to retain in partnership as stated in partnership agreement/ section 26(a) for no agreement] • Conclusion: Partnership may use two methods in recording partners' equity; (a) Fixed capital method (b) Flexible / Variable capital method

21. PARTNERSHIP ACCOUNTS (3) Profits generated by the partnership business (as computed by the P&L Account) is distributed between the owners (i.e. partners) unlike profit in sole trader business which is retained or taken out solely by one person (i.e. the owner) Therefore, a P&L Appropriation Account is needed. • [Appropriation means allocation of something for a particular purpose]

22. PARTNERSHIP ACCOUNTS Forms of profit distribution/component of profit-sharing agreement; (i)Interest on capital – to compensate partners for capital contributed, the larger the contribution, the bigger the interest received. • The rate is what agreed by the partners basing on either fixed ratio or average of credit capital balance. Note section 26(d)

23. PARTNERSHIP ACCOUNTS Forms of profit distribution/component of profit-sharing agreement; (ii)Salaries/Bonus – to reward partners who provide services to partnership in terms of skills and time. • This form of distributing profits is preferred to the larger share in profits because larger share in profits also mean greater share in losses. Note section 26(f)

24. PARTNERSHIP ACCOUNTS Forms of profit distribution/component of profit-sharing agreement; (iii)Share of balance (Residual) – the portion of profit/loss left after deducting items above will then be divided according to agreed profit&loss-sharing ratio (basing either on average capital balance or fixed proportion) • Note section 26(a) – equal distribution between partners if there is no agreement.

25. PARTNERSHIP ACCOUNTS (4) Drawing – a withdraw of capital out of business; it is not a form of profit distribution. This is recorded in current account (fixed capital method).* *To discourage excessive drawing, interest on drawings is normally charged on partners. The interest paid by partners is neither an injection of capital nor an income to the business but can be considered part of all partners' extra income, which is distributed in P&L Appropriation Account.

26. PARTNERSHIP ACCOUNTS (4) Drawings - continued *permanent withdrawals = increase/ decrease of capital (recorded in capital account under both method), other withdrawals like cash or goods (recorded in current account under fixed capital method)

27. PARTNERSHIP ACCOUNTS (5) Partner's loan (advance) to partnership business (note section 26(c) for its definition). Interest on loan received by the partner is a normal charge against partnership profit in P&L Account.* *Without any agreement on this matter, the partner is entitled to interest at 8% per annum from the date of initial payment on the loan.

28. PARTNERSHIP ACCOUNTS *Alternative treatments of interest on loan by partners: • Loan is considered capital from owner, therefore the interest is a form of profit distribution. Dt. Interest expense (P&L Appropriation) Ct. Current account (fixed capital) • Loan is considered liability from outsider, therefore the interest is an expense. Dt. Interest expense (P&L) Ct. Cash/Accrued • Combination of above Dt. Interest expense (P&L) Ct. Current account (fixed capital)

29. PARTNERSHIP ACCOUNTS Pro-forma journal entries • Step 1 – Close P&L Account Dt. P&L Account Ct. P&L Appropriation Account [Transfer net profit for the year to P&L Appropriation Account] @ Dt. P&L Appropriation Account Ct. P&L Account [Transfer net loss for the year to P&L Appropriation Account]

30. PARTNERSHIP ACCOUNTS Pro-forma journal entries • Step 2(a) – Profit distribution Dt. P&L Appropriation Account Ct. Current Account,partner(s) – fixed capital @ Ct. Capital Account,partner(s)–flexible capital [Distribution of interest on capital, salaries, and share of balance of profit to individual partners-should be done separately for each item]

31. PARTNERSHIP ACCOUNTS Pro-forma journal entries • Step 2(b) – Interest on drawings Dt. Current Account,partner(s) – fixed capital @ Dt. Capital Account,partner(s)–flexible capital Ct. P&L Appropriation Account [Payment of interest on drawings by individual partners]

32. PARTNERSHIP ACCOUNTS Pro-forma journal entries • Step 3(a) – Permanent drawings Dt. Capital account,partner(s)-for both method Ct. Cash/assets [Withdrawal of capital permanently from the business]

33. PARTNERSHIP ACCOUNTS Pro-forma journal entries • Step 3(b) – Normal drawings Dt. Current Account,partner(s) – fixed capital @ Dt. Capital Account,partner(s)–flexible capital Ct. Cash/stocks [Frequent drawings made by individual partners]

34. PARTNERSHIP ACCOUNTS Pro-forma journal entries *If partnership opt to use individual partner's drawing account to avoid congestion in capital/current account, the journal entry would be: Dt. Drawings account, partner(s) Ct. Cash/stocks [Recording drawings of cash/stocks made by each partner in individual drawings account] & Dt. Current Account,partner(s) – fixed capital @ Dt. Capital Account,partner(s)–flexible capital Ct. Drawings account, partner(s) [Transfering balance of drawings account to each individual partners' capital/current account]

35. EXERCISE WEEK 1 • Please download and print the exercise question. • Prepare your answers based on pro-forma journal entries discussed. • Please work in pairs. • Any pair of student may be required to present their answers on…..