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CHAPTER 6: ACCOUNTING FOR ASSETS

CHAPTER 6: ACCOUNTING FOR ASSETS. Accounting for Assets. Current asset. Examples: cash, inventory, debtors (account receivables), prepaid items etc. Non-current. Examples: Land, buildings (properties), vehicles, machineries, patent, trademark, goodwill and copy right. 6.1 CASH.

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CHAPTER 6: ACCOUNTING FOR ASSETS

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  1. CHAPTER 6: ACCOUNTING FOR ASSETS

  2. Accounting for Assets Current asset Examples: cash, inventory, debtors (account receivables), prepaid items etc. Non-current Examples: Land, buildings (properties), vehicles, machineries, patent, trademark, goodwill and copy right.

  3. 6.1 CASH • Cash is the most desirable asset because it is readily convertible into any other asset. • Cash consists of • Cash on hand (notes and coins) • Cash at bank • Cheque accounts • Cash equivalents (bank overdrafts, deposits on money market, 90-day bank acceptance bills)

  4. Internal control over cash receipts • Establishment of responsibility • authorised personnel handle cash receipts • Segregation of duties • different individuals handle cash, record cash receipts and hold the cash • Documentation procedures • remittance advices, cash register tapes, deposit slips used

  5. Physical, mechanical and electronic controls • cash stored securely, cash banked frequently, cash registers used/direct deposits • Independent verification • cash receipts counted daily, comparison of receipts to bank deposits

  6. Internal control over cash payments • Establishment of responsibility • authorised personnel only to sign cheques • Segregation of duties • separate tasks of approving and making payments, signatory not to record the payment, limit knowledge of PIN, etc. • Documentation procedures • pre-numbered cheques, approved invoices, account marked as paid

  7. Physical mechanical and electronic controls • blank cheques stored securely, limited access • Independent internal verification • compare cheques to invoices, reconcile bank statement monthly

  8. Bank Reconciliation • The use of a bank contributes significantly to good internal control over cash by: • Minimising the amount of cash that must be kept on hand. • Providing a double record of all bank transactions: • one by the business • one by the bank

  9. Bank Reconciliation (cont’d) Reconciling the bank account • Lack of agreement between firm’s books and bank statement can result from: • Time lags preventing the parties recording transactions in the same period. • Time between when cheque is written and dated and date it is paid by the bank. • Time between when receipts are recorded and when recorded by the bank. • Errors by either party in recording transactions.

  10. Bank Reconciliation (cont’d) Reconciliation procedure • Reconcile balance per books and balance per bank to their adjusted or correct balances. • The reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

  11. Transactions - appear on the cash book. 1. Unpresented cheque:(Cek belum dikemukakan) - Cheque which has been issued but not yet presented to the bank - Example: FrontlineLtd has issued a cheque worth RM 3,000 to Hunter Ltd (a supplier). Cash account has been credited by RM 3,000 but Hunter Ltd has not cashed the cheque.

  12. Transactions - appear on the cash book……cont • Deposit in transit: (deposit dalam transit) • - a cheque has been posted to bank (through mail service), which will involve a few days before the cheque is cleared. • Example: A cheque worth RM 2,500 was sendby Frontline Ltd to the bank. The transaction has been debited in the cash book but the bank has no information on this transaction as it is still in transit.

  13. Transactions appear in bank statement • Dishonoured cheque (bounced cheque) or NSF (non-sufficient fund) • Bank charges – bank commission/fees, cheque book and interest on loan • Interest earned • Errors in recording. E.g. A cheque RM 5,000 was issued to an employee. The amount recorded in journal was RM 500. • Direct transfer of money

  14. Preparation of Bank Reconciliation Statement: Example: A summary of cash books for Nisa Enterprise for the month ended 31 July 2006. RM Opening balance 1,954 Add: Receipts 361,537 363,491 Less: Payment 343,287 Closing balance 20,204 Closing balance of the bank statement is RM18,025 on 31 July 2006.

  15. Other Information: • A cheque worth RM 4,135was issued to a supplier, Beaver, however was not presented to the bank. Deposit in transit worth RM 5,350 is not recorded in the bank statement. • Nisa Enterprise paid to ABC Ltd through direct debit from the bank account worth RM 150. The payment is for purchasing a computer. The amount is not recorded in the cash book. • A cheque issued by Nisa Enterprise worth RM 119, is recorded in the cash book as RM191. • Bank charge of RM54. • The bank has incorrectly debited RM 832 to Nisa Enterprise account.

  16. Method no.1: Cash Account (bank) Opening bal. 20,204 Bank charge 54 Error 72 Computer 150 Closing bal 20,072 20,27620,276 Bank Reconciliation as at 31 July 2006RM Balance as per bank statement 18,025 Add: Deposit in transit5,350 Correction by bank 832 6,182 Less: Unpresented cheque(4,135) Balance as per cash book20,072

  17. Method no.2 Bank Reconciliation as at 31 July 2006 RM Balance as per cash book 20,204 Add: Error 72 Unpresented cheque 4,135 4,207 24,411 Less: Bank charge 54 Computer 150 Deposit in transit 5,350 Error by bank 832 (6,386) Balance as per Bank statement 18,025

  18. Method no. 3

  19. Procedure after the preparation of Bank Reconciliation:

  20. Petty Cash Fund • A petty cash fund is a cash fund used to pay relatively small amounts.

  21. The Petty Cash Fund 1. Establishing the petty cash fund 2. Making payments from the fund • Amount of expenditure is limited. • Receipt for the expense is required. • Petty cash voucher for the expense is signed by an authorised person. Mar 1 Petty Cash 100 Cash at Bank 100 (To establish a petty cash fund) Note: Sum of cash receipts and monies in fund should equal the petty cash total.

  22. Petty Cash Fund (cont’d) 3. Replenishing the fund • At times the petty cash receipts may not match the cash. • A cash shortage (or surplus) is debited (or credited) to the Over and Short Account (an expense account). Mar 15 Postage Expense 44 Supplies 38 Miscellaneous Expense 5 Cash at Bank 87 (To replenish petty cash fund)

  23. Exercise E 7-5 Oct. 1 A petty cash fund is established with a cheque for $130 issued to the petty cash custodian. Oct 31 A count of the petty cash fund disclosed the following items: Currency (notes) $8.00 Coins 0.30 Expenditure receipts: Office supplies $36.50 Telephone and fax 21.30 Postage 53.70 Freight-out 8.80

  24. Oct 31 A cheque was written to reimburse the fund and increase the fund to $260 Journalise the entries in October that pertain to the petty cash fund.

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