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Accounting for trading purposes:
• The Purchase Function :
In accounting when goods are purchased, when goods are sold , it is written as sales/sold
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Explanation: purchase function involves the acquisition of goods and services in exchange for payment of
some kind
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2-Planned Purchase Order: A planned purchase order is a long-term agreement committing to buy items or
services from a single supplier
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3-Blanket Purchase Order: This purchase order involves a purchaser agreeing to purchase certain goods or
services from a particular vendor, without necessarily having a specific quantity, price or required a delivery
schedule
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This agreement is created with the supplier to agree to specific terms and conditions
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When this figure is high
in relation to total sales, it indicates that a company is having difficulty shipping high-quality goods to its
customers
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The natural balance in
these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account
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Presentation of Sales Returns and Allowances: Sales returns and allowances is a line item in the income
statement that reduces sales by product returns from customers and sales allowances granted
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• Periodic System: The periodic inventory system is often used by smaller businesses that have easy-to-manage
inventory and may not have a lot of money or the opportunity to implement computerized systems into their
workflow
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COGS is an important accounting metric, which, when subtracted from revenue, shows a
company's gross margin
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Changes in inventory are accurate and can be accessed immediately
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• Worksheet: An accounting worksheet is a document used within the accounting department to analyze and
model account balance
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It can
also be helpful for tracking the changes to an account from one period to the next
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Totals of debit and credit column of the balance sheet are equal
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It also shows whether a company is making profit or loss for a given period
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Statement of owner equity: The statement of owner's equity is a financial statement that analyzes why a
farmer's net worth (or owner equity) changed over the past year
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Statement of cash flow: The cash flow statement is a key financial statement that reports the cash generated
and spent during a specific period of time
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Preparation of financial Statements: Financial statements are written records that convey the business
activities and the financial performance of a company
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to ensure accuracy and for tax, financing, or investing purposes
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Nonprofit entities use a similar but different set of financial statements
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To know the operative expenses
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To know the relationship between selling expenses
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It helps in calculating the various accounting ratio to determine the progress of business
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Departmental P&L Account is prepared to ascertain the profit or loss of each
department separately and at the end of the year it is transferred to General profit and loss account of the
whole organization
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Advantages of Department Accounts:
It provides an idea about the affairs of each department
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It helps to reward the Departmental mangers and staff on the basis of performance
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It helps to compare the result of one department with those of other departments
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It will help in the preparation of departmental budgets
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There are two methods that are used in departmental accounting: Where a separate set of books is maintained for every department
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Accounting Systems
• Developing a System :
Developing accounting information systems (AIS) includes five basic steps that include planning, analysis,
design, implementation, and support
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1- Planning – project management objectives and techniques – The very first phase of a Accounting
Information System Development is planning the project
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2- Analysis – The analysis phase is used to determine and document the accounting and business processes
used by the company
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3- Data Analysis is a review of the accounting information that is currently being collected by a company
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This method is used primarily when designing accounting transaction processing systems
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The primary
decisions that managers are responsible for are identified on an individual basis
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This method is valuable when the primary objective of the system is
decision support
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The organizational processes are
identified and segmented into a series of events that are able to either add or change data
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This accounting method is used
when automation or reengineering is the system’s primary objective
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They are typically
used to record credit sales and the accounts involved are individual debtors' accounts and sales accounts
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Format
Special journals are in the form of a table of numerous rows and multiple columns
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The names of columns vary based on the type of transaction in a special journal
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The accounts in the subsidiary ledgers hold more specific information about the accounts that make
up the general ledger
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Companies use subsidiary ledgers to monitor the individual components of a controlling general
ledger account, such as accounts receivable, accounts payable, inventory, and property, plant, and
equipment
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Entries in the cash book are then posted into the general ledger
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It is set up in columns with four column
headers: "date," "description," "reference" (or "folio number"), and "amount"
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The amount of the transaction is
recorded in the final column
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Petty cash book: A petty cash book is a sort of cash account utilized to keep track of little, routine expenses
like workplace tea, bus ticket, petrol, newsprint, hygiene products, fasteners, casual labor, etc
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Control Accounts: A control account is a summary-level account in the general ledger that contains
aggregated totals for transactions that are individually stored in subsidiary-level ledger accounts
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The ending balance
in a control account should match the ending total for the related subsidiary ledger, and if the balance does
not match, it is possible that a journal entry was made to the control account that was not also made in the
subsidiary ledger
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Advantages of a Control Account

A control account can keep a general ledger from becoming choked with transactional detail
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Cash and temporary investment
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1
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3
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1
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3
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Nature and Composition of Cash: Cash is a payment instrument that is ready and free to use to finance the
company’s general activities
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Cash Processing:
Generally recognized as a legal tender
Can be used at any time if desired
Its use is free
Received according to the nominal value at the time of cashing
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Cash deposits are assets
held to meet short-term cash commitments, not for investment and can quickly be turned into cash
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Postdated checks are still
recorded as receivables until the date on which they can be cashed
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Because cash moves so readily between bank accounts and other financial assets, cash
management really means the management of all financial resources
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The basic
objectives of cash management are as follows:
Provide accurate accounting for cash receipts, cash disbursements, and cash balances
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Anticipate the need for borrowing and assure the availability of adequate amounts of cash for conducting
business operations
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Cash Control:
There are 2 cash controls, namely:
1-Control for Cash Receipts
All cash receipts must be recorded immediately
All cash receipts on that day should also be deposited with the bank
The separation of functions between officers who handle cash receipts is done by a cash register machine
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Checks must be signed by at least 2 officials
Checks that are canceled or mistyped must be neatly arranged
Should be paid in full for evidence and checks that have been issued
• Maintaining Bank Account
• Bank Reconciliation: Reconciliation of bank statements is a record of the company and the bank, and is useful
for knowing receipts or expenses that have not been recorded by the company
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Bank reconciliation can be made in 2 different ways:
The final balance reconciliation can be made in 2 forms:
1
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Bank balance reconciliation report to cash balance
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Bank balance reconciliation report to cash balance (4 columns)
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Bank balance and cash balance reconciliation report to show the correct balance (8 columns)
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3
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5
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Short term investments: Short-term investments are assets that can be converted into cash or can be sold
within a short period of time, typically within 1-3 years
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Short-term trading or day trading entails a
significant degree of speculation and, consequently, substantial risk
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Advantages of Short-Term Investing:
Short-term investing offers flexibility to the investor as they do not need to wait for the security to mature in
order to get cash
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Investors can make substantial profits in a very short amount of time
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a
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Taxes and inflation also reduce the returns earned via short-term investing
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Accounting for debtors and stock
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Accounting Treatment of Bad Debts: Occasionally a receivable that has been written off as worthless will later
be collected in full or in part
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Collection of an
account receivable previously written off is evidence that the write-off was an error; the receivable should
therefore be reinstated as an asset
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Instead of making end-of-period adjusting entries to record uncollectible accounts expense on the basis of
estimates, these companies recognize no uncollectible accounts expense until specific receivables are
determined to be worthless
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When the direct write-off method is used, the accounts receivable will be listed in the
balance sheet at their gross amount, and no valuation allowance will be used
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The allowance method is preferable to the direct write-off method because the allowance method does a
better job of matching revenues and expenses
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If a company makes most of its sales for cash, the amount of its account’s receivable
will be small in relation to other assets
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Consequently, the direct write-off method is acceptable because its use does not have a material effect on
the reported net income
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From the
standpoint of accounting theory, the allowance method is better because it enables expenses to be matched
with the related revenue and thus provides a more logical measurement of net income
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Aging Schedule: An aging schedule is an accounting table that shows a company’s accounts receivables,
ordered by their due dates
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It’s a breakdown of receivables by the age of the outstanding invoice,
along with the customer name and amount due
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Companies can use aging schedules to see which bills are overdue and which customers it needs to send
payment reminders to or, if they are too far behind, send to collections
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Percentage of Sales Method: The percentage of sales method allows you to forecast financial changes based
on previous sales and spending accounts
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The benefits of percentage forecasting: Business forecasting may not perfectly predict your company’s
financial future, but it can give you a strong sense of where your company is headed and any changes you
may need to make
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Developing structured plans: With an idea of how much revenue you stand to gain or lose in the coming
period, you can create a detailed plan for how to increase or achieve that revenue
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Creating accurate budgets: Knowing the exact accounts your money is leaving from and coming into allows
you to create a more accurate budget
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3
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4
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Percentage of sales method formula:
There are five basic steps to the percentage of sales method formula
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Current sales (1+Growth rate/100) = Forecasted sales
• Recoveries of Bad debts : Bad debt recovery is a payment received for a debt that was written off and
considered uncollectible
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Because it generally generates a loss when it is written off, bad debt recovery usually produces
income
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Recovering Non-Business Bad Debts:
The IRS allows tax filers to write off non-business bad debts, which must be completely not collectible and the
taxpayer must prove they did as much as possible to recover the debt
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If the debt is repaid after it was claimed as a bad
debt, the tax filer has to report the recovered funds as income, but only an amount equal to the bad debt
deduction that reduced his tax obligation in the year he claimed the bad debt
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Opening Stock: Value of stock at the beginning of an accounting period
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Types of stock
There are 4 main types of stock
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1
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2
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3
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4
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• Measurement of Stock Quantity:
• Measurement of Stock Cost
• Perpetual Stock System
• Periodic Stock System
Accounting for property, plant and equipment
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Property, Plant and Equipment: Property, plant, and equipment (PP&E) are long-term assets vital to business
operations
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The overall value of a company's PP&E can range
from very low to extremely high compared to its total assets
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PP&E assets fall
under the category of noncurrent assets, which are the long-term investments or assets of a company
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1
Examples of property, plant, and equipment include the following:

1
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3
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Intangible assets are nonphysical assets, such as patents and copyrights
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Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually
holds these assets on its balance sheet for more than one fiscal year
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Calculating PP&E:
Net PPE=Gross PPE+ Capital Expenditures−AD
where: AD=Accumulated depreciation
• Lump-sum Purchase: A lump-sum purchase occurs when several assets are acquired for a single price
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This situation most
commonly arises when property is purchased and the purchase price includes both land and structures
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The property includes land with a market value of $250,000 and a
building with a market value of $800,000
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For accounting purposes, entities need to evaluate subsequent expenditure to
determine if it may be capitalized or expensed at the time incurred
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The most common depreciation methods include:
• Straight-line
• Double declining balance
• Units of production
• Sum of years digits
• Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life
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The four main depreciation methods mentioned above are explained in detail below
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Straight-Line Depreciation Method
Straight-Line Depreciation is a very common, and the simplest, method of calculating depreciation expense
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Depreciation Formula Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs $25,000 with an estimated useful life of 8 years and a $0 salvage
value
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Double Declining Balance Depreciation Method
Compared to other depreciation methods, Double Declining Balance Depreciation results in a larger amount
expensed in the earlier years as opposed to the later years of an asset’s useful life
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With the
double-declining-balance method, the depreciation factor is 2x that of the straight-line expense method
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To calculate the double-declining balance depreciation, set up a schedule:
The information on the schedule is explained below:
1
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4
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6
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The rate of depreciation (Rate) is calculated as follows:
Expense = (100% / Useful life of asset) x 2
Expense = (100% / 8) x 2 = 25%
3
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Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value)
Example
Consider a machine that costs $25,000, with an estimated total unit production of 100 million and a $0
salvage value
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To calculate the depreciation expense using the formula above:
Depreciation Expense = (4 million / 100 million) x ($25,000 – $0) = $1,000
4
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A higher expense is
incurred in the early years and a lower expense in the latter years of the asset’s useful life
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Sum-of-the-Years-Digits Depreciation Method , the remaining life of an asset is divided by the sum of
the years and then multiplied by the depreciating base to determine the depreciation expense
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Example
Consider a piece of equipment that costs $25,000 and has an estimated useful life of 8 years and a $0 salvage
value
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It can
only be used if it is possible to reliably measure the fair value of an asset, and a firm must make revaluations
with sufficient regularity to ensure that the amount at which an asset is carried in the company's records does
not vary materially from its fair value
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" If the
increase reverses a revaluation decrease, recognize the revaluation gain in profit or loss to the extent of the
previous loss
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Conceptually, the amortization of intangible assets is identical to the depreciation of fixed assets like PP&E,
with the non-physical nature of intangible assets being the main distinction
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Similar to depreciation amortization is effectively the “spreading” of the initial cost of acquiring intangible
assets over the corresponding useful life of the assets
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Note that the value of internally developed intangible assets is NOT recorded on the balance sheet
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Hence, internally developed intangible assets like branding, trademarks, and IP will not even appear on the
balance sheet since they cannot be quantified and recorded in an unbiased way
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g
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Since the purchase price can be confirmed, a portion of the excess amount paid could be allotted to the rights to
owning the acquired intangible assets and recorded on the closing balance sheet (i
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purchase accounting in
M&A)
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g
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Goodwill – Goodwill captures the excess of the purchase price over the fair market value of an acquired
company’s net identifiable assets
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Amortization of Intangible Assets Formula
Under the straight-line method, an intangible asset is amortized until its residual value reaches zero, which tends
to be the most frequently used approach in practice
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Amortization Expense = (Historical Cost of Intangible Asset – Residual Value) ÷ Useful Life Assumption
• Wasting assets and depletion:
Over time, the value of a wasting asset decreases
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The depreciation period is intended to correspond to the same time period
as the valuation decline
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The same
concept applies to natural resources, such as minerals, which lose value over time as they are consumed
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The concept also applies to all types of options;
their value is reduced to zero on the expiration date of these instruments
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