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ACC10007 Topic 2 Part 2 Lecture recording — Transcript

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0:18okay the recording is
0:20on so once again uh good morning to all
0:24of you who are here as well as those who
0:27are online
0:29uh we will continue on this topic too
0:33which is basically
0:34recording
0:36and reporting
0:39business transactions
0:42using accrual accounting
0:44and
0:45in this part two
0:47we are
0:49mainly focusing
0:50on financial performance
0:53in other words
0:56the items which are
0:58in the
1:00income
1:02and
1:03expenses
1:04meaning that
1:06we are focusing on the statement of
1:09comprehensive income because inside the
1:11statement of comprehensive income
1:14there are the income items
1:16and the expenses items all right
1:19so
1:20[Music]
1:25let's uh link this
1:27as usual to the unit learning outcomes
1:31so after successfully completing this
1:34topic to part two which is uh today's
1:38session
1:39you should be able to
1:42address this two unit learning outcomes
1:45it's the same one
1:46the first one
1:48is to discuss and evaluate the role that
1:51financial information plays in practice
1:53within an environment of business
1:56decision making
1:58same url number one and
2:01url number two
2:03which is to apply accounting tools to
2:06prepare financial reports for both
2:08external and internal business use
2:11the financial report
2:14that we are focusing on in this session
2:17like i mentioned just now
2:19is the statement of comprehensive income
2:23in part one which was uh last week
2:27uh we were focusing on the statement of
2:30financial position right so
2:34last week's session it was a statement
2:36of financial position that we were
2:39focusing on and
2:42in this
2:43session
2:44we are focusing on
2:45the
2:48statement of comprehensive
2:50income
2:52in terms of
2:55the
2:56particular learning objectives that this
2:59session is referring to
3:03they are as follows
3:06after studying this topic 2 part 2 you
3:08should be able to first of all
3:12discuss
3:13the definition and classification of
3:16income items all right um you will see
3:20uh some numbers over here
3:23these numbers on the left side here they
3:27correspond directly to
3:30uh the textbook
3:33or the text or the ebook that uh you
3:37should be reading all right uh
3:40sort of
3:41one out from there i'm not too sure why
3:44i'll just reload this thing again
4:46you sure why there's a message over
4:47there but anyway
4:49[Music]
4:53okay
4:55okay we were actually on this slide so i
4:57was actually explaining about the
4:58numbering uh
5:00next to the learning objective this uh
5:02numbering uh actually corresponds
5:04directly
5:05to
5:06uh the uh
5:09uh the textbook
5:10or the ebook that you are using so if
5:13you see here
5:15this is 6.5 it's actually
5:18uh in chapter six all right so
5:21yeah
5:22okay so you will see this uh in the
5:25textbook or the e-book which you should
5:28be assessing so it looks like this
5:30can you see that
5:32on the top right hand corner
5:33okay so the first one discuss the
5:36definition and classification of income
5:38items followed by the next one discuss
5:41the definition and classification of
5:44expenses items
5:46so what are expenses
5:48and what are incomes in other words
5:51next
5:53uh learning objective
5:54is to explain the purpose and importance
5:57of measuring financial performance how
6:00is the
6:02organization or the business doing are
6:04they earning
6:07uh money from the sales so here we're
6:10looking at financial performance are
6:12they making profit
6:14or are they making loss right
6:18next
6:19objective is 6.2 which is to explain
6:23the reporting period concept
6:26and the difference between accrual
6:28accounting and cash accounting
6:32and it's followed by this one here which
6:35is to describe the measurement of
6:37financial performance
6:44okay there's some more learning
6:45objectives
6:46um
6:48learning objective 6.8 would be to
6:50identify presentation formats in the
6:53statement of comprehensive income
6:57and to differentiate between alternative
6:59financial performance measures
7:02which basically means
7:04uh
7:06how else can we actually measure
7:09income items and expenses items
7:13followed by
7:15the learning objective which is to
7:17explain the relationship between the
7:20statement of comprehensive income and
7:22the statement of financial position
7:24which we learned last week
7:27all right so these are the learning
7:28objectives for
7:30this
7:32session
7:33so we're going to be focusing on income
7:34and expenses items so let's have a look
7:37at income
7:39there is a definition of income in the
7:42conceptual framework
7:45which we introduced
7:47way back in topic one
7:50and the definition of income is
7:53increases of assets
7:55or decreases of liabilities
7:59that result in increases in equity so if
8:02you have income
8:04this is supposed to happen assets will
8:07increase or liabilities will
8:10decrease and at the same time equity
8:14will
8:15increase
8:16then you have an income but
8:18there is an important exception here
8:22because it says
8:24other than
8:25those relating to equity holder claim
8:28contributions
8:30all right what do we mean by this
8:33actually let's make it simple
8:35uh any kind of capital contribution
8:39by the owner
8:41is specifically excluded from being
8:45considered as income
8:47all right so in this uh in this week's
8:50um
8:51tutorial session
8:53uh in
8:54the second
8:57tutorial question
8:59which is a question 4.35 you will see in
9:03one transaction where the owner
9:06contributed
9:07some cash into the business right um
9:11that actually increased the cash which
9:13is
9:15an increase in asset
9:16and
9:18it increased equity
9:22but it is not an income it is actually a
9:26direct increase in equity so that's why
9:28uh we will
9:30increase the capital account
9:32um
9:33directly right so any capital
9:36contribution by the owner is
9:38specifically excluded from being treated
9:40as income
9:42right other than that
9:44all other income items will increase
9:46assets or decrease in liabilities and it
9:49will also increase equity specifically
9:53the profit and loss
9:55column
9:56in the
9:58in the
9:59worksheet
10:00okay
10:05now you might have some of you might
10:07have heard of the word revenue right uh
10:11technically
10:12revenue is a subset of income
10:15uh what do we mean by this revenue is
10:19part of income revenue
10:22uh technically is not
10:25equivalent to income
10:27right so we
10:28should not be using these
10:30two words interchangeably
10:33uh so
10:35this mean being a subset of income it
10:37means that there are some items
10:40of income which are not considered as a
10:43revenue all revenues are income items
10:47but not all income items are revenue
10:50items
10:51okay yeah so let's have a look
10:54uh at the next point
10:56income consists of first of all revenue
11:00and it consists of
11:02gains
11:03so what is the difference between
11:05revenue and gains
11:08revenue arises from ordinary business
11:12activities this is the important thing
11:15all right for example
11:17uh you can have sales
11:19now this is a normal thing uh if you got
11:22a business you should be selling
11:23something either selling things or
11:26selling some services so these are
11:30revenue which are
11:32income items
11:33and if the business is involved in
11:37providing
11:38services they charge fees right so this
11:42would be revenue and it's also
11:45an income item
11:47okay now uh gains
11:50arise from other business activities
11:54not
11:55ordinary business activities that means
11:57there could be something
11:59that the business has done
12:01okay uh that is
12:04income in nature
12:07but it's not revenue
12:11for example
12:14the business could have
12:16disposed
12:17some non-current assets for example
12:20certain property plan and equipment
12:22which are too old already the business
12:24could have
12:26uh dispose it off i
12:29do not actually
12:30want to say that the business has sold
12:33them because if you say sale or
12:36sold then it will give us the idea of
12:40sales which is revenue so i don't want
12:42to use the same word so i'll use the
12:45word dispose right they they dispose it
12:48off
12:49sometimes they get money from the
12:51disposal
12:52right so
12:54this will be considered as what we call
12:57a gain a gain is income but it is not
13:03revenue because revenue is only from
13:05ordinary business activities
13:08disposal of property price equipment is
13:11not an ordinary business activity right
13:15it only happens once in a while
13:17not
13:18all the time yeah
13:21another uh example will be gains on
13:24revaluing
13:25assets now certain assets for example
13:29some property plant and equipment item
13:33like buildings or land
13:36you can actually re-value
13:40land and building
13:42okay
13:45revaluation of this kind of thing is
13:47only done once in a few years
13:50right so it's not
13:53an ordinary everyday business activity
13:57when you revalue yes it will
14:01result in
14:03a gain all right so it's not
14:07um
14:08it's not a
14:10revenue okay
14:14uh right
14:17now how do you know whether an activity
14:20is an ordinary business activity or it's
14:22something that it doesn't happen every
14:24day
14:24um
14:26it actually depends on
14:28the business that we are talking about
14:30so that that is the thing okay um
14:34whether an income
14:36comes from ordinary business activity
14:38and therefore should be treated as
14:39revenue
14:40or
14:42that income comes from other business
14:44activity which should be treated as
14:46gains
14:47this
14:49will depend on the nature of the
14:52business so you have to understand uh
14:54what the business is actually doing
14:57so for example right
14:59uh you might have uh this thing called
15:01interest income or dividend income
15:05right uh should we treat this
15:07interest income if you've got money in
15:09the bank or the business has got money
15:11in the bank and they earn interest from
15:13there is it um
15:16revenue or is it a gain
15:18if the business has got some investment
15:21let's say investment in shares right
15:23okay
15:24should we treat it as a revenue or a
15:27gain it actually depends so
15:30uh let's see here
15:32interest income and dividend income
15:34example uh it will be considered as a
15:37revenue which means from ordinary
15:40business activity
15:41if
15:42it is an investment company because an
15:45investment company
15:47by their nature they should be dealing
15:49with uh investments which is going to
15:52result in
15:54uh dividend income and interest income
15:57so this is
15:58what they do every day right
16:02but for
16:04other companies like for example trading
16:07buying and selling things type of
16:09companies
16:10or other companies which are
16:12non-investment
16:13services like hotel kind of business
16:16or consultancy type of business right
16:21having
16:22investment is
16:24not part of their core
16:27or main business activity so if they get
16:29interest income and dividend income then
16:31it is something extra it's not from an
16:33ordinary
16:35business activity for this type of
16:37trading and non-investment services uh
16:40business then they will treat this as
16:44a
16:45gain
16:46right rather than revenue
16:49now is it actually important
16:53uh to know whether it is a revenue or it
16:57is a gain
16:58uh the answer is yes
17:01okay because
17:03uh revenue
17:04will be
17:06uh
17:07considered as a sale but again it's
17:10actually not an income which results
17:13from a sale so
17:15the position
17:17that it is recorded in the statement of
17:19comprehensive income is different
17:23right it is different
17:24it will not affect
17:27the profit the the end of
17:30the ending line but the way it is
17:32presented will be
17:34in different
17:36uh
17:37places right whether it is a revenue or
17:39it is a gain
17:41okay
17:42now another example is rental income so
17:44you've got some space and you're renting
17:47it out to someone all right is it a
17:50revenue or is it a gain it depends on
17:53the type of business
17:55so for rental income it will be recorded
17:58as a revenue which is from ordinary
18:00activity
18:01for a company which specializes in
18:04renting up property so
18:07you know the the
18:09main
18:10activity of this
18:12type of business is to rent our property
18:14and collect rental okay so this one
18:17this type of activity happens all the
18:19time for this company it will be treated
18:22as a revenue
18:24okay um but this rental income will be
18:27treated as a gain
18:30for a manufacturing company
18:33because
18:34um
18:35a manufacturing company the main job is
18:38to make things not to rent out spaces
18:42but
18:43some manufacturing companies they got
18:44some extra space right um like a spare
18:48warehouse for example then they can rent
18:51it out but you need to realize that this
18:53is not part of your normal business
18:56activity and therefore it should be
18:58treated as a gain
19:00right
19:01which is an income you just have to
19:02realize that it is not revenue okay
19:08now we look at expenses okay expenses is
19:11the total opposite of income
19:14just make things simple all right
19:17expenses are defined in the conceptual
19:19framework as decreases of assets or
19:23increases of liabilities that result in
19:25decreases in equity
19:27total opposite of income right
19:30um
19:32and then of course there is an important
19:34exception
19:36wording here it says other than
19:39those relating to equity holder claim
19:42distribution
19:44what do we mean by this
19:46uh
19:48it simply means drawings all right so um
19:51so that's why i put here drawings
19:54right so if you see any transaction
19:56where the owner is actually taking out
19:59um
20:01from
20:03the
20:04capital right then uh it is not an
20:08expense it's a direct withdrawal of
20:10capital item
20:12so uh again in this
20:15week's uh tutorial question there is one
20:19transaction
20:20uh i think it's in uh question 4.27
20:24where the owner
20:25took out some
20:27money right so this to the business is
20:30not an expense it is a direct take out
20:33of capital
20:39okay
20:40let's talk a little bit more about
20:41expenses because
20:43if you have noticed
20:45if you look into the statement of
20:46comprehensive income right
20:49there are a lot more different types of
20:51expenses compared to
20:54the income items income items normally
20:56there's one or two lines like sales
20:59okay but for expenses normally you can
21:01see several lines and
21:03let me introduce you to this expense
21:06called cost of sales
21:09cost of sales first of all is also known
21:11as cost of goods sold
21:13right or sometimes c-o-g-s for cost of
21:17goods so
21:18uh sometimes uh cost of sales they can
21:22shorten it to c-o-s it means the same
21:25thing so cos
21:27it's the same as c-o-g-s is the same as
21:30cost of sales it's the same as cost of
21:31goods so so hopefully it is not too
21:34confusing
21:36uh what else do we need to know about
21:37cost of sales
21:39cost of sales is one of the largest
21:41expenses
21:43for a trading business what do you mean
21:46by trading business
21:48business that
21:49buys things from the supplier
21:53and then sells these things to the
21:56customer
21:57something like um let's say parksen
22:00right they buy things from supplier and
22:02then they sell things to the customer
22:04and we've got a lot of different types
22:06of trading business
22:07um
22:10pharmacy will be a trading business they
22:13buy from different suppliers this
22:14medicine and all that and then they sell
22:16it to the customer so it's a trading
22:17business okay
22:19um
22:21so this uh cost of sales
22:23measures the direct cost the business
22:26incurs in order to make sales so what
22:29does it mean it means that this cost of
22:32sale is directly related to sales
22:36um in other words right you cannot have
22:40a cost of sale without having a sale
22:44first
22:45okay so you need to sell
22:47and then you have got the cost of sale
22:49because the sale doesn't actually exist
22:51without sales they are all there they
22:53are related to each other
22:55now um
22:57some of you might have heard of the word
22:59purchases all right
23:01uh let me clarify that cost of sale is
23:04not the same as purchases all right what
23:06is purchases purchases is the amount
23:09that the business purchase or bought
23:12from the supplier
23:13right
23:14um
23:15cost of sale is not purchases because
23:17cost of sale is the cost of the thing
23:20that is sold to the customer
23:25the cost of the thing that is sold to
23:27the customer so it's something to do
23:29with the sales rather than
23:32something that you bought
23:34but cost of sales can actually
23:38be
23:39related to purchases
23:42okay by this
23:45uh formula over here some of you might
23:48have seen this before
23:51especially if you have done uh found
23:54foundation i think
23:56you would have seen cost of sales would
23:58be equal to inventory
24:00at the beginning of the period plus the
24:02purchases minus the inventory at the end
24:06of the period
24:08who has actually seen this thing before
24:11in opening inventory plus purchases
24:13minus closing inventory i think probably
24:16some of you have seen it right
24:18okay i just want to
24:20uh mention that cost of sales is not the
24:23same as purchases why is it not the same
24:26it's very obvious here cost of sales is
24:28actually
24:30inventory at beginning plus purchases
24:32minus inventory at the end so so cost of
24:35sales is not
24:37actually equal to purchases it's not
24:39because of this inventory thing
24:42okay um
24:43[Music]
24:45but how do you actually explain this
24:47thing
24:49the
24:50amount
24:52the cost price of the thing which you
24:54actually
24:56sell
24:57to
24:58the customer which is actually the this
25:00is actually known as the cost how do we
25:03get the figure
25:05this cost of the thing
25:07the thing that you sold to the customer
25:10must have
25:11either come from the inventory which you
25:14already had at the beginning of the
25:17period that's why it is here
25:20or
25:21it would have come from the purchases
25:25uh that you got from the supplier during
25:29the financial period in other words the
25:31things which you sow to the customer can
25:34either be coming from the
25:36uh inventory at the beginning or it can
25:39come from the inventory
25:41that you bought during the financial
25:43period which you have sold in the same
25:45financial period
25:47but
25:48the cost of sale will definitely exclude
25:51the inventory at the end of the period
25:53why because you would not have sold the
25:56thing
25:57at the end of the period
26:00that's why there is the inventory at the
26:01end of the period so that's why you
26:03minus it out so this is the
26:05logic
26:07behind this
26:08um this this this formula over here all
26:12right
26:13um so
26:15if you don't understand this thing
26:17um what you can do perhaps uh in your
26:20own time when i upload this thing you
26:21can replay this part okay
26:26yeah just for your own understanding
26:28okay
26:30um so let's have a look at this cost of
26:33sale or cost of goods sold
26:34so this is actually the cost price of
26:37the inventory that was purchased
26:41for
26:43sale to the customer
26:45right so how do we actually relate this
26:48okay this cost of sale is subtracted or
26:51taken away from sales in order to
26:53calculate this thing called gross profit
26:56so for example
26:58you've got sales let's say it's 50 000
27:00then you minus the cost of sale which is
27:0331 000 that will give you a remaining
27:05amount of 19 000 right so we call this
27:09gross profit right so sales minus cost
27:12of sales will give you the
27:15gross profit
27:17now um
27:20uh you need to realize that okay
27:23uh if i give you the sales figure and i
27:26give you the cost of sales figure you
27:27need to be able to calculate the gross
27:28profit because the formula is like this
27:30if i give you the sales figure and i
27:32give you the gross profit figure you
27:34should be able to calculate the cost of
27:36sales if i give you the cost of sales
27:38figure and the gross profit figure you
27:40should be able to calculate the sales by
27:42working back
27:43the
27:44formula all right because it's actually
27:46the same formula you need to
27:48just rearrange it
27:50yeah
27:51in terms of um
27:54the worksheet okay let's say that
27:58there was a sale
27:59a cash sale of 50 000 which relates to
28:02here okay
28:04so
28:05when the sale was made
28:07uh you charge 50 000 to the customer the
28:11customer pays 50 000
28:13immediately so the cash increases by
28:16fifty thousand and at the same time you
28:19have got a fifty thousand dollar
28:21sales recorded sales here okay so it
28:25increases the profit by fifty thousand
28:28but remember
28:31you need to record the cost of sales
28:34at the same time
28:35so let's record the cost of sales so you
28:37minus the 31 000 and we know that this
28:40is an expense it's called a cost of sale
28:41so that's why 50 000 minus the 31 000
28:44here in this column you will get a 19
28:46000 left over which you call a profit
28:48right okay now what do we actually
28:52deduct this 31 000
28:55from you need to deduct this 31 000 from
28:59the inventory amount because
29:02you have sold the inventory to the
29:05customer so obviously the inventory will
29:08drop in amount right okay so um yeah so
29:12that's why you minus off the 31 000 here
29:15now
29:17you
29:18should realize
29:20that the 31 000 is the cost price
29:23right
29:24uh that means that whatever that is
29:27uh recorded in this column of inventory
29:30it will be recorded at the cost price
29:34okay the amount that you charge to the
29:36customer is the selling price
29:39and the amount it cost you to make that
29:42sale is the cost price the difference
29:44between the two is known as the gross
29:48profit
29:49okay huh
29:54now let's look at other expenses now
29:57we've got
29:58many other expenses so i just list out
30:01the most common one
30:03that we are going to come across
30:06in this uh unit
30:09this is not all there is but these are
30:11the most common one will come across
30:12this
30:14quite often
30:15wages and salaries if you have this it
30:19is an expense you have depreciation
30:21expense
30:23advertising expense interest expense now
30:27interest expense will happen when you
30:29have got a loan all right so maybe the
30:32business has got a loan so they borrow
30:34some money from the bank the bank will
30:36uh you have to repay the bank the
30:38original amount of the loan but the bank
30:40will also charge interest
30:42so in the anna the business will have to
30:44pay back
30:45um
30:47more than just the amount of the loan
30:49the additional amount is the interest
30:51expense right
30:54rental expense if the business
30:57does not have their own place to do
31:00business
31:01and
31:02they have to rent it from someone else
31:03so they have to pay rent so this is the
31:05rent expense
31:07okay
31:08utilities expense uh
31:11meaning water electricity every business
31:14will need to have this otherwise it's
31:16not going to work telecommunications
31:19expense like phone
31:21fax email all right
31:24yeah
31:24internet
31:26expense right so all these are part of
31:29communications expense
31:32and uh there's one more which i bet
31:35that's written off so if
31:37the business sold something to the
31:38customer and then the customer did not
31:40pay the customer ran away or the
31:42customer went bankrupt
31:45so the business knows that it is not
31:48going to get the money from that
31:50customer already so we have to write off
31:52that debt that is an expense
31:56so these are very common expenses
31:58apart from the cost of sales
32:02um
32:03one more thing
32:05most expenses have to be paid
32:08sooner or later
32:10either now or later
32:12except for
32:13depreciation expense and bad debts
32:16written off so that's why i highlighted
32:18these two in different color
32:20right for depreciation expense and bet
32:23that's written off you do not actually
32:25have to pay
32:26money for this
32:28depreciation expense and that that's
32:30written off so these are
32:33rather special type of expenses where
32:37they are expenses but you don't have to
32:40pay for them look at the others huh
32:43like salaries and wages advertising
32:46interest rental utilities
32:49telecommunications expense all this
32:52you actually have to pay for it you have
32:53to pay cash for it either now or later
32:56right you have to pay the worker you
32:58have to pay the for advertising etc but
33:01not the depreciation i bet that's
33:02written off okay
33:05and
33:07why do i want to highlight this thing
33:10here
33:11okay the depreciation expense in fact
33:13that's written off they do not have to
33:14be paid
33:16why do why do i actually
33:18um
33:19make
33:20uh you realize this because when it
33:23comes to preparation
33:25of
33:26another statement which is called the
33:28statement of cash flows which is going
33:29to be in topic three you need to make an
33:32adjustment uh
33:34in the
33:35when doing the
33:37statement so it is depreciation expense
33:40and that's written off all right so just
33:43make you aware of it
33:45earlier rather than later
33:47okay
33:49now let's talk a little bit about
33:50depreciation which is actually an
33:52expense
33:53the acquisition of property equipment so
33:56when you're buying property flight
33:57equipment it is not an expense at that
34:00point
34:01why
34:02because
34:03property equipment are expected to
34:05provide future economic benefits through
34:07their usage over a period of time this
34:10period of time normally it will be a few
34:12years
34:13right when you buy furniture when you
34:15buy even when you buy
34:18computers uh office equipment etc for
34:22use in the business you expect to use
34:25them
34:26for
34:27a couple of years
34:28right um and
34:31yeah so that's why we said they provide
34:32future economic benefits
34:35so if they provide future economic
34:37benefits they are not expensive
34:40expenses
34:41do not provide future economic benefits
34:45right so that's why we treat them as an
34:47expense
34:50right so remember expenses do not
34:52provide future economic benefit the
34:54economic benefit that expenses brings is
34:57only for this particular period not for
35:00future
35:01right so this is what makes
35:03uh an asset different from an expense
35:08now
35:09having said that right
35:10remember i said uh the property
35:12equipment is going to be used over many
35:15years so the usage of
35:18the property for equipment over a period
35:21of time it will entail the depreciation
35:24expense so
35:26when you use the property plug equipment
35:28that is when you have got that
35:30depreciation expense
35:33right so
35:34this
35:35allocates the cost
35:37of the property equipment over what we
35:40call their useful
35:42life um
35:44when you get
35:45property equipment right uh you
35:49have an estimated amount of number of
35:51years where they are going to be useful
35:53we call it a useful life
35:56sometimes uh maybe computer let's say
35:58the user life is three years
36:00right um
36:02furniture the useful life should be
36:04longer right
36:06um yeah so so different types of
36:08property equipment they got different uh
36:10useful
36:11lives
36:14okay huh
36:15now the next thing is let's talk about
36:18the purpose and importance of measuring
36:19financial performance
36:21the statement of compressive income
36:23shows what shows the income the expenses
36:25and the profit or sometimes if you got
36:27more expenses than income you've got a
36:29loss
36:31for the entity over a specified time
36:34period right so if you got statement of
36:37uh compressing income it you have to
36:39specify
36:41how long is that time period is it one
36:45year
36:45or is it one month or is it three months
36:48or
36:50how long is it for okay
36:52so the profit is the difference between
36:54the income and expenses uh for a
36:56reporting period so in other words to
36:58get profit you've got to take all the
37:00income items
37:02minus all the expenses
37:04items
37:07okay let's talk a little bit about the
37:09reporting period
37:10this reporting period
37:13is also known as the accounting period
37:16so it is the period of time
37:19to which financial statement relates so
37:22it could be one year or one month or it
37:23could be three months it could be six
37:25months
37:26it could be
37:27one week
37:29it could be x number of days etc but
37:33um
37:34true experience right
37:37quite often
37:39it could be one year or it could be one
37:42month these are the most common one so
37:44i'll give you the examples the reporting
37:47period strictly speaking can start
37:50on any date and it can end on any date
37:55right but for practical purposes
37:58um
38:00quite often we will start at the
38:01beginning of a month for example like
38:04this from 1st of january 2022
38:07until 31st of december 2022 so this is
38:10for one year 12 months
38:12right uh or it could be from 1st of july
38:152022 until 30th of june 2023 so this is
38:19also for 12 months it's also for one
38:20year
38:23korea
38:24or it could be let's say first of july
38:262022 until 31st of july 2022 so this one
38:29is for one month
38:31so it can start on any day it can finish
38:33on any day
38:36but quite often
38:37it will start on first of the month and
38:39then finishes off at the
38:42at the end of another month it could be
38:44the same month it could be another month
38:45but um
38:47really it can start and end on any day
38:50okay yeah
38:55okay the next thing is we are going to
38:56talk about cash accounting uh and
39:01another one which is accrual accounting
39:03right
39:04so
39:06what is cash accounting
39:09under a cash accounting system you got
39:12profit or loss
39:13but how do you calculate the profit or
39:15loss the profit of loss is calculated as
39:18the difference between the cash received
39:20for income and the cash paid for
39:22expenses
39:23what does this mean
39:25it means that under the cash accounting
39:28system right um the income
39:32is
39:33the same as the
39:35cash that is received it's the same
39:38amount
39:39all right and the expenses
39:42is the same as the cash that is paid out
39:45right so this makes cash accounting a
39:48very
39:50simple
39:52type of accounting system
39:55but um
39:57it's not very
40:01accurate
40:02let's just say it that way
40:05because
40:07you see to get profit it is income minus
40:10expenses right so if you say that uh
40:12income is the cash that is received and
40:14expenses is the cash that is paid out
40:17then um
40:18whatever you receive and whatever that
40:21you paid out is the cash that is left
40:23over right so you're saying that the
40:24cash that is left over is actually the
40:26profit of the business
40:28not necessarily so
40:30right so we have to separate out these
40:32two concepts uh so we will look at it in
40:35just a
40:36moment so back to cash accounting
40:39transactions are recorded in the period
40:41when the cash is received or paid so
40:44you're only looking at
40:46money that is coming in
40:48cash that is received and money that is
40:50going out which is cash that is paid and
40:53nothing else so under cash accounting
40:55you do not have things like
40:58expenses which never have to be paid for
41:01example like depreciation there is no
41:03such thing as depreciation in cash
41:05accounting
41:06right
41:07there is no such thing as bad debts in
41:10cash accounting because that debt is an
41:12expense but it has
41:14it doesn't have to be paid
41:16right so
41:17yeah
41:18it's not a very good accounting
41:21system it's not a very accurate one and
41:23because of this right
41:25cash accounting is not allowed by the
41:28accounting standards
41:30and for this reason we do not emphasize
41:33this and we do not teach this thing
41:37right uh
41:39the one that we are using is called
41:42accrual accounting right so what is
41:46accrual accounting it's a system in
41:49which
41:50transactions and events are recorded in
41:52the periods which they occur
41:55rather than in the periods where the
41:57cash is received or paid okay so from
42:00this sentence
42:03under accrual accounting
42:06you have to separate out the idea of
42:10income
42:11from
42:12cash that is received
42:14it is not the same concept right income
42:19and cash received are
42:22not identical
42:24it's related but it's not identical
42:28and
42:29expenses
42:30and cash that is paid out
42:32they are not identical
42:35concepts they are related but they are
42:37not identical so this is the thing that
42:40you need to realize
42:42for a cruel accounting okay so uh
42:45accrual accounting will recognize
42:48when we say recognize means that we will
42:50report
42:51we will record it in the account
42:54we will recognize the income on the
42:57basis that it has been what we call earn
43:00whether the cash
43:03has been received or the cash
43:06has not yet been received
43:08okay so we will record the revenue when
43:11we have already done the job
43:14whether we have received the cash or not
43:18that is a separate issue so this is the
43:21thing that we need to realize and get
43:24used to
43:27in a crude accounting for income
43:30same thing for expenses huh
43:32we will recognize or record expenses
43:35when the expenses have been incurred or
43:38consumed when the expenses actually
43:41happen
43:42not
43:43when we paid for those expenses so the
43:47occurrence of the expenses and the
43:49payment
43:50of the expenses may not happen at the
43:54same time it can come earlier or it can
43:56come later so under accrual accounting
43:59uh yeah
44:00the payment and the receipt of cash
44:05may occur at different times from the
44:09income and the expense it can occur at
44:11the same time or it can occur at a
44:13different time so for this reason
44:18if you're starting on accounts
44:21it needs a little bit of getting used to
44:24all right this is a crude accounting
44:27but
44:28it's
44:29not extremely hard once you get it it's
44:35it's it's quite uh
44:37uh you know it's it's not that hard yeah
44:40okay
44:40uh and uh it's supported by the
44:42accounting standards accounting
44:44standards require accounts and financial
44:46statements to be prepared using accrual
44:49accounting
44:50not cash accounting
44:52all right so uh let's talk about accrual
44:55accounting for income
44:57right so under accrued accounting the
45:00following may occur for income items
45:03so the income is recognized recognized
45:05means recorded in the accounts without
45:07the
45:08receipt of cash so
45:11the income is recorded first but you
45:13receive the money at some time later
45:15okay so this is called accrued income
45:19so the income has been earned in other
45:22words the sales or services has been
45:23provided and therefore we got to record
45:26the income because we done the sales and
45:28we you know we provided the services
45:30but the cash is not yet received from
45:34the customer so
45:35we will record it as a receivable which
45:39is an asset not under cash okay it is uh
45:44under this asset item which is called
45:47receivable
45:49now uh you can have another situation
45:52cash
45:53received from customer but the income is
45:56not recognized yet so we do not record
45:58the income yet why because it is an
46:01income or an amount that is received in
46:03advance that means for some reason the
46:06customer pays you the money but you have
46:08not yet done the service at that point
46:11you will do the
46:12service at some time later but that's
46:16a story for another day right so
46:19um
46:20once you receive the money
46:22you record that you have received the
46:23cash but you cannot record that sale at
46:26that point of time so in this case here
46:29any uh income that is received in
46:32advance is recorded as a liability
46:37until the income is actually earned
46:39until you have provided the service at
46:41some point in the future then you record
46:43as an income
46:46okay next one oops
46:56okay accrual accounting for expenses now
46:59okay uh under accrual accounting the
47:01following may occur for expenses
47:04expense is recognized without payment of
47:06cash that means you already have the
47:08expense but you haven't actually paid
47:09yet so in this case we call it accrued
47:12expense
47:13so expense
47:15have been consumed or used therefore you
47:17record the expenses but at that point
47:20you have not made not yet done any
47:22payment
47:23so in this case here you record the
47:26expenses and at the same time you record
47:28this thing called accrued expense which
47:31is actually a liability
47:34right and accrued expense is a liability
47:37so
47:39try not to get confused
47:41a crude expense is a liability yeah okay
47:45um
47:47and then you can have another case where
47:49you make payments
47:52but the expense is not yet incurred you
47:54don't have that expense yet okay
47:58and in this situation it's called a
48:00prepaid expense
48:02right a prepaid expense
48:05or a prepayment
48:08is actually not an expense
48:12it is actually an asset
48:14okay yeah so only when the prepayment is
48:17consumed or used up then we record it as
48:20an expense but that again happens
48:22sometime in the future then we do that
48:26okay
48:27this thing here um
48:29this this accrual accounting for income
48:32and expenses
48:34can be a little bit confusing all right
48:36so those who are new please spend a
48:38little bit of time to look through this
48:41here
48:43okay let's have some examples maybe we
48:45can understand a little bit better uh
48:47let's say that there's a credit sale and
48:49subsequent collection all right
48:51so um the business sales goods 400
48:55on credit
48:57right
48:58so it allows the customer 30 days to pay
49:01so you sell the thing first right so
49:03when the sale occurs
49:05uh the statement of compressor income
49:07will show an increase in sales so
49:10this is the sale amount this
49:13uh by the way is the selling price right
49:18you charge the customer
49:19this 400 they have to pay the 400 this
49:23is what we call the selling price the
49:24price that we sell to the customer right
49:27now
49:28now at the same time did you receive the
49:31money from the customer the answer is no
49:33because you gave them 30 days to pay
49:35right okay so now the customer owes the
49:38business
49:39all right
49:40so this will create a current asset it's
49:43called receivables in the statement of
49:46financial position so at the point of
49:48the sale you at the same time create the
49:51receivable which is 400 over here
49:55now sometime in the future
49:58when the customer pays within the 30
50:00days right then you
50:04get this receivables account you will
50:06reduce this receivable account
50:08to make them
50:10not all this amount anymore
50:14and then another current asset cash will
50:17be increased so that is when you
50:20record the
50:21um
50:23increase in the amount of cash because
50:26they paid up at that time and at that
50:29time you also reduce the amount that
50:31they owe which is the receivable so
50:34reduce the 400 so at that point of time
50:37the receivables will be zero because you
50:39created the 400 and then you reduce the
50:41400
50:42at that time
50:43okay
50:46so in terms of the worksheet uh at first
50:49you have got that sale so you created
50:52the receivable so it increases your the
50:54receivables and at the same time there
50:56was a sales right so the sales under uh
50:58it gets recorded under the profit and
51:00loss as a positive figure
51:03and you call it credit sales and
51:05sometime in the future
51:06when the customer actually pays
51:09you increase the cash because you
51:11receive the money
51:13but at the same time you have to reduce
51:15the amount that the receivables is
51:17actually owing so at the end of the day
51:20400
51:21minus the 400 under this receivers
51:24column that will give you
51:26zero after everything is over
51:28right
51:29okay
51:32let's have an exam another example
51:34you've got a credit purchase of
51:36inventory so the business is buying
51:39inventory
51:42but this
51:43buying of inventory from the supplier is
51:46on credit meaning that the business is
51:49not paying the supplier immediately
51:52right
51:54so
51:55the business acquires inventory on
51:57credit for four thousand dollars now
52:01this is the amount
52:03that the business will have to pay to
52:05the supplier right so we call this the
52:08cost price
52:09to the business it is the cost price
52:12right
52:13uh maybe sometime later when the
52:14business actually sells to the customer
52:17they are going to sell it for normally
52:19it will be higher than four thousand
52:20let's say five thousand let's say
52:23then uh the amount that they charge to
52:25the customer is known as the selling
52:28price but the amount that
52:31you need to pay to the supplier it's the
52:33cost price okay it's the cost to the
52:36business
52:37so
52:38uh
52:39for asset the inventory will increase
52:42and then for liability
52:44the creditor or the accounts payable
52:46will increase so
52:48in terms of the worksheet
52:51you have to increase the amount for the
52:53inventory which is 4 000
52:56so that's why i say just now
52:58uh amounts that go into inventory
53:01account will always be at cost price
53:04we do not record selling price
53:07in the inventory column right
53:09and at the same time because it is a
53:11credit purchase uh you have to increase
53:13the amount that you owe to the supplier
53:16so that's why we're increasing the
53:18payables
53:19right
53:20so yeah
53:24and then later on when there is a sale
53:27right of that inventory so when the
53:29inventory is sold
53:31the asset uh which is the inventory will
53:35be reduced
53:36by the cost amount and shown as an
53:40expense in the statement of
53:42comprehensive income when it is so so
53:44for example let's continue the story
53:46you sell the inventory on credit
53:50uh for 1500 that means the selling price
53:53is 1500
53:54and the inventory
53:56cost
53:57eight hundred so that means uh the
54:00business did not sell all the four
54:02thousand dollars of inventory the
54:03business only sold eight hundred dollars
54:05of that inventory
54:06for how much for one thousand five
54:08hundred so let's continue the
54:12story the revenue or the sales will be
54:14increased by 1500 this is the selling
54:18price
54:19and
54:20uh
54:21it says sale inventory on credit right
54:23so you have to increase the receivables
54:25so that's why
54:26uh you are increasing the receivables
54:291500 over here and at the same time it
54:32is a sale so you got to record the
54:36um positive 1 500 because it's an income
54:41for sales it's here
54:43right and at the same time you will
54:45record the cost of sale by taking away
54:48800
54:50of course price from the inventory
54:53column and at and at the same time also
54:56you minus
54:57800 from the profit and loss column
55:00because it is a cost of sale so in this
55:04particular transaction how much profit
55:06did we make 1 500 minus 800 so that
55:10would give us
55:13700
55:14of gross profit granular sale minus the
55:18cost of sale there will be the gross
55:20profit of 700 yeah
55:25okay let's continue some other examples
55:27you got accrued expenses
55:29expenses which were incurred in the
55:32period but have not been paid so let's
55:35have an example an amount of 250
55:39for the previous month which is may
55:41electricity invoice it was paid
55:44uh on 30th of june which is the next
55:46month
55:47so
55:48um
55:50at the same time you receive the monthly
55:51electricity invoice which is a bill of
55:54500 on the 30th of june it's for the
55:56june month but
55:58you haven't paid it yet so in this case
56:01here
56:02this will increase the expenses called
56:05electricity right expenses and then it
56:08creates a current liability called
56:10accrued expenses in the statement of
56:12financial position so in terms of the
56:15worksheet right
56:17um
56:19you're actually owing
56:21250
56:23dollars
56:24to the electric company at the beginning
56:27of the month so that is why
56:30during the month of june
56:33you are paying that 250 dollars so if
56:36that's the case during the payment you
56:39have to reduce the cash of course cash
56:42goes out
56:43okay and then the accrual
56:46is
56:47reduced because you're paying
56:50the
56:51electric company
56:53so now you don't owe them any more
56:55but
56:56at the end of june you receive another
57:00bill
57:01right and that bill is 500. so in that
57:03case then you have to
57:06record that you are owing the electric
57:09company
57:11500
57:13and then
57:14uh
57:15what is that 500 for is for electricity
57:18expenses so as an expense
57:21you will record it under the profit and
57:23loss column in negative
57:26figure because it is an expense right
57:29and you call it electricity expenses
57:33right
57:35let's have another example uh
57:37this one is about prepaid expenses so in
57:40june
57:41the business pays 3 000
57:45dollars for three months of
57:47advertisement
57:49and then they actually tell you which
57:50month it is june july and august but you
57:54paid in june you paid all of it 3 000.
57:57okay
57:58so assume the accounting period ends on
58:0130th of june right okay so
58:05you have a cash that is reduced in june
58:07because you paid 3000 in june right
58:10okay
58:10next
58:11the appropriate advertising expense for
58:14june is only 1 000 because that 3 000 is
58:17for three months
58:18so for one month it's only 1 000
58:21per month right
58:22okay so at the end of june the expense
58:25should be only one thousand dollars and
58:28not three thousand dollars right
58:30okay so
58:32in june
58:33the three thousand dollars paid is shown
58:37in the statement of financial position
58:38as an expense
58:40for june 1000
58:43only and then there is a current asset
58:46which we call pre-payment
58:48or prepaid expense if you like
58:51of two thousand dollars at the end of
58:54june because at the end of june you
58:56actually have a prepayment of two
58:58thousand the prepayment of 2000 is a
59:01future economic benefit which is
59:04the right to advertise for two months in
59:08the next accounting period which is july
59:10and august
59:12right
59:12so um
59:15in terms of the worksheet
59:17in june
59:19you paid three thousand right so cash
59:20goes out three thousand yep
59:23no no
59:24no mistake about that cash went out
59:26three thousand but it's to pay what by
59:29the end of june is to pay for three
59:31months of
59:33uh advertising but at the end of june
59:35there's only one month which is one
59:37thousand dollars of advertising expense
59:41so the expense which is uh recorded as a
59:43negative figure right
59:45uh is 1000
59:47recurring advertising expense what
59:48happened today 2000
59:50the 2000 is treated as a prepayment is
59:53it it is an asset
59:55okay so this is for july and august but
59:59you're looking at you're looking at this
1:00:002000 from the point of view of the 30th
1:00:04of june so on the 30th of june
1:00:06you know that there is two thousand
1:00:08dollars
1:00:09prepayment and that prepayment is for
1:00:11the next two months which is july and
1:00:14august right
1:00:20okay let's have another example
1:00:22uh this one is unearned revenue so
1:00:25unearned revenue is what is money that
1:00:26you receive in advance likely for
1:00:30from a customer
1:00:31but the sale has yet to have been
1:00:34completed or performed
1:00:36so you are
1:00:38getting the money first but you haven't
1:00:40actually done any sales yet so
1:00:43the cash receipt will be recorded
1:00:45because you receive the money
1:00:47and then a sale however cannot be
1:00:49recognized or recorded yet at that point
1:00:51of time because
1:00:53no revenue has been earned at that point
1:00:55of time then you record the amount that
1:00:58you receive as a current liability which
1:01:01we call
1:01:02unearned revenue
1:01:04until the goods and services have been
1:01:07delivered at some time in the future
1:01:10right so
1:01:12uh if you receive let's say 15 000
1:01:17from
1:01:18a customer
1:01:20right um that at that point of time you
1:01:23record uh cash coming in so increase the
1:01:26cash 15 000 but if you have not yet done
1:01:28the service at that time then you record
1:01:31it under unearned revenue and earn
1:01:33revenue is a liability it's a liability
1:01:36yeah it's not a
1:01:38revenue
1:01:40as we know it
1:01:41okay then at some point in the future
1:01:43when you finally
1:01:46perform the service
1:01:48then you decrease the unearned revenue
1:01:51because it's no longer unearned it is
1:01:53earned right and at the same time you
1:01:56record the actual sales of 15 000. so
1:02:00sales is a positive figure right you
1:02:02call it sales and then um
1:02:06at the same time you've got cost of
1:02:08sales if it happens to be uh sales of
1:02:10goods so you reduce the inventory in
1:02:13this example it's 10 000 right so reduce
1:02:16the inventory and then um
1:02:18reduce the profit and loss and quality
1:02:20cost of sales so in this case here can
1:02:22you see here
1:02:23this is there is a gross profit of five
1:02:27thousand fifteen thousand minus the ten
1:02:29thousand
1:02:30yeah
1:02:33okay so now we
1:02:35compare
1:02:36uh
1:02:37cash accounting and accrual accounting
1:02:39so this one this slide and the next
1:02:42slide demonstrates to you that if you
1:02:44use cash accounting you're going to get
1:02:46one result if you use a crew accounting
1:02:48you're going to get another result
1:02:50right so let's have a look
1:02:53there is a financial year ended 31st of
1:02:56december 2019 okay so in uh in this
1:03:00financial year a few things happen
1:03:03firstly
1:03:05uh the business provided eight thousand
1:03:07dollars of coaching services to the
1:03:08customer
1:03:10right in 2019
1:03:12but
1:03:14the amount is only received from the
1:03:17customer in the next year which is in
1:03:19the year 2020.
1:03:21okay huh
1:03:22and then
1:03:23uh the next thing is that the business
1:03:26received 12 000
1:03:28from customers for coaching services
1:03:32but
1:03:33the services is only going to be
1:03:35performed in the year 2020 which is the
1:03:38next year so if i compare these two
1:03:40right this this to this two point here
1:03:43the first point is you provided the
1:03:45services but you haven't got the money
1:03:47yet
1:03:48right the money you will get
1:03:50next year
1:03:51in the second point here you got the
1:03:53money after a thousand dollars from the
1:03:55customer but you have not yet uh
1:03:58provided the service you will provide
1:04:00the service next year
1:04:03okay yeah
1:04:05and then the next one in in this point
1:04:07here
1:04:08um
1:04:09in the year 2 2019
1:04:12the business incurred 500 of
1:04:15mobile phone expenses but this
1:04:18500 is only paid in 2020 which is next
1:04:21year not in 2019 so the expenses
1:04:24happened in 2019 but the payment only
1:04:28happened next year
1:04:30and and then there's another thing
1:04:32uh in 2019 2400 was paid so there was a
1:04:36payment for this insurance
1:04:39but only 200 dollars of this 2400 is for
1:04:422019 so what happened to the other
1:04:44amount the
1:04:472200 the remaining amount relates to the
1:04:492020 year which is the next year so if
1:04:52you compare the third point and the
1:04:55fourth point here like this uh
1:04:57uh in the third point here you have got
1:05:00the expenses in 2019
1:05:03but the payment is only next year
1:05:05okay in the fourth point
1:05:07you have the payment in 2019
1:05:10but the expenses are only 200 is in 2019
1:05:13the risk the rest of it is in the year
1:05:152020 which is next year
1:05:17okay huh
1:05:20so if you compare the treatment between
1:05:23cash accounting and accrual accounting
1:05:26you are going to get different results
1:05:29okay so if this this part here on top
1:05:31here is for accrual accounting and then
1:05:34the bottom part here is for cash
1:05:35accounting
1:05:37all right so let's have a look and
1:05:39compare
1:05:43now in financial year ended
1:05:452019 you provided 8 000
1:05:49of coaching services to customers but
1:05:50they only paid in 2020.
1:05:53so under accrual accounting you will
1:05:57record the coaching fee in 2019
1:06:01but under
1:06:02cash accounting you will only record the
1:06:05amount that is received as an income in
1:06:08the year 2020
1:06:10when you actually receive the money
1:06:13okay yeah
1:06:15now if you look at
1:06:16the next one
1:06:18the business received 12 000 from
1:06:20customer for coaching services to be
1:06:22performed in the year 2020 you're only
1:06:24performing the services in the year 2020
1:06:27therefore
1:06:28this 12 000
1:06:30under accrual accounting right will only
1:06:32be recorded in the year 2020
1:06:35but under cash accounting it will record
1:06:38this 12 000
1:06:39immediately
1:06:40in the year 2019
1:06:43right because they received the money
1:06:442019 yeah
1:06:49now
1:06:50the third point
1:06:52the business incurred 500 of mobile
1:06:54phone expenses so it got the expenses
1:06:56but it was only paid in the year 2020 so
1:06:58under accrual accounting the expenses is
1:07:00for 2019 right so that is why
1:07:03under accrued accounting you have got
1:07:05these 500 of mobile phone expenses but
1:07:08under cash accounting
1:07:10you only pay
1:07:12in the next year so that is why under
1:07:14cash accounting you record in the year
1:07:172020
1:07:20okay
1:07:20uh and the final one
1:07:24uh 2400 it was paid for insurance
1:07:26premium so the payment was in 2019 all
1:07:29of it
1:07:30okay but
1:07:32only 200 is actually the expense then
1:07:35the remaining amount relates to the 2020
1:07:38year so
1:07:40that's why under accrual accounting you
1:07:42only record 200
1:07:44as an expense and then the remaining
1:07:46amount
1:07:47is recorded as an expense in the year
1:07:492020. but look what happen if you do the
1:07:52cash accounting part all of it is
1:07:56recorded as an expense in the year 2019.
1:08:01so
1:08:02the gist of the story is like this okay
1:08:05depending on which uh which type of
1:08:08accounting system you are using okay it
1:08:11does have an effect on the timing of
1:08:14recording of the income and expenses
1:08:16items okay
1:08:18but
1:08:19uh so so so
1:08:21before the budget
1:08:22um you will see here
1:08:25under the accrual uh
1:08:27accrual accounting in 2019 you get seven
1:08:30thousand three hundred dollars of profit
1:08:31but under the cash accounting you get
1:08:33nine thousand six hundred dollars of
1:08:35profit so which one is the correct one
1:08:37the correct one is the accrual
1:08:39accounting right which is 7 300. but
1:08:42if you look at the year 2020
1:08:44under a accrual accounting you record 9
1:08:47800 of profit but under cash accounting
1:08:50you have thousand five hundred dollars
1:08:52of profit so
1:08:54it
1:08:55matters
1:08:56uh
1:08:58when you record the expenses and income
1:09:02because if you record it in the wrong
1:09:04year or in the wrong period
1:09:06you are going to get a wrong
1:09:08profit okay which we are trying to avoid
1:09:11but
1:09:12notice something yeah notice something
1:09:15the difference is only within one year
1:09:19if you add up the two years together you
1:09:21will get the same result okay
1:09:25um
1:09:26if you say if you add up the two income
1:09:29you get 20 000 right this is for
1:09:31accrual
1:09:32if for cash you add up the two years it
1:09:36you also get 20 000
1:09:38okay the same thing for expenses as well
1:09:402 900
1:09:42and then 2 900.
1:09:43so you will get the same profit 17 100
1:09:46for accrual accounting and 70 100 for
1:09:48cash accounting so
1:09:51some of you
1:09:53might say well since it over two years
1:09:55you're going to get the same so it
1:09:57doesn't matter whether it's cash or
1:09:58accrual right
1:09:59no
1:10:00because we do not record
1:10:03uh
1:10:04yeah we do not make a report only after
1:10:06two years
1:10:07we have to report it more regularly
1:10:10because people want to know what is
1:10:11going on in the company on a more
1:10:13regular basis so that is why uh we have
1:10:16to record it properly under the accrual
1:10:19based
1:10:21method
1:10:22okay
1:10:23the next thing is we're looking at
1:10:24depreciation
1:10:27okay
1:10:28um so uh
1:10:31depreciation there is an actual
1:10:33definition for it it's the systematic
1:10:36allocation
1:10:38of depreciable cost of a property
1:10:41equipment asset over its useful life so
1:10:43let's have a look at the first
1:10:45point here
1:10:48ready
1:10:50to have depreciation you must have
1:10:53property plant and equipment if you do
1:10:56not have property plant equipment there
1:10:57is no such thing as depreciation so the
1:11:00property equipment must be there first
1:11:03then
1:11:04when you are using the property plant
1:11:05equipment then you
1:11:08have that depreciation
1:11:10now to have that depreciation you need
1:11:13to realize something
1:11:15firstly
1:11:17that property plug equipment you need to
1:11:19realize that there is a period of time
1:11:22when it is useful
1:11:24right so it depends on the property
1:11:27plant and equipment some
1:11:30items have a shorter useful life some
1:11:32items have a longer useful life for
1:11:34example like i mentioned just now a
1:11:36computer
1:11:38useful life normally it's about three
1:11:40years or
1:11:42you know maximum i think you can use it
1:11:44for five years and it's it's not so
1:11:45efficient
1:11:47anymore so the useful life is rather
1:11:48short
1:11:49but for
1:11:51things like furniture or buildings you
1:11:54expect the useful life to be longer
1:11:56right 10 years 20 years
1:11:59buildings
1:12:01it could even be longer than that right
1:12:04so
1:12:05yeah so that
1:12:07um
1:12:08cost of that property plant equipment
1:12:11we are going to
1:12:12split it
1:12:14up over the useful life which could be a
1:12:17number of years
1:12:19now the other thing that i want you to
1:12:22realize is that
1:12:24it may not be the original amount
1:12:29of cost of that property flight
1:12:31equipment that you divide over the
1:12:33useful life
1:12:35the thing that i want to emphasize to
1:12:37you is the depreciable cost
1:12:41not the original cost it's called the
1:12:44depreciable cost
1:12:46all right so
1:12:49we'll have a look at this in just a
1:12:51moment right
1:12:54depreciation like i mentioned just now
1:12:56it is an expense
1:12:58but
1:12:59unlike most expenses depreciation is
1:13:02rather special
1:13:04because it does not involve cash flow
1:13:08meaning that there is no payment for
1:13:10depreciation you don't have to pay for
1:13:12depreciation
1:13:13so it is an expense but it doesn't
1:13:15require payment
1:13:18okay huh
1:13:19so how do you actually get depreciable
1:13:22cost
1:13:23you take the cost the original cost huh
1:13:26minus what we call the residual value
1:13:30then the next thing you're going to ask
1:13:33me is what is residual value
1:13:35procedural value is
1:13:37the value of
1:13:39the property by equipment asset at the
1:13:42end of the useful life
1:13:44but
1:13:47how do we know
1:13:49the value of the thing at the end of the
1:13:53useful life you haven't come to that yet
1:13:55right right
1:13:56you need to do the
1:13:58depreciation
1:14:00you need to know the residual value
1:14:03but when are we going to get the
1:14:04residual value you need to get the
1:14:06residual value at the beginning
1:14:09so
1:14:14you realize that this residual value
1:14:17in practice
1:14:19is actually an estimated figure
1:14:22because you cannot wait until the next
1:14:24few years to get the residual value you
1:14:26must know it at the beginning of the
1:14:29life of the property equipment
1:14:32so that you can do the depreciation
1:14:34because if you don't have the residual
1:14:36value
1:14:38you can't do the
1:14:39depreciation properly well right
1:14:42um so it's actually an estimated
1:14:46amount but don't worry
1:14:48for student purposes right
1:14:50when you're answering the question the
1:14:52residual value will be given to you
1:14:55right but in real life
1:14:56you need to estimate it at the uh during
1:14:59the beginning of the period okay yes i
1:15:01just want you to realize this
1:15:03um yeah
1:15:06the useful life
1:15:07is the estimated period of time whereby
1:15:10the property equipment asset is expected
1:15:12to be useful
1:15:15so
1:15:17we have two things which we have to
1:15:19decide on
1:15:21the first one is the
1:15:23residual value which is actually an
1:15:25estimated figure
1:15:27and number two
1:15:28you have to decide on the useful life is
1:15:31it how many years is it three years five
1:15:33years
1:15:35so
1:15:36it again it is an estimated useful life
1:15:40right
1:15:42for student purposes
1:15:44the useful life will be given to you all
1:15:46you need to do is to do your
1:15:47calculations but in real life in
1:15:49practical sense you need to decide
1:15:52uh how long is it
1:15:54but uh
1:15:56luckily
1:15:57we have guidelines
1:15:59for
1:16:00you know from from other businesses
1:16:02so that's why i keep saying that you
1:16:04know
1:16:05for computers right normally it's about
1:16:07three years because
1:16:09a lot of businesses they
1:16:11appreciate this over three years
1:16:15okay and uh this one of course is longer
1:16:19right the furniture is longer
1:16:22the next thing
1:16:23uh is the idea of accumulated
1:16:25depreciation
1:16:27what is it it is the total depreciation
1:16:30that has been charged to that asset the
1:16:33property price equipment i said since
1:16:35the beginning of the useful life right
1:16:39so
1:16:40i'm just going to show you
1:16:42by using an example
1:16:46before we get on to this example here
1:16:49um
1:16:50i want to mention
1:16:52something
1:16:53you see here depreciation example and
1:16:56you see here it's called straight line
1:16:58depreciation right
1:16:59for our purposes for this unit i
1:17:04like to keep things as simple as
1:17:06possible we will learn only one type of
1:17:10method of depreciation it's called
1:17:12straight line depreciation
1:17:16then from what i say you
1:17:18would probably realize that there is
1:17:21more than one way that we can calculate
1:17:23depreciation but we're not going to
1:17:25learn all the other ways
1:17:27right
1:17:28we will learn it in some other
1:17:30accounting
1:17:31course
1:17:32right
1:17:33but you will but not here right now
1:17:36we'll just stick to one straight line
1:17:38depreciation is called okay so how does
1:17:40it work
1:17:42on first of january 2022
1:17:44right a vehicle is purchased for forty
1:17:46thousand dollars cash
1:17:49with an estimated useful life of four
1:17:51years okay
1:17:53then there is an estimated residual
1:17:54value of four thousand okay so the
1:17:59uh formula is like this how to find the
1:18:01depreciation you take the cost minus the
1:18:04residual value divided by your useful
1:18:06life so if you put in the numbers
1:18:08here you you take the 40 000 original
1:18:12cost minus the residual value 4 000
1:18:15so you get 36 000 right and then you
1:18:17divide by four years so the depreciation
1:18:20expense will be 9 000
1:18:22per year
1:18:23right so uh what do we do after this
1:18:28you can see this in a table right so
1:18:31i'll just run through this table with
1:18:32you
1:18:33so on the 1st of january 2022 the first
1:18:35day that you have got this
1:18:38vehicle the original cost was 40 000.
1:18:42so on the first day you have not used
1:18:43the vehicle yet so there's no
1:18:45depreciation at that time so of course
1:18:47there's no accumulated depreciation
1:18:49because there's no depreciation at that
1:18:50point of time
1:18:53then we have got this thing here
1:18:56everyone
1:18:57look here
1:18:59it's called carrying amount
1:19:02all right so what do we mean by that
1:19:05it is actually the cost minus the
1:19:08accumulated depreciation that's what is
1:19:12defined as so i put there the formula a
1:19:14minus c so that carrying amount on the
1:19:18first day is 40 000. so far so good can
1:19:21understand this thing
1:19:23all right now
1:19:24fast forward 12 months
1:19:27you have 31st of december 2022
1:19:30the cost will still be the same because
1:19:33this is the amount that you paid to the
1:19:35supplier it will not change because you
1:19:38paid this 40 000
1:19:40but you have one year of depreciation by
1:19:4231st of december so the deposition is 9
1:19:45000.
1:19:47the accumulated depreciation will be
1:19:509000 also because this
1:19:53accumulated depreciation
1:19:55is the total depreciation since the
1:19:57beginning of the
1:19:59useful life
1:20:01so after one year
1:20:03that accumulated depreciation is 9000
1:20:06because of the first year depreciation
1:20:08now at that point the carrying amount
1:20:11will be 40 000 minus the accumulated
1:20:14depreciation of 9000 that will give you
1:20:1631 000. so you notice that the carrying
1:20:19amount is getting less and less
1:20:22from 40 000 dropped to 31 000
1:20:25let us fast forward one more year
1:20:2831st of december 2023
1:20:30the cost will still be the same
1:20:33all right it will not change because
1:20:34this is the amount that you paid to the
1:20:36supplier right
1:20:38the depreciation for
1:20:40the second year which is 2023 is still
1:20:429000 right remember just now we said
1:20:44depreciation is 9 000 per year
1:20:46right so
1:20:48in 2023 the depreciation is 9 000 but
1:20:51look at what happened to the accumulated
1:20:53depreciation the accumulated
1:20:55depreciation
1:20:56remember is the total depreciation from
1:20:59the beginning so you have got
1:21:02this nine thousand accumulated
1:21:03depreciation plus the
1:21:06second year depreciation nine thousand
1:21:08oops
1:21:09second year depreciation thursday will
1:21:10give you 18 000 over here
1:21:12at the end of the second year so it will
1:21:14be 40 000 minus the 18 000 so that's why
1:21:16you got 22 000 as the carrying amount at
1:21:19the end of the second year
1:21:23fast forward one more year at the end of
1:21:24the third year
1:21:27so it'll be 31st of december 2024 the
1:21:29cost will still be the same the
1:21:30depreciation for the third year will
1:21:32still be the same
1:21:33but look what happened to the
1:21:34accumulated depreciation it has gone up
1:21:36to 27 000
1:21:38which is the accumulated depreciation
1:21:41for the end of the second year plus
1:21:43another 9 000 so that'll give you 27
1:21:45000.
1:21:46so the carrying amount at the end of the
1:21:49third year will be 40 000 minus 27 000
1:21:53that will give you 13 000.
1:21:56one more year
1:21:58the last year of the useful life the
1:22:00cost will be the same
1:22:02uh the depreciation expense will be the
1:22:04same
1:22:06the accumulated depreciation will be
1:22:08increasing from twenty seven thousand
1:22:10plus another nine thousand it'll be
1:22:11thirty six thousand
1:22:13and then the carrying amount at the end
1:22:15of the fourth year will be forty
1:22:16thousand minus thirty six thousand that
1:22:18will give you four thousand so did you
1:22:19know tisa
1:22:21that at the end of the useful life
1:22:23the value of the
1:22:26vehicle is actually the residual amount
1:22:30right
1:22:31so
1:22:32that is what we mean
1:22:34so if you've got the residual amount you
1:22:36should end up with that amount at the
1:22:38end of the useful life
1:22:40okay yeah
1:22:41some questions
1:22:44do give you
1:22:46an amount for residual
1:22:48a figure for your residual amount some
1:22:51questions they actually tell you
1:22:53that the residual amount is zero there's
1:22:55no residual amount
1:22:57so
1:22:58in that case then
1:23:00your formula will be easier like because
1:23:02your depreciation expense will be cos
1:23:04minus 0 which is the residual amount
1:23:07divided by the useful life
1:23:09so it depends on
1:23:11the question
1:23:12okay
1:23:17okay let's have an example here okay
1:23:19depreciation example end of year one
1:23:22which is 31st of december 2022
1:23:24so you
1:23:25bought the vehicle so you have got the
1:23:28vehicle 40 000 and then you paid cash
1:23:30right so
1:23:32cash goes up 40 thousand and then at the
1:23:34end of the year one you have got
1:23:37uh
1:23:39nine thousand dollars of depreciation
1:23:40expense which
1:23:42you enter as a negative figure
1:23:45nine thousand over here
1:23:47and then you have this extra column
1:23:51called accumulated depreciation
1:23:54accumulated depreciation
1:23:57uh which is here
1:23:59so this is the extra column next to the
1:24:02vehicle
1:24:03all right
1:24:04uh and you record negative 9000 over
1:24:08here
1:24:09now let me mention something about the
1:24:12accumulated depreciation
1:24:14account accumulated depreciation is
1:24:19recorded on the left-hand side and you
1:24:21notice that it is just next to the
1:24:23property equipment but at the same time
1:24:26it is a negative so
1:24:29class
1:24:31accumulated depreciation is actually a
1:24:34very special
1:24:36asset account why do i say that it is
1:24:39very special because it is always a
1:24:42negative figure the normal the normal
1:24:46way we treat it is negative but it is an
1:24:49asset
1:24:50it's not a liability
1:24:52it is actually an asset but it is a
1:24:54negative asset
1:24:56all right it always takes away
1:24:59an amount from an original which is here
1:25:02uh here is vehicle
1:25:03okay yeah
1:25:05so um if you look at the statement of
1:25:07comprehensive income okay these figures
1:25:08are made up so don't ask me where they
1:25:11are from uh the the the
1:25:14the
1:25:15sales the gross profit uh you know the
1:25:18sales the cost of sales and the gross
1:25:19profit these are all make up figures the
1:25:22one that i want to show you is actually
1:25:24the nine thousand dollars here the
1:25:26depreciation expense okay so you minus
1:25:29it out then you get 16 000 profit in the
1:25:31statement of financial position
1:25:33this is how we will uh show it
1:25:36right under non-current assets you've
1:25:38got the motor vehicles which is 40 000
1:25:40and then you minus the accumulated
1:25:41depreciation which is 9000 so you can
1:25:43see it's in negative so you have this
1:25:46net figure which is 31 000
1:25:49okay
1:25:51in the second
1:25:52year in the second year
1:25:55um
1:25:57remember you got accumulated
1:25:58depreciation of 9000
1:26:00in the beginning of the year
1:26:02right so you add another 9 000 so you
1:26:04get negative 18 000 for accumulated
1:26:07depreciation but
1:26:09for the expense you only have nine
1:26:12thousand
1:26:13because remember expense
1:26:15uh is for only one year okay so at the
1:26:18end of the second year which is 2023
1:26:20you've got sales and cost of sales these
1:26:21are all make up figures
1:26:23minus the depreciation which is 9 000
1:26:26okay so this is your net profit
1:26:29example
1:26:31and then in the statement of financial
1:26:32position uh you got your motor vehicles
1:26:3440 000 it doesn't change and then you
1:26:36minus the accumulated deposition now so
1:26:38this one has gone up to 18 000
1:26:42so you can see the accumulated
1:26:44depreciation gets more and more right so
1:26:47the net figure which is actually the
1:26:50carrying amount it gets less and less
1:26:54okay yeah
1:26:57okay the next
1:26:59one is uh the idea of bad debts okay bad
1:27:04debts is a risk associated with selling
1:27:07goods or selling things on credit is
1:27:09when the customer for whatever reason uh
1:27:13they want to pay or they cannot pay or
1:27:15something happen
1:27:16the risk of selling on credit
1:27:20uh
1:27:21meaning the customer
1:27:22doesn't pay immediately
1:27:25is
1:27:27the customer will not pay the amount due
1:27:29and therefore you got bad debts
1:27:31when
1:27:32you are sure when you are certain that
1:27:36the customer will not
1:27:38pay
1:27:39all right if you are not sure whether
1:27:42the customer will pay or not you are
1:27:46you you don't have a bad debt
1:27:49you only have bad debts when you are
1:27:51very sure that the customer cannot or
1:27:54will not pay
1:27:56right if you are not sure uh i don't
1:27:59know whether they will pay or not that's
1:28:01not about that that is what we call a
1:28:03doubtful debt
1:28:05which we are not going to be
1:28:07dealing with
1:28:09in this
1:28:10unit okay we're only dealing with bad
1:28:13debt
1:28:14so what should we do with bet that bad
1:28:16debts must be written off okay
1:28:19so what do we mean we increase the
1:28:22expenses we should call the bad debts
1:28:23expense and then we reduce the current
1:28:25asset accounts receivable balance okay
1:28:28so the effect of doing this is that we
1:28:31no longer
1:28:33consider
1:28:34the amount owing from the customer when
1:28:38you've got a bad debt
1:28:40you are you are saying that the customer
1:28:42no longer owes you the amount why
1:28:44because it is not possible
1:28:47to collect the money from that customer
1:28:50if it is not possible to collect money
1:28:52from the customer
1:28:53then why should it be still sitting in
1:28:55the account right
1:28:57whatever you do you will never get
1:28:59collected
1:29:00right so there's no point
1:29:02putting it in the account so that's why
1:29:04we write it off
1:29:06okay
1:29:07so
1:29:09what do we need to realize here the
1:29:11sales amount in the statement of
1:29:13comprehensive income is not affected by
1:29:15the write-off or bet that's because you
1:29:17really sold to the customer
1:29:20right
1:29:21um
1:29:23it is
1:29:25the problem is only that the customer is
1:29:27not paying up but you did actually
1:29:29provide a service to the customer so
1:29:31that's why you cannot cannot make uh
1:29:33adjust the sale you can adjust the
1:29:36amount of receivable and therefore
1:29:39we call this a write off of
1:29:42the bad debt
1:29:44yeah
1:29:46so this is an example you got accounts
1:29:48receivable
1:29:50uh 10 000
1:29:51and then an account receivable
1:29:54uh who owes the business 500 cannot pay
1:29:57okay so how do you deal with this
1:30:00um
1:30:01you're going to have a 500 of bad debts
1:30:04expense so let's say that in your
1:30:06worksheet right you have got this uh
1:30:08receivable which is 10 000 uh
1:30:12dollars right and out of this 10 000
1:30:14there is a 500 amount from a certain
1:30:18customer
1:30:19and you cannot
1:30:21get money from them they are not going
1:30:23to pay or they can't pay or whatever it
1:30:25is
1:30:26then you write off that 500 how do you
1:30:29do it you reduce the receivable by 500
1:30:32and at the same time you
1:30:34treat this 500 as a bad debt expense so
1:30:37since it is an expense it is a negative
1:30:40500 written in the column profit and
1:30:44loss
1:30:45right
1:30:46yeah
1:30:49then the next thing uh after looking at
1:30:52the various uh types of
1:30:55income and expenses especially the
1:30:56expenses let's talk about the
1:30:58presentation
1:31:00of the statement of compressive income
1:31:03this presentation of the statement of
1:31:05comprehensive income
1:31:07will depend on
1:31:09whether the statement is being prepared
1:31:12for external or internal reporting
1:31:14purposes in other words whether it is
1:31:16for
1:31:17financial accounting or management
1:31:19accounting purposes
1:31:21and
1:31:22whether the business entity is a
1:31:23reporting entity or not
1:31:26what do we mean by this
1:31:28um if the statement of comprehensive
1:31:31income is actually prepared for external
1:31:34purposes remember
1:31:36um
1:31:38if it is a
1:31:40general purpose financial report then it
1:31:44needs to follow the accounting standard
1:31:46style
1:31:47right
1:31:48uh if it is going to be prepared for
1:31:51internal reporting purposes
1:31:54then
1:31:55um the presentation is more flexible
1:31:58because it will depend on the
1:32:00requirement or the need
1:32:05of the
1:32:06internal
1:32:08people
1:32:09what do you mean by this
1:32:11we are not saying that the numbers
1:32:12should be false or fake or something
1:32:14other it should still be correct it
1:32:15should still be accurate okay but the
1:32:18way that it is presented uh will have to
1:32:22depend on what kind of decision making
1:32:25that they are
1:32:27doing for example do they
1:32:29need to know certain uh let's say for
1:32:32example accounting ratios and things
1:32:33like that maybe
1:32:34when you prepare according to accounting
1:32:37standards certain
1:32:38items may not be so detailed
1:32:40right
1:32:41remember for management accounting
1:32:42purposes we want detailed figures in
1:32:45order to make proper internal decisions
1:32:48right so
1:32:49yeah so one thing is it depends on
1:32:51whether it's for external internal
1:32:53reporting purposes and also
1:32:55whether the business entity is a
1:32:56reporting entity or not if the com uh if
1:33:00the company is actually a reporting
1:33:02entity then they need to follow the
1:33:04accounting standard so this is the the
1:33:06presentation is most standardized
1:33:08if the business entity is not a
1:33:10reporting entity it is going to be
1:33:12reporting to the
1:33:13only to a few shareholders right
1:33:16then um
1:33:17if they don't have any public
1:33:19accountability then they do not have to
1:33:20actually follow the accounting standard
1:33:24okay then there is more scope for
1:33:28you know sort of presentation which may
1:33:30not be
1:33:33in the format that the accounting
1:33:35standards
1:33:36actually prescribed which is not very
1:33:38advisable actually because uh
1:33:41i mean if you ask me
1:33:42whether
1:33:43whether the company is a reporting
1:33:45entity or is not it is always a good
1:33:47practice to follow the accounting
1:33:48standards way of presentation
1:33:52because
1:33:54we want
1:33:55our financial statements to look
1:33:57presentable right
1:33:59just like you know everything else we
1:34:01want it to be presentable
1:34:03okay
1:34:05so
1:34:06if you look at the
1:34:08statement of comprehensive income you
1:34:10can see over here
1:34:13don't worry too much about the numbers
1:34:14it's just an example over here but there
1:34:16are certain things that i want you to
1:34:20to notice
1:34:23you've got income you've got you've got
1:34:25income over here right and then you've
1:34:27got this sales and then you've got the
1:34:29cost of sales can you see that sales
1:34:31minus cost of sales and therefore you
1:34:33get the gross profit
1:34:35right and then
1:34:37you have got
1:34:39something here
1:34:40they could other income five thousand
1:34:43this other income
1:34:46is an income
1:34:48but it is not revenue ah do you see that
1:34:53if you put this 5000
1:34:55up here
1:34:56it will be 500 and 5 000 for sales right
1:35:00correct right and then that would
1:35:02actually give you a different gross
1:35:04profit figure right
1:35:06later on
1:35:08when
1:35:09you
1:35:10do analysis it's going to distort the
1:35:13analysis of the financial statement
1:35:15which is the thing that we do not want
1:35:16so this is why it is important for us to
1:35:20know whether the income is a revenue
1:35:23sales item or it is not a revenue sales
1:35:26item because it will affect the way that
1:35:30we present the thing in the statement of
1:35:33comprehensive income
1:35:35okay yeah
1:35:36and then for expenses
1:35:39all these are operating expenses so we
1:35:43so they are quite
1:35:46sort of normal expenses okay so we
1:35:49totaled them up and put it here so
1:35:52this gross profit plus the other income
1:35:54minus the expenses will give you the
1:35:56profit before tax
1:35:58and then what happens after that you see
1:36:00an interesting part which is the tax
1:36:03expense
1:36:04so that means for this
1:36:07business
1:36:08it is directly taxed
1:36:12so what
1:36:13what can we conclude from here
1:36:15you can tell straight away
1:36:18just by looking at this account that it
1:36:20is actually a company
1:36:22because only the company
1:36:25gets directly taxed
1:36:26on its profit right we talked about this
1:36:29in the first stop uh in the first topic
1:36:31right and sure enough if you look at the
1:36:35title
1:36:36coconut plantations proprietary limited
1:36:40which is actually a company structure
1:36:42right now so if i
1:36:45do not actually
1:36:47put anything here if i just show you the
1:36:49accounts
1:36:51uh hopefully you realize that only the
1:36:54company has got this cut uh type of uh
1:36:57income tax taken directly away from the
1:37:01profit to give you profit after tax
1:37:04okay
1:37:04now let's talk about the link
1:37:07between um
1:37:09the statement of compression income and
1:37:11the statement of financial position
1:37:13the statement of compressing income it
1:37:15will report the profit of loss for the
1:37:17reporting period and then
1:37:19for the statement of financial position
1:37:23the retained earnings section
1:37:25the retained earnings
1:37:27is part of the owner's equity right okay
1:37:31so in that retained earnings you have
1:37:34got
1:37:35profit or loss
1:37:37for reporting period this is from the
1:37:39statement of compressive income it will
1:37:42be added to
1:37:44any retained earnings at the beginning
1:37:46of the financial period
1:37:49okay so i put down here if any so in
1:37:52certain
1:37:54in certain situations you may not have
1:37:56the opening retained earnings
1:37:58but if it is not the first year that you
1:38:01are doing the accounts that means you
1:38:04are in the second year or third year or
1:38:05fourth year then
1:38:08most likely you will have an opening
1:38:10balance for the retained earnings
1:38:13the only time when you do not have the
1:38:16opening balance for the retained
1:38:18earnings is when you are doing the
1:38:20accounts for the very first year or the
1:38:23first month
1:38:24where the opening balance of the
1:38:26retained earnings is zero that is the
1:38:29only time at any other time you will
1:38:32have
1:38:33an amount for the opening balance of the
1:38:36retained earnings which you will add
1:38:39with the profit or loss
1:38:42for the reporting period to give you the
1:38:46ending balance of the retained earnings
1:38:48but wait there is some other thing
1:38:52you got this two this number two here
1:38:54you may have
1:38:56distributions or drawings from the
1:38:58retained earnings
1:39:00in this case if you got distributions or
1:39:02drawings from the written earnings then
1:39:05it is going to be deducted from the
1:39:08retained earnings okay so for example
1:39:13if there is a dividend so it's a
1:39:15distribution of profit
1:39:18okay um so this type of thing like
1:39:21dividends it will be taken away from
1:39:25the
1:39:26retained earnings okay then after that
1:39:29you have the net balance which is after
1:39:31steps one and two there will be the
1:39:32retained earnings at the end of the
1:39:35period
1:39:36now let's have a look uh now at a demo
1:39:40problem so this is quite a simple one
1:39:42after all the discussion
1:39:44uh let's have a look
1:39:45john commences a lot more in business
1:39:47called green enterprise putting ten
1:39:48thousand dollars of his own money into
1:39:50the business bank account we talked
1:39:51about that last time
1:39:52green enterprise borrows 5000 from the
1:39:54bank to further fund the business and
1:39:56then on day two
1:39:57great enterprise purchases a mower for
1:39:59four thousand dollars cash and pays two
1:40:01thousand dollars for advertising and
1:40:03then
1:40:04uh on day four green enterprise sells
1:40:06the mower for seven thousand dollars
1:40:08cash so in that case here
1:40:11um we talked about all this last time so
1:40:14the
1:40:16uh the new thing would be the sale
1:40:20all right so he got the cash of 7000 and
1:40:23at the same time there was a sale
1:40:25of that mower so the selling price is 7
1:40:29000 he charged the customer 7000 but
1:40:33the cost for that mower is actually only
1:40:36four thousand so
1:40:38uh he bought the mower right from the
1:40:40supplier for four thousand and then uh
1:40:42now since he sells it off the mower is
1:40:45no longer there so take away that four
1:40:47thousand cost price take it away
1:40:51and then that would be the cost of sales
1:40:53so how much
1:40:55gross profit did he make from this sale
1:40:593 000 which is the 7 000
1:41:02sale
1:41:03minus the four thousand dollars cost of
1:41:05sale so the gross profit is
1:41:08three thousand
1:41:09what happened to the inventory
1:41:12it's gone because when he bought it
1:41:14there was a four thousand dollar
1:41:15inventory right the mower and now he
1:41:18sold it it's gone
1:41:20zero
1:41:21all right yeah
1:41:23um
1:41:25so when you do the signal compression
1:41:27income you got a sales minus the cost of
1:41:30sales then you got the gross profit then
1:41:31you minus all the advertising you get a
1:41:33net profit over here then you transfer
1:41:35this net profit to the statement of
1:41:37financial position at the end of the
1:41:39four years to show increase or decrease
1:41:42in the owner's
1:41:44equity okay so the same financial
1:41:47position at the end of the fourth day um
1:41:51you will have normal inventory so the
1:41:53inventory is nil
1:41:55right
1:41:56but your profit
1:41:59as for the previous slide it was one
1:42:01thousand so that will give you a total
1:42:02owner's equity 11 000. your left side
1:42:05and your right side should be equal
1:42:07right so you can go through this uh in
1:42:11your own time okay so hopefully uh this
1:42:14makes sense
1:42:16in next week's um
1:42:19next week's uh tutorial
1:42:22in next week's tutorial
1:42:24i am going to
1:42:28upload in the canvas
1:42:31a very important file
1:42:33it's called lecture illustrations
1:42:36lecture illustrations anyway it will be
1:42:39in the
1:42:40in the canvas please click on that and
1:42:43make sure that you have access to it
1:42:45during the tutorial because we will be
1:42:48uh
1:42:49talking about that
1:42:51um
1:42:53the question is actually inside there
1:42:55all right so
1:42:57yeah so i'll see you in the
1:43:00uh tutorial for next week and then those
1:43:02who have not had the
1:43:04tutorial for this week i'll see you
1:43:08um uh
1:43:10you know in in the remaining tutorial
1:43:12okay so
1:43:14um yeah so i'll be here for a couple of
1:43:16minutes uh you can ask any questions um
1:43:20uh if you've got questions right online
1:43:23series are you all right
1:43:27yeah okay uh okay so i am going to shut
1:43:31off the recording now
1:43:33right so
1:43:34i'm gonna post it up at a later time
1:43:37okay thanks
1:43:38see you

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