POA (updated 5 feb 09)
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Post your questions, answers etc all under this thread.
Only important points will be posted as well as sample questions. Feel free to contribute...
Paper 1 (30%, 1 hr)
Multiple Choice Paper consisting of 30 items testing across the whole syllabusPaper 2 (70%, 2 hr)
Paper 2 will be divided into two sections:Section A (50%)
Three compulsory structured questions
One compulsory question which will involve the preparation of the final accounts of a businessSection B (20%)
Candidates will answer one out of two problem solving questions.
Candidates will write their answers using multi-column accounting stationery.Further details of the GCE 'O' Level syllabus can be found at
http://www.seab.gov.sg/SEAB/oLevel/syllabus/2009_GCE_O_Level_Syllabuses/7118_2009.pdf
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Introduction: What is Debit & Credit?
The use of Debit (Dr) and Credit (Cr) in POA is different from that of normal English. In POA, certain accounts are designated as credit accounts, certain as debit accounts.
Example, asset is a debit account, that means it has debit balance.Explanation: If I increase an asset, I debit that account. If I decrease an asset, I credit it.
Liabilities in the opposite of Asset - that is Liabilities is a credit account. Hence if I increase a liability, I credit that account. If I decrease a liability, I debit it.
Same goes for Owner's Equity. It is a credit account. If I increase owner's equity, I credit it. If I decrease owner's equity, I debit it.
So how do we know which account is credit, which account is debit? MEMORISE.
In POA, whenever we increase or decrease any accounts, we either debit or credit it. Example as I mentioned earlier,assets are debit accounts.
You can simply treat Debit as a word substitution of increase. I increase the asset. = I debit the asset account.
To take note, every transaction will affect at least 2 accounts.
Important Equation (Memorise pls)
Asset = Liabilities + Equity + Revenue - Expenses - Drawings
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The following part is solely on Depreciation & Disposal of Fixed Assets. Pls skip to next part for all the examples and solutions.
Depreciation
Layman's explanation: Let's say the company buy a table for $5000 and use it for 5 years. If they expensed the whole $5,000 in the first year they bought, it's like the table costs $5,000 to use for the first year, then the next 4 years is free. So a more appropriate way is to have a certain expense for each of the 5 years the table is used.
The 5 years mentioned here is known as the useful life. This will be provided in the question.
This is in line with the matching principle that you've earned - to match cost of using the fixed asset in a particular year against the revenue earned in that year to get the true profit.
If I don't use depreciation, let's say my revenue is $10K each year.
My profit for year 1 will be = $10K - $5k = $5K
Year 2 - Year 5 is $10K each. This is an understatement of the true profit in year 1 and overstatement of the true profit in year 2 - 5 because I've only used 1/5 of the table in year 1.
2 methods to calculate depreciation
1 Straight-line method
Annual depreciation = (original cost - scrap value) / no. of years of useful life
E.g. If the table costs $5,000 and the scrap value (that is at the end of the 5th year, it is expected to bring me $500 if I sold it off) and useful life is 5 years.
Annual depreciation = ($5000 - $500) / 5 = $900 per year.
Annual depreciation is constant every year.
Disadvantage of this method - it assumes that the fixed asset gives the same service or I prefer to phrase it as - it assumes we use the table for the same amount of frequency each year. For some assets, we use it more in the first few years when it's brand-new and use it less as it gets older and less efficient etc. Sometimes when business is very good, we will use it very often, while if economy is bad like now we use it less. So straight-line method may not be the most appropriate choice.
2 Reducing Balance/Diminishing Balance Method
I shan't explain this method using words but rather with an example.
Let's say a van costs $10K and I expect to sell it for $256 at the end of its life. Its useful life is 4 years, rate of depreciation = 60%
Year 1 Depreciation expense = 60% x 10K = $6K
Book value now = $10K - $6K = $4K
Year 2 Depreciation expense = 60% x $4k = $2.4K
Book value now = $4k - $2.4K = $1.6K
Year 3 Depreciation expense = 60% x $1.6K = $960
Book value now = $1.6K - $960 = $640
Year 4 Depreciation expense = 60% x $640 = $384
Book value at end of year 4 = $640 - $384 = $256. (= scrap value)
Advantage:
- Useful for assets that are most efficient in earlier years. (more truthful allocation)
- Overall expenses is more or less constant for the use of a fixed asset because the lower depreciation cost in the later years is offset by the high maintenance and repair costs.
Disadvantages:
- Fixed asset takes a long time to be written off
- In order to write-off the whole cost of the asset, the rate of depreciation has to be quite high. This will cause the book value to be lower in the earlier years and not very realistic when compared to current market value of the asset.
3 Revaluation method (ONLY FOR 'O' LEVELS STUDENTS)
This method is used for items such as farmers' livestock (your chickens, cows etc..).
You use this method when it is difficult to estimate with any certainty the rate at which the asset will depreciate.
E.g. You (a farmer) have a herd of cows
Value of cows at beginning of year $20K
Add purchases during year $ 6K (purchase extra cows)
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$26K
Less value of cows at end of the year $17K
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Depreciation expense for the year $9K
Depreciation expense = Value of asset at beginning of year + purchases during the year - value at end of the year
Advantage - fixed asset is shown at its current value at end of year in the Balance Sheet (more realistic)
Disadvantage - you need more time and effort to revalue the assets (more expensive for the business)
Recording Depreciation
Once you calculate the expense,
Dr Depreciation account (expense account) - the value = annual depreciation
Cr Provision for Depreciation Account
Fixed asset account is always maintained at the asset's original cost so don't shift any depreciation stuffs inside here.
The depreciation from year to year is recorded in Provision for Depreciation Account which shows the accumulated depreciation.
In the Balance Sheet, the fixed asset is shown at its Book Value ( = Cost minus provision for depreciation)
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Example, On 1 January 2010, a business bought a printing machine for $8K. It decided to depreciate the machine at 20% using the reducing balance method.
General Journal
2010
Dec 31 Depreciation of Equipment $1.6K
Provision for depreciation of equipment $1.6K
Being depreciation for equipment
Profit and Loss Account $1.6K
Depreciation of Equipment $1.6K
Being transfer of depreciation for the year to Profit and Loss Account.
2011
Dec 31 Depreciation of Equipment $1,280
Provision for depreciation of equipment $1,280
Being depreciation for equipment
Profit and Loss Account $1,280
Depreciation of Equipment $1,280
Being transfer of depreciation for the year to Profit and Loss Account.
Ledger
Equipment Account
2010 $ 2010 $
Jan 1 Bank 8,000 Dec 31 Balance c/d 8,000
2011 2011
Jan 1 Balance b/d 8,000 Dec 31 Balance c/d 8,000
2012
Jan 1 Balance b/d 8,000
Notice the balance is always at cost price.
Depreciation for Equipment Account
2010 $ 2010 $
Dec 31 Provision for depre. 1,600 Dec 31 Profit & Loss Account 1,600
2011 $ 2011 $
Dec 31 Provision for depre. 1,280 Dec 31 Profit & Loss Account 1,280
Because depreciation account is an expense account, it must be closed and "emptied" at the end of each year and the balance transferred to Profit and Loss Account.
Profit and Loss Account for the year ended 31 Dec 2010
$
Depreciation of equipment 1,600
Profit and Loss Account for the year ended 31 Dec 2011
$
Depreciation of equipment 1,280
Balance Sheet as at 31 December 2010 (assets only)
Fixed Assets: $ $
Equipment as cost 8,000
Less provision for depreciation 1,600 6,400
Balance Sheet as at 31 December 2011 (assets only)
Fixed Assets: $ $
Equipment as cost 8,000
Less provision for depreciation 2,880 5,120
Book value on 31 Dec 2010 is $6,400.
Book value on 31 Dec 2011 is $5,120.
I hope students can see that depreciation expense is an annual figure while provision for depreciation account gives you the accumulated depreciation which you can use to prepare your Balance Sheet.
Disposal of Fixed Assets
All information regarding the fixed asset to be disposed of is transferred to a temporary account, which is open temporarily =)
1 To transfer the cost of the fixed asset
- Dr Disposal Acc
- Cr Fixed Asset Acc
2 To Transfer Accumulated Depreciation
- Dr Provision for Depreciation
- Cr Disposal Acc
3 Value received on disposal of account
- Dr Bank Account (with selling price of the asset)
- Cr Disposal Acc
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ALL EXAMPLES WILL BE POSTED HERE.
Example 1: Depreciation & Sales of Fixed Assets
31 Dec - Sold Machine A for $25,000 cash. Machine A was purchased on 1 Dec 2000 for $50, 000. The total hours used since it was purchased up to 31 Decemeber 2002 was 6,000 hours and the total hours used for the financial year ended 31 Decemember 2002 has not been recorded in the books.
Machine A
Cost $50, 000
Total Production capacity/useful life: 10, 000 hours
Accumulated depreciation: $22,500a) Prepare journal entries, no narrations required. Show all workings.
Assume depreciation is charged in year of disposal.
Plant & Machinery a/c
Bal B/f 50,000 Disposal a/c 50,000
Provision for Depreciation a/c
Bal b/f 22,500
Disposal a/c 30,000 Depreciation (P&L) 7,500
Disposal a/c
Plant & Machinery a/c 50,000 Bank a/c 25,000
Income (P&L) 5,000 Provision for depreciation a/c 30,000
Depreciation a/c
Prov for Depreciation 7,500 Depreciation expense (P&L) 7,500
thanks to maurizio13 for answers...
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what does a debit balance mean?
so far I understand that
for assets, when increasing it the entry will be under debit side and for decreasing under credit side?
then for liabilities and owner's equity, for increasing it the entry will be under credit side and for decreasing under debit side?
or is this the nature of the entries? I'm confused with this part.
I understand the latter part of the post. What assests, liabilities and owner's equity are.
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Cool!!! I have never learn account before.... This will be useful... Thanks!
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i wan 2 help
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16 Oct
I read the re edited post and understand your explanation about the debit and credit balances which is linked to profit or losses? am I right?
So far I seem to understand.
the 1.1 exemplification.
What's a T account? Is that double entry?
I have a question,
quote:
Example. Let's start with assets. Let's say cash.
1 Oct - I put invested $50K cash,
2 Oct - I use $25K to purchase a van.
What you should see is in a T-account format is
Cash Account
Debit Credit
1 Oct - Owner's equity $50,000
2 Oct - Motor Vehicles Account $50,000
wouldn't the purchase of van entry be $25k credited under the cash account instead of $50k? Am I missing something?
I just need to read it about 10 times for it to really marinate and start making sense in my head.
Thanks.
on the side: shall I read up on my textbook.
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Fwah.
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Originally posted by Master -_-:
i wan 2 help
you know the syllabus ma? -
Originally posted by tinuviel07:
you know the syllabus ma?
i nvr take poa before leh -
i nvr take POA before but damn.. i wanna learn
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Originally posted by Master -_-:
i nvr take poa before leh
haha then how? u take the poms poms and cheer us on? -
Originally posted by tinuviel07:
haha then how? u take the poms poms and cheer us on?i tot my degree in accountancy would help
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hahah.. then hmm you type certain topics lah
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tinuviel...
want to help contribute to
onlinerevision.blogspot.com?
I can add one for POA :D
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haha not now man.. sorry.. busy studying my cfa lol.. got time then come here add more
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wah CFA
i think i should go dig out my basic accounting module summary and post it here as well, or upload somewhere for pple to download :D
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sure :) not sure if forums a lot of ppl take POA?
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Originally posted by eagle:
wah CFA
i think i should go dig out my basic accounting module summary and post it here as well, or upload somewhere for pple to download :D
eagle you took accounts? :) -
wow tin tin got teach account
yay! she can teach me another subject!
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Originally posted by xXBlack_RebelXx:
eagle you took accounts? :)very basic ones... but dun think is very related to what is taught at O levels
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