Statements of Financial Statements of Financial position : Balance Sheetposition : Balance SheetStatements of Financial Statements of Financial position : Balance Sheetposition : Balance Sheet

DBS3024 BUSINESS TRANSACTIONDBS3024 BUSINESS TRANSACTION

byStephen Ong

Visiting Fellow, Birmingham City University Business School

Visiting Professor, Shenzhen University

Today’s Overview Today’s Overview

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11The Balance SheetThe Balance Sheet

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Learning objectivesLearning objectivesAfter this lecture, you should be After this lecture, you should be able to:able to:

Explain why statements of financial Explain why statements of financial position are position are not part of the double not part of the double entry systementry system

Explain why it is important that Explain why it is important that account balances account balances are shown under are shown under appropriate headings in the appropriate headings in the statement of financial positionstatement of financial position

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Learning objectives (Continued)Learning objectives (Continued) Explain the meanings of the terms Explain the meanings of the terms

non-current asset, current assetnon-current asset, current asset, , current liability and non-current current liability and non-current liabilityliability

Describe the sequence in which each Describe the sequence in which each of the of the five main categories of items five main categories of items appear in the statement of financial appear in the statement of financial positionposition

Describe the sequence in which each Describe the sequence in which each non-current asset non-current asset is entered in the is entered in the statement of financial positionstatement of financial position

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Learning objectives (Continued)Learning objectives (Continued)

Describe the sequence in which Describe the sequence in which each each current asset current asset is entered in is entered in the statement of financial the statement of financial positionposition

Draw up a statement of financial Draw up a statement of financial position from information given position from information given in a in a trial balancetrial balance

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DefinitionDefinition

The statement of financial position is The statement of financial position is a a list of balances list of balances arranged arranged

according to whether they are according to whether they are

assets, capital or assets, capital or liabilitiesliabilities

and so depict the financial and so depict the financial

situation on a specific date.situation on a specific date.

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The statement of financial positionThe statement of financial position

The statement of financial position The statement of financial position used to be called used to be called the balance sheetthe balance sheet..

The statement of financial position The statement of financial position contains details of contains details of assets, liabilities assets, liabilities and capitaland capital – all those accounts with – all those accounts with balances that were balances that were not included in the not included in the income statement.income statement.

The statement of financial position is The statement of financial position is not part of the double entry not part of the double entry system.system.

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The format for a statement of financial The format for a statement of financial positionposition

Non-current (Fixed) assetsNon-current (Fixed) assets – assets – assets that are:that are: Not bought primarily to be Not bought primarily to be sold.sold. Bought to be Bought to be usedused in the business. in the business. Are expected to be of use in the business Are expected to be of use in the business

for a for a long timelong time..

Non-current assets are listed first in the Non-current assets are listed first in the statement of financial position starting statement of financial position starting with those the business will with those the business will keep the keep the longest.longest.

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Current assets Current assets – assets that – assets that are:are: Likely to Likely to change in the short term change in the short term

and certainly within 12 months.and certainly within 12 months. Include: items held for Include: items held for resale, resale,

accounts receivable, cash accounts receivable, cash in the bank in the bank and in hand.and in hand.

Current assets are listed in Current assets are listed in increasing order of liquidity.increasing order of liquidity.

The format for a statement of The format for a statement of financial position (Continued)financial position (Continued)

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Current liabilities:Current liabilities: Liabilities that have to be Liabilities that have to be paid paid

within a yearwithin a year of the date of the of the date of the statement of financial position.statement of financial position.

Examples include Examples include bank bank overdrafts and accounts overdrafts and accounts payable.payable.

The format for a statement of The format for a statement of financial position (Continued)financial position (Continued)

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Non-current (Long term) Non-current (Long term) liabilities:liabilities:

Liabilities that have to be Liabilities that have to be paid paid more than a yearmore than a year after the date of after the date of the statement of financial the statement of financial position.position.

Examples include Examples include bank loans and bank loans and loansloans from other businesses. from other businesses.

The format for a statement of The format for a statement of financial position (Continued)financial position (Continued)

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The format for a statement of The format for a statement of financial position (Continued)financial position (Continued)

Non Current AssetsNon Current Assets

Current AssetsCurrent Assets

Current LiabilitiesCurrent Liabilities

FROM FROM INCOME INCOME

STATEMENTSTATEMENT

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Learning outcomesLearning outcomes

You should have now learnt:You should have now learnt: That That all balances remaining all balances remaining on a trial on a trial

balance after the income statement for balance after the income statement for a period has been drawn up are a period has been drawn up are displayed in a statement of financial displayed in a statement of financial position dated position dated ‘as at’ the last day of the ‘as at’ the last day of the periodperiod

That the statement of financial position That the statement of financial position is not part of the double entryis not part of the double entry

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Learning outcomes (Continued)Learning outcomes (Continued) That the statement of financial position That the statement of financial position

starts with starts with non-current assets at the top, non-current assets at the top, then current assets, then current then current assets, then current liabilities, then non-current liabilities, liabilities, then non-current liabilities, then capitalthen capital

The meanings of the terms non-current The meanings of the terms non-current asset, current asset, current liability and asset, current asset, current liability and non-current liabilitynon-current liability

That you list That you list non-current assets in non-current assets in descending order descending order starting with those starting with those that will remain in use in the business for that will remain in use in the business for the the longest timelongest time

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Learning outcomes (Continued)Learning outcomes (Continued)

That you list current assets That you list current assets from from top to bottom in increasing order top to bottom in increasing order of liquidityof liquidity

That current assets less current That current assets less current liabilities are known as liabilities are known as ‘net current ‘net current assets’ or assets’ or ‘working capital’‘working capital’

Why the figure for net current Why the figure for net current assets is very importantassets is very important

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22Computerised accounting Computerised accounting

systemssystems

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Learning objectivesLearning objectives

After this lecture, you should be able to:After this lecture, you should be able to: Explain how computerised accounting Explain how computerised accounting

systems mimic manual accounting systems mimic manual accounting systems and can do everything that is systems and can do everything that is done by a manual accounting systemdone by a manual accounting system

Describe how computerised accounting Describe how computerised accounting systems automate most of the entries systems automate most of the entries required in a manual accounting system required in a manual accounting system including, in some cases, the initial entry including, in some cases, the initial entry for each transactionfor each transaction

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Learning objectives (Continued)Learning objectives (Continued)

Describe and explain the advantages Describe and explain the advantages and pitfalls of using a computerised and pitfalls of using a computerised accounting systemaccounting system

Explain the importance of fully Explain the importance of fully integrating a computerised accounting integrating a computerised accounting systemsystem

Explain the importance of full Explain the importance of full compatibility between the various compatibility between the various components of a computerised components of a computerised accounting systemaccounting system

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Learning objectives (Continued)Learning objectives (Continued)

Explain the need to take great care when Explain the need to take great care when converting from a manual accounting converting from a manual accounting system to a computerised onesystem to a computerised one

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Computers in accountingComputers in accounting

Computer accounting packages Computer accounting packages use the fundamental use the fundamental principles principles of accounting.of accounting.

Therefore, even the most Therefore, even the most sophisticated computer sophisticated computer accounting system needs to be accounting system needs to be operated by someone with operated by someone with accounting knowledgeaccounting knowledge..

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Benefits of using a Benefits of using a computerised systemcomputerised system

1.1. You can perform the processing much You can perform the processing much more more quickly, consistently and quickly, consistently and accurately.accurately.

2.2. Output of reports is Output of reports is immediateimmediate..3.3. A computerised system should be able A computerised system should be able

to to flag inconsistenciesflag inconsistencies..4.4. Computerised systems are capable of Computerised systems are capable of

exception reporting to flag warningsexception reporting to flag warnings..5.5. Most systems are capable of Most systems are capable of enhanced enhanced

reporting.reporting.

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Key aspects of the Key aspects of the computerised systemcomputerised system

The computerised system will work The computerised system will work on the same principles as on the same principles as double double entry bookkeepingentry bookkeeping but the entries but the entries only have to be only have to be made oncemade once..

Reports can be run at any time.Reports can be run at any time. The accounts are run using a The accounts are run using a

system of codessystem of codes, all classified for , all classified for ease of reference.ease of reference.

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Integration of other modulesIntegration of other modules

It is possible to integrate other modules It is possible to integrate other modules such as:such as:

Inventory, so that Inventory, so that stock levels are stock levels are updated automaticallyupdated automatically..

Sales order processing, so that orders Sales order processing, so that orders automatically generate invoicesautomatically generate invoices..

Purchase order processing, so that Purchase order processing, so that orders can be orders can be sent to suppliers and sent to suppliers and converted to inventory.converted to inventory.

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The integrated computerised The integrated computerised systemsystem

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Accounting information systemsAccounting information systems

An AIS is a total suite of components that An AIS is a total suite of components that comprises the inputs, storage, transaction comprises the inputs, storage, transaction processing, collating and reporting of data.processing, collating and reporting of data.

The objective is to collect and store data to The objective is to collect and store data to generate meaningful output for decision-generate meaningful output for decision-making.making.

An AIS does not have to be computerised An AIS does not have to be computerised but the benefits are greater when it is, and but the benefits are greater when it is, and an AIS is only fully effective when all the an AIS is only fully effective when all the components are integrated.components are integrated.

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Electronic disseminationElectronic disseminationOne of the benefits of a computerised One of the benefits of a computerised AIS is that output (and funds) can be AIS is that output (and funds) can be sent electronically, including all Tax / sent electronically, including all Tax / Inland Revenue Department (LHDN) Inland Revenue Department (LHDN) reports and returns resulting in:reports and returns resulting in: Improved speed, accuracy and Improved speed, accuracy and

securitysecurity Lower administration costsLower administration costs Lower bank chargesLower bank charges Reduction in the use of paperReduction in the use of paper

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Considering an AISConsidering an AIS When and how to introduce the AIS?When and how to introduce the AIS? Which AIS to use and whether to customise?Which AIS to use and whether to customise? Who is responsible for the AIS?Who is responsible for the AIS? How long will it take to introduce?How long will it take to introduce? Who will need training and when?Who will need training and when? What hardware will be needed and when?What hardware will be needed and when? What safeguarding procedures are needed?What safeguarding procedures are needed? Who will run tests and how?Who will run tests and how? What costs and benefits are there?What costs and benefits are there?

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Data safeguardsData safeguards Prevention of data theft by Prevention of data theft by

using a (secure) password.using a (secure) password. Prevention of fraudulent or Prevention of fraudulent or

malicious data manipulation by malicious data manipulation by using security measures.using security measures.

Prevention of data loss by Prevention of data loss by implementing and using a implementing and using a back-up system.back-up system.

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Learning outcomesLearning outcomesYou should have now learnt that:You should have now learnt that:1.1. Bookkeeping and accounting skills and Bookkeeping and accounting skills and

knowledge are more important than knowledge are more important than computing skills and knowledge when a computing skills and knowledge when a switch is made from a manual switch is made from a manual accounting system to a computerised accounting system to a computerised accounting system.accounting system.

2.2. The user interface of an accounting The user interface of an accounting package often looks similar to those of package often looks similar to those of other frequently used Windows-based other frequently used Windows-based software packages.software packages.

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Learning outcomes Learning outcomes (Continued)(Continued)

3.3. Computerised accounting systems can Computerised accounting systems can do everything a manual accounting do everything a manual accounting system can do, but does them quicker, system can do, but does them quicker, more accurately, more consistently and more accurately, more consistently and with greater flexibility.with greater flexibility.

4.4. A considerably enhanced ability to A considerably enhanced ability to obtain reports is available from a obtain reports is available from a computerised accounting system computerised accounting system compared to a manual accounting compared to a manual accounting system.system.

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Learning outcomes Learning outcomes (Continued)(Continued)

5.5. The various records maintained in a The various records maintained in a computerised accounting system mimic computerised accounting system mimic those in a manual accounting system, those in a manual accounting system, thought the names of some of the records thought the names of some of the records may be different.may be different.

6.6. Account codes are used in computerised Account codes are used in computerised accounting systems instead of folio accounting systems instead of folio numbers.numbers.

7.7. Maximised integration of the various Maximised integration of the various components in a computerised accounting components in a computerised accounting system generates the maximum benefits.system generates the maximum benefits.

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Learning outcomes (Continued)Learning outcomes (Continued)

8.8. Compatibility between the various Compatibility between the various components in a computerised components in a computerised accounting system is essential if it is to accounting system is essential if it is to operate effectively.operate effectively.

9.9. One of the major benefits of One of the major benefits of computerised accounting systems is computerised accounting systems is the ability to generate electronic output.the ability to generate electronic output.

10.10.Implementing adequate controls to Implementing adequate controls to safeguard data is essential when safeguard data is essential when accounting systems are computerised.accounting systems are computerised.

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Learning outcomes (Continued)Learning outcomes (Continued)

11.11.Implementing a switch to a Implementing a switch to a computerised accounting computerised accounting system is a non-trivial task system is a non-trivial task that should never be done that should never be done lightly and needs to be lightly and needs to be done with the greatest of done with the greatest of care.care.

Resources : Core ReadingResources : Core Reading

Wood, Frank and Robinson, Sheila Wood, Frank and Robinson, Sheila (2009) (2009) Bookkeeping and Accounts Bookkeeping and Accounts ,7,7thth Edition, Pearson/ FT Prentice HallEdition, Pearson/ FT Prentice Hall

Wood, Frank and Sangster, Alan (2012) Business Accounting ,12th Edition, Pearson/ FT Prentice Hall

Fortes, Hilary (2011) Accounting Simplified , Pearson/ FT Prentice Hall

QUESTIONS?QUESTIONS?