Sample Disclosure - Auditors' Report With Unqualified Opinion (29 December 2008)

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Sample Disclosure - Auditors' Report With Except For Qualified Opinion (10 December 2008)

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Sample Disclosure - Significant Accounting Estimates and Judgements (10 December 2008)

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Sample Disclosure - Employee Benefits (7 December 2008)

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Sample Disclosure - Note On Share Capital (4 December 2008)

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Sample Disclosure - Note On Reserves (4 December 2008)

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Sample Disclosure - Note on Property, Plant and Equipment (4 December 2008)

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Sample Disclosure - Key Sources Of Estimation Uncertainty (3 December 2008)

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Sample Disclosure - Critical Judgements Made In Applying Accounting Policies (3 December 2008)

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Sample Disclosure - Non-current Assets Held For Sale and Discontinued Operations (3 December 2008)

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Sample Disclosure - Income Taxes (30 November 2008)

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Various Types of Transactions - Part 6, Refund of Deposits Placed Earlier With Third Parties

I have discussed in detail the relevant double entries for the recording of rental income and the rental deposits and utility deposits in the books of the landlord, ABC Co. Ltd., in my post:Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income).

The recording of all these transactions in the books of the tenant, XYZ Co. Ltd., are the opposite of those of the landlord. If XYZ Co. Ltd. records its transactions on cash basis, the double entry used to record the transactions when XYZ Co. Ltd. pays the monthly rentals is: -

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Rental expense			xxxx
Cash at bank		xxxx

1. The double entry for the recording of the security deposits is: -

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Refundable deposits (current assets):
- Rentals	3,000
- Utility	500
Cash at bank		3,500

2. The double entry for the recording of the 8 months rental (March 2006 to October 2006) is: -

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Rental expense			12,000
Cash at bank		12,000

3. Recognition of November 2006 and December 2006 rental

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Rental expense			3,000
Rental payable (current liabilities)		3,000

I will not elaborate further on these as the recording of the transactions is just the opposite of what I have shown in the earlier post: Various Types of Transactions – Part 4c, Collection from Other Source of Revenue and Income (Rental Income).

Let’s assume XYZ Co. Ltd. terminated the renting of the premise, the double entry to record the refund of the security deposits in the books of the tenant is: -

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Cash at bank	3,500
Refundable deposits (current assets):
- Rentals		3,000
- Utility		500

Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties

Business entities may apply for loans or borrow money from third parties (usually financial institutions; sometimes in the form of short term loans or advances from owners, directors & etc.). THIS IS NOT A SOURCE OF REVENUE OR OTHER INCOME. This is because the principal sum borrowed is a liability (resource – money that you get from others temporarily and you need to pay the price for this – interest). Upon fulfilling the terms and conditions set and agreement reached between the borrowers and the lenders, the principal sum of the loan will be realeased to the borrowers.

The double entry involved in the recording of the realease of the loan is as follows:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Cash at bank	24,000
Loan from XXX Bank		24,000

A decision need to be made as to whether the loan should be classified as current liability or non-current liability. This involves "splitting" the loan into the current portion and non-current portion in accordance with the repayment terms. Some business entities do not split the loan into current and non-current since it received the realease of the loan, nor during the financial year. The splitting of the loan into current and non-current portion is done ONLY as at the end of the financial year for proper financial statements presentation purposes. This is achieved by way of a reclassification journal entry once the current portion and non-current portion of the loan is calculated (this must be reflective of the position of the loan to the business entities as at the end of the financial year).

Assume the $24,000 loan received from XXX Bank is repayable over 5 years with monthly principal repayment of $500 (the interest on loan is purposely omitted), and as at the end of the financial year, the balance of the loan is $19,500 (This means 9 installments of $500 have been repaid). The portion of the loan to be classified as current liability is $6,000 (i.e. the amount expected to be repaid over the next 12 months from the end of the financial year, $500 x 12 months). The non-current portion of the loan is therefore $13,500 ($19,500 - $6,000). Assume the Loan from XXX Bank was originally classified as a current liabilities account, the reclassification journal entry is:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Loan from XXX Bank (Current liabilities)	13,500
Loan from XXX Bank (Non-Current liabilities)		13,500

Further Example

The financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 January 2006, ABC Co. Ltd receive $100,000 loan from Northern Bank upon approval of its application submitted earlier. Interest is charged at 7% per annum calculated monthly. Based on these terms, the repayment schedule is tabulated as follows:-

Assume ABC Co. Ltd. pays the installments on time

The double entries to record the transactions during the year ended 31 December 2006 are as follows:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
1 January 2006
Cash at bank	100,000
Loan from Northern Bank		100,000
31 January 2006
Loan from Northern Bank	1,396.67
Interest expense			583.33
Cash at bank		1,980
(Please refer to instalment No. 1 of the repayment schedule)
28 February 2006
Loan from Northern Bank	1,404.81
Interest expense			575.19
Cash at bank		1,980
(Please refer to instalment No. 2 of the repayment schedule)
31 March 2006
Loan from Northern Bank	1,413.01
Interest expense			566.99
Cash at bank		1,980
(Please refer to instalment No. 3 of the repayment schedule)
30 April 2006
Loan from Northern Bank	1,421.25
Interest expense			558.75
Cash at bank		1,980
(Please refer to instalment No. 4 of the repayment schedule)
31 May 2006
Loan from Northern Bank	1,429.54
Interest expense			550.46
Cash at bank		1,980
(Please refer to instalment No. 5 of the repayment schedule)
30 June 2006
Loan from Northern Bank	1,437.88
Interest expense			542.12
Cash at bank		1,980
(Please refer to instalment No. 6 of the repayment schedule)
31 July 2006
Loan from Northern Bank	1,446.27
Interest expense			533.73
Cash at bank		1,980
(Please refer to instalment No. 7 of the repayment schedule)
31 August 2006
Loan from Northern Bank	1,454.71
Interest expense			525.29
Cash at bank		1,980
(Please refer to instalment No. 8 of the repayment schedule)
30 September 2006
Loan from Northern Bank	1,463.19
Interest expense			516.81
Cash at bank		1,980
(Please refer to instalment No. 9 of the repayment schedule)
31 October 2006
Loan from Northern Bank	1,471.73
Interest expense			508.27
Cash at bank		1,980
(Please refer to instalment No. 10 of the repayment schedule)
30 November 2006
Loan from Northern Bank	1,480.31
Interest expense			499.69
Cash at bank		1,980
(Please refer to instalment No. 11 of the repayment schedule)
31 December 2006
Loan from Northern Bank	1,488.95
Interest expense			491.05
Cash at bank		1,980
(Please refer to instalment No. 12 of the repayment schedule)

The relevant "T" accounts shown below provide a clearer picture of the figures involved in respect of the release of loan and the repayments recorded during the year ended 31 December 2006:-

ABC Co. Ltd
General Ledger
Loan From Northern Bank (Balance Sheet)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
31-Jan	Cash at bank		1,396.67	01-Jan	Cash at bank		100,000.00
28-Feb	Cash at bank		1,404.81
31-Mar	Cash at bank		1,413.01
30-Apr	Cash at bank		1,421.25
31-May	Cash at bank		1,429.54
30-Jun	Cash at bank		1,437.88
31-Jul	Cash at bank		1,446.27
31-Aug	Cash at bank		1,454.71
30-Sep	Cash at bank		1,463.19
31-Oct	Cash at bank		1,471.73
30-Nov	Cash at bank		1,480.31
31-Dec	Cash at bank		1,488.95
31-Dec	Balance C/F		82,691.68
			100,000.00				100,000.00
Cash at bank (Balance Sheet)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
01-Jan	Balance B/F		5,467.98	31-Jan	Loan from Northern Bank		1,396.67
01-Jan	Cash at bank		100,000.00	31-Jan	Interest expense		583.33
				28-Feb	Loan from Northern Bank		1,404.81
				28-Feb	Interest expense		575.19
				31-Mar	Loan from Northern Bank		1,413.01
				31-Mar	Interest expense		566.99
				30-Apr	Loan from Northern Bank		1,421.25
				30-Apr	Interest expense		558.75
				31-May	Loan from Northern Bank		1,429.54
				31-May	Interest expense		550.46
				30-Jun	Loan from Northern Bank		1,437.88
				30-Jun	Interest expense		542.12
				31-Jul	Loan from Northern Bank		1,446.27
				31-Jul	Interest expense		533.73
				31-Aug	Loan from Northern Bank		1,454.71
				31-Aug	Interest expense		525.29
				30-Sep	Loan from Northern Bank		1,463.19
				30-Sep	Interest expense		516.81
				31-Oct	Loan from Northern Bank		1,471.73
				31-Oct	Interest expense		508.27
				30-Nov	Loan from Northern Bank		1,480.31
				30-Nov	Interest expense		499.69
				31-Dec	Loan from Northern Bank		1,488.95
				31-Dec	Interest expense		491.05
				31-Dec	Balance C/F		81,707.98
			105,467.98				105,467.98
Interest expense (income statement)
DEBIT				CREDIT
Date	Descriptions	Folio	$	Date	Descriptions	Folio	$
2006				2006
31-Jan	Interest expense		583.33	31-Dec	To income statement		6,451.68
28-Feb	Interest expense		575.19
31-Mar	Interest expense		566.99
30-Apr	Interest expense		558.75
31-May	Interest expense		550.46
30-Jun	Interest expense		542.12
31-Jul	Interest expense		533.73
31-Aug	Interest expense		525.29
30-Sep	Interest expense		516.81
31-Oct	Interest expense		508.27
30-Nov	Interest expense		499.69
31-Dec	Interest expense		491.05
			6,451.68				6,451.68

Before the income statement and balance sheet of ABC Co. Ltd. are finalized, a reclassification journal entry is required to present correctly the current portion and non-current portion of the Loan from Northern Bank. From the "T" account shown above, the outstanding amount of Loan from Northern Bank as at 31 December 2006 was $82,691.68 (31-Dec Balance C/F). From the loan repayment schedule, the principal sum expected to be repaid in Year 2 is $18,559.53. This is the portion of the loan expected to be repaid within 12 months from the year end i.e. 31 December 2006 and therefore should be presented as a current liabilities item. The non-current portion of the loan is calculated as follows:-

Principal sum outstanding as at 31 December 2006	82,691.68
Principal sum expected to be repaid in the next 12 months	(18,559.53)
Principal sum expected to be repaid after the next 12 months	64,132.15

Assume the Loan from Northern Bank was originally classified as a current liabilities account, the following reclassification journal entry is required to reflect correctly the current portion and the non-current portion of the loan on the balance sheet:-

	Balance Sheet		Income Statement
	DR	CR	DR	CR
Loan from Northern Bank (Current liabilities)	64,132.15
Loan from Northern Bank (Non-Current liabilities)		64,132.15

The income statement and balance sheet of ABC Co. Ltd. after the above transactions being recorded in the respective accounts and also the impact of the $64,132.15 reclassification journal entry are as follows: -

Income Statement and Balance Sheet of ABC Co. Ltd.
Income Statement for the year ended 31 December 2006
	BEFORE	Adjustment		AFTER
		DR	CR
	$			$
Sales	109,270.00			109,270.00
Cost of Sales	- 40,875.00			- 40,875.00
Gross profit	68,395.00			68,395.00
Other income: -
Rental income	12,000.00			12,000.00
Operating expenses: -
Accountancy fee	- 800.00			- 800.00
Depreciation of property, plant and equipment	- 4,400.00			- 4,400.00
Donation	- 500.00			- 500.00
Electricity & water	- 3,340.00			- 3,340.00
Interest expense	- 6,451.68			- 6,451.68
Printing & stationery	- 1,697.00			- 1,697.00
Rental of premises	- 12,000.00			- 12,000.00
Salaries	- 27,865.00			- 27,865.00
Upkeep of office	- 3,547.00			- 3,547.00
Telephone charges	- 1,285.00			- 1,285.00
Travelling, petrol & toll charges	- 2,648.00			- 2,648.00
	- 64,533.68			- 64,533.68
Net profit for the year	15,861.32			15,861.32
Retained profits B/F	27,654.00			27,654.00
Retained profits C/F	43,515.32			43,515.32
Balance Sheet as at 31 December 2006
	$			$
Non-current assets
Property, plant and equipment	19,600.00			19,600.00
Current assets
Inventories	5,000.00			5,000.00
Trade receivables	32,807.00			32,807.00
Other receivables, deposits & prepayments:
Rental receivable	3,000.00			3,000.00
Rental deposit	3,000.00			3,000.00
Utility deposit	500.00			500.00
Cash and bank balances	105,467.98			105,467.98
	149,774.98			149,774.98
Current liabilities
Trade payables	- 3,588.00			- 3,588.00
Other payables and accruals	- 24,579.98			- 24,579.98
Loan from Northern Bank	- 82,691.68	64,132.15		- 18,559.53
	- 110,859.66			- 43,139.51
Net current assets	38,915.32			106,635.47
	58,515.32			126,235.47
Financed by: -
Share capital	15,000.00			15,000.00
Retained profits	43,515.32			43,515.32
	58,515.32			58,515.32
Non-current Liabilities
Loan from Northern Bank	-		64,132.15	64,132.15
	58,515.32			122,647.47