Introduction to Accounting IM51005B Lecture 4 Recap & Accounting for Limited Companies Dr Sarah Lauwo

Middlesex University Dubai Recap : Current Assets Current Assets Cash/Bank Inventories (Stocks) Prepayments Trade Receivables Other Receivables Current assets are assets held: for short term (less than one accounting year). for sale (trading purposes) or consumption in the normal course of operating cycle or conversion into cash, within less than twelve months. ACC1755 (L6W6) (Sem20506)

Recap : Trade Receivable In business world, sales to customers may directly (offered by business) or indirectly (via a bank/credit card company) be made on credit. Debtors are persons who owe money to a business. Trade debtors are customers who buy goods or services on credit but have not yet paid. In the statement of financial position the trade debtors are referred to as trade receivables.

Recap : Bad & Doubtful debt A debt is described as a bad debt when there is no further hope of the customer paying the amount owed. For example, the debtor declared bankrupt with no asset available to pay their creditors. The bad debt is written off in the income statement and debtors balance is reduced in the balance sheet. If the customer is known to be in difficulties but the company still hopes to recover the cash owed, the debt is described as a doubtful debt. A provision is created in the IS.

Middlesex University Dubai Recap: Bad Debts Middlesex University Dubai When a trade debtor fails to settle the outstanding amounts, the debt is said to be irrecoverable Bad Debt Debtor cannot pay (e.g. gone bankrupt) Bad debt Write off ACC1755 (L6W6) (Sem20506)

Recap: Doubtful Debts When a trade debtor is known to be in difficulty but the company still hopes to recover the amount owed Doubtful Debt Debtor may not pay or unlikely to pay (e.g. may go bankrupt) Doubtful debt Make provision

Recap: Provision for Doubtful Debts Middlesex University Dubai Recap: Provision for Doubtful Debts Example: Trade receivables (opening balance) = £ 2,800 Known bad debts = £350 Required general provision of 4% Provision for doubtful debts: (£2,800 – £350) x 4% = £98 ACC1755 (L6W6) (Sem20506)

Recap: Increase in Provision for Doubtful Debts Middlesex University Dubai Recap: Increase in Provision for Doubtful Debts In the previous example, if we assume that there was an existing provision for £90. This means that we only need to increase the current provision to reach the desired 4% which was calculated to be £98. Increase required = £98 – £90 = £8 ‘Expense’ for £8 only IS Provision for doubtful debts £98 To be deducted from ‘Trade Receivables’ SoFP ACC1755 (L6W6) (Sem20506)

Recap: Decrease in Provision for Doubtful Debts Middlesex University Dubai Recap: Decrease in Provision for Doubtful Debts In the previous example, if we assume that there was an existing provision for £110. This means that we only need to decrease the current provision to reach the desired 4% which was calculated to be £98. Decrease required = £110 – £98 = £12 (You can either include it as minus under expense or other income). ACC1755 (L6W6) (Sem20506)

Recap: Depreciation- straight line method ABC Ltd. Bought a machine at a cost of £80,000. The machine has an expected useful life of 5 years and at the end of the 5th year, it can be sold for £10,000. Depr= (80,000-10,000)/5 = 14)   Cost Annual depreciation (Income Statement) Provision for Depreciation (Balance Sheet) NBV Date of purchase 80,000 End of 1st year 14,000 66,000 End of 2cd year 28,000 52,000 End of 3rd year 42,000 38,000 End of 4th year 56,000 24,000 End of 5th year 70,000 10,000

Recap: Depreciation: reducing balance method Example: A machine costs £50,000 is to be depreciated at 15% on Reducing Balance Method   Cost Annual depreciation (Income Statement) Accumulated Depreciation (Balance Sheet) NBV Date of purchase 50,000 End of 1st year 50,000 x 15% = 7,500 7,500 42,500 End of 2cd year 42,500 x 15% = 6,375 6,375 36,125 End of 3rd year 36,125 x 15% = 5,419 5,419 30,706 End of 4th year 30,706 x 15% = 4,606 4,606 26,100 End of 5th year 26,100 x 15% = 3,915 3,915 22,185

Accounting for a Limited Liability Company Preference shares Ordinary shares (equity) Types of shares Capital reserves Revenue reserves Types of Reserves

Sources of long-term finance for a typical limited company Share issues Long-term borrowings Long-term finance Retained earnings Companies derive their long-term finance from three sources: new share issues, retained earnings and long-term borrowings. For a typical company, the sum of the first two (jointly known as ‘equity finance’) exceeds the third. Retained earnings usually exceed either of the other two in terms of the amount of finance raised in most years.

The relationship between the shareholders, the directors and the auditors review elect report account Shareholders Directors Auditors The directors are appointed by the shareholders to manage the company on the shareholders’ behalf. The directors are required to report each year to the shareholders, principally by means of financial statements, on the company’s performance, position and cash flows. To give greater confidence in the statements, the shareholders also appoint auditors to investigate the reports and to express an opinion on their reliability.

Practice Question Self Assessment question Atrill and McLaney, 12th edition, p141-142, attached on VLE. Please print and bring a copy with you to the lecture for practice

Peer Limited Income Statement for the year ended 31 Dec 2012 £ Sales revenue Less Cost of sales Gross profit Less : Salaries Depreciation Other operating costs Operating profit Less Interest payable Profit before taxation Less Taxation for the year Profit for the year

Peer Limited Balance sheet as at 31 Dec 2012 £ Assets Non-current assets Property, plant and equipment at cost (1,570+30) Less: Accumulated Depreciation (690 +12) Current assets Inventories Trade receivables Cash at Bank Total assets 1,322

Peer Limited Balance sheet as at 31 Dec 2012 … Current Liabilities Trade payables 88 Other Payables Accrued expenses (Loan interest (10%*300)/2+ electricty2 +30 on machine 47 Taxation (30% of 58) 17 Borrowings - Bank overdraft 105 Dividend approved 25 Total current liabilities 302 Non-Current Liabilities: 10% Loan –Borrowing 300 Total liabilities 602

Peer Limited Balance sheet as at 31 Dec 2012 … Equity Share Capital 300 Share Premium 300 Retained earnings (104 +41-25) 120 Total Equity 720 Total Equity and Liabilities 1,322