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

2. 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)

3. 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.

4. 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.

5. 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)

6. 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

7. 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)

8. 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)

9. 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)

10. 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

11. 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

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

13. 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.

14. 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.

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

16. 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

17. 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 ( )
Current assets
Inventories
Trade receivables
Cash at Bank
Total assets ,322

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

19. Peer Limited Balance sheet as at 31 Dec 2012 …
Equity
Share Capital
Share Premium
Retained earnings ( )
Total Equity
Total Equity and Liabilities ,322