PRINCIPLES OF ACCOUNTS

END OF PERIOD ADJUSTMENTS: BAD DEBTS & DOUBTFUL DEBTS

CSEC SYLLABUS [2008] SECTION 6: OBJECTIVES 6, 7

• Those notes are produced primarily of the CSEC course POA and so may skip some of the fundamental tenets and nuances of IAS, FRS and other accounting pronouncements.

LESSON NOTES

6.0        Highlighting the debt process.

• A business extends credit [debt] to certain customers, who agree to a repayment schedule.
• This debt begins to age once the repayment does not occur as scheduled
• The business makes provision in anticipation that some debts would not be paid on time
• The business also monitors the ageing debts and makes every effort to retrieve the funds
• The debt is deemed uncollectible or bad when all reasonable efforts to settle have failed

6.1          What are bad debts?

• Bad debts are the outstanding balances of a business’ debtors, which the business has deemed uncollectible.

6.2          Why do bad debts occur?

• Debtor may have become bankrupt
• Debtor may have died
• Debtor may have intentionally refused to pay

6.3          What are doubtful debts?

• Doubtful debts are what the business anticipate will be the level of debts which will fail to meet the repayment schedule at the end of the period.
• Doubtful debts are derived from an arbitrary percentage of the total debtors at the end of the period.

7.0          Accounting for bad and doubtful debts.

• Bad Debts are expenses [since they reflect a loss of revenue]
• Doubtful Debts are expenses [however they are NON-CASH transactions]
• Both bad debts and doubtful debts affect the profit statement
• ONLY doubtful debts affect the Balance Sheet
• The doubtful debts must be recalculated at the end of each period.

7.1          Accounting actions for bad debts.

• Record the occurrence of the bad debt
  • Debit     Bad Debts a/c
  • Credit         debtor a/c
  • Charge the bad debt expense to the profit statement
    • Debit     Profit & Loss a/c
    • Credit          bad debts w/o
    • Where a bad debt is later recovered or paid
      • Debit     debtor a/c
      • Credit           bad debts (recovered)
      • Register the debt which was recovered
        • Debit     bank
        • Credit            debtor

7.2          Accounting actions for doubtful debts.

• Record the doubtful debt provided for
  • Total debtors * percentage (debt unlikely to be collected)
  • Charge the doubtful debts to the profit statement
    • Debit     Profit & Loss a/c
    • Credit         Provision for doubtful debt
    • Provision for doubtful debts must be recalculated at the end of each year since it changes as total debtors change.
    • Where the amount provided for is less than the previous year
      • Debit     provision for doubtful debts a/c
      • Credit           profit & loss a/c
      • Reduce the total debtors on the Balance Sheet by the debt provision made for the period
        • Debtors  less provision for doubtful debts

Rikki had heard and seen other men toss their lines over the salt rusted wrought iron rails that guarded the silos; and within seconds would howl and pull a two to five pound fish from the water.  Good eating fish like chubbs,  jacks, groupers and even some rock hinds.  In fact only last week, he saw a man land a ‘big one’ from the very spot where he was now sitting.

The sea-breeze was coming into the shore. It was a little warmer than the air in his village at this time of the night, but it was not by any means hot.  It did, however, seem to collude with the soft clapping of the water below his feet to cast a spell of sleepy comfort over his eyes.   He fought it though.  Rumour had it that once a rock-fisher is lulled into dreamland, the fish congregate and leap into the air in a chariot like formation.  When the half daze fisher glimpses this phenomenon, he would step off the rocks in his attempt to hold onto the reins of the chariot.

Unfortunately, it’s only his fishing line that he would have grasped as he falls headlong into the briny to be swept away by the viscous under tow beneath the water’s placid surface.

For a brief second Rikki thought he had felt a tug at the end of his line.  He paused momentarily, and then he gently reeled back the nylon, expecting it to stiffen.  But It didn’t.  In disgust, he reeled it in anyhow wrapping it fluidly around the old insecticide can. 

Three hours and nothing to show for it. Other men had come and gone with buckets or plastics of no less than three fish each. Time to go home!  Rikki made one more furtive glance at the glistening water which teased him in the blue-green eerie light of the moon.  Something jumped into the air just as he was about to look away.  So he looked back. 

There!  A fat shimmering red spotted grouper… could be about eight pounds, skirting just beneath the surface, shielded by a shoal of tiny silverbacks.  Rikki tossed a few pieces of the bread he had been nibbling into the water.  The shoal darted away, but the big fish shot up and gobbled the bread pieces.  He’s a hungry fella!

Rikki carefully baited his line, tossed it skilfullly into the sea, and then sat back down on the rocks.  Thax!  The line flexed outward and he let it rip.  The line then tightened.  Rikki became very excited.  His heart raced and so did his mind.  He braced his feet firmly on the rock, and slowly started to haul the line.  It was very tight but it seemed to be moving in his direction.

He kept on reeling in; his breathing had almost stopped, and he was sweating a nervous sweat.  He kept his eyes squeezed shut so that he could focus on landing this big catch.  Nevertheless, after what seemed like half an hour, the line was still tight and Rikki was still hauling.  Wait a minute! Why is this fish not fighting back?

Rikki opened his eyes to a squint and just in time to see the shoal of silverbacks float in the air in a chariot formation, the big fish at the lead… and the reins? They  were wrapped around his hands.  Either it was shock or fright that caused Rikki to drop the can with the nylon line.  The, as his foot hit the icy cold water, he gasped; and grasped the salt gouged rock against which he had painfully landed buttocks first.  And as the sharp edges of the grykes tore at his fingers and the exposed flesh of his skinny chest, Rikki held on until …

An entrepreneur is expected to perform the following roles in the new enterprise:
• conceptualise the type of business to be established;
• anticipate the level of risk the business idea require;
• plan and develop strategies for growth;
• access funds for its operations;
• seek opportunities to expose the business; and
• evaluate the performance of the business.

A potential entrepreneur should generally ask these two questions:
• Do I have what others want (to pay for)?
• Do I have the necessary qualities (to provide for them)?

An entrepreneur who desires to be successful should possess the majority of the characteristics or qualities identified below:
• creative [imagination]
• innovative [self-motivated]
• flexible [adapt to change]
• independent [goal-oriented]
• persistent [determination]
• persevering [sacrificing]
• risk-taking [perceptive]

An entrepreneur may decide to start a business for a variety of reasons, some of  the main ones are:
• to achieve financial independence
- to be self-employed
- to have an additional source of income
• to have a sense of self-fulfilment
- to be one’s own boss
- to meet a need existing in society
- to create employment for others
• to reach a self-actualisation goal.
- to fulfill a lifelong dream
- to convert a hobby into a source of wealth

A good entrepreneur will begin the business on a piece of paper [formally or informally]. Nevertheless there are several steps which must filter through his/her mind.
• CONCEPTUALIZATION
o Converting that ‘abstract idea’ into a real world scenario
o Determining whether to go it alone or get a partner
• MARKET RESEARCH
o Probe the people who you intend to target
o Test it on a few ‘friends’ – listen to the criticism
• RESOURCE NEEDS
o How much money would you need to start
o What materials or human assistance will be required
• BUSINESS PLAN
o Set out clearly what your business will be about
o Show how it will be finance, marketed and operated successfully
• FUNDING
o What will be your specific source(s) of funding
o On what terms will you accept external funding
• OPERATIONS
o Where will you have your business based
o How often will you produce or provide ‘your product’

Starting a business is not as simple as it looks… not if you want it to be successful for a very long time.

A good entrepreneur would do the necessary research. One would need to know where the sources of relevant primary and/or secondary information are. [reader -THAT”S YOUR JOB!]

A good entrepreneur should have a plan… a well thought out plan, just like the blue print of a house. A good plan shall essentially have three levels:
• LONG-TERM OBJECTIVES
o Plans of what the business INTENDS TO DO in the next 10 years
o [eg to gain 60% of the current target market]
• MEDIUM-TERM OBJECTIVES
o Strategies for attaining the specific targets set for the next 5 years
o [eg increase sales volume by 35% in the target market]
• SHORT-TERM OBJECTIVES
o Detailed steps to successfully reach a target with in 1 to 3 years
o [eg introduce our product as a special brand at $0.25 above average market price]

A BUSINESS PLAN is really a short-term plan.
A business plan simply identifies
• Who is responsible for the business
• What the business is intended to do
• Where it is going to get its funding
• How much profits it is expected to make

A business plan is often required by potential investors or financiers for several reasons:
• To get a blueprint of the operations of the business
• To identify the anticipated income –expenditure level
• To be able to monitor [and advise on] the performance of the business
• To provide a guide to the particular goals of the entrepreneur for the business

A good business plan should have at least 5 major sections
• Executive Summary
o This declares who is responsible for the business [owner’s name, address]
o It states what the business intends to do [aims and objectives]
• Operational [Production] Analysis
o This declares the specific product(s) or service(s)to be offered
o It states the costs, process, and prices to be incorporated
• Marketing Analysis
o This declares the target market(s) [customers, competition, share]
o It states the strategies to be used to capture the market
• Financial Analysis
o This declares the means of financing the business
o It states forecasted cash flows, profits, capital expenditure
• Management Controls
o This declares the procedures for recording and monitoring progress
o It states the ways the business is expected to grow

UNIT 1: MODULE 2          Objective 8, 9

 The Partnership Agreement

—  To avoid complications in the future, partners in a business venture should make a formal agreement on certain issues, such as:

—  The rational for formation

—  Capital contributions

—  Opportunity cost (interests or penalties)

—  Profit & loss sharing ratios

—  Admission of new partners (goodwill or bonus)

—  Exit of old partners (retirement)

—  Dissolution of the partnership

—  Interest on a partner’s loan to the firm

Capital contribution

—  Partners agree on the (total amount of) capital needed to operate the business effectively.

—  The capital is essentially a pooling of the assets and liabilities of the individual partners.

—  The assets and liabilities are generally recorded at their fair values (what they are valued at if sold on the current market)

—  The capital is recorded as a simple journal entry in the (new) business.

Opportunity costs

—  Partners should agree on

—  Interest rate (if any) to be given on capital invested before the profits are shared.

—  They should state whether it is the opening, closing or average capital

—  This represents the opportunity benefit for not investing the capital in another project.

—  Interest rate (if any) to be charged on drawings on the capital base before the profits are shared.

—  This represents the opportunity penalty for reducing the capital due to personal reasons.

Remunerations

—  Partners should agree on

—  Which partner(s) should be paid a salary  [it is usually the general partner(s)]

—  Which partner(s), if any, would receive a bonus

—  Whether on income before the allocations

—  OR on the income after the allocations

Profit/loss sharing

—  Partners should agree on how they will share the profits or losses of the business.

—  This might be by fixed ratio

—  OR by the ratio of their capital balances

Exercise  (to be done in the classroom – 15 Sept, 2011)

M&C started business on January 1, 2005

Purchases              120000               Sales                   300000

Staff wages              40000               Rent                       10000

Electricity                  9000               Sundry expenses     5400

Premises at cost    60000             Fixtures at cost       28000

Trade debtors          5460            Trade creditors           2860

Bank                        94000            Loan from Christy   10000

Marty’s capital      60000            Christy’s capital       40000

Marty’s drawings  24000           Christy’s drawings    17000

Notes:

1. Stock at December 31, 2005 was valued at $18000
2. Depreciation on original costs is to be provided on premises at 5% p.a; and on fixtures at 12½% p.a
3. Interest on capital and drawings has been set at 5% p.a
4. Annual salaries to partners were Marty $20000 and Christy $10000
5. The balance of profits/loss is to be shared in the ratio 2:1 respectively [to Marty and Christy]
6. Interest on loan by Christy to the partnership is set at 8% per annum

•  Prepare the Trading, Profit & Loss and appropriation accounts at 31-12-05;

• Prepare the partners’ current accounts.

• Prepare the Balance Sheet as at 31-12-05

To describe a business, focus on
 Its ownership & management structure
 Its raison d’être (purpose of existence)
 Its source of funding
 Its tax jurisdiction/requirements
 Its formation (legal) requirements
 Its risk factor

To form an opinion, focus on
 Start-up process
 Decision-making process
 Ability to raise capital/investment
 Management structure & size
 Profit sharing (and other accounting ratios)
 Relationship with employees
 Relationship with clients/customers
 Liability & legal status
 Continuity/transfer of ownership

SOLE PROPRIETORSHIP
 A separate and distinct organisation (business) with a single owner.
 Generally a small retail operation; or an individual professional service (eg dentist).
 Funded through owner’s efforts
 Profits treated as personal income (no tax)
 No specific legal regulations to start up

Advantage
 Except for specific licences or certificates (eg liquor) one can start up the business at anytime with legal hindrances.
 It is recommended, however, that the business be registered (at minimal) with the business registry.
 Owner generally plays an active role in the management (often the only manager)
 Profits remain under the owner’s control
 Decisions can be put into effect at once without the necessity to consult
 The small size allows owner to be intimately involve with every aspect of the operation.
 The small size encourages a more personal relationship with employees

Disadvantage
 Unlimited liability (claim on owner’s personal assets)
 Difficulty in raising ownership capital
 Lacks continuity (terminates with the owner)
 Difficult to transfer ownership
 Often impacted by owner’s absence

PARTNERSHIPS
 An incorporated association (business) with two or more co-owners.
 has2 to 20 persons; at least one must be a general partner
 typically a small retail operation (e.g family store); or provision of professional service (eg, dentists, lawyers).
 Funded through the pooling of their resources and skills
 Profits are shared; and are subjected to personal income tax
 No specific legal regulations to start up; but are guided by the Partnership Act of 1890 or 1907*

Advantage
 Except for specific licences or certificates (eg liquor) start up no legal hindrances.
 It is recommended, however, that the business be registered (at minimal) with the business registry; and partners sign a formal agreement*
 At least one owner must play an active role in the management
 Decisions are more consultative and reduces impulsive action
 The small size encourages a more personal relationship with employees
 The number of partners lend to greater specialisation and work distribution

Disadvantage
 Unlimited liability (claim on owners’ personal assets)
 Difficulty in raising ownership capital as fewer people are interested in partnerships
 Lacks continuity (terminates with any change of owner)
 Difficult to transfer ownership (Agreement)
 Often impacted by poor decisions of any partner (Agency)

Other comments
 General partners – has the right to manage the business (except forbidden by partnership agreement); and assume unlimited liability for the debts of the partnership.
 Limited partners – invest capital in the business but have no active role in its management. [also known as a sleeping partner].
 Agency theory – implies that each partner acts as an agent of the partnership; and can thus bind the partners into a contract when acting within the scope of the business.
 Transfer of interest – a partner is free to dispose of his/her interest in the partnership in any legal way; but the current partners must approve of the incoming party in order for them to participate in the business.

CORPORATIONS (limited companies)
 A group of persons associated together to form a legal entity* to undertake some form of business activity.
 These are generally large businesses requiring heavy investment of capital (e.g a commercial bank)
 The capital required is divided into shares* and sold to interested individuals in variant amounts.
 The profits are divided in proportion to the amount and type of shares held by each shareholder*.
 The entity is required to pay corporation tax*; while shareholders pay income tax
 Subject to stringent legal rules and regulations in order to safeguard shareholder interest

 Must be registered with the Registrar of Companies or similar body
 Becomes an entity recognised as an individual under the law
 Owners elect a directorate (board) to ensure the investments are protected. They report to the others at the AGM*
 Decision making is left up to managers and other hired professionals.
 Employs high degree of specialisation of skills and management
 Owners are generally estranged from both employees and employers.

Advantage
 Limited liability (claim on company assets only)
 Easier to raise ownership capital especially if business is doing well
 Has continuity as shareholders can transfer ownership interest
 Ownership (shares) can be easily transferred on the market at anytime.

Disadvantage
 Impacted by double taxation; and government regulations
 Expansion in size leads to greater complexity and bureaucracy
Other comments
• Public companies – can have as many owners (shareholders) as possible; the shares are bought and sold in a public securities market or stock exchange.
 Private companies – the number of owners are restricted [1 – 50]; the shares cannot be bought or sold in a public securities market or stock exchange.
 Statutory companies – are owned by the government (state) as established by act of Parliament.

CO-OPERATIVES

 An association of persons with common interest and goals to form a democratically controlled enterprise.
 It is self-governed (autonomous) – directors are chosen to manage its affairs
 Capital invested by members form the capital pool (base) of the organisation
 Each member has his/her separate businesses; but pool funds to enjoy economies of scale (cheap inputs, advertising, etc)
 Economic returns (profit?) are mutually distributed

Advantage
 Voluntary, non-discriminatory, and open membership policies
 Democratic control; one vote per member (regardless of contribution to the pool)
 Limited interest on capital invested*
 All surplus (less reserved deductions*) generated from operations belong to the members
 Act of continuous education and training to help improve the contribution of members
 Cooperating with other cooperatives to foster harmony and greater economies of scale

Disadvantage
 Shares are not transferable
 Capital invested can be returned if person ceases to be a member
 New tax laws have impact this entity
 Limited liability of the cooperative itself
 Focus is not profit making but cost reduction and creation of investment opportunities.

NON-GOVERNMENTAL ORGANISATIONS (NGOs) & Non-profit organizations
 A large group of organisations that have been established as non-profit making entities. Its main focus is to work with people to achieve long-term improvements in the quality of their lives*.
 It can be a church, a youth group, a political party, a research institute, a professional association, a social club, a sports club, or a charity.
 Some NGOs have been created* by Acts of Parliament

 It can be incorporated* or unincorporated*
 Its management and operations are independent of government control
 It is managed by a of Board of Directors (elected to office for a specific period of time)
 It is a legal entity when it has been incorporated
 It has no (share) capital and is thus funded via restricted* and unrestricted* means.
 All of its funding must be declared and an account given for its disbursement (preferably audited)

 NGOs operate on funds provided by donors who do not benefit directly from the organisations’ programmes.
 Sources of funding* are
 Donations
 Sponsors (special business events)
 legacies & bequests
 Fund-raising events (cake sales, fairs)
 Free rent & volunteering
 Membership subscriptions
 Sales of publications or artifacts
 Government grants & subventions

after posting data from the journals to the ledgers

after extracting the Trial Balance … it is time to present the reports

known as Financial Statements (or final  )

Was it the strangely sweet, familiar scent that caused her to turn? Myrna was unsure. It seemed as if there was something or someone in her room a few moments ago. How long that presence was there she had no idea, but something had caused her to awake from her sleep.
She tried peering into the darkness but to no avail, for her eyelids, like her mind, were still groggy with sleep. She squeezed them shut for a few moments and listened. She could hear the cool night breeze playing with the curtain at her window; she could also hear the trailing echoes of conversational stanzas floating up and down the stairway that led from her living room below.
On opening her eyes she remembered why she had gone to bed so early. She searched the room without moving off the bed. She eyed every corner of the room ascertaining whether anything seemed different. She knew her bedroom as well as she knew the back of her hands; she would be able to tell if a button had been shifted from where she had left it. There …. She smelt it again! It was sweet and tantalising, and it lingered in the air like skywriting. Ummm …what was it?
Myrna’ mind had flashed back about four hours earlier when she had a “little” dispute with her husband. He had been too busy flirting with the new girl from his office, whom he had invited to their regular weekend house party. The girl was pretty and sophisticated. Myrna remembered the lump of jealousy that had risen in her heart when Brian introduced her as his research assistant. All night the Miss “R A” clung to him like his underwear; and Myrna had no intentions of being slighted.
Just as the dispute got out of control and the tears were rushing down her face, someone came and put an arm around her shoulder, and whispered softly: “Go on up and rest dear, Brian is not interested in her at all!” Myrna was too busy crying her heart out to notice the voice trying to explain away what seemed quite obvious. That pretty little thing was all over her man like an umbrella. How do you mean ‘not interested’? That was how she recognised the scent.
Brian’s clothes had carried that same smell on numerous occasions, especially when he had to do business overseas. What did he say it was? Ave Negro …. Some kind of black bird! Myrna screamed out of sheer disbelief. Her husband’s other woman had sent her, the wife, to her room. Was she now lurking in the shadow of her half open door with criminal intent? Or was she just checking to see if the coast was clear. Myrna screamed again and ran crazily down the stairs …. Only to crash into the naked body of “the other woman”, who whispered harshly, “Didn’t I tell you to go to bed?”

1. What does MIS stand for?
2. What is the difference between the ‘internet’ and an ‘intranet’?
3. What is an MIS?
4. What are three basic activities performed by an MIS?
5. State three of the ways the MIS was designed to assist management.
6. State three ways the computer side of the MIS contributes to a business.
7. Using your knowledge of MIS, briefly explain how it is used with ATMs.
8. What are three advantages to be gained from setting up an MIS in a business?
9. Give three reasons why you would advise a company not to set up an MIS.
10. Design (draw the layout) an MIS system for your school.