Harry, the owner of Harry Pte Ltd, was finalising his company accounts for the year ending 31 December. His accou
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Harry, the owner of Harry Pte Ltd, was finalising his company accounts for the year ending 31 December. His accountant has just met with an accident, and he approached you for help. Harry presented you the unadjusted
Debit Credit
Machine at cost 130,000
Motor Vehicles at cost 150,000
Accumulated depreciation - Motor vehicles 30,000
Cash 80,000
Share capital 180,000
Bank loan (Long term) 150,000
Inventory 120,000
Cost of goods sold 240,000
Patents 100,000
Sales 500,000
Other expenses 95,000
Allowance for Doubtful debts 2000
Accounts receivable 92,000
Accounts payable 45,000
Total 1,007,000 1,007,000
After discussing with Harry, you are further furnished with the additional information.
(i) The company made sales of $30,000 during December 2021. This included $20,000 sales on credit. The gross margin for these sales was 60%.
(ii) The company estimated that 4% of accounts receivable will be uncollectible.
(iii) The company bought a machine on 1 January 2021 that costs $130,000. The company depreciates the machine using the straight-line method. The machine is expected to have a residual value of $10,000 at the end of its useful life of 5 years.
(iv) On 1 July 2021, the company purchased a patent for $100,000 in cash. The patent will expire in 20 years but the company anticipates the patent will be obsolete and worthless at the end of 10 years.
(v) The company depreciates motor vehicles using the double-declining method with an assumed useful life of 5 years and residual value at 5% of the cost.
(vi) The bank loan carries an annual interest of 5%, payable every 31 December.
(vii) During December 2021, the company received $10,000 cash for amounts owing and paid $5,000 to creditors.
(viii) Due to a substantial decline in demand, the market value of inventory items has declined by 70% at end of 2021. Harry is not certain what to do.
Analyse the above and present the necessary entries for Harry Pte Ltd for the year 2021
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