“The secret of getting ahead is getting started.

” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

Lesson 3 for week beginning 29 January 2018

Topics:
1. The accounting cycle
2. Rules of debit and credits
3. Journal entries  ledger  Trial balance
4. Control accounts and the subsidiary ledgers
5. GST Input and Output Taxes
6. Accrual vs cash basis of accounting

Learning objectives:
Refer to the course outline

Reading:
STH Chapter 2 (Part B) – in the customised textbook

Textbook:
STH: Spiceland J. D., Thomas W., Herrmann D. (2016), “Financial Accounting”, 4th edition, McGraw-Hill.

Online Assignments
There are one Connect assignment and one online assignment in the NTULearn Seminar Group site.
Please complete the online assignment in NTULearn before your class so that your instructor could do
a debrief of that assignment.

Discussion Questions

Question 1

One often hears the statement: “Debits are bad and Credits are good for the business.” Do you agree?
Why or why not?

Question 2

What is the purpose of preparing a trial balance? What are the errors revealed and not revealed by the
trial balance?

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 1

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

Question 3 - Cash vs Accrual basis of accounting

Safety Transport Pte Ltd has been providing school bus services for a few years. It owns a fleet of five
buses. The company has the following transactions relating to January 20x4:

Date Transaction
Jan 1 Drawn down a loan of $20,000 at an annual interest rate of 6%. The loan will be
fully repaid on 31 December 20x4. Interest is payable on 31 December 20x4. The
company has no other borrowings.

Jan 3 Collected $42,800 cash from school students for bus transport services for the
months of January and December 20x4. It is an industry practice to collect
December’s transport fee in the first month of a school year, January.

Jan 5 Paid $12,000 annual insurance premium for 20x4. The insurance policy covers the
whole of 20x4.

Jan 8 The company issued 10,000 shares at $1.20 each for cash.

Jan 15 Received an invoice, amounting to $1,000, from the petroleum company for diesel
consumption by the five buses for first two weeks of January 20x4. The company
paid the invoice on 5 February 20x4.

Jan 31 Paid $9,000 to the drivers as salary for January 20x4. Overtime pay of $1,700
incurred in January 20x4 was not paid till 3 February 20x4.

Jan 31 The company paid dividends of $2,500 to its shareholders.

Feb 2 Received an invoice, amounting to $1,250, from the petroleum company for diesel
consumption by the five buses for last two weeks of January 20x4.

The company prepares its financial statements at end of each month. What is the net profit or loss for
the month of January 20x4 using accrual and cash basis of accounting?

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 2

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

Question 4 – Journal entries, posting to ledgers and trial balance

Salukis Pte Ltd is in a business of providing car washing services. It is a GST-registered company. The
prevailing GST rate is 7%. The company charges $10 plus 7% GST for each car washing service rendered
to customers.

Below are the transactions for June 20x4, the first month of operations. The company prepares financial
statements monthly.

Date Transactions

June 1 Issue shares in exchange for cash of $60,000.

June 1 Obtain a loan of $30,000 from the bank, at an interest rate of 12% per annum.

June 1 Sign employment contracts with two employees at a monthly salary of $1,000 each.
The employees start work immediately on 1 June.

June 2 Place an order with the supplier for car wash equipment at a value of $65,000 plus
7% GST. The equipment will be delivered on 7 June.

June 7 Receive the car wash equipment ordered on 2 June and pay cash.

June 8 Pay rent of $2,000 for June and July.

June 10 Purchase cleaning supplies of $7,000 plus 7% GST on credit.

June 12 Wash 400 cars and all customers pay cash.

June 19 Pay for advertising in a local newspaper, costing $400 plus 7% GST.

June 19 Wash 500 cars for a corporate customer on account.

June 23 Pay the supplier of cleaning supplies, which is purchased on 10 June.

June 28 Receive cash from the corporate customer who has received the car washing
services on 19 June.

June 29 Pay employees $2,000 as salary for June.

June 29 Receive an order to wash 200 cars. Expect to complete service by 5 July. The
customer pays $535, inclusive of GST, in advance.

June 30 Pay loan principal of $3,000 and interest for June.

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 3

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

June 30 Pay dividends of $500 to shareholders.

Required:

(i) Prepare the journal entries, with narrations, for each transaction.

(ii) Post each transaction to the appropriate ledger accounts. Compute the balance for each account
as at 30 June 20x4.

(iii) Prepare an unadjusted trial balance as at 30 June 20x4.

Question 5 – Ethical Reasoning

You are the Chief Financial Officer (“CFO”) of HiTech Limited, which is a manufacturer of electronic
products. The company’s year-end falls on 30 September. Currently, it is September 2015, the last
month of your current financial year. Last week, one of the biggest customers cancelled its order and as
a result, HiTech’s profits for the year will fall short of its target by $1 million. Your superior, the Chief
Executive Officer (“CEO”), tasked you to look for ways to increase the company’s profits. You still could
not find legitimate ways to increase the company’s profits by $1 million. The CEO has summoned you to
his office this afternoon to discuss the financial results. You entered the CEO’s office with a heavy heart.
Below was the conversation that took place.

CEO: Have you found any ways to increase the profits?

You: No. There is no other way to increase the profits by $1 million in such a short time. We are 10
days to the financial year-end.

CEO: If we do not meet the profit target, we will lose six months of performance bonus.

You: Yah and I need that bonus to pay for my daughter’s first year of tuition fee at Cambridge.

CEO: Let me tell you what to do. I have contacted my good friend, Nelson, from Super Power
Limited. He has agreed to help us. We will send $2 million worth of goods to his company this
week and you will raise an invoice of $2 million to Super Power Limited. He will return the
goods back to us progressively in a few batches after our year-end. This will give us an
additional $1 million profits for the current financial year.

You: But….but….this is not….

CEO: No buts! Just do as I say. Don’t you want your performance bonus to pay for your daughter’s
tuition fee?

You left the CEO office feeling perplexed. You are at a loss of what to do next.

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 4

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

Required:

1. Using Josephson’s Six Pillars of Character discussed in Mintz and Morris1 and the ISCA Code of
Professional Conduct and Ethics, identify and explain the ethical issues that you face in this
situation.

2. Using at least two modern moral philosophies discussed in Mintz and Morris1 and the ISCA Code
of Professional Conduct and Ethics, identify and evaluate at least three possible actions that you
can take to resolve this ethical dilemma.

3. Decide, with justifications, on the appropriate action(s) that you would take

1Mintz S. M., Morris R. E. (2014), “Ethical Obligations and Decision Making in Accounting: Text and
Cases”, 4th Edition, McGraw-Hill.

Self-Practice Questions

Question 6 - Cash vs Accrual basis of accounting

Spark Clean Pte Ltd has been providing cleaning services to commercial offices and residential homes
for a few years. The company has the following transactions in January 20x5:

Date Transaction
Jan 2 Received a bill of $300 for utilities consumed in December 20x4.

Jan 4 Paid $500 to the cleaners for overtime work completed in December 20x4.

Jan 5 Bought $1,000 worth of cleaning supplies on credit.

Jan 7 Paid $9,000 of rental in advance for the first quarter of 20x5.

Jan 10 Declared and paid dividends of $3,500 to the shareholders.

Jan 15 Secured a new customer and she paid $3,000 as advance payment for cleaning
services to be rendered in February 20x5.

Jan 18 Paid $300 for the utilities bill received on Jan 2.

Jan 31 Billed customers for a total sum of $25,000 for cleaning services rendered in
January 20x5. Collected a total of $26,000 from customers (excluding the $3,000
collected in Jan 20x5), of which $20,000 was related to cleaning services rendered
and invoiced in December 20x4.

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 5

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

Jan 31 $600 worth of cleaning supplies, which was purchased on Jan 5, was consumed
during January 20x5.

Jan 31 Paid $4,000 salary to the cleaners for January 20x5. Overtime pay of $900 incurred
in January 20x5 was not paid till 5 February 20x5

Jan 31 The company took a one-year bank loan of $10,000 at an annual interest rate of 6%
on 1 February 20x4. The full year interests and loan were paid/repaid in full. There
was no other borrowing.

Feb 2 Received a bill of $330 for utilities consumed in January 20x5.

The company prepares its financial statements at end of each month. What is the net profit or loss for
the month of January 20x5 using accrual and cash basis of accounting? (Key answers: Net profit under
accrual basis of accounting: $16,120; Net profit under cash basis of accounting: $14,600)

Question 7 – Journal entries, posting to ledgers and trial balance

Ute Sewing Pte Ltd is in a business of providing sewing and alteration services. It is a GST-registered
company. The prevailing GST rate is 7%.

Below are the transactions for March 20x4, the first month of operations. The company prepares
financial statements monthly.

Date Transactions

March 1 Issue shares in exchange for cash of $10,000.

March 1 Obtained a loan with a local bank, $5,000, at an interest rate of 12% per annum.

March 1 Sign employment contract with one employee at a monthly salary of $1,500. The
employee starts work immediately on 1 March.

March 2 Place orders with the supplier for some sewing supplies amounting to $250 plus
GST. The sewing supplies will be delivered on March 12.

March 3 Purchase sewing equipment on credit, $1,700 plus GST.

March 5 Pay rent of $1,000 for March and April.

March 7 Martha, a customer, places an alteration order for several dresses. Ute estimates
that the alterations will cost Martha $700 (before GST). Martha is not required to
pay for the alternations until the work is complete.

March 12 Receive the sewing supplies ordered on March 2 and pay cash.

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 6

 “The secret of getting ahead is getting started.” ~ Mark Twain

NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL
AC1101 – ACCOUNTING I
SEMESTER 2, 2017/2018

March 15 Martha receives the altered dresses and pays cash to Ute.

March 16 Pay the supplier of sewing equipment, which is purchased on March 3.

March 17 Complete alteration of 10 dresses for Cathy and bill Cathy for $800 plus GST.

March 19 Bob needs 100 pairs of overall expanded as he purchased too many small and
medium sizes. Ute charges $30 plus GST for each pair of overall altered. Bob pays
$1,605, inclusive of GST, in advance to Ute for services and expects the alteration to
be completed by April 2.

March 25 Receive cash from Cathy, for alteration of 10 dresses completed on March 17.

March 31 Pay employee $1,500 as salary for March.

March 31 Pay dividends of $100 to the shareholders.

March 31 Pay loan principal of $500 and interest for March.

Required:

(i) Prepare the journal entries, with narrations, for each transaction.

(ii) Post each transaction to the appropriate ledger accounts. Compute the balance for each account
as at 31 March 20x4.

(iii) Prepare an unadjusted trial balance as at 31 March 20x4.

Please note that questions 3 and 6 are past quiz questions.

17S2 AC1101 Lesson 3 Discussion Questions \ Chan Ai Lin 7