Chapter 1: Introduction to Accounting and Business

1. Nature of a Business
 Definition: A business is an organization where basic resources (inputs)
are transformed into goods or services (outputs) for customers. These
resources are either physical (materials, machinery) or intellectual (skills,
knowledge).
 Types of Businesses:
o Manufacturing: Produces goods by converting raw materials into
finished products.
o Trading: Focuses on buying and selling goods without transformation.

o Service: Provides intangible products such as consulting, healthcare,

or education.
2. Types of Business Organizations
 Corporation: Ownership is divided into shares, and shareholders have
limited liability.
 Partnership: Owned by two or more individuals who share the profits and
responsibilities.
 Sole Proprietorship: A single individual owns and operates the business,
assuming all risks and rewards.
3. Accounting Basics
 Three Key Activities:
1. Identifying economic events relevant to the business (e.g., sales,
purchases).
2. Recording these events in a systematic way.
3. Communicating the recorded information to stakeholders through
financial reports.
 Stakeholders: Individuals or groups who have an interest in the business.
They are divided into:
o Internal Users: Managers, employees who use accounting
information for decision-making.
o External Users: Investors, creditors, regulators who require
information to assess the business’s performance and financial health.
4. The Profession of Accounting
 Financial Accounting: Focuses on creating financial statements for
external users.
  Managerial Accounting: Involves internal financial analysis and
reporting for management decisions.
 Public Accountants: Provide accounting services to multiple clients for a
fee.
 Private Accountants: Work within a single company or organization.
5. GAAP (Generally Accepted Accounting Principles)
 Purpose: GAAP provides a framework of standards for financial reporting
that ensures consistency, transparency, and comparability between
companies.
 Standard-Setting Bodies:
o FASB (Financial Accounting Standards Board): Sets accounting
standards in the United States.
o IASB (International Accounting Standards Board): Sets global
standards, including the International Financial Reporting
Standards (IFRS).
6. Key Accounting Concepts
 Business Entity Concept: The business and its owner are separate
entities. Business transactions are recorded independently of the owner’s
personal financial activities.
 Historical Cost Principle: Assets are recorded at the price paid to acquire
them, and this value remains on the books, regardless of market fluctuations.
 Accounting Period: Financial results are reported over specific periods
(monthly, quarterly, annually).
 Going Concern Concept: Financial statements assume the business will
continue its operations indefinitely unless there’s evidence to suggest
otherwise.
 Consistency Concept: The company should use the same accounting
methods from period to period to ensure comparability.
 Materiality Concept: Only information that could influence decision-
making should be included in financial reports. Insignificant details can be
omitted.
 Monetary Unit Assumption: Only transactions that can be expressed in
monetary terms are recorded.
7. Accounting Equation
 Formula: Assets = Liabilities + Owner’s Equity
 o Assets: Resources owned by the business that are expected to
provide future economic benefits (e.g., cash, equipment, inventory).
o Liabilities: Debts and obligations owed to outsiders (e.g., loans,
accounts payable).
o Owner’s Equity: The residual interest in the assets of the
business after deducting liabilities. It includes capital contributed
by the owner and retained earnings (profits reinvested in the
business).
8. Expanded Accounting Equation
 Expanded Formula: Assets = Liabilities + Capital + Retained Earnings -
Drawings + Revenues - Expenses
o Revenues: The income earned from providing services or selling
products.
o Expenses: The costs incurred to generate revenue.

o Drawings: Owner withdrawals for personal use.

9. Accounting Transactions
 Internal Transactions: Economic events that occur within the company
(e.g., using supplies).
 External Transactions: Economic events between the company and an
external party (e.g., sales to customers, purchasing equipment).
 Transaction Analysis: Each transaction must have a dual effect on the
accounting equation to ensure that both sides (assets vs. liabilities and
owner’s equity) remain balanced.
Examples of transactions include:
 Investment by the Owner: Increases both cash (asset) and owner’s equity.
 Purchase of Equipment for Cash: Decreases cash (asset) but increases
equipment (asset).
 Purchase of Supplies on Credit: Increases both supplies (asset) and
accounts payable (liability).
 Services Performed for Cash and Credit: Increases both cash (asset) and
accounts receivable (asset), while also increasing owner’s equity (through
revenue).
10. Financial Statements
 Profit and Loss Statement (Income Statement): Shows the company’s
profitability over a period of time. It lists revenues and expenses,
culminating in net income (or net loss).
  Balance Sheet: Provides a snapshot of the company’s financial
position at a specific date. It lists assets, liabilities, and owner’s
equity, showing the equation’s balance.
 Statement of Owner’s Equity: Summarizes changes in the owner’s equity
over a period, including investments, withdrawals, and retained
earnings.
 Statement of Cash Flows: Tracks cash inflows and outflows during a
specific period, detailing where cash came from and how it was used.
Chapter 2: Analyzing Transactions
Objectives
 Describe the characteristics of an account.
 List the rules of debit and credit, and the normal balances of accounts.
 Prepare a trial balance.
What is an Account?
 An account is a record of increases and decreases in a specific asset,
liability, equity, revenue, or expense item.
 Accounts are represented in a T-account format.
 Debit (Dr.) means "left" and Credit (Cr.) means "right."
Double-entry System
 Each transaction affects two or more accounts to maintain the balance in
the accounting equation.
 Every debit must have a corresponding credit, and vice versa.
 The system ensures that debits equal credits for each transaction.
Debit and Credit Rules
 Assets: Debits increase assets, and credits decrease them.
 Liabilities: Credits increase liabilities, and debits decrease them.
 Equity: Credits increase equity, and debits decrease it.
 Revenues: Revenues are increased by credits.
 Expenses: Expenses are increased by debits.
Normal Balances
 Accounts have a "normal balance," which is the side (debit or credit) that
increases the account.
o Assets: Normal balance is debit.
 o Liabilities: Normal balance is credit.

o Capital: Normal balance is credit.

Steps in the Recording Process

1. Analyze the transaction: Determine which accounts are affected and
whether they are increasing or decreasing.
2. Journalize the transaction: Enter the transaction into the journal,
recording the debit and credit entries.
3. Post to the ledger: Transfer the journal entries to the general ledger,
where individual account balances are updated.
The Journal
 The journal is the book of original entry where all transactions are recorded
in chronological order.
 It discloses the full effect of transactions, maintains a sequence of
records, and aids in identifying errors.
The Ledger
 The general ledger contains all the asset, liability, and stockholders'
equity accounts.
 After journalizing transactions, entries are posted (transferred) to the
ledger.
Trial Balance
 A trial balance is prepared to ensure that debits equal credits in the
ledger.
 The trial balance lists all accounts and their balances at a specific time.
 It helps identify errors but has limitations, such as not detecting
transactions that are omitted, duplicated, or recorded in the wrong
accounts.
Limitations of the Trial Balance
 The trial balance may still balance even if:
1. A transaction is not recorded.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amounts.
 Chapter 3: The Matching Concept and The Adjusting Process
Time Difference and Accounting Basis
 Cash Basis Accounting: Revenues and expenses are reported in the period
when cash is received or paid. For example, if a company sells goods on
credit in May but receives payment in June, revenue is recognized in June.
 Accrual Basis Accounting: Revenues and expenses are reported when
they are earned or incurred, regardless of when cash is received or paid.
Matching Concept
 The matching concept requires that revenues and their related expenses
be reported in the same period. This principle ensures that income and
expenses are recognized when they are incurred, not necessarily when
cash is exchanged.
The Adjusting Process
 Adjusting entries are necessary to ensure that revenues and expenses
are recorded in the correct accounting period. Adjusting entries always
involve one income statement account and one balance sheet
account.
 Adjustments are needed to ensure that the trial balance is up to date and
complete. Adjustments are made at the end of the accounting period before
financial statements are prepared.
Deferrals and Accruals
 Deferrals: Cash is received or paid before the revenue is earned or
the expense is incurred. Common examples include prepaid expenses
(e.g., prepaid rent, insurance) and unearned revenues (e.g., rent received in
advance).
 Accruals: Revenues and expenses are recognized before cash is
exchanged. Examples include accrued revenues (services performed but not
yet billed) and accrued expenses (salaries owed but not yet paid).
Adjusting Entries for Prepaid Expenses
 Prepaid expenses (e.g., insurance, supplies) are initially recorded as assets
but are expensed over time as they are used up.
 Example: A company purchases $2,500 in supplies. At the end of the period,
$1,500 worth of supplies is used. The adjusting entry would debit supplies
expense and credit supplies for the $1,500 used.
Depreciation
 Depreciation is the process of allocating the cost of long-term assets like
buildings and equipment over their useful life.
  The asset is recorded at its original cost, and accumulated depreciation is
recorded as a contra asset account.
 Example: If equipment costs $480 per year to depreciate, $40 is recorded as
depreciation expense each month.
Adjusting Entries for Unearned Revenues
 Unearned revenues (e.g., rent received in advance) are initially recorded as
liabilities. When the service is provided, the liability is reduced, and
revenue is recognized.
 Example: A company receives $600 for 6 months of rent in advance. At the
end of each month, $100 is recognized as rent revenue, and the unearned
rent liability is reduced by $100.
Accrued Expenses and Revenues
 Accrued Expenses: Expenses that have been incurred but not yet paid or
recorded.
o Example: Salaries owed to employees at the end of the period but not
yet paid.
 Accrued Revenues: Revenues that have been earned but not yet
received or recorded.
o Example: Services provided by a lawyer that haven’t been billed at
the end of the month.
Summary of Adjusting Process
1. Deferred Expenses: Initially recorded as assets (e.g., prepaid expenses)
and expensed over time.
2. Deferred Revenues: Initially recorded as liabilities (e.g., unearned revenue)
and recognized as revenue over time.
3. Accrued Expenses: Expenses that are recognized before cash is paid (e.g.,
salaries payable).
4. Accrued Revenues: Revenues that are recognized before cash is received
(e.g., accounts receivable).
5. Depreciation: Allocation of the cost of long-term assets over time.
Chapter 4: Completing the Accounting Cycle
Work Sheet Structure
 A typical worksheet contains 6 columns:
1. Account Title: Lists the accounts.
2. Trial Balance: Initial balances before adjustments.
 3. Adjustments: Adjusting entries for accruals, deferrals, and
corrections.
4. Adjusted Trial Balance: Balances after adjustments are made.
5. Profit and Loss Statement (Income Statement): Revenue and
expense accounts used to calculate net income or loss.
6. Balance Sheet: Lists assets, liabilities, and equity accounts.
Steps to Complete a Work Sheet
1. Enter the Trial Balance: First step is to enter the unadjusted balances of all
accounts.
2. Enter Adjustments: Make necessary adjusting entries for accruals and
deferrals.
3. Determine Adjusted Trial Balance: After adjustments, update the trial
balance to reflect accurate balances.
4. Place Adjusted Amounts in PL or BS: Separate the accounts for the
income statement and balance sheet.
5. Determine Profit or Loss: The difference between debits and credits in the
income statement (profit and loss).
Closing Entries
 Purpose: To close temporary accounts (revenues and expenses) and transfer
their balances to the Profit and Loss Summary (Income Summary) account.
 Process:
1. Close expenses to Profit and Loss Summary.
2. Close sales (revenue) to Profit and Loss Summary.
3. If sales exceed expenses, transfer the balance to Retained Earnings. If
expenses exceed sales, debit Retained Earnings.
Example Closing Entries:
1. Dr Profit and Loss Summary, Cr Expenses: Close expense accounts.
2. Dr Sales, Cr Profit and Loss Summary: Close revenue accounts.
3. If Net Profit: Dr Profit and Loss Summary, Cr Retained Earnings.
4. If Net Loss: Dr Retained Earnings, Cr Profit and Loss Summary.
Profit and Loss (Income Statement) Components:
 Revenues: Sales or other income sources.
 Cost of Goods Sold (COGS): Cost of inventory sold.
  Gross Profit: Difference between revenue and COGS.
 Operating Expenses: Supplies, salaries, and other costs.
 Net Profit: Gross profit minus operating expenses.
Chapter 5: Accounting for Trading Business
Accounting for Purchases
 Perpetual Inventory System: Each purchase and sale is recorded directly
in the inventory account, continuously showing inventory on hand and cost of
goods sold (COGS).
o Formula: Closing Balance = Opening Balance + Purchases - Sales.

 Periodic Inventory System: Inventory is counted at the end of the period,

and COGS is calculated as:
o COGS = Opening Balance + Purchases - Closing Balance.

 Recording Purchases: Different journal entries are used to record

purchases made by cash, credit, or a combination of both.
Purchase Discounts and Returns
 Purchase Discounts: Discounts provided to buyers for early payment (e.g.,
2/10, n/30), where a 2% discount is available if payment is made within 10
days.
 Purchase Returns and Allowances: When goods are returned or the price
is adjusted, entries are made to reduce the liability or asset accordingly.
Accounting for Sales
 Sales by Cash or Credit: Revenue from sales is recognized upon the
transaction. The cost of goods sold is also recorded simultaneously, reducing
inventory.
 Sales Discounts: Sellers may offer buyers discounts for early payment,
reducing the amount of receivable or revenue.
 Sales Returns and Allowances: When goods are returned or prices are
adjusted due to defects, entries are made to reduce sales revenue.
Goods and Services Tax (GST)
 Businesses are authorized to charge and collect GST (or VAT) on behalf of the
tax authority. The chapter explains how GST is handled in purchases and
sales, and how businesses settle the net amount of tax.
Transportation Costs
 FOB Shipping Point: The buyer pays the transportation costs.
  FOB Destination: The seller pays the transportation costs.
Profit and Loss Statement for a Trading Business
 The chapter explains how to prepare a profit and loss statement, which
includes:
o Revenue from Sales.

o Cost of Goods Sold (COGS): Calculated under either perpetual or

periodic inventory systems.
o Gross Profit: Revenue minus COGS.

o Operating Expenses: All expenses incurred during operations.

o Net Profit: Gross profit minus operating expenses.

Chapter 6: Cash and Internal Controls

Internal Control
Internal control consists of policies and procedures implemented by an organization
to provide reasonable assurance of achieving its objectives. These include:
 Asset protection
 Operational efficiency
 Compliance with laws and regulations
Key components of internal control include:
1. Control Environment: The tone set by top management that values
integrity and discourages unethical activities.
2. Risk Assessment: Identifying and analyzing risks that the business may
face and determining how to manage those risks.
3. Control Activities: Specific policies and procedures designed to reduce
risks. These include:
o Segregation of Duties: Prevents one person from having too much
control over any single transaction by separating authorization,
custody, record-keeping, and reconciliation.
o Authorization of Transactions: Transactions are reviewed and
approved by a designated person, typically a supervisor.
o Retention of Records: Proper documentation is kept to substantiate
all transactions.
o Supervision or Monitoring: Regular review or observation of
ongoing activities to ensure compliance.
 o Physical Safeguards: Use of security measures (e.g., cameras, locks,
physical barriers) to protect assets.
Internal Control for Cash
 Cash includes coins, paper money, cheques, and bank deposits. It is crucial
for the daily operation of any business but also presents a high risk of loss or
theft. Therefore, proper controls are necessary.
Cash Receipt Controls
 The principle of segregation of duties is critical to cash receipt controls.
The person responsible for record-keeping should not have physical access to
the cash itself.
Cash Disbursement Controls
 Cash payments should be properly authorized, and the payments should
ideally not be made directly in cash but rather through a bank account, to
provide an additional layer of control.
Bank Account
 A bank account is a crucial tool for controlling cash because it provides a
second record of cash transactions. By using bank accounts for payments,
businesses reduce the risk of errors or fraud.
Chapter 7: Receivables
Classification of Receivables
Receivables represent money owed to a business by other entities. They are
classified as:
1. Accounts Receivable: Amounts owed by customers for sales made on
credit. Typically collected within 30 to 60 days.
2. Notes Receivable: Formal written agreements where customers owe money.
These usually involve interest payments and may have longer collection
periods.
3. Other Receivables: Include items like interest receivable and employee
advances, shown separately on the balance sheet.
Internal Control of Receivables
Effective internal control procedures for receivables include:
 Segregation of Duties: Separate employees handle sales, accounting, and
receivables.
 Credit Approval: Ensuring proper authorization before granting credit.
 Reconciliation: Regular comparison of receivables and payment records.
  Collection Policies: Enforcing clear policies to manage overdue accounts.
Uncollectible Receivables
Some receivables may become uncollectible. To handle these, businesses classify
them as:
 Bad Debts: Accounts confirmed to be uncollectible.
 Doubtful Debts: Accounts suspected of being uncollectible but not
confirmed.
Accounting for Uncollectible Receivables
There are two main methods for accounting for bad debts:
1. Allowance Method: Estimating the amount of receivables that will not be
collected. This involves creating an allowance for doubtful accounts to
anticipate potential bad debts.
o Example: If a company has $10,000 in receivables and estimates 5%
will be uncollectible, it records a $500 doubtful debt expense.
2. Direct Write-off Method: Writing off bad debts only when they are
confirmed to be uncollectible. This method is typically used for small or
infrequent amounts.
Notes Receivable
 Promissory notes used when larger amounts are owed or when accounts
receivable exceed normal limits.
 Notes can be expressed in terms of months or days, with interest calculated
using a specific formula.
Chapter 8: Inventories
Inventory Cost Flow Assumptions
 Businesses may purchase identical goods at different costs, and inventory
cost flow assumptions are used to manage these differences:
1. First-In, First-Out (FIFO): The earliest goods purchased are sold
first.
2. Last-In, First-Out (LIFO): The most recently purchased goods are
sold first.
3. Weighted Average Cost: Averages the cost of goods available for
sale.
Periodic and Perpetual Inventory Systems
 Periodic Inventory System: Inventory is updated at the end of the
accounting period.
 o Formula: COGS = Opening Balance + Purchases - Closing
Balance.
 Perpetual Inventory System: Inventory is updated continuously with each
purchase and sale, using an inventory account.
Inventory Costing Methods under the Periodic Inventory System
 FIFO Example: The first goods purchased are assumed to be the first sold,
so closing inventory reflects the most recent purchases.
 LIFO Example: The last goods purchased are assumed to be the first sold, so
closing inventory reflects the earliest purchases.
 Weighted Average Example: All costs are averaged, and COGS is based on
the average unit cost of goods available for sale.
Inventory Costing Methods under the Perpetual Inventory System
 Similar to the periodic system, but inventory is updated in real-time for each
transaction. Examples illustrate how FIFO, LIFO, and Weighted Average
methods are applied under the perpetual system, with ongoing adjustments
to inventory and COGS after each sale or purchase.
Effect on Profit and Loss Statement (PL) and Balance Sheet (BS)
 The choice of inventory costing method affects both the COGS and Ending
Inventory values, which in turn influence the gross profit, net profit, and
inventory balance reported on the financial statements.
Choosing the Appropriate Costing Method
 Companies choose a method based on their policies and financial strategies:
o FIFO: In periods of inflation, this method results in higher gross profits
and ending inventory balances.
o LIFO: In some countries, LIFO is not permitted, and its use is often
limited.
o Weighted Average: Provides a balance between FIFO and LIFO but
may not be as favorable in inflationary periods.
Chapter 9: Tangible Fixed Assets
Tangible Fixed Assets
 Tangible fixed assets are physical items with a definite size and shape, used
in operations and not intended for sale. They have a useful life of several
years.
 Assets may be purchased using cash, bank, or credit. The purchase is
recorded as:
 o DrPPE

 Cr Cash/Bank/Account Payable
Depreciation
 Depreciation is the systematic allocation of the cost of an asset over its
useful life (excluding land). As fixed assets age, they lose their ability to
provide useful services.
 Key terms:
o Cost: Total cost spent to acquire the asset.

o Expected Useful Life: The period during which the asset will be
productive.
o Residual Value: The value of the asset at the end of its useful life.

Accounting for Depreciation

Three methods are used to calculate depreciation:
1. Straight-line Method: Provides equal depreciation expense each year.
o Formula: Annual Depreciation = (Cost - Residual Value) / Useful Life

2. Units-of-Production Method: Depreciation is based on actual usage (units

produced or hours operated).
o Formula: Depreciation per unit = (Cost - Residual Value) / Total
Estimated Units
3. Declining-Balance Method: Depreciation decreases over time, with the
highest depreciation in the first year.
o Formula: Depreciation for the first year = Cost x Declining Balance
Rate
o For subsequent years, depreciation is applied to the asset's net book
value.
Disposal of Tangible Fixed Assets
Disposal of tangible fixed assets occurs when a company removes an asset from its
books due to it no longer being useful. This can happen through discarding,
selling, or trading the asset. When an asset is disposed of, it's important to ensure
that its net book value (NBV) is correctly calculated, as this determines whether
the disposal results in a gain, a loss, or no financial impact.
1. Discarding Fixed Assets
When an asset is discarded, it is no longer usable or has been fully depreciated. The
accounting treatment depends on whether the asset is fully depreciated or not.
  Fully depreciated assets: If the asset has been fully depreciated, the
disposal is recorded by removing both the asset and its accumulated
depreciation from the balance sheet.
o Journal Entry:

 Dr Accumulated Depreciation
 Cr PPE (Asset Account)
 Partially depreciated assets: If the asset is not fully depreciated, it is
necessary to record the depreciation for the period up until the disposal date.
The net book value at the time of disposal will be treated as a loss, and the
asset is removed from the books.
o Journal Entry:

 Dr Depreciation Expense (for the depreciation period before

disposal)
 Cr Accumulated Depreciation
 Dr Accumulated Depreciation
 Dr Loss on Disposal of Fixed Assets (for the NBV)
 Cr PPE
Example of Discarding
 Assume equipment costing $50,000 is being depreciated using the straight-
line method at a rate of 10%. The accumulated depreciation at the beginning
of 2021 is $20,000. The asset is discarded on 1st June 2021. Here's how the
transaction is recorded:
o First, calculate the depreciation for the period up to the disposal date:

 Depreciation for 5 months = $50,000 x 10% x (5/12) = $2,083.

o Journal Entry:

 Dr Depreciation Expense $2,083

 Cr Accumulated Depreciation $2,083
 Remove the accumulated depreciation and asset:
 Dr Accumulated Depreciation $22,083 (total accumulated
depreciation)
 Dr Loss on Disposal of Fixed Assets $27,917 (the NBV)
 Cr PPE $50,000
2. Selling Fixed Assets
When selling a fixed asset, the company needs to compare the selling price with the
net book value (NBV) of the asset. The NBV is the asset's original cost minus
accumulated depreciation. Based on this comparison, the company will record a
gain, loss, or neither.
 Gain: If the selling price is greater than the NBV.
 Loss: If the selling price is less than the NBV.
 No Gain/Loss: If the selling price equals the NBV.
Journal Entries for Selling Fixed Assets
 When Selling Price < NBV:
o Dr Cash (for the amount received)

o Dr Accumulated Depreciation (total depreciation to date)

o Dr Loss on Disposal of Fixed Assets (for the difference between

NBV and selling price)
 Cr PPE (Asset Account) (original asset value)
 When Selling Price = NBV:
o Dr Cash (for the amount received)

o Dr Accumulated Depreciation (total depreciation to date)

 Cr PPE (Asset Account) (original asset value)

 When Selling Price > NBV:
o Dr Cash (for the amount received)

o Dr Accumulated Depreciation (total depreciation to date)

 Cr PPE (Asset Account) (original asset value)

 Cr Gain on Disposal of Fixed Assets (for the difference
between NBV and selling price)
Example of Selling
 Assume equipment costing $20,000 is depreciated using the straight-line
method at a rate of 10% annually. Accumulated depreciation at the beginning
of 2021 is $5,000. The equipment is sold on 30th June 2021, and the selling
price is $16,000.
o NBV: $20,000 - ($5,000 + $1,000) = $14,000

o Selling price: $16,000 (greater than NBV, so a gain of $2,000 is

recorded)
o Journal Entry:
  Dr Cash: $16,000
 Dr Accumulated Depreciation: $6,000
 Cr PPE: $20,000
 Cr Gain on Disposal of Fixed Assets: $2,000
3. Exchanging Fixed Assets
In some cases, businesses trade in old equipment to purchase new equipment. The
trade-in allowance is the value given by the seller for the old asset, and it can be
greater than or less than the NBV.
 Trade-in allowance > NBV: No gain is recognized, but the excess amount
reduces the cost of the new equipment.
 Trade-in allowance < NBV: The difference between the NBV and trade-in
allowance is recorded as a loss.
Journal Entries for Exchanging Fixed Assets
 If Trade-in Allowance > NBV:
o Dr Accumulated Depreciation

o Dr PPE (New Asset) (Cost minus trade-in allowance)

 Cr PPE (Old Asset)

 Cr Cash (amount paid)
 If Trade-in Allowance < NBV:
o Dr Accumulated Depreciation

o Dr Loss on Exchange of Fixed Assets

o Dr PPE (New Asset)

 Cr PPE (Old Asset)

 Cr Cash (amount paid)
Assume equipment costing $20,000 is depreciated at a straight-line rate of 10%,
with accumulated depreciation of $17,000. The equipment is traded in for a new
machine costing $15,000 with a trade-in allowance of $2,000.
 NBV of old equipment = $3,000 (Cost - Accumulated Depreciation)
 Journal Entry:
o Dr Accumulated Depreciation $17,000

o Dr PPE (New Asset) $15,000

o Dr Loss on Exchange of Fixed Assets $1,000 (Trade-in allowance
of $2,000 < NBV)
 Cr PPE (Old Asset) $20,000
 Cr Cash $13,000 (Amount paid for the new equipment)