Content Standard 11.3

Analysis Method

Kaedah Analisis

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Explanation

The Analysis Method (Kaedah Analisis) is one way to solve incomplete-records problems when the trader keeps more information than just the opening and closing capital. Typically the trader still keeps a Cash Book (Buku Tunai), lists of debtors and creditors, lists of assets and liabilities, and some source documents such as invoices and receipts, but does not maintain a complete double-entry set. Because the available information is more detailed than in the Capital Comparison Method, the Analysis Method lets us re-estimate the figures for sales, purchases, revenue and expenses one by one, and then prepare a full Income Statement (Penyata Pendapatan) and a complete Statement of Financial Position (Penyata Kedudukan Kewangan), rather than merely estimating profit from the change in capital.

The first step is usually the Analysis of the Cash Book (Analisis Buku Tunai). The Cash Book (cash column and bank column) is analysed to identify all receipts and payments during the period. From this analysis we can extract key figures such as cash sales, cash purchases, money received from debtors, money paid to creditors, expenses paid in cash, cash drawings by the owner, and the opening and closing cash and bank balances. If one figure is unknown (for example drawings or cash sales), it can be found as the balancing figure, because the total debit side of the Cash Book must equal the total credit side. The cash and bank balances obtained are then carried into the Statement of Financial Position under current assets.

The next step is to estimate sales and purchases. Credit sales are estimated by preparing a Debtors Control Account (Akaun Kawalan Penghutang). The formula is: Credit sales = closing debtors + money received from debtors + discount allowed + bad debts + returns inwards - opening debtors. Credit purchases are estimated through a Creditors Control Account (Akaun Kawalan Pemiutang): Credit purchases = closing creditors + money paid to creditors + discount received + returns outwards - opening creditors. Total sales equals cash sales (from the Cash Book) plus credit sales, while total purchases equals cash purchases plus credit purchases. These figures form the basis of the top part of the Income Statement.

After that we estimate revenue and expenses on the accrual basis. Amounts paid or received in cash must be adjusted for accrued (terakru) and prepaid (prabayar) amounts at the beginning and end of the period so that we obtain the amount that belongs to the current accounting period. For an expense: This year's expense = expense paid - opening accrued + closing accrued + opening prepaid - closing prepaid. For revenue (for example commission or rent received): This year's revenue = revenue received + closing accrued - opening accrued + opening received in advance - closing received in advance. Drawing a T-account for each expense or revenue item helps avoid mixing up the plus and minus signs.

Once all figures have been estimated, the final step is to prepare the Income Statement to determine gross profit and net profit, followed by the Statement of Financial Position to show the position of assets, liabilities and owner's equity at the balance date. The Analysis Method is regarded as more accurate and complete than the Capital Comparison Method because it produces full financial statements, but it requires skill in preparing control accounts and adjustment accounts. Work in a set order: analyse the Cash Book first, then the debtors and creditors control accounts, then the revenue and expense adjustments, and only then assemble both statements.

Worked examples

Analysing the Cash Book to find cash sales

Seri Melur Grocery keeps a Cash Book but does not know its total cash sales. Information: opening bank balance RM3,000, money received from debtors RM45,000, cash purchases RM12,000, payments to creditors RM30,000, cash expenses RM6,000, drawings RM4,000, and closing bank balance RM5,000.

Reconstruct the Cash Book (bank column). Debit side: opening balance RM3,000 + debtors RM45,000 + cash sales (X). Credit side: cash purchases RM12,000 + creditors RM30,000 + expenses RM6,000 + drawings RM4,000 + closing balance RM5,000 = RM57,000.

Total debit must equal total credit: 3,000 + 45,000 + X = 57,000, so cash sales X = RM9,000. This RM9,000 is added to credit sales to get total sales in the Income Statement.

Debtors and Creditors Control Accounts

Opening debtors RM8,000; money received from debtors RM45,000; discount allowed RM1,000; bad debts RM500; closing debtors RM10,500. Credit sales = 10,500 + 45,000 + 1,000 + 500 - 8,000 = RM49,000.

Opening creditors RM6,000; payments to creditors RM30,000; discount received RM800; closing creditors RM7,200. Credit purchases = 7,200 + 30,000 + 800 - 6,000 = RM32,000.

Therefore total sales = cash sales RM9,000 + credit sales RM49,000 = RM58,000, and total purchases = cash purchases RM12,000 + credit purchases RM32,000 = RM44,000.

Expense adjustment and final statements

Rent paid RM12,000, opening accrued rent RM500, closing accrued rent RM800. Rent expense for the Income Statement = 12,000 - 500 + 800 = RM12,300. Closing entry: Debit Profit and Loss (rent expense) RM12,300; Credit Rent RM12,300.

In the Statement of Financial Position, the bank balance RM5,000 and debtors RM10,500 are current assets, while closing accrued rent RM800 and creditors RM7,200 are current liabilities.

With sales of RM58,000, purchases of RM44,000 and the estimated expenses, the Income Statement is completed to obtain gross profit and net profit, then the Statement of Financial Position is drawn up.

Practice

The opening debtors of Bestari Stationery are RM12,000. During the year, money received from debtors was RM68,000, discount allowed RM1,500, bad debts written off RM800, and returns inwards RM700. Closing debtors were RM9,500. Estimate the credit sales.

Answer: Prepare a Debtors Control Account. Credit sales = closing debtors + money received + discount allowed + bad debts + returns inwards - opening debtors = 9,500 + 68,000 + 1,500 + 800 + 700 - 12,000 = RM68,500. So credit sales are RM68,500.

Cahaya Enterprise paid RM30,000 to creditors, received a discount of RM1,200, and returned goods worth RM900 (returns outwards). Opening creditors were RM7,000 and closing creditors RM8,900. Estimate the credit purchases.

Answer: Prepare a Creditors Control Account. Credit purchases = closing creditors + payments to creditors + discount received + returns outwards - opening creditors = 8,900 + 30,000 + 1,200 + 900 - 7,000 = RM34,000. So credit purchases are RM34,000.

Insurance paid during the year totalled RM4,800. At the start of the year there was prepaid insurance of RM400, and at the end of the year prepaid insurance of RM600. Estimate the insurance expense to be recorded in the Income Statement.

Answer: Insurance expense = insurance paid + opening prepaid - closing prepaid = 4,800 + 400 - 600 = RM4,600. Opening prepaid is added because it is this year's expense paid last year; closing prepaid is subtracted because it belongs to next year. The insurance expense recorded is RM4,600, and closing prepaid RM600 becomes a current asset in the Statement of Financial Position.

A business keeps a Cash Book. Opening bank balance RM2,500, money received from debtors RM50,000, cash sales RM8,000. Payments: cash purchases RM10,000, creditors RM35,000, general expenses RM7,000, and closing bank balance RM6,500. Estimate the owner's cash drawings.

Answer: Reconstruct the Cash Book (bank column). Debit: opening balance 2,500 + debtors 50,000 + cash sales 8,000 = RM60,500. Credit: cash purchases 10,000 + creditors 35,000 + general expenses 7,000 + closing balance 6,500 + drawings (X). Debit = Credit: 60,500 = 58,500 + X, so drawings X = RM2,000. The owner's cash drawings are RM2,000.

Exam tips

Distinguish the Analysis Method from the Capital Comparison Method: use the Analysis Method when the question gives a Cash Book plus debtor and creditor details, because such questions require a full Income Statement and Statement of Financial Position.
Always draw neat T-accounts for the Debtors Control Account, the Creditors Control Account and each expense or revenue account. The balancing figure is the item being estimated, such as credit sales, credit purchases or a balance.
Remember where each item sits: discount allowed, bad debts and returns inwards are on the credit side of the debtors account; discount received and returns outwards are on the debit side of the creditors account.
Work in a fixed order: analyse the Cash Book, estimate sales and purchases, adjust revenue and expenses, then prepare both statements, so no figure is left out or carried wrongly.

Key terms

Analysis Method: A method of solving incomplete records by re-estimating sales, purchases, revenue and expenses to prepare full financial statements.
Debtors Control Account: A summary account of all debtors used to estimate credit sales as the balancing figure.
Creditors Control Account: A summary account of all creditors used to estimate credit purchases as the balancing figure.
Cash Book Analysis: The process of analysing receipts and payments in the Cash Book to extract figures such as cash sales, drawings and bank balances.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

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