• 1 July 2025: Construction, Rental, Education, Financial (Phase 1), and Health-related services become subject to SST.
• 1 August 2025: Health-related services – transitional period begins.
• 1 September 2025: Financial Services Phase 2 expansion.

Sector	SST Rate	Registration Threshold
Construction	6%	RM1.5 million/year
Rental/Leasing	8%	RM500,000/year
Education	6%	RM60,000 per student/year
Private Health Services	6%	RM1.5 million/year
Financial Services	8%	RM500,000/year (except card fees)

• Commercial buildings, infrastructure, ports, mixed-use developments
• Facility management during construction

• Pure residential construction
• Federal/State government and local authority projects

• Retention sums: taxable when released
• Liquidated damages (LAD): not taxable
• B2B exemption if subcontractor and contractor are registered
• Transitional rules for ongoing projects

• Commercial property rental, machinery, vehicles
• Import of lease services

• Residential property
• Financial leases, hire-purchase
• Offshore leasing

• B2B exemption (subleasing use)
• Fixed-term or low-value contracts (< RM500k/year)

• Private institutions charging > RM60,000/year per student
• Higher education and language centres serving non-Malaysians

• Malaysian citizens, OKU holders
• Preschool and special needs education
• Short courses (under 3 months/20 hours)

• Services to non-Malaysians in:
  • Private hospitals and clinics (medical, dental, ambulance, etc.)
  • Traditional/complementary medicine (e.g., Malay, Chinese, Indian, chiropractic)
  • Allied health (e.g., physiotherapy, radiography, psychology)

• Services to Malaysian citizens
• Services by public hospitals and exempt university medical centres

• Service tax applies where service is rendered to foreigners
• Location rules: services within/between Designated or Special Areas may be exempt
• Transitional guidance applies for services crossing 1 August 2025

• Loan/credit facilities, Islamic financing
• Insurance and takaful (certain policies)
• Investment advice, fund management, brokerage, underwriting

• Fee-based financial services not explicitly listed

• Interest/profit from loans
• Late payment charges
• Basic banking (ATM, account maintenance)
• Services linked to exports, offshore assets
• Intra-group transactions
• Services to the Government

• Malaysian businesses receiving services from overseas must self-account for tax

1. Review all services provided against SST thresholds
2. Register via MySST if thresholds are exceeded
3. Issue tax invoices with correct tax codes
4. Apply for exemptions (B2B, government, residential, special areas)
5. Comply with transitional rules and maintain proper accounting

📘 Understanding Malaysia’s Dividend Tax: What You Need to Know for 2025
As Malaysia modernizes its tax framework, a new rule has been introduced that will impact investors and shareholders across the board. Starting from the Year of Assessment (YA) 2025, a 2% tax will be imposed on chargeable dividend income that exceeds RM100,000 per individual annually.
While this change represents a shift in tax policy, it’s important to note that not all dividend income will be taxed. In fact, the Inland Revenue Board of Malaysia (IRBM) has outlined a range of exemptions that could significantly reduce — or even eliminate — your liability.
In this article, we break down the new rules, the exemptions, and what you should do to prepare.
📊 Overview: The New Dividend Tax
Effective from YA 2025, individuals (residents and non-residents alike) will be taxed at 2% on dividend income above RM100,000 annually, after deductions and allowances.
This tax is part of Malaysia’s efforts to broaden its revenue base while still encouraging investment through targeted exemptions.
✅ Exemptions from Dividend Tax
The IRBM has made it clear that the following types of dividend income are not subject to the 2% tax:
1. Foreign-Sourced Dividends
Dividends received from foreign sources are exempt, as long as:

• The income has been taxed in the foreign jurisdiction; or
• The receiving entity in Malaysia meets certain economic substance requirements.

This aligns with the latest IRBM guideline titled “Tax Treatment in Relation to Income Received from Abroad” (Amendment, Dec 2022).
2. Pioneer Status or Reinvestment Allowance Companies
Dividends paid out from companies that enjoy pioneer status or are granted reinvestment allowances under the Investment Incentives Act are tax-exempt.
This encourages ongoing investment and industrial development in key sectors.
3. Tax-Exempt Shipping Companies
Dividends from profits of shipping companies that are exempted from income tax will not attract the 2% dividend tax.
4. Cooperative Societies
Dividends distributed by registered cooperatives are fully exempt, consistent with Malaysia’s policy to support cooperative movements.
5. Closed-End Funds
Income declared in the form of dividends by closed-end funds falls outside the scope of the dividend tax.
6. Labuan Entities
Dividends received by Malaysian residents from Labuan entities — governed under the Labuan Business Activity Tax Act — are not taxed.
7. Exemptions at Shareholder Level
Where any specific exemption is granted to a shareholder by the IRBM, that exemption will prevail.
🏦 Institutions Not Subject to Dividend Tax
In addition to the above, dividend tax does not apply to distributions made to contributors and depositors of:

• Kumpulan Wang Simpanan Pekerja (KWSP) – Employees Provident Fund
• Lembaga Tabung Angkatan Tentera (LTAT) – Armed Forces Fund
• Amanah Saham Nasional Bumiputera (ASNB)
• Any approved Unit Trust Fund

This ensures that retirement and savings-focused institutions continue to enjoy tax efficiency.
🕒 When Does This Take Effect?
These changes are effective from the Year of Assessment 2025. If you're an investor or managing dividends, it’s vital to review your investment portfolio and tax planning strategy ahead of time.
📌 What Should You Do Next?
Tax rules are becoming more nuanced — and the difference between being taxed and being exempt could lie in how your income is structured or where it originates from.
Here’s how you can prepare:

• ✅ Identify which dividend sources fall under the exempt categories.
• ✅ Review your investments in shipping, cooperatives, and Labuan-based entities.
• ✅ If you receive foreign dividends, ensure proper documentation and compliance with economic substance rules.

🔍 Conclusion
As the 2025 assessment year approaches, it is crucial for individuals and investors to proactively assess the impact of the new dividend tax. While the 2% levy may seem modest, the cumulative effect could be significant for high-income dividend earners — especially those unaware of potential exemptions.
The good news? With proper planning and a clear understanding of the available exemptions, you can minimize your tax exposure and ensure compliance with confidence.
Whether you're receiving dividends locally or from abroad, taking action now can help preserve your returns and avoid unexpected liabilities.

𝐕𝐢𝐬𝐢𝐭 𝐮𝐬
Wisma 𝐓𝐇𝐊, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
Wisma 𝐊𝐓𝐏, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
 
𝐓𝐇𝐊 (𝐒𝐞𝐜𝐫𝐞𝐭𝐚𝐫𝐢𝐚𝐥, 𝐀𝐜𝐜𝐨𝐮𝐧𝐭/𝐏𝐚𝐲𝐫𝐨𝐥𝐥, 𝐀𝐝𝐯𝐢𝐬𝐨𝐫𝐲)
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An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients
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MFRS 15 vs MPERS 34: Recognition in Property Development and Construction

The recognition of revenue in property development and construction industries has long been a critical accounting consideration. Two key frameworks—MPERS Section 34 and MFRS 15—offer distinct approaches, reflecting their unique underlying principles and objectives. Understanding the differences between these standards is crucial for entities navigating compliance and accurate financial reporting.

MPERS Section 34: Project-Specific Revenue Recognition

• Focus: MPERS Section 34, designed for entities adopting the Malaysian Private Entities Reporting Standard (MPERS), emphasizes project-specific revenue recognition methods. This framework suits small to medium-sized enterprises (SMEs) with simpler reporting needs.
• Recognition Basis: Revenue is recognized based on the progress of the construction or development project. This ensures that revenue aligns closely with the project’s completion stage.
• Measurement: The percentage of completion (POC) method is applied to measure revenue. This involves estimating the stage of completion using inputs such as costs incurred to date versus total estimated costs.
• Balance Sheet Presentation: Project-related balances are presented as “amount due from customers” (asset) or “amount due to customers” (liability), depending on the net position of project costs and billings.

MFRS 15: Revenue from Contracts with Customers

• Key Principle: MFRS 15, applicable to public interest entities and entities requiring compliance with Malaysian Financial Reporting Standards (MFRS), revolves around the principle of performance obligations. The standard focuses on recognizing revenue when an entity satisfies performance obligations by transferring control of goods or services to the customer.
• Recognition Basis: Revenue is recognized at the point when control of the asset or service is transferred to the customer, rather than solely based on project progress. This approach emphasizes the customer’s ability to direct the use and obtain the benefits of the transferred asset.
• Measurement: Performance obligations may involve recognizing revenue over time if certain criteria are met (e.g., the customer simultaneously receives and consumes the benefits as the entity performs). Otherwise, revenue is recognized at a point in time when control is transferred.
• Balance Sheet Presentation: MFRS 15 introduces the concepts of “contract assets” and “contract liabilities,” replacing traditional terms such as “amount due from customers.” These classifications are determined by the net position of revenue recognized and amounts billed.

Conclusion

Choosing between MPERS Section 34 and MFRS 15 depends on the nature of the entity and its reporting requirements. SMEs may find MPERS Section 34’s straightforward approach suitable for their needs, while larger or public interest entities must adopt MFRS 15’s more detailed and principle-based framework.


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(Acc Update) Understanding MFRS 116 : Accounting on Property, Plant, and Equipment

Let’s learn MFRS 116, a key accounting standard for buildings, machinery, and equipment. Uncover the crucial guidelines it establishes and understand their impact on businesses globally.

What is MFRS 116?

MFRS 116 is a rule from Malaysia on how to account for property, plants, and equipment (PPE), updating the old rule, MFRS 117.

It tells companies how to recognize PPE as assets if they think these assets will bring future benefits and if they can accurately figure out the costs. This includes adding up all costs needed to get the asset ready for use.

Main Points Explained

Recognizing Assets

MFRS 116 focuses on correctly identifying PPE assets, making sure they will likely bring future benefits and that their costs can be accurately measured. This helps keep financial reports trustworthy, letting others understand a company's assets clearly.

Measuring Costs

After an asset is recognized, its cost is calculated by taking the original cost and subtracting any depreciation (value loss over time) and losses in value. All costs directly related to getting or building the asset are included. This careful calculation helps in making smart decisions and keeps financial reports clear.

Depreciation

Depreciation spreads out the cost of an asset over its useful life. Companies must choose a depreciation method that matches how the asset's benefits are used up over time. This makes sure the asset's value in the books matches its real contribution to the business.

Revaluation

MFRS 116 lets companies adjust the book value of an asset to its current market value, but it's not required. If companies choose to do this, they need to update the values regularly. This option lets companies show the true value of their assets.

Telling Others

Companies must share detailed information about their PPE, including values, depreciation methods, and life spans. This openness helps investors and others understand the company's financial health better.

Example: Updating Equipment Value

Imagine a company with a factory that suddenly becomes more valuable because of new technology. MFRS 116 says the company should update the factory's value in their books to show its true current worth. This shows the rule's focus on keeping financial information up-to-date and reliable.

Why It Matters for Businesses

Following MFRS 116 is important for companies because it affects their financial reports, taxes, and decisions. By sticking to these rules, companies make their financial statements more believable, clear, and trustworthy. This also helps compare different companies more easily, improving analysis within and across industries.

To sum up, MFRS 116 guides businesses in accurately and transparently accounting for their buildings, machines, and equipment. Understanding and applying these rules helps businesses deal with accounting challenges confidently, earning trust from those involved.

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{Acc Update} Understanding Profitability Ratios

Understanding your company's financial health is key to success, especially for small and medium enterprises (SMEs) in Malaysia. Our 'Understanding Profitability Ratios: A Practical Guide for Non-Accountants''‘ is designed to simplify financial insights for non-English speakers.

At THK, a leading accounting firm in Malaysia in Southern region, we provide comprehensive services in auditing, taxation, bookkeeping, corporate secretarial, and business advisory. This guide uses straightforward language to explain crucial financial concepts, helping you make informed decisions for your business.

Simplified analytical tools are key to unlocking the mysteries of financial data, offering clear insights into a company's financial story. These tools, especially profitability ratios, are easy to understand and vital for assessing a company's efficiency, stability, and overall financial health.

Simplified Guide to Profitability Ratios:

Join us as we explore four key types of profitability ratios in an easy-to-understand format:

Gross Profit Margin

• What It Means: This ratio shows what a business earns after paying for the direct costs of making its products or providing services (like labor and materials).

• Simple Formula: (Gross Profit / Net Sales) x 100%

• Why It's Important: It helps you understand how well the company is controlling its direct costs.

Operating Expense Ratio

• What It Means: This ratio helps us look at a company's overall costs and how efficiently it handles its everyday operations.

• Simple Formula: (Total Operating Expenses / Net Sales) x 100%

• Why It's Important: It shows how effectively a company is managing its regular expenses compared to its income.

Pre-Tax Profit Margin

• What It Means: This tells us what percentage of sales becomes profit before considering income tax.

• Simple Formula: (Profit Before Tax / Net Sales) x 100%

• Why It's Important: It offers insights into how efficiently a company operates and earns profit before taxes.

Net Profit Margin

• What It Means: This ratio reveals the actual profit a company makes in a year, after taxes are paid.

• Simple Formula: (Profit After Tax / Net Sales) x 100%

• Why It's Important: It gives a clear view of the company's ultimate profitability after tax expenses.

In conclusion, understanding these profit ratios is crucial for the financial well-being of your business. Our firm, KTP, is dedicated to assisting Malaysian SMEs in navigating their financial journey with our expert auditing, taxation, bookkeeping, corporate secretarial, and business advisory services.

Visit our websites at www.ktp.com.my and www.thks.com.my for more insights and professional assistance.

Accounting for Stock In Trade

''Stock in trade,'' often referred to as ''inventory'' in accounting and business terminology, encompasses movable and immovable property and materials used in day-to-day business operations.

Accurate identification and tracking of stock in trade are vital for precise financial reporting, particularly for the balance sheet, as it significantly affects a company's financial health and performance.

Valuation of Stock in Trade

There are two primary methods for valuing stock in trade:

(a) Acquisition Cost

This includes:

i. Direct expenses related to the purchase of goods intended for resale or materials and components used in the production of finished goods.

ii. Other direct expenses explicitly associated with acquiring stock or bringing it to its current condition and location (e.g., customs duties, direct labor, transport, and packaging).

iii. A portion of any overhead expenses properly attributable to manufacturing goods (e.g., office rent, utility charges, stationery, and maintenance services).

(b) Cost Methods

There are three primary cost methods:

i. First-In, First-Out (FIFO): Assumes the earliest items in inventory are the first to be sold or used, and their costs are allocated to the cost of goods sold.

ii. Last-In, First-Out (LIFO): Assumes the most recent items in inventory are the first to be sold or used, and their costs are allocated to the cost of goods sold. Note that LIFO is not allowed under International Financial Reporting Standards (IFRS) and is unacceptable for income tax purposes.

iii. Weighted Average Cost (WAC): Calculates an average cost for the entire inventory based on the total cost of all units in stock and the total number of units in stock.

Summary

In conclusion, properly valuing stock in trade is critical for financial reporting and business performance. Understanding the cost methods can help businesses make informed decisions about their inventory management, financial health, and compliance with accounting standards.

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Capital Expenditure vs Capital Revenue

The Difference between Capital Expenditure and Capital Revenue

Capital expenditure refers to the funds invested in acquiring or enhancing long-term assets, while capital revenue represents income generated from the sale of capital assets or other sources contributing to the capital of a business.

1. Purpose of Funds

Expenditure – Funds invested in long-term assets or development in the business. These expenses are intended to provide long-term benefits to the company.

Revenue – Funds spent on day-to-day operations of the business, covering routine expenses necessary to keep the business running.

2. Nature of Expense

Expenditure – Typically non-recurring in nature.

Revenue – Generally recurring in nature.

3. Designation

Expenditure – Often referred to as Development Expenditure. These investments are aimed at improving the company's capacity or capabilities.

Revenue – Commonly known as Non-Development Expenditure because it does not involve the development or acquisition of new assets.

4. Accounting Treatment

Expenditure – Capitalized on the balance sheet and depreciated over time. The cost is spread out over its useful life through depreciation, which means the expense is recognized gradually over time to match the asset's value consumption.

Revenue – Recorded as income in the profit and loss statement. It contributes to the company's total income for the period in which it is earned.

5. Financial Statements

Expenditure – Affects the balance sheet by increasing assets and the income statement through depreciation.

Revenue – Impacts on the income statement as a source of income.

6. Examples

Expenditure – Plant & Machinery, Buildings

Revenue – Raw Materials

Conclusion

Understanding the distinction between capital expenditure and capital revenue is essential for effective financial management in any business. Capital expenditure involves investments in long-term assets, which impact the balance sheet and long-term strategic planning.

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What are The 2 Types of Shares?

We delve into the world of shares, exploring their intricate definitions, classifications, and the impact they have on financial and accounting practices, with a special focus on International Accounting Standard (IAS) 32.

1. Shares Defined under Accounting Standards

Shares represent units of ownership in a company, but their classification under IAS 32 is vital. Shares are considered equity when there's no contractual obligation to transfer cash or other financial assets. Furthermore, when such shares are subsequently sold or disposed of, they can trigger income tax or real property gain tax (RPGT) implications.

2. Two Types of Shares

Our discussion uncovers two primary types of shares:

• Para 3(b) Shares under IFRS 2 - Shares Based Payment

• Real Property Company (RPC) shares

3. Definition of Para 3(b) shares under IFRS 2 - Shares Based Payment

Para 3(b) shares refer to the exchange of assets for shares in a controlled company.

4. Definition of RPC Shares

RPC shares, on the other hand, pertain to shares in a real property company. A company qualifies as an RPC if it meets two conditions: it's a controlled company and owns real property or RPC shares that collectively account for at least 75% of total tangible assets (TTA).

5. When Shares Qualify as Both Para 3(b) and RPC Shares

Intriguingly, there are instances where shares meet the criteria for both Para 3(b) and RPC shares. In such scenarios, the priority lies with Para 3(b). Consequently, these shares won't be categorized as RPC shares, even if the company transitions into an RPC or already is one during the circumstances described in Para 3(b).

Key Summary

In conclusion, shares are the embodiment of ownership in a company and hold significant importance in financial and accounting contexts. Whether they fall under the umbrella of equity or have tax implications can significantly influence financial reporting and strategic decisions for both investors and companies.

Furthermore, the distinction between Para 3(b) and RPC shares plays a pivotal role in understanding a company's standing concerning real property ownership and associated tax considerations.

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Cost Classification and its types

Cost classification is the process of categorizing various expenses incurred by a business or organization into specific groups or categories based on their nature, function, behavior, or other relevant criteria. This classification helps in analyzing and managing costs more effectively, making informed decisions, and preparing financial statements.

Cost classification according to behavior

Cost classification according to behavior refers to costs that are observed through their behavior on production of units produced. This type of cost can consist of various components, including:

a. Fixed Cost

b. Variable cost

c. Mixed Cost

Fixed Cost

Fixed cost is an expense that does not change when sales or production volumes increase or decrease. Examples include factory rental, depreciation expenses of factory building, transportation, and so on.

Characteristics of Fixed Costs:

a. Stability: Fixed costs remain the same regardless of whether a business produces one unit or a thousand units of a product. They provide a stable foundation for a company's cost structure.

b. Time-Based: Fixed costs are typically considered on a monthly or yearly basis. For example, if a business pays a monthly rent of $1,000 for its office space, that $1,000 remains constant each month as long as the lease terms do not change.

c. Non-Production Dependent: These costs are not tied to production or sales activities. Even if production comes to a halt or sales decrease, fixed costs persist. 

Variable Cost

Variable cost is an expense that changes in proportion to production units or activity units. Examples include direct raw materials, direct labor, sales commission and so on.

Characteristics of Variable Costs:

a. Direct Relationship: Variable costs have a direct and linear relationship with production or sales. If a business doubles its production, its variable costs will roughly double as well.

b. Per-Unit Basis: Variable costs are typically expressed on a per-unit basis. For instance, the cost of raw materials per unit or the direct labor cost per unit produced.

c. Production-Dependent: These costs are directly tied to production activities. As more units are produced, more resources (and costs) are required.

Mixed Cost

Mixed cost is a cost that contains both fixed costs and variable costs. Examples include utilities, rent, salaries, landline telephone bill and so on.

Characteristics of Mixed Costs:

a. Combination of Fixed and Variable Elements: Mixed costs have both a fixed portion and a variable portion. The fixed portion remains constant over a certain range, while the variable portion changes with production or activity levels.

b. Step-Like Behavior: Mixed costs often exhibit a step-like behavior, where they remain constant within a certain range and then abruptly increase when production or activity exceeds that range.

c. Non-Linear Relationship: The relationship between mixed costs and production or activity is not linear. This means that the variable portion of mixed costs does not change at a constant rate.

In conclusion, cost classification is a vital accounting process that involves categorizing expenses within a business or organization based on various criteria, including their behavior. The behavior-based cost classification, in particular, is crucial for understanding how costs relate to production or activity levels.

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Accounting Concepts: Consistency, Going Concern & Prudence

What are Accounting Concepts?

It is the basic rules, ideas, and conditions by which companies record their financial transactions and organize their bookkeeping.

What is the objective of Accounting Concepts?

To achieve uniformity and consistency in preparing and recording financial reports.

What is Consistency Concept?

The same accounting method should be used consistently once it has been adopted by the company, unless a change is required by law or other valid reasons to do otherwise.

It will prevent manipulation in accounts and make the financial numbers comparable across different periods or years.

What is Matching Concept?

The matching concept is linked to the accruals concept.

It requires revenue earned and expenses incurred to be matched and recorded during the same accounting period.

Example 1:

Deposit of RM 500 received from the customer on 27 December 2022 for a dinner reservation on 10 January 2023.

No expenses have been incurred yet if the RM 500 deposit is recorded as revenue on 27 December 2022.

Hence, the RM 500 deposit should be booked as “Deposit from Customer (Balance Sheet)” in December 2022 and adjusted as “Sales revenue (Income Statement)” in January 2023 to match the expenses incurred on 10 January 2023.

Example 2:

ABC Sdn Bhd’s financial year ended on 31 December 2022. It only issued invoices to its customers in January 2023 for work carried out in December 2022.

An accounting adjustment needs to be made for the unbilled revenue as “Accrued revenue” on 31 December 2022 to match the expenses incurred during the financial year.

What is Going Concern Concept?

Also known as the continuity assumption, this assumption assumes that a business will continue its operations for the foreseeable future.

It implies that financial statements are prepared with the expectation that the business will continue to exist and not be liquidated.

Examples of situations that may cast doubt on the going concern assumption include:

• Continuous losses: If a business consistently incurs significant losses, it may raise concerns about its ability to continue operating in the future.

• Legal or regulatory issues: Legal disputes, loss of key licenses or permits, or significant changes in regulations can impact a business's ability to continue its operations.

What is Prudence Concept?

This is an accounting concept that suggests caution and a conservative approach in preparing financial statements.

The prudence concept suggests that losses such as bad debts, inventory obsolescence, or decline in the value of investments, should be accounted for even if they have not yet occurred.

However, gains should only be recognized when they are realized.

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Accrual Accounting Concept

What is Accounting Concepts?

It is the basic rules, ideas, and conditions by which companies record their financial transactions and organize their bookkeeping.

What is the objective of Accounting Concepts?

To achieve the uniformity and consistency in preparing and recording financial reports.

What is the importance of accounting concepts?

• Serves as a uniform set of rules for each step in recording a financial transaction of a company.

• Provides quality management reports and financial statements.

• Helps users to make financial decision by making the reports reliable, relevance, understandable and comparable.

The 5 commonly used accounting concepts:

• Accrual Concept

• Consistency Concept

• Matching Concept

• Going Concern Concept

• Prudence Concept

What is Accrual Concept?

Revenue is booked when it is earned, NOT when cash is received.

Expenses are recorded when they are incurred, NOT when cash is paid out. Accruals can be passed by journal entries at the month/year end.

Example 1:

Goods delivered on 25 May 2023 and Sales Invoice of RM 1,000 issued on 26 May 2023, but money received from customer on 10 June 2023.

To recognize sales on 26 May 2023:

DR Accounts Receivables RM 1,000

(Balance Sheet)

CR Sales RM 1,000

(Income Statement)

Example 2:

Salary of RM 3,000 incurred in May 2023 but payment to staff only made in early June 2023.

To record expenses on 31 May 2023:

DR Salaries RM 3,000

(Income Statement)

CR Accruals RM 3,000

(Balance Sheet)

More accounting concepts to be continued in the next posting…

 

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Common Accounting Mistakes

Introduction

Accounting is not just for tax reporting purposes, but it can help to identify areas in which costs can be cut or resources can be added to increase the profit and efficiency of the company.

Some accounting mistakes can lead to incorrect financial status presentation and hence wrong business decisions being made.

Let's find out the common mistakes in accounting.

1. Assuming Profit equals Cash Flow

This common misconception by many people will distort the company’s real financial position.

When a company buys machines to increase production, the profit of the company will not be reduced by the same amount of payment for the purchase of machines. Instead, the cost of the machines will be recorded as Property, Plant and Equipment under Balance Sheet.

2. Data Entry Error

Accounting work is all about details. While having an accounting software is essential to efficiency for complex and high transactions, nonetheless, human being can make mistakes whether we are using accounting software or manual way.

For example, wrong double entries being keyed, wrong amount being recorded or deposit paid not deducted from invoice.

It is important to have segregation of duty with other personnel to do the review work to minimize this type of errors.

3. Mix up between personal and business accounts

Many people will feel maintaining 2 bank accounts to separate personal and business accounts as very tedious work. Actually, it is not. In fact, it will smoothen the whole accounting process and increase efficiency.

It is important to have the mindset that business accounts should be strictly for business purpose. If the personal expenses are mixed up with business expenses, the accounts will be scrutinized by the auditors and tax officers even tighter.

Likewise, it is a good practice to do proper filing by separating business and personal bills.

4. Consistency in Classification between Direct and Indirect cost

Cost structure refers to different type of expenses a business incurred, which comprises of direct and indirect costs.

Direct costs are expenses that can be attributed to a specific product, while indirect costs are expenses required to maintain and run a company.

If the classification of the direct and indirect costs is not being identified properly or consistently, it will lead to unusual fluctuation in the gross profit margin. This will further affect decision making made by the company.

5. Not Reconciling Books with Bank/Loan Statements

This process, called reconciliation, helps verify that your financial records match your bank/loan statements. Failing to do this can lead to inaccuracies.

6. Not Accounting for Petty Cash

Small, petty cash transactions can add up over time and lead to noticeable discrepancies if not properly recorded.

7. Inaccurate Depreciation Calculations

Incorrect calculation of asset depreciation can lead to an overstatement or understatement of asset values.

8. Using the Cash-Based Accounting Method

Businesses usually use either cash-based or accrual accounting. Using the wrong method for your business type can lead to discrepancies.

9. Not Back-up Accounting Data

Imagine the consequence if the financial data is lost, stolen or hacked, and you don’t have any back up.

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3 Key Difference Between Tax Capital Allowance and Accounting Depreciation

1. New Asset Yet in Use
MPERS S17: Depreciation of an asset begins when available for use. The asset must be in use.

2. Assets Acquired from Related Party
Account point of view: Cost is depreciated over the asset’s useful life. Tax point of view: Only remaining residual expenditure qualifies.

3. Company Assets Used by Related Party
According to Public Ruling No. 5/2014, assets not for business purpose is not entitled to claim capital allowance.

References
1. Public Ruling No. 5/2014
2. MPERS 17 – Property, Plant and Equipment
3. Income Tax Act 1967

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Insolvency Test for A Company

In terms of the “solvency test”, solvency relates to the assets of the company, which are fairly valued, equal or exceed the liabilities of the company.

What does it mean to be insolvent?

It is a state of financial distress where a company is unable to pay its bills.

What are the warning signs of insolvent companies?

• Inability to pay your debts.

• Poor profitability.

• No access to finance.

• Unpaid creditors beyond normal credit terms.

• Unable to raise further equity funding.

What is the company insolvency test?

• Cash flow test

• Ratio test

The purpose is to analyze:

• Existing debt of company

• The dates any company income will be received

• The date each debt will be due for payment

• The company’s present and expected cash resources

• Whether the company’s debts are payable in the near future

Ratio Insolvency Test

Quick Ratio = Projected Cash + Account Receivable / Current Liabilities

Reveal the reliability of the company’s repayment of short-term debts with current assets and inventory.

Solvency ratio = Projected Net Profit + Depreciation / Current Liabilities

It is to measures the ability of a company to meet its short-term debts.

Current ratio = Projected Current Assets / Current Liabilities

It is commonly used as a quantification of short-term solvency and give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into cash.

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What is Use of Right Assets in Accounting?

Background

MFRS 117 introduces the treatment of both finance lease and operating lease, but operating lease is treated as an off-balance sheet lease.

MFRS 16 superseded MFRS 117 and introduced the “right to use” approach, which requires lessee to recognize the rights and obligations arising from the lease arrangement in the balance sheet with the effect from 01.01.2019 in order to standardize the treatment for both finance and operating lease.

Definition of Right-of-Use Asset -  MFRS 16

• Lessee has the rights to control the use of an identified asset for a period of time. [Para 9]

• Lessee able to obtain all of the economic benefits generated from the use of assets. [Para 9]

• Lessee able to decide how and for what purpose the asset is used [Para 9]

• Lessee has the obligation to make payment for the identified asset [Para 9]

• Risk and reward of the ownership for the asset is still mainly retained with the lessor. [Para 65]

Exemption of MFRS 16 – Para B6

• Short term lease (Less than 12 months) and contain no purchase option.

• Lease for asset with a low value when new

Initial measurement:

(i) Cost of the right of use asset should include [Para 24]:

• Lease liability

• Prepayment of lease payment – lease incentives

• Initial direct costs

• Dismantling costs

(ii) Lease liability [Para 26]:

• Present value of lease payments

Subsequent measurement:

(i) Right of use assets [Para 30]

• Cost – accumulated depreciation – accumulated impairment loss

(ii) Lease liability [Para 36]

• Recognise lease interest and payment

Tax implications:

Lessee:

• Not entitled to claim the capital allowance on the leased assets [Public Ruling No. 5/2014 - Para 11.3]

• Depreciation charged is non-tax deductible

• Interest expenses is tax deductible if fulfilled the condition of Section 33 (1) of Income Tax Act 1967 

Sources:

• MFRS 16

• Section 33 (1) of Income Tax Act 1967

• Public Ruling No. 5/2014

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MPERS Section 7 Statement of Cash Flows

What is the Statement of Cash Flows?

This is the statement showing the inflows and outflows of cash for the reporting period and showing separate changes from operating activities, investing activities and financing activities.

Information to be presented in the Statement of Cash Flows

1) Operating activities

The main activities that generate revenue for the company.

Example:

o Cash receipts from sales and other revenue

o Payments to suppliers and employees

o Payments or refunds of income tax

2) Investing activities

The acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Example:

o Purchase and proceeds from the sale of Property, plant and equipment

o Purchase and proceeds from the sale of marketable securities

o Advance or repayment of advances and loans made to other parties

3) Financing activities

It results in an entity's equity and borrowings changing in size and composition.

Example:

o Proceeds from issuing shares or other equity instruments

o Proceeds from issuing short-term or long-term borrowings and repayment of debts

Method to present the cash flow statement

2 types of methods to represent:

A) Indirect method

Determined by adjusting net Profit or loss for the effects of: -

•  Changes in inventories, receivables, and payables;

•  Non-cash items, such as depreciation, unrealised foreign currency gains and losses and etc; and

•  All other items that relate to investing or financing.

B) Direct method

Major classes of gross cash receipts and payments are disclosed.

Information may be obtained such as:

•  From the accounting records; or

•  By adjusting sales, cost of sales and other items in the income statement for:

• Changes in inventories, receivables, and payables;

• Other non-cash items; and

• Other items that are investing or financing.

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Month End Closing

The month-end close is the collection of financial accounting information, review, and reconciliation of records each month. This is a financial reporting requirement for some companies and helps businesses keep accurate records throughout the year.

Appended below is the checklist for month end closing :

• Record incoming cash

• Update account payable

• Reconcile bank accounts

• Review petty cash

• Review fixed assets

• Count stocks

• Check revenue and expense account

• Adjust journal entry

• Final review

• Plan for next month

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MPERS Section 32 - Events after the end of the reporting period

1. What is the Event after the reporting period?

These are the events that may affect the financial statement that occurs between the end of the reporting period and the date of the financial statements.

There are two types of events which are

Adjusting events

- provide evidence of conditions that existed at the end of the reporting period

Non-adjusting events

Non-adjusting events

- indicative of conditions that arose after the end of the reporting period

2. Recognition & Measurement

a) Adjusting events after the reporting period

- Adjust the amounts recognised in its financial statements, including related disclosures

- Example of adjusting events:

o Impairment of assets with audit evidence

o contingent liabilities

o the bankruptcy of a major customer which confirms that a loss existed

o discovery of fraud or errors that show the financial statements were incorrect

b) Non-adjusting event

- No adjustment to be recognised in financial statements but including the related disclosures

- Types of non-adjusting events

o disposal of a major subsidiary

o announcement of a plan to discontinue an operation

o major purchases or disposals of assets

o destruction of a major production plant by a fire

o entering into significant commitments or contingent liabilities

3. Disclosure

a) Adjusting events after the reporting period

- Shall adjust the amounts recognised in its financial statements, including related disclosures, to reflect adjusting events after the end of the reporting period.

b) Non-adjusting events after the reporting period

- Disclosure shall include: -

 the nature of the event; and

 an estimate of its financial effect, or a statement that such an estimate cannot be made.

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Exposure Draft on Section 23 Revenue of the IFRS for SMEs

Section 23 of the IFRS for SMEs Accounting Standard set out requirement for SMEs to recognise revenue. It is based on IAS11 Construction Contracts and IAS 18 Revenue.

The IASB has applied the alignment approach to IFRS 15 Revenue from Contracts with Customers and is proposing to revise Section 23 by introducing a single framework for recognising revenue for goods and services.

The IASB is proposing to

1. introduce a framework for recognizing revenue which require revenue to be recognized when the customer obtains control of the goods/service, based on the 5 step model in IFRS 15.

2. simplify requirements of IFRS 15 to make the five-step model easier for SME

3. provide transition relief to allow SME to apply their current revenue recognition policy to contracts already in progress.

Framework for recognizing revenue

1. Identify the contract with a customer

2. Identify the promises in the contract

3. Determine the transaction price

4. Allocate the transaction price to the promises in the contract

5. Recognise revenue when (or as) the entity satisfy a promise

What would this proposal mean for SME?

A comprehensive framework for determining when and how much revenue to recognise for goods and services.

For many contracts, the revised Section23 is expected to have little, if any, effect on the amount and timing of revenue recognition.

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